In general Americans are poorer today than they were at the turn of the century in 2000.
Since that time average household income is up about 14% but big ticket items like housing, college, health care, cars ate up much more.
In order to keep up we borrow and debt is at an all time high. This is actually what one would expect as the population increases, but per capita debt has also risen significantly.
So a modest increase in income offset by significant increase in debt does not equate to a great economy.
It equates to a economy that is at risk.
The increase in debt is possible because we have seen interest rates kept artificially low.
Similar to previous periods when the economic elements get our of kilter, there is usually a dramatic adjustment.
That adjustment is needed to bring debt and incomes into balance. It could be inflation, deep recession or something unpredictable, but these type of out of balance situations are not sustainable over the long term.
We have a debt bubble and it will pop.
Just when is the question?
Showing posts with label recession. Show all posts
Showing posts with label recession. Show all posts
Friday, August 2, 2019
Monday, December 24, 2018
Stock Losses
Watching the stock market fall recently is a bit troubling.
Its not surprising since we have a lot of uncertainty in Washington now and that doesn't bode well for business prospects.
To a large extent stocks are more predictive than reactive, so the current sell off represents fear that the economy is headed to a recession.
It might be, we have the trade wars, the divided Government, the deficit, interest rate increases, but generally the economic picture isn't much different than it has been.
However just the chance of a recession will create selling and once it starts it can build on itself for awhile until either it is confirmed or it isn't.
If we were to actually enter a recession, it might be a stimulus to the market as the future would look better than the present.
One of the issues with large sell offs is that many baby boomers are in or near retirement age, and probably without much thought count on the increases in the stock markets we have seen before this year.
To see the amount in their 401k decrease is unsettling and most no longer have the safety of a defined company pension anymore.
If the loss causes you to move your money into something safe, remember you are only right if the sell off continues. It might but it also can easily reverse itself.
You can lock in losses just like you can lock in profits.
The latter is a much better option. Sell high, buy low, if you can.
Its not surprising since we have a lot of uncertainty in Washington now and that doesn't bode well for business prospects.
To a large extent stocks are more predictive than reactive, so the current sell off represents fear that the economy is headed to a recession.
It might be, we have the trade wars, the divided Government, the deficit, interest rate increases, but generally the economic picture isn't much different than it has been.
However just the chance of a recession will create selling and once it starts it can build on itself for awhile until either it is confirmed or it isn't.
If we were to actually enter a recession, it might be a stimulus to the market as the future would look better than the present.
One of the issues with large sell offs is that many baby boomers are in or near retirement age, and probably without much thought count on the increases in the stock markets we have seen before this year.
To see the amount in their 401k decrease is unsettling and most no longer have the safety of a defined company pension anymore.
If the loss causes you to move your money into something safe, remember you are only right if the sell off continues. It might but it also can easily reverse itself.
You can lock in losses just like you can lock in profits.
The latter is a much better option. Sell high, buy low, if you can.
Monday, June 25, 2018
Economic Tipping Point?
Outside of the contentiousness we see everywhere, on the surface things are continuing to be okay.
We have had a fairly steady recovery from the 2009 financial crisis which has continued through the current administration.
Structurally there hasn't been much change as current policies haven't revived much manufacturing or mining and the areas improving are little changed.
There are of course economic forces at work that is using the power of the unseen hand to determine where work is best performed based on being most efficient.
Government involvement in this process is normally futile and almost always is ineffective.
We now see the dontard trying to influence the economy via tariffs.
The original group were apparently to appease a few of his friends who wanted to reduce competition to some businesses that faced foreign competition.
However, he apparently is unaware that other countries set their own policies and were going to react.
We see China targeting specific areas that will hurt many of his supporters and the same from the EU.
His response is typical, he escalates and we seem unable to get the congress, which is populated by proponents of free trade to do anything.
So we see the beginning of the most likely event to cause a recession.
There are other troubling signs, but the disruption that might be caused by trade wars is probably the most serious.
Recessions are unfortunately part of the business process as every few years excesses are adjusted and we see a reduction in growth.
We are certainly due. However, as much as the recovery was criticized for being too slow, that may be why we have avoided one so far. The excesses weren't created, or at least not to the extent they normally are.
The retaliatory tariffs will likely lead to reduce exports and increased domestic prices and it may be the tipping point.
Time will tell.
We have had a fairly steady recovery from the 2009 financial crisis which has continued through the current administration.
Structurally there hasn't been much change as current policies haven't revived much manufacturing or mining and the areas improving are little changed.
There are of course economic forces at work that is using the power of the unseen hand to determine where work is best performed based on being most efficient.
Government involvement in this process is normally futile and almost always is ineffective.
We now see the dontard trying to influence the economy via tariffs.
The original group were apparently to appease a few of his friends who wanted to reduce competition to some businesses that faced foreign competition.
However, he apparently is unaware that other countries set their own policies and were going to react.
We see China targeting specific areas that will hurt many of his supporters and the same from the EU.
His response is typical, he escalates and we seem unable to get the congress, which is populated by proponents of free trade to do anything.
So we see the beginning of the most likely event to cause a recession.
There are other troubling signs, but the disruption that might be caused by trade wars is probably the most serious.
Recessions are unfortunately part of the business process as every few years excesses are adjusted and we see a reduction in growth.
We are certainly due. However, as much as the recovery was criticized for being too slow, that may be why we have avoided one so far. The excesses weren't created, or at least not to the extent they normally are.
The retaliatory tariffs will likely lead to reduce exports and increased domestic prices and it may be the tipping point.
Time will tell.
Wednesday, November 29, 2017
Impact of Tax Manipulation
It is certainly possible that we will see a tax bill passed to appease big business, not because it is considered wonderful, but because it is needed so Republicans can say they got something done.
The bill itself is clearly not of much benefit to anyone not already fairly wealthy although it does throw the masses a few bones. Of course the real impact won't be felt until people file their 2018 tax returns, well after the midterms and before that many individuals might actually see small increases in take home pay as the tax rates get reduced.
The vast majority of Americans today actually use the tax system as sort of a forced saving device where what the pay every pay period is a little too high resulting in a refund when they file their taxes.
Having that little more in you pay check may seem fine until you find out the usual refund from personal deductions and other things has vanished.
As I said, the details are still vague and we know the benefit to low and middle class people is almost nothing, with increases likely in many States that have high taxes, but its simply impossible to do all the math until the bill is actually finalized and conferenced.
That's not going to stop our dotard talking about how it doesn't help people like him (it does) and how it is all aimed at the middle class (it isn't).
We do know it is going to be a bonanza for business and wealthy individuals and that it will significantly increase the debt. The only hope would be that it stimulates the economy so much that the increase economic activity offsets the expenses. However, considering the looming worker shortage and the current level of activity, the chances of that are pretty slim.
More likely to have the opposite effect, as any excess can be used to buy down debt as the Fed increases the discount rate.
Let's hope not.
The bill itself is clearly not of much benefit to anyone not already fairly wealthy although it does throw the masses a few bones. Of course the real impact won't be felt until people file their 2018 tax returns, well after the midterms and before that many individuals might actually see small increases in take home pay as the tax rates get reduced.
The vast majority of Americans today actually use the tax system as sort of a forced saving device where what the pay every pay period is a little too high resulting in a refund when they file their taxes.
Having that little more in you pay check may seem fine until you find out the usual refund from personal deductions and other things has vanished.
As I said, the details are still vague and we know the benefit to low and middle class people is almost nothing, with increases likely in many States that have high taxes, but its simply impossible to do all the math until the bill is actually finalized and conferenced.
That's not going to stop our dotard talking about how it doesn't help people like him (it does) and how it is all aimed at the middle class (it isn't).
We do know it is going to be a bonanza for business and wealthy individuals and that it will significantly increase the debt. The only hope would be that it stimulates the economy so much that the increase economic activity offsets the expenses. However, considering the looming worker shortage and the current level of activity, the chances of that are pretty slim.
More likely to have the opposite effect, as any excess can be used to buy down debt as the Fed increases the discount rate.
Let's hope not.
Friday, September 18, 2009
Growth thoughts
As bad as the current recession has been, to some extent the reaction to certain events, or maybe I should say the over-reaction, was worse than the actual event itself.
The initiation of the recession was to some extent initiated (not caused) by two specific events. The first of these was when housing prices got so high that even with amazingly easy credit, buyers were no longer available. Part of this was related to the overbuilding in many parts of the country to take advantage of what seemed like the ever increasing real estate bubble.
The second event was the oil shock of 2008. It is very hard to see any real reason for the rapid run-up in oil and gasoline prices we had at that time except for speculation. However, the increase in gasoline and other oil related prices diverted a significant amount of spending away from other items at the same time that companies were seeing costs increasing.
When housing prices actually started to decline, and we lost the spending related to home equity loans as well as the loss in consumption due to high energy costs, the economy had to correct. Of course we all learned that the financial community had made extremely foolish decisions based on erroneous assumptions and lets face it, outright greed, that required a robust housing market.
When the housing market slowed and then declined, jobs were lost, sub prime mortgages were defaulted, and all of a sudden many billions of securitized debt lost significant value. The dramatic events that followed are fairly well known and the financial turmoil exacerbated the recession that might otherwise have been fairly mild.
Now as the recession comes to an end, we see housing has fallen to levels that are probably lower than they should be. However, we still have an oversupply of housing in some areas, the big four (California, Nevada, Florida and Arizona) that will keep those prices depressed for quite a while. However, in other parts of the country we should see price appreciation. Further, energy prices are likely going to stay near current levels, since more fuel efficient vehicles and other energy saving options and alternative fuels will keep downward price pressure on oil.
So, we need something to ignite job growth. I believe we may already have the ignition between the stimulus and the return of the consumer. Since in reaction to the "panic of 2008" we saw companies slash costs and reduce inventories, we are now going to see an uptick as some hiring will take place in manufacturing and retail. I also believe that the alternative and renewable energy fields will increase employment as well as the jobs related to the stimulus.
Increased employment, will mean increased need for housing and some price appreciation, at least in most of the country. That is the seeds for a sustained recovery and one that may start to heat up fairly soon. However, I don't think inflation will be a problem in the near term, especially as the imports of oil decrease and improve our balance of payments. A slightly weaker dollar internationally, will cause imports to be more expensive and improve our export capability. However, weaker demand for many of these products will force prices to stay low as efficiencies will be required to remain competitive.
The initiation of the recession was to some extent initiated (not caused) by two specific events. The first of these was when housing prices got so high that even with amazingly easy credit, buyers were no longer available. Part of this was related to the overbuilding in many parts of the country to take advantage of what seemed like the ever increasing real estate bubble.
The second event was the oil shock of 2008. It is very hard to see any real reason for the rapid run-up in oil and gasoline prices we had at that time except for speculation. However, the increase in gasoline and other oil related prices diverted a significant amount of spending away from other items at the same time that companies were seeing costs increasing.
When housing prices actually started to decline, and we lost the spending related to home equity loans as well as the loss in consumption due to high energy costs, the economy had to correct. Of course we all learned that the financial community had made extremely foolish decisions based on erroneous assumptions and lets face it, outright greed, that required a robust housing market.
When the housing market slowed and then declined, jobs were lost, sub prime mortgages were defaulted, and all of a sudden many billions of securitized debt lost significant value. The dramatic events that followed are fairly well known and the financial turmoil exacerbated the recession that might otherwise have been fairly mild.
Now as the recession comes to an end, we see housing has fallen to levels that are probably lower than they should be. However, we still have an oversupply of housing in some areas, the big four (California, Nevada, Florida and Arizona) that will keep those prices depressed for quite a while. However, in other parts of the country we should see price appreciation. Further, energy prices are likely going to stay near current levels, since more fuel efficient vehicles and other energy saving options and alternative fuels will keep downward price pressure on oil.
So, we need something to ignite job growth. I believe we may already have the ignition between the stimulus and the return of the consumer. Since in reaction to the "panic of 2008" we saw companies slash costs and reduce inventories, we are now going to see an uptick as some hiring will take place in manufacturing and retail. I also believe that the alternative and renewable energy fields will increase employment as well as the jobs related to the stimulus.
Increased employment, will mean increased need for housing and some price appreciation, at least in most of the country. That is the seeds for a sustained recovery and one that may start to heat up fairly soon. However, I don't think inflation will be a problem in the near term, especially as the imports of oil decrease and improve our balance of payments. A slightly weaker dollar internationally, will cause imports to be more expensive and improve our export capability. However, weaker demand for many of these products will force prices to stay low as efficiencies will be required to remain competitive.
Friday, September 4, 2009
Recovery
About 70% of the US economy is driven by consumer spending. Now how much consumer's spend is dependant on a large number of factors. We have seen major expansion in spending in this country based upon an increase in debt.
Spending can only consist of immediate or differed payments. It is fairly safe to say that there was a revolution in this country based on the wide availability of credit which allowed people to consume now and pay later.
It can make sense to finance certain purchases, if the payments extend over the useful life of the item. If you need a car and don't have enough available cash to simply buy one, making payments for 3-4 or 5 years may be your only option. Similarly, buying a house also would most likely need to be financed.
As you look at various items that you can finance, the advisability of using credit depends on the long term value of the item. Financing an education that will increase your earning potential is probably a good investment. Financing a hot tub might not be.
As credit has become more difficult to obtain, many of the items that American used to buy on credit have been hit quite hard. This is also related to the decline in home equity which used to provide opportunities for many Americans to finance purchases, or pay down other types of debt.
Spending decisions are made based on many factors and as consumers lose confidence in the future, they tend to either stretch out purchases or wait until prices fall. This results in a reduction in demand that can be persistent. Consider a decision to buy a car. Many Americans liked to trade in their car every few years in order to have a new model and avoid potential maintenance problems. As the economy declined and confidence waned, many of these same individuals decided to differ or postpone that car purchase. So if you used to buy or lease a new car every three years, but add a year onto that cycle, the number of new cars sold every year will decrease by a significant amount.
This reduced demand can be offset by price reductions, think about the clunker program, but the only way to really reverse it would be to restore consumer confidence and credit.
We are not going to do that so easily, which is why the contraction in the economy is not going to disappear quickly. However, barring any other sudden jolts, it has finished contracting and will grow in what may very well be a more sustainable way.
Spending can only consist of immediate or differed payments. It is fairly safe to say that there was a revolution in this country based on the wide availability of credit which allowed people to consume now and pay later.
It can make sense to finance certain purchases, if the payments extend over the useful life of the item. If you need a car and don't have enough available cash to simply buy one, making payments for 3-4 or 5 years may be your only option. Similarly, buying a house also would most likely need to be financed.
As you look at various items that you can finance, the advisability of using credit depends on the long term value of the item. Financing an education that will increase your earning potential is probably a good investment. Financing a hot tub might not be.
As credit has become more difficult to obtain, many of the items that American used to buy on credit have been hit quite hard. This is also related to the decline in home equity which used to provide opportunities for many Americans to finance purchases, or pay down other types of debt.
Spending decisions are made based on many factors and as consumers lose confidence in the future, they tend to either stretch out purchases or wait until prices fall. This results in a reduction in demand that can be persistent. Consider a decision to buy a car. Many Americans liked to trade in their car every few years in order to have a new model and avoid potential maintenance problems. As the economy declined and confidence waned, many of these same individuals decided to differ or postpone that car purchase. So if you used to buy or lease a new car every three years, but add a year onto that cycle, the number of new cars sold every year will decrease by a significant amount.
This reduced demand can be offset by price reductions, think about the clunker program, but the only way to really reverse it would be to restore consumer confidence and credit.
We are not going to do that so easily, which is why the contraction in the economy is not going to disappear quickly. However, barring any other sudden jolts, it has finished contracting and will grow in what may very well be a more sustainable way.
Saturday, August 1, 2009
Thoughts on the economy
Whether you are a student of economics or not, it can be important to know something about wealth. Wealth is accumulated value and all wealth is subjective. You may say feel some things are not subjective (i.e. gold) but the value of gold is dictated by what people are will to pay for it, and we have seen gold go from very high levels to very low levels. Money of course is subject to changes in its valuation and if you are familiar with history, there are many examples, such as the German Wiemar Republic, where money became essentially worthless in a very short time.
The world creates a certain amount of real goods each year (crops, ores, oil, lumber etc.) that can be said to increase the amount of wealth. These basic products are then turned into manufactured goods and value is added to them creating more wealth. Of course the third stage are the services provided to deliver these goods to the market as well as other services.
As nations develop, they usually start as producers of real goods, commodities, which they sell to more developed nations that turn these items into manufactured goods of some sort and provide services. Of course, some commodities require very little intervention to be marketed while others require quite a bit.
The reason all wealth is subjective is because ultimately the value of anything is dictated by demand. It wasn't very long ago that housing in some parts of this country demanded prices that were double what they can be sold for today. In a dollar denominated system, they have lost 50% of their wealth. Of course, if you own one of those houses, you own exactly the same thing you owned previously, and if you don't have a mortgage, you may actually be better off since it is likely your property taxes may be adjusted, but you would feel poorer.
By the same token, the prices we pay for many other items have also decreased as demand has withered and producers are forced to discount items in order to move them. The big danger here is potential deflation. Now the problem with deflation in a credit driven economy is that it leads to debt exceeding perceived value. If I have a $500,000 mortgage on a $750,000 I perceive that I'm doing OK. If the value of that house drops to $400,000, I am now paying the bank more than I believe I should. It makes better economic sense (depending on how you feel about your credit score) to simply walk away and let the bank have the house. Of course doing that makes the loss real, and you may very well feel that over time the value of your house will recover, but that is a gamble of sorts and requires a certain faith in the economy, or at least a belief that inflation will return.
So what is the natural outcome of an economic downturn, where wealth is lost? With or without Government intervention, prices will drop to a point at which demand is restored. Once demand is restored, the economy will stop contracting, and having eliminated the excesses that led to the downturn, it will start to grow once again. How fast it grows depends on many things, but clearly, as demand grows, employment will grow, helping to increase demand further at some rate.
In the bubble years, we had tremendous demand that was based on credit secured by housing wealth and to some extent loose credit policies that encouraged consumer spending. In fact our economy became dependant on consumer spending, and to a large extent the rest of the world is dependant upon our economy being successful. When we saw the housing wealth decline, that spending declined with it.
Now it would seem that in many parts of this country, housing has neared a bottom. However, because of the reduction in demand, we have greatly increased the number of unemployed individuals and reduced their income. Further, even if housing has stabilized (and it may still decline some more) it is not going to suddenly jump in value (at least not everywhere) so that wealth and associated credit needs to be discounted from the market for some time.
An additional factor is that many Americans have now been scared into saving. They have also been scared into safe investments. These investments simply do not create monetary wealth very quickly.
What does this mean? In a very simplistic way it means that the new American economy is going to be smaller than it was. This can be computed simply enough if you make some basic assumptions. For argument's sake, lets assume the amount of disposable income overall remains stable. This plus credit becomes the amount available to spend. Now credit spending unrelated to housing is down from 2008 levels but very close to 2007 levels. However, housing values in this country are down significantly. Ignoring primary mortgages for now, in the 2004 to 2007 period, there was a tremendous amount of refinancing done in order to tap equity. For a while the number of refinancing averaged over 800,000 a month. Currently more refinancing are done to lower interest rates and the numbers were below 200,000 a month. The implications of this should be apparent, consumer spending will increase/decrease year over year based on the following formula, d-s+c+m to d1-s1+c1+m1 where d and d1 equal discretionary income 12 months apart, s and s1 equal savings for those same two points in time c and c1 represent consumer credit and m and m1 equal cash out refinancing. In the best case scenario, m1 current is much lower than m of 2008. Now as time goes on, m1 will become m and the new m1 may actually be higher than current levels. This will create growth in consumer spending but I can't imagine anyone believes that a year from now cash out refinancing will be anything near where they were a year or two ago.
The formulas can be revised to be more precise, but with savings up and cash out refinancing down, the amount of consumer spending will be significantly less than it was, probably around 20%. If nothing else was to change, and consumer spending equals 70 of the economy, we can expect a fairly permanent contraction of 14-15%. That is about the contraction we have experienced which is why we are likely at the bottom of the downturn and starting to recover.
Now, discretionary income is simply not going to increase dramatically and I don't expect home prices to skyrocket either. Consumer credit is likely to increase somewhat as employment increases but realistically it is very hard to see growth in consumer spending going up fast.
Other sources of demand for the economy include exports and this can be an area of significant growth in the future.
One argument against a rapid improvement in the economy is the amount of foreign debt the nation is issuing. Interest payments on foreign debt will require money being removed from the economy and sent to the foreign holders of this debt. Now, this impact can clearly be mitigated to some extent if we improve our balance of payments and get those countries to use that money to buy US goods. Of course, this does not need to be a direct transaction, if China for example buy a lot of commodities from Russia and Russian spend that money on American products, the money does return to us ultimately. A lot of commentators like to discuss the likelihood of Chinese consumerism, and of course if we can sell items directly that will work, but it doesn't really matter if it is direct or indirect if exports can increase enough.
Can the US handle its debt? The answer is that in one way or another we will, the question is how disruptive will managing the debt be. What needs to be remembered is that every year the US produces tremendous wealth in commodities, manufactured goods and services, and this wealth will increase in value as the economy recovers. After WW2 the US had tremendous debt that the country was able to manage and prosper at the same time. To a significant extent that period was fueled by the redevelopment of Europe and Japan. I believe in a few years we will look back and see that the new prosperity was fueled by the development of China and India and the opportunities they will create for this country.
The world creates a certain amount of real goods each year (crops, ores, oil, lumber etc.) that can be said to increase the amount of wealth. These basic products are then turned into manufactured goods and value is added to them creating more wealth. Of course the third stage are the services provided to deliver these goods to the market as well as other services.
As nations develop, they usually start as producers of real goods, commodities, which they sell to more developed nations that turn these items into manufactured goods of some sort and provide services. Of course, some commodities require very little intervention to be marketed while others require quite a bit.
The reason all wealth is subjective is because ultimately the value of anything is dictated by demand. It wasn't very long ago that housing in some parts of this country demanded prices that were double what they can be sold for today. In a dollar denominated system, they have lost 50% of their wealth. Of course, if you own one of those houses, you own exactly the same thing you owned previously, and if you don't have a mortgage, you may actually be better off since it is likely your property taxes may be adjusted, but you would feel poorer.
By the same token, the prices we pay for many other items have also decreased as demand has withered and producers are forced to discount items in order to move them. The big danger here is potential deflation. Now the problem with deflation in a credit driven economy is that it leads to debt exceeding perceived value. If I have a $500,000 mortgage on a $750,000 I perceive that I'm doing OK. If the value of that house drops to $400,000, I am now paying the bank more than I believe I should. It makes better economic sense (depending on how you feel about your credit score) to simply walk away and let the bank have the house. Of course doing that makes the loss real, and you may very well feel that over time the value of your house will recover, but that is a gamble of sorts and requires a certain faith in the economy, or at least a belief that inflation will return.
So what is the natural outcome of an economic downturn, where wealth is lost? With or without Government intervention, prices will drop to a point at which demand is restored. Once demand is restored, the economy will stop contracting, and having eliminated the excesses that led to the downturn, it will start to grow once again. How fast it grows depends on many things, but clearly, as demand grows, employment will grow, helping to increase demand further at some rate.
In the bubble years, we had tremendous demand that was based on credit secured by housing wealth and to some extent loose credit policies that encouraged consumer spending. In fact our economy became dependant on consumer spending, and to a large extent the rest of the world is dependant upon our economy being successful. When we saw the housing wealth decline, that spending declined with it.
Now it would seem that in many parts of this country, housing has neared a bottom. However, because of the reduction in demand, we have greatly increased the number of unemployed individuals and reduced their income. Further, even if housing has stabilized (and it may still decline some more) it is not going to suddenly jump in value (at least not everywhere) so that wealth and associated credit needs to be discounted from the market for some time.
An additional factor is that many Americans have now been scared into saving. They have also been scared into safe investments. These investments simply do not create monetary wealth very quickly.
What does this mean? In a very simplistic way it means that the new American economy is going to be smaller than it was. This can be computed simply enough if you make some basic assumptions. For argument's sake, lets assume the amount of disposable income overall remains stable. This plus credit becomes the amount available to spend. Now credit spending unrelated to housing is down from 2008 levels but very close to 2007 levels. However, housing values in this country are down significantly. Ignoring primary mortgages for now, in the 2004 to 2007 period, there was a tremendous amount of refinancing done in order to tap equity. For a while the number of refinancing averaged over 800,000 a month. Currently more refinancing are done to lower interest rates and the numbers were below 200,000 a month. The implications of this should be apparent, consumer spending will increase/decrease year over year based on the following formula, d-s+c+m to d1-s1+c1+m1 where d and d1 equal discretionary income 12 months apart, s and s1 equal savings for those same two points in time c and c1 represent consumer credit and m and m1 equal cash out refinancing. In the best case scenario, m1 current is much lower than m of 2008. Now as time goes on, m1 will become m and the new m1 may actually be higher than current levels. This will create growth in consumer spending but I can't imagine anyone believes that a year from now cash out refinancing will be anything near where they were a year or two ago.
The formulas can be revised to be more precise, but with savings up and cash out refinancing down, the amount of consumer spending will be significantly less than it was, probably around 20%. If nothing else was to change, and consumer spending equals 70 of the economy, we can expect a fairly permanent contraction of 14-15%. That is about the contraction we have experienced which is why we are likely at the bottom of the downturn and starting to recover.
Now, discretionary income is simply not going to increase dramatically and I don't expect home prices to skyrocket either. Consumer credit is likely to increase somewhat as employment increases but realistically it is very hard to see growth in consumer spending going up fast.
Other sources of demand for the economy include exports and this can be an area of significant growth in the future.
One argument against a rapid improvement in the economy is the amount of foreign debt the nation is issuing. Interest payments on foreign debt will require money being removed from the economy and sent to the foreign holders of this debt. Now, this impact can clearly be mitigated to some extent if we improve our balance of payments and get those countries to use that money to buy US goods. Of course, this does not need to be a direct transaction, if China for example buy a lot of commodities from Russia and Russian spend that money on American products, the money does return to us ultimately. A lot of commentators like to discuss the likelihood of Chinese consumerism, and of course if we can sell items directly that will work, but it doesn't really matter if it is direct or indirect if exports can increase enough.
Can the US handle its debt? The answer is that in one way or another we will, the question is how disruptive will managing the debt be. What needs to be remembered is that every year the US produces tremendous wealth in commodities, manufactured goods and services, and this wealth will increase in value as the economy recovers. After WW2 the US had tremendous debt that the country was able to manage and prosper at the same time. To a significant extent that period was fueled by the redevelopment of Europe and Japan. I believe in a few years we will look back and see that the new prosperity was fueled by the development of China and India and the opportunities they will create for this country.
Tuesday, July 14, 2009
Recession bottoms
While we have seen a surge in the stock market after an analyst upgraded Goldman Sachs, these type of low volume summer moves come and go and will likely reverse either later this week or possibly after earnings. While there are many clear signs that the economy is not going to get significantly worse and, in fact, will start getting better, possibly only in a few sectors at first and possibly slowly, there are still a large number of people pushing negative news.
I read an article titled "Nine reasons the economy is not getting better" that focused on the recent unemployment report and tried to demonstrate that as bad as it was on the surface it was actually much worse. Some of the data was real but there was an awful lot of speculation related to part time workers, trends used by the labor department and the status of people who were unemployed but are no longer collecting unemployment. Now, I don't pretend to know what these people are doing right now, but the author doesn't either and speculated a worst case scenario. Being a worst case scenario, it may have some validity, but, statistically, worst case is normally not very likely.
One point made in the article concerned the fact that unemployment has increased at a record pace during this downturn. He thinks this bodes ill for the economy, but why would that be? Companies reacting quickly and dumping workers, is going to make them profitable much faster than if they reacted slowly.
So what is required for economic recovery? The most obvious answer is businesses that are making money. Profitable businesses will survive and eventually grow. One way to stay profitable during a drop in demand is to become more productive. Companies that fail to react quickly soon go out of business, unless of course the Government bails them out, but economics requires that efficient companies survive and non-efficient ones don't.
It would seem we are now at the point where the companies that are going to survive have reduced costs to the level they need to. Before you can have growth, you have to have some stability. The second step will be some increase in demand.
I should point out that many negative analysts argue along the following lines. Increased demand is being created to replenish inventories and not because consumers are buying more. Therefore, since there isn't top line growth, it isn't a real recovery.
Let's consider this logic. If the economy has reached a point where inventories are depleted and therefore companies have to increase production to replenish it, what does that mean? It means plants that have laid off employees will need to bring at least some of them back or increase the hours and pay of those currently there. Now, this would represent an incremental increase in disposable income and even if savings were to stay at the recent high levels, it would represent an incremental increase in demand. This is the start of a recovery cycle. Because just like on the slope down, each incremental decrease in demand resulted in less employment and less demand, you recover the same way. Will it be an explosive increase? No, it has to build, but it will pick up speed over time.
In addition, we are going into a period where the stimulus package the Government has passed is going to start having more impact. If you add this to the incremental increases in demand, you will suddenly start to see some real growth in consumer spending. If past experience is any measure, by the time the stimulus is fully hitting the economy, it may no longer be needed and may simply start to fuel inflation. I wouldn't predict that since we have some other fundamental issues related to housing and credit, but I wouldn't rule it out either.
Simply put, recoveries always happen, and many times they seem to be a surprise. Pessimistic views will continue and some analysts will talk about false recovery and how we are living in a fool's paradise and eventually we will have another recession, and they will point out how right they were all along.
I read an article titled "Nine reasons the economy is not getting better" that focused on the recent unemployment report and tried to demonstrate that as bad as it was on the surface it was actually much worse. Some of the data was real but there was an awful lot of speculation related to part time workers, trends used by the labor department and the status of people who were unemployed but are no longer collecting unemployment. Now, I don't pretend to know what these people are doing right now, but the author doesn't either and speculated a worst case scenario. Being a worst case scenario, it may have some validity, but, statistically, worst case is normally not very likely.
One point made in the article concerned the fact that unemployment has increased at a record pace during this downturn. He thinks this bodes ill for the economy, but why would that be? Companies reacting quickly and dumping workers, is going to make them profitable much faster than if they reacted slowly.
So what is required for economic recovery? The most obvious answer is businesses that are making money. Profitable businesses will survive and eventually grow. One way to stay profitable during a drop in demand is to become more productive. Companies that fail to react quickly soon go out of business, unless of course the Government bails them out, but economics requires that efficient companies survive and non-efficient ones don't.
It would seem we are now at the point where the companies that are going to survive have reduced costs to the level they need to. Before you can have growth, you have to have some stability. The second step will be some increase in demand.
I should point out that many negative analysts argue along the following lines. Increased demand is being created to replenish inventories and not because consumers are buying more. Therefore, since there isn't top line growth, it isn't a real recovery.
Let's consider this logic. If the economy has reached a point where inventories are depleted and therefore companies have to increase production to replenish it, what does that mean? It means plants that have laid off employees will need to bring at least some of them back or increase the hours and pay of those currently there. Now, this would represent an incremental increase in disposable income and even if savings were to stay at the recent high levels, it would represent an incremental increase in demand. This is the start of a recovery cycle. Because just like on the slope down, each incremental decrease in demand resulted in less employment and less demand, you recover the same way. Will it be an explosive increase? No, it has to build, but it will pick up speed over time.
In addition, we are going into a period where the stimulus package the Government has passed is going to start having more impact. If you add this to the incremental increases in demand, you will suddenly start to see some real growth in consumer spending. If past experience is any measure, by the time the stimulus is fully hitting the economy, it may no longer be needed and may simply start to fuel inflation. I wouldn't predict that since we have some other fundamental issues related to housing and credit, but I wouldn't rule it out either.
Simply put, recoveries always happen, and many times they seem to be a surprise. Pessimistic views will continue and some analysts will talk about false recovery and how we are living in a fool's paradise and eventually we will have another recession, and they will point out how right they were all along.
Friday, July 10, 2009
Thoughts about jobs and taxes
After the S&P dropped to the 666 level in March, it bounced back in April and May to the low 900s. Since then it has been flat to down going to the high 800s right now. This pattern comes very close to the pattern we saw in the early 1970s and if that example holds the S&P will have to drop to about 825 after which it should climb to around 11-1200.
Following that example further, after it reaches that level it will consolidate there for a number of years with variations of as much as 15-20% up and down. Two things characterized that period of stagflation, excess money and high unemployment. The reason for the high unemployment then was that we were transitioning from a manufacturing based economy to a more technological and service based one. Millions of jobs in industries that had dominated the US economy in the 50s and 60s effectively went elsewhere as it was cheaper to buy foreign items then to make them here. Eventually, the rise of high tech and service industries increased employment leading to increased consumption, rise in real estate values and adjustment in valuations to the money supply.
Now, looking at the next ten years in America we face similar problems. The remnants of the old industrial jobs are under fire again but also, we are seeing a direct challenge to tech and service jobs. It is clearly cheaper to manufacture almost everything overseas but services were at least local. However, as less and less services are performed in person, there really is no reason for service jobs to be local. Also, as more and more sales go on-line, even relatively low paying jobs in retail will be reduced. If I complete an on-line purchase, there is no need to deal with a person at all. Further, I have grown quite fond of the self service checkout at places like home depot and some grocery stores. Yes they have a person monitoring these by instead of 4 people, they only need one. These are jobs that are not coming back. Considering the long term hit to construction (which at least for now still has to be locally) there are millions of jobs going away that are not going to return.
Now, even if the service jobs go on-line, they could still be performed in this country if it made economic sense. Certainly not all jobs are going away but think about this for a second. If we have 100 million people looking for work and 95 million jobs we have a 5% unemployment rate. Assuming the number of people looking for work stays the same but 5 million jobs go overseas or simply disappear because technology replaces them (only 5%) we now have 100 million job seekers for 90 million jobs we now have a 10% unemployment rate.
So are we doomed to live with high unemployment? Until the next growth industry comes along to create jobs the answer is yes. There are some things we can do to mitigate the problem, make the relative cost of employment cheaper by centralizing health insurance cost (if you are going to pay it whether you have employees or not, it stops being a deterrent to hiring), but technology is not going to stop getting better and the trend towards on-line or self-service will continue.
I believe jobs can be created by invigorating the renewable energy industry and by providing funds to fix our aging infrastructure. Further, we need to make sure the cost of doing business in this country is not higher than it should be. I believe we should switch to a tax on consumption to even the playing field. If you sell product in this country you should pay a fair amount of tax.
Currently faced with massive deficits and an increasing national debt, we see our politicians scrambling to find more things to tax. I recently saw a proposal that would take the difference between income and savings and tax it. Generally, that is a better system than what we currently have, but still requires millions of returns to be filed. It really seems simpler to tax sales and do it strictly.
Following that example further, after it reaches that level it will consolidate there for a number of years with variations of as much as 15-20% up and down. Two things characterized that period of stagflation, excess money and high unemployment. The reason for the high unemployment then was that we were transitioning from a manufacturing based economy to a more technological and service based one. Millions of jobs in industries that had dominated the US economy in the 50s and 60s effectively went elsewhere as it was cheaper to buy foreign items then to make them here. Eventually, the rise of high tech and service industries increased employment leading to increased consumption, rise in real estate values and adjustment in valuations to the money supply.
Now, looking at the next ten years in America we face similar problems. The remnants of the old industrial jobs are under fire again but also, we are seeing a direct challenge to tech and service jobs. It is clearly cheaper to manufacture almost everything overseas but services were at least local. However, as less and less services are performed in person, there really is no reason for service jobs to be local. Also, as more and more sales go on-line, even relatively low paying jobs in retail will be reduced. If I complete an on-line purchase, there is no need to deal with a person at all. Further, I have grown quite fond of the self service checkout at places like home depot and some grocery stores. Yes they have a person monitoring these by instead of 4 people, they only need one. These are jobs that are not coming back. Considering the long term hit to construction (which at least for now still has to be locally) there are millions of jobs going away that are not going to return.
Now, even if the service jobs go on-line, they could still be performed in this country if it made economic sense. Certainly not all jobs are going away but think about this for a second. If we have 100 million people looking for work and 95 million jobs we have a 5% unemployment rate. Assuming the number of people looking for work stays the same but 5 million jobs go overseas or simply disappear because technology replaces them (only 5%) we now have 100 million job seekers for 90 million jobs we now have a 10% unemployment rate.
So are we doomed to live with high unemployment? Until the next growth industry comes along to create jobs the answer is yes. There are some things we can do to mitigate the problem, make the relative cost of employment cheaper by centralizing health insurance cost (if you are going to pay it whether you have employees or not, it stops being a deterrent to hiring), but technology is not going to stop getting better and the trend towards on-line or self-service will continue.
I believe jobs can be created by invigorating the renewable energy industry and by providing funds to fix our aging infrastructure. Further, we need to make sure the cost of doing business in this country is not higher than it should be. I believe we should switch to a tax on consumption to even the playing field. If you sell product in this country you should pay a fair amount of tax.
Currently faced with massive deficits and an increasing national debt, we see our politicians scrambling to find more things to tax. I recently saw a proposal that would take the difference between income and savings and tax it. Generally, that is a better system than what we currently have, but still requires millions of returns to be filed. It really seems simpler to tax sales and do it strictly.
Friday, June 19, 2009
Recession limits
If you think about the economy, we seem to have gotten past the panic level. There was a time when there was significant uncertainty related to whether the economy was going to enter a new depression and we would recreate the 1930s. Most people do not think this is true anymore, although of course there are those who believe the recent improvements are not real and that we should expect another downturn.
It should be noted that while our unemployment rate has grown, there are factors in the current economy that simply did not exist in the 1930s. First, the society back then was much more dependant on immediate earnings. There were no unemployment benefits or social security and even private pensions were relatively rare. So when we see an increase in unemployment, the buying power of that individual does not go to zero, or only what they have saved, but is going to be supplemented by unemployment insurance as well as other forms of assistance available.
Our population has been aging and living longer. Yes, many of the retired individuals lost income due to reduction in asset valuation, but those living on traditional pensions, annuities or just making do with social security had no real reduction. This is nothing like the situation that existed in the 1930s.
In the 1930s, there was effectively no public safety net. If the breadwinner lost their job, well that was the end of bread for awhile. Millions of people were forced to eke out survival by any means possible, relying to some extent on charity but certainly not collecting unemployment, disability or other public assistance.
Yes, there was a tremendous loss of wealth in this country as real estate returned to levels from the early part of this century, but even those people who lost their homes and their jobs, they are not as bad off as they would have been during the depression.
This is simply no longer an all or nothing economy.
It should be noted that while our unemployment rate has grown, there are factors in the current economy that simply did not exist in the 1930s. First, the society back then was much more dependant on immediate earnings. There were no unemployment benefits or social security and even private pensions were relatively rare. So when we see an increase in unemployment, the buying power of that individual does not go to zero, or only what they have saved, but is going to be supplemented by unemployment insurance as well as other forms of assistance available.
Our population has been aging and living longer. Yes, many of the retired individuals lost income due to reduction in asset valuation, but those living on traditional pensions, annuities or just making do with social security had no real reduction. This is nothing like the situation that existed in the 1930s.
In the 1930s, there was effectively no public safety net. If the breadwinner lost their job, well that was the end of bread for awhile. Millions of people were forced to eke out survival by any means possible, relying to some extent on charity but certainly not collecting unemployment, disability or other public assistance.
Yes, there was a tremendous loss of wealth in this country as real estate returned to levels from the early part of this century, but even those people who lost their homes and their jobs, they are not as bad off as they would have been during the depression.
This is simply no longer an all or nothing economy.
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