🥛 Why’s global liquidity stalling? 🥴

GM, this is Milk Road PRO, the salt in the soup of global finance.

(We make it palatable, and easier to consume).

It seems that by now most of the crypto industry has figured out that crypto prices are heavily reliant on global liquidity.

Milk Road is likely a big part of the reason that this crypto investing cheat code has made its way to the masses, considering we have written about it ad nauseam for the last 2 years 🤷

That said, it helped us time the bottom of the crypto market at the end of 2022 and has kept us in the game ever since.

But for the last 15 weeks, global liquidity has done nothing but decrease week over week, leading many to wonder if the top is already in or if the correlation between crypto and liquidity no longer exists. 

In today’s PRO report, I’m going to walk us through a short and sweet macro masterclass,  breaking down exactly what’s happening in our world currently that is causing this pullback in liquidity.

Once we understand WHY, we will then better understand WHERE global liquidity is heading next.

And of course, once we understand where global liquidity is heading (and why), we can answer if crypto will remain correlated with these liquidity trends or not.

Before we answer the above questions however, let’s dial things back and first remember why global liquidity matters in the first place.

It’s all about demographics…

DEMOGRAPHICS, GLOBAL LIQUIDITY & CRYPTO MARKETS

The story of global liquidity and markets begins with an aging and infertile global population.

You see, world population growth has been declining massively since the 1980s.

A big part of this has to do with a decline in fertility rates in women globally, mainly due to a significant change in the average humans health over the last 40 years (consuming fake foods, living sedentary lifestyles, microplastics and hormone disrupters in our food and environment, stressful lifestyles and more).

In addition, the boomers (the largest demographic in history) have all reached their elderly years contributing to an aging population, especially in the largest economies in the world like the USA, China, Japan and Europe.

Now, why does an ageing and declining global population growth matter for crypto and global liquidity?

Because this is part of the magic formula that dictates economic growth (aka GDP Growth).

As a reminder, GDP stands for gross domestic product (aka the amount of revenue economies earn).

All economies must grow their GDP, otherwise they fall into recession and if not fixed, the economy will collapse (similar to a business going bankrupt).

The magic formula for economies is the following:

GDP growth = population growth + productivity growth + debt growth

Said more simply, in order for an economy to grow (GDP growth) you must have more humans consuming/producing in an economy (population growth) and/or more consumption/production per human in an economy (productivity growth) and/or more money created to consume or produce things in an economy (debt growth).

Because the largest economies in the world all have declining population growth, the only way they can grow their GDP and remain solvent is to either become more productive or create more money…there is NO other option.

While technology is always improving productivity, it’s not doing enough yet to make up for the declining population growth (more on this later). 

As a result, the largest economies in the world have no choice but to grow their debt to make up for the lack of new human capital, if they want to keep their economies functioning.

You can see this dynamic clearly with the chart below comparing the US labor force participation rate (the amount of people in the US working and being productive citizens) vs. the US government debt as a % of GDP (the amount of debt that makes up the economy’s GDP).

This chart is one of the most important charts in macro and there are 2 key takeaways from this:

1/ Non-working humans (aka non-productive humans) create a “drag” on an economy, making it harder and harder for an economy to grow and remain solvent. Retired and non-working humans create little economic value, yet come with significant costs in terms of social security, healthcare, etc.

As you can see above, the % of non-productive humans in the US economy is only growing.

2/ Because of declining fertility rates, the labour force participation rate will only go down for years and decades to come, forcing governments to create more and more debt.

You may have heard of the term: Global debt spiral?

This is the root cause of the entire thing. It’s all about demographics…

The way these governments create more debt is by creating more of their currency (printing money). 

You can see this dynamic clearly in the chart below, comparing Fed Net liquidity and US Government debt as a % of GDP.

And this is where things get tied back to crypto markets.

As governments grow their debt, they debase their currency by printing more of it. As a result, the value of these currencies goes down versus scarce assets like Gold, Real Estate, Crypto and Tech Stocks.

This explains why these assets continue to go up and to the right over the long-term, while governments continue to print more and more money.

A key point to remember about government debt is that governments need to pay interest on it, the same as we pay interest on unpaid credit card debt or mortgages.

This is where the “debt spiral” mentioned above comes in...

Not only are government debts getting bigger and bigger because we have less productive humans overtime, but the interest payments on this unpaid debt is compounding year over year.

On a side note, this also explains why interest rates have trended lower over time since the 1980s. The government simply can’t handle sustained high interest rates, it MUST go lower or the debt spiral will accelerate and the system will collapse.

It’s all about demographics…

BUT WHY ISN'T GLOBAL LIQUIDITY RISING?

As the debt continues to grow from declining population growth and compounding interest payments, governments have no choice but to keep printing money, as shown below when comparing Fed Net Liquidity and interest payments on government debt.

Interestingly, in the chart above you can see that something changed in mid 2024. Fed liquidity has not been increasing along with the government's interest payments.

But why? Isn’t this going to lead to a debt spiral?

The answer is immigration. The US has found a way to increase its productive-human population without producing more babies. They simply import them from other countries.

Since the Biden administration, the US has had its fastest rate of immigration since the 1850s, adding almost 4 million (legal) immigrants in 2024 alone.

Remember the magic formula: GDP Growth = population growth + productivity growth + debt growth.

Since the push in immigration, the result has been that government debt has not needed to increase compared to GDP. In fact, it’s gone lower since 2021.

It's not until debt to GDP (red) reaches new highs that the FED needs to create new liquidity and add the debt to its balance sheet.

Since the Fed printed more money than it ever has during the 2020-21 pandemic, the US has found some relief by significantly increasing immigration.

Dare I say it: It’s all about demographics…

By the way, this isn’t just a story about the USA. All of the largest economies in the world, who also have declining population growth, have the same story.

Here is the UK…

Here is Europe…

And here is China…

Did you notice something different about the China chart versus the UK, Europe and the USA?

China’s liquidity is at all time highs and has only continued rising, whereas the US, Europe and the UK are still below their highs of 2021.

Can you guess why? Immigration (yes, it’s all about demographics)

China doesn’t have immigration like the others do. In fact they have the complete opposite, more people are emigrating than immigrating. China's population growth isn’t just declining, its actual population size is decreasing! 

As a result, China’s only choice is to print more $$.

Of the largest economies in the world, there is one more whose chart is different than the others: Japan.

Japan is in the same situation as China with a sky rocketing debt to GDP because they also have no immigration and the oldest population of them all. 

However, Japan hasn’t been growing their liquidity to make up for it, putting some serious pressure on the Japanese economy (this is why the Yen has been collapsing recently).

But why? Why hasn’t Japan been adding liquidity? Even China recently has stopped printing as of late? All of this has led to the recent steep decline in global liquidity shown at the beginning of this report.

The answer is…