The origins of the economic crisis

A good way to understand the origins of the current economic crisis in Australia is to examine the historical behaviour of key macroeconomic aggregates. The previous Federal Government claimed they were responsibly managing the fiscal and monetary parameters and creating a resilient competitive economy. This was a spurious claim they were in fact setting Australia up for crisis. The reality is that the previous government created an economy which was always going to crash badly.

The global nature of the crisis has arisen because over the last 2-3 decades most Western governments including the Australian government succumbed to the neo-liberal myth of budget austerity and introduced policies which allowed the destructive dynamics of the capitalist system to create an economic structure that was ultimately unsustainable. Once this instability began to manifest it was only a matter of time before the system imploded – as we are now seeing.

You can understand my take on this story by looking at the following graphs that I have put together (click on each graph for a larger version). This short blog is a summary of a major study I am conducting on this issue.

The first graph is the so-called “sectoral balances” which plots the Budget Deficit (-), the Current Account balance (- for deficit) and the private domestic balance (difference between Saving and Investment; – for deficit) as a per cent of GDP. The sectoral balances is another way of viewing the national accounts and provides empirical evidence for the influence of fiscal policy over private sector indebtedness. Consider the accounting identity drawn from the national accounts for the three sectoral balances:

(S – I) = (G – T) + (X – M)

The Equation says that total private savings (S) is equal to private investment (I) plus the public deficit (spending, G minus taxes, T) plus net exports (exports (X) minus imports (M)), where net exports represent the net savings of non-residents. Thus, when an external deficit (X – M < 0) and public surplus (G – T < 0) coincide, there must be a private deficit. While private spending can persist for a time under these conditions using the net savings of the external sector, the private sector becomes increasingly indebted in the process.

The graph shows the sectoral balances for Australia. While the current account deficit has fluctuated with the commodity price cycle, it has continued to deteriorate slightly over the longer term. Accordingly, the dramatic shift from budget deficits to surpluses from the mid-1990s onwards has been mirrored by a corresponding deterioration in private sector indebtedness.

The only way the Australian economy could keep growing in the period after 1996 was for the private sector to finance increased spending via increased leverage. As I have explained in other blogs, this is an unsustainable growth strategy. Ultimately the private deficits will become so unstable that bankruptcies and defaults will force a major downturn in aggregate demand. Then the fiscal drag compounds the problem.

The solution is simple. The government balance has to be in deficit for the private balance to be in surplus given a relatively stable external balance. In terms of the slightly worsening current account deficit, we can interpret that as signifying an increased desire by foreigners to place their savings in financial assets denominated in Australian dollars. This desire means that that the foreign sector will allow us to enjoy more real goods and services from them relative to the real goods and services we have to export. We note that exports are always a “cost” while imports are “benefits”. As long as there is a foreign desire for our financial assets, the real terms of trade will provide net benefits to Australian residents which manifests as the current account deficit. An external deficit presents no intrinsic problem despite views by the orthodoxy to the contrary.

sectoral_balances

In the second graph you can see that real wages have failed to track GDP per hour worked (in the market sector) – that is, labour productivity. Real wages fell under the Hawke Accord era which was a stunt to redistribute national income back to profits in the vein hope that the private sector would increase investment. It was based on flawed logic at the time and by its centralised nature only reinforced the bargaining position of firms by effectively undermining the traditional trade union movement skills – those practised by shop stewards at the coalface. Under the Howard years, some modest growth in real wages occurred overall but nothing like that which would have justified by the growth in productivity. In March 1996, the real wage index was 101.5 while the labour productivity index was 139.0 (Index = 100 at Sept-1978). By September 2008, the real wage index had climbed to 116.7 (that is, around 15 per cent growth in just over 12 years) but the labour productivity index was 179.1.

real_wage_productivity_gap

What happened to the gap between labour productivity and real wages? The gap represents profits and shows that during the neo-liberal years there was a dramatic redistribution of national income towards capital. The Federal government (aided and abetted by the state governments) helped this process in a number of ways: privatisation; outsourcing; pernicious welfare-to-work and industrial relations legislation; the National Competition Policy to name just a few of the ways. The next graph depicts the summary of this gap – the wage share – and shows how far it has fallen over the last two decades.

wage_share

The question then arises: if the output per unit of labour input (labour productivity) is rising so strongly yet the capacity to purchase (the real wage) is lagging badly behind – how does economic growth which relies on growth in spending sustain itself? This is especially significant in the context of the increasing fiscal drag coming from the public surpluses which squeezed purchasing power in the private sector since around 1997.

In the past, the dilemma of capitalism was that the firms had to keep real wages growing in line with productivity to ensure that the consumptions goods produced were sold. But in the recent period, capital has found a new way to accomplish this which allowed them to suppress real wages growth and pocket increasing shares of the national income produced as profits. Along the way, this munificence also manifested as the ridiculous executive pay deals that we have read about constantly over the last decade or so.

The trick was found in the rise of “financial engineering” which pushed ever increasing debt onto the household sector. The capitalists found that they could sustain purchasing power and receive a bonus along the way in the form of interest payments. This seemed to be a much better strategy than paying higher real wages. The household sector, already squeezed for liquidity by the move to build increasing federal surpluses were enticed by the lower interest rates and the vehement marketing strategies of the financial engineers. The financial planning industry fell prey to the urgency of capital to push as much debt as possible to as many people as possible to ensure the “profit gap” grew and the output was sold. And greed got the better of the industry as they sought to broaden the debt base. Riskier loans were created and eventually the relationship between capacity to pay and the size of the loan was stretched beyond any reasonable limit. This is the origins of the sub-prime crisis.

The next graphs shows various perspectives on the increasing household indebtedness in Australia. The left hand chart shows the spiralling in the debt to disposable income ratio which stood at 69.1 per cent in March 1996 and by September 2008 had risen to a staggering 156.1 per cent. It was often argued by the Government, the RBA and so-called financial industry experts during the build up period that there was no call for alarm because wealth was growing along with the debt. Well the debt was increasingly purchasing volatile assets other than housing and a fair proportion of the wealth created during that period has gone but the debt remains. The right hand chart shows the servicing burden (interest payments as a percentage of disposable income). This ratio has risen from 5.7 per cent in March 1996 to 15 per cent in September 2008, further squeezing the living standards of the household sector.

hh_debt_income

hh_interestt_income

The problem with this strategy is that is was unsustainable. Household savings went negative as the government budgets went further into surplus. The next graph shows this clearly.

hh_saving_ratio

The only thing maintaining growth was the increasing credit which, of-course, left the nasty overhang – the precarious debt levels. I said years ago that this would eventually unwind as households realised they had to restore some semblance of security to their balance sheets by resuming their saving. Further, this increased precariousness of the household sector meant that small changes in interest rates and labour force status would now plunge them into insolvency much more quickly than ever before. Once defaults started then the triggers for global recession would fire and the malaise would spread quickly throughout the world. I was often criticised by conservatives and neo-liberal types for “crying wolf”. They kept harping on the fact that wealth was rising. Well the wealth has been severely diminished in the crisis but the nominal debt and the servicing commitments remain.

The return to deficits is the first step in recovery. Budget deficits finance private savings and are required if the household balance sheets are to remain healthy. Real wages also have to grow in proportion to labour productivity for spending levels to be maintained with sustainable levels of household debt. The household sector cannot dis-save for extended periods.

In designing the policy framework that will sustain growth in employment and reduce labour underutilisation these tenets have to be central. It also means that the massive executive payouts both in the private and public sector (including universities) have to be stopped and more realistic distributional parameters (more widely sharing the income produced) have to be followed.

Further, the first thing the Federal government should purchase is all the labour that no-one wants. By introducing a Job Guarantee they could offer a minimum wage to all those who wanted work and therefore restore full employment at a fraction of the investment they are proposing to make by way of fiscal stimulus.

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84 Responses to The origins of the economic crisis

  1. James Juniper says:

    Great blog! My only suggestion for future blogs on this theme would be , in regard to your comments about the move into riskier lending territory, to place more emphasis on:

    (a) the efforts of the banking industry to convince respective national governments to further deregulate the finance sectors (e.g. repeal of Glass-Spiegel Act in the US and the deregulation policies maintained by the Blair and Brown governments in the UK);

    (b) the inadequacies of Basel-II, which favoured both internal modeling techniques affording too much influence to easily-compromised ratings agencies, and dubious processes of generating securitised collateral, where the associated risk was on-sold to institutions situated outside the province of the heavily regulated trading bank sector.

    I would also note that development models in 1960s and 1970s East Asia and early post-war Japan avoided the down-sides of such a debt-driven spending strategy through a combination of repressed-consumption and state-managed promotion of investment (an approach that is currently embraced by China).

  2. Alan Dunn says:

    Hello Bill,

    Great article / blog which unfortunately would be beyond the scope of politicians or the reptiles that advise them upon economic and financial matters.

    good times ahead I’m sure.

  3. bill says:

    Dear Alan

    Thanks for the comment. Blogs can be educative perhaps. I guess we will learn this the hard way but eventually we will learn it. The middle class are being levelled by this crisis and they are the ones that swing back and forth to substantiate paradigm changes.

    best wishes, bill

  4. Alan Dunn says:

    Dear Bill,

    “The middle class are being levelled by this crisis and they are the ones that swing back and forth to substantiate paradigm changes.”

    If I read this correctly ,then by destroying the middle-class, neo-liberalism will be able to resist the paradigm change.

    Cheers, Alan

  5. alienated says:

    Hi Professor Mitchell,

    I am finding your blog very interesting and thought-provoking.

    The reason for this post is that I have been following a different argument on the origins of the crisis presented by Andrew Kliman and Alan Freeman, which draws on Marx’s tendency for the rate of profit to fall.

    (I realize this tendency stands or falls with Marx’s theory of value, but Kliman and Freeman are associated with the “temporal single-system interpretation” (TSSI) of Marx, which claims to have refuted existing critiques of Marx’s theory – their arguments are summarised by Kliman in his book Reclaiming Marx’s “Capital”: A Refutation of the Myth of Inconsistency.)

    I would be very interested in your opinion on Kliman’s argument.

    Briefly, Kliman argues that capitalism cannot be set back on a sustainable high-growth course until profitability recovers to something like the level attained after the Great Depression and WWII – or at least until profitability recovers to levels well above those that have prevailed at the onset of each unsustainable recovery since the 1970s.

    According to Kliman, in 1932 the rate of profit had sunk to –2%. By 1943, due to massive destruction of capital – both in value and physical terms – the rate of profit had risen to 30%. He argues that it was this strong revival in profitability that lay the basis for strong growth in the immediate post-war period.

    Since then, however, the rate of profit has tended to recover, after crises, to lower and lower levels. According to Kliman, from 1941-1956, the rate of profit averaged 28%. From 1957-1980 it averaged 20%. From 1981-2004 it averaged 14%. The reason for the decline in profitability, he argues, is that governments have stepped in during crises (e.g. in the 1970s, early 1980s, and now) in an attempt to prevent the degree of capital destruction that occurred during the Great Depression and WWII, for obvious reasons. For Marx, the functional role of capitalist crises is to restore profitability, but this has not been allowed to occur sufficiently (in terms of the system’s requirements) – for political and, yes, humane reasons.

    But in limiting the degree of capital destruction, Kliman argues, revival of profitability is also prevented, causing stagnationist tendencies that have been overcome only through unsustainable debt and the consequent creation of speculative bubbles.

    In my view (though Kliman doesn’t argue this, at least in the link provided below), the ongoing vicious attacks on real wages and workers’ living conditions of the past thirty-five years or so can be regarded as an attempt by capitalists (and neoliberal governments) to prop up the rate of profit.

    A more in-depth summary of Kliman’s argument can be found here:

    http://marxisthumanistinitiative.org/2009/04/17/on-the-roots-of-the-current-economic-crisis-and-some-proposed-solutions/

    alienated

  6. Michael says:

    The formula in the USA for the period 1980-2007 is really very simple (and it is what all “bailouts” and Fed money-printing are aimed at restoring): As productivity increases, real wages go down (that’s right, Virginia, “productivity” gains are always good for employers, but only good for employees if something makes the employers share those gains – which they really don’t want to do). The demand gap created by falling wages is filled (and demand is greatly expanded) by a big growth in consumer debt. You have reviewed it well, Bill. This process requires no specific government action other than to get out of the way (though in a starting environment like USA 1980, where there were existing government supports for wages and government restrictions on credit creation, pro-active government steps consisting of removing wage supports – including labor organizing laws – and removing credit creation restrictions, enhances the process).

    In theory, if allowed to continue uninterrupted, as long as 1) lenders will lend to all who seek to borrow and 2) borrowers will borrow from all who will lend and 3) borrowers will make all their interest payments and 4) borrowers will repay all the principal or lenders will refinance all debt, then productivity can increase to 100% (assuming all goods and services are eventually produced by machines) and all the former wage earners will pay for all their consumer expenses with borrowed money. Total consumer debt will never go higher than GDP – in fact, the way GDP is measured increases in debt on the books (and all the financial activity to expand and service debt) raises GDP. This theory is part and parcel of neo-liberalism, which is not only inherently anti-government it is also inherently anti-labor (it is, in fact, only pro-capitalist – with an open worship of “entrepreneurs”). This whole model is not workable in the real world for too many reasons to discuss here, all of which would be obvious to a bright 6th-grader. In the USA the neo-liberal experiment from 1989-2007 first started breaking down (in the USA) toward the end of 2005 when the interest payments on debt undertaken by families to maintain or increase consumption reached levels of interest due higher than available income received (during the transition, people who had been taking home-equity loans to consolidate credit card debt started taking on additional credit card debt to meet their mortgage payments. “Financial innovation” (no-down payment loans, liar loans, interest-only loans, and zero-pay loans) only accelerated the credit ride up and the fall back down by loading up low-income families with big debts, it wasn’t necessary for the process to be unsustainable. The tipping point came when families couldn’t meet their interest payments – most commonly on mortgage debt, but only because paper-gains real estate equity extraction had become the primary form of debt expansion for consumer purchases. The rest is history, with the actual “credit crisis” (in which lending froze up and even when dethawed remained on a declining trajectory) coming only after consumer borrowing had gone into spasm. All the subsequent banking and commercial problems have resulted simply and directly from the reversal of the consumer debt growth that so wonderfully replaced wage growth for almost thirty years.

    Looking forward, we ask “Will the governments – by bank and mortgage bailouts, or by money-printing, or by any other means, be able to restore the status quo ante as they so desperately desire”? The neo-liberal answer is yes, as soon as they get all the borrowing back to the level it was before. There is no room in the neo-liberal world for returning to wage growth, only for returning to credit growth (remember, “productivity is King”). Your model, Bill, as I understand it, points toward addressing wage growth rather than credit growth as a means to restore purchasing power and economic prosperity. I think you are on the more economically sound and socially healthier path, but sadly I don’t believe for a moment that any Anglo-American-Australian-type government will pay you any attention.

  7. alienated says:

    Regarding the explanation of the crisis that I mentioned above, Kliman has made available a new study on US corporate profitability and its connection (in his view) with crises, including the current one. It is still in draft form and can be found here (along with the data used in the study):

    http://akliman.squarespace.com/persistent-fall/

    The paper is long (about 27000 words). A brief summary of his findings can be found here:

    http://marxisthumanistinitiative.org/2009/10/18/the-persistent-fall-in-profitability-underlying-the-current-crisis/

  8. Sergei says:

    Bill and everybody,

    would it be an objective point to start saying that wages as share of GDP should be 50% (or least never go below this point if we say that government is out there for all people) and then design public policies toward this objective? Like personal tax vs capital gain and corporate tax.

    If yes then on this metric Australia still fares pretty well.

  9. Income and wealth inequality develops by not rewarding labor for their productivity, as the professor has just shown us. It is the root cause of financial instability. Capital, and the need for capital must be balanced, for an economy to function stably.

    If the accumulation of capital exceeds the need for capital to fund growth, the taxes on wealth and capital gains must be increased, and that on consumption and consumer income decreased .

    If consumer demand, and the attendant capital needs, outpace capital accumulation, the reverse is required. Taxes then should be shifted from capital gains to consumption and consumer income.

    Over the past several decades capital accumulation has outpaced the demand for capital, largely due to reductions in top bracket tax rates and stagnation of middle class incomes. The discussion that follows shows what happens when this occurs.

    If too much capital is accumulated, rates of return on capital drop. As rates of return drop, capitalists seek ways to improve them through the use of leverage or through the use of techniques to increase the demand for credit.

    If leverage is used , risk increases, necessitating even larger rates of return. This leads to a potentially unstable situation. So there is a limit to the amount of leverage that can be used.

    As the limits of leverage are reached, investment banks and hedge funds will look for ways to stimulate demand for credit. This can be done by relaxing the standards for issuing credit, and compensating by using techniques to hide risk.

    By collateralizing debt and issuing insurance on debt capitalists can be made to feel more comfortable with less secure investments. Debt issued with relaxed credit standards can be mixed with more secure debt making it harder for rating agencies to correctly assess risks. If regulation does not keep up with these measures, or decreases, the value of the collateralized assets and insurance instruments will be jeopardized.

    Excess capital can also result in additional risky speculation. When returns on productive investments are low and approaching inflation levels, capitalists will be willing to take larger risks in short term speculation on valuable assets and commodities, causing prices to rise. In turn, the rise in prices creates an upward momentum in asset prices that attracts even more speculation. Such price bubbles tend to be self sustaining as more and more capitalists are willing to take advantage of the upward momentum in prices, until eventually that trend cannot be sustained and the bubbles burst.

    All of these measures are driven by the need to increase returns on capital, when there is just too much capital for the real investment needs of the country. This is the situation that has developed over the last few decades largely because returns have been going more and more to capitalists while workers wages have stagnated. With stagnating wages, the demand for goods and services has not kept up with the accumulation of capital.

    The stagnation of wages has caused consumers to seek returns in the financial sector and to tap available credit to sustain consumption. This is evidenced by the excessive growth of the financial sector. At the same time, high income and capital gains tax rates have been reduced, accelerating the income and wealth gap between capitalists and middle class consumers.

    Unless taxes are shifted to wealth and capital gains from consumption and consumer incomes, this increasing spread in income and wealth will continue to cause instability and the kind of financial crises we are now experiencing.

  10. Fed Up says:

    Future references:

    http://voxeu.org/index.php?q=node/5823
    Debt, deleveraging, and the liquidity trap – krugman
    *****
    http://bilbo.economicoutlook.net/blog/?p=13193
    When will the workers wake up?
    *****
    http://bilbo.economicoutlook.net/blog/?p=13206
    Saturday Quiz – January 22, 2011 – answers and discussion (Wage Share)
    *****
    bill, I like how I can add to a post this far in the future. Thanks for that!!!

  11. Fed Up says:

    More Future References:
    *****
    http://krugman.blogs.nytimes.com/2012/04/28/where-the-productivity-went/
    Where The Productivity Went
    *****
    http://www.epi.org/publication/ib330-productivity-vs-compensation/
    The wedges between productivity and median compensation growth
    By Lawrence Mishel | April 26, 2012

    “Conclusion
    Productivity growth has frequently been labeled the source of our ability to raise living standards. This is sometimes what is meant by the call to improve our “competitiveness.” In fact, higher productivity is an important goal, but it only establishes the potential for higher living standards, as the experience of the last 30 or more years has shown. Productivity in the economy grew by 80.4 percent between 1973 and 2011 but the growth of real hourly compensation of the median worker grew by far less, just 10.7 percent, and nearly all of that growth occurred in a short window in the late 1990s. The pattern was very different from 1948 to 1973, when the hourly compensation of a typical worker grew in tandem with productivity. Reestablishing the link between productivity and pay of the typical worker is an essential component of any effort to provide shared prosperity and, in fact, may be necessary for obtaining robust growth without relying on asset bubbles and increased household debt. It is hard to see how reestablishing a link between productivity and pay can occur without restoring decent and improved labor standards, restoring the minimum wage to a level corresponding to half the average wage (as it was in the late 1960s), and making real the ability of workers to obtain and practice collective bargaining.”
    *****
    Try putting more people into retirement to tighten up the labor market.

  12. Fed Up says:

    And even more future references:

    Debt inequality is the new income inequality

    By Tami Luhby @CNNMoney May 2, 2012: 5:26 AM ET

    http://money.cnn.com/2012/05/02/news/economy/income-debt-inequality/index.htm
    *****
    Debt Serfdom in One Chart

    The essence of debt serfdom is debt rises to compensate for stagnant wages. (probably should be real wages)

    Friday, May 04, 2012

    http://charleshughsmith.blogspot.com/2012/05/debt-serfdom-in-one-chart.html

    plus the Doug Short chart
    *****
    Leveraging Inequality

    Finance & Development, December 2010, Vol. 47, No. 4

    Michael Kumhof and Romain Rancière

    http://www.imf.org/external/pubs/ft/fandd/2010/12/Kumhof.htm

    At end, “Restoring equality by redistributing income from the rich to the poor would not only please the Robin Hoods of the world, but could also help save the global economy from another major crisis.”

    No mention of banking/hedge fund in there. Replace major crisis with a too much debt crisis. Too much gov’t debt and too much private debt are both medium of exchange problems. Increasing the amount of medium of exchange while having a zero private debt and zero public debt economy helps allow productivity gains and other things to be evenly distributed between the major economic entities and evenly distributed in time. It also helps to eliminate:

    savings of the rich = dissavings of the gov’t (preferably with debt) plus dissavings of the lower and middle class (preferably with debt)

    And, also helps to eliminate the idea that the amount of medium of exchange in circulation can fall due to debt defaults and/or debt repayments.

    Those are all problems from targeting price inflation and/or NGDP and assuming real aggregate demand is unlimited and doing nothing else.

  13. Fed Up says:

    And again more future references:

    http://www.calculatedriskblog.com/2012/06/fed-survey-from-2007-to-2010-median.html

    From the Federal Reserve: Changes in U.S. Family Finances from 2007 to 2010: Evidence from the Survey of Consumer Finances (ht MS)

    http://www.federalreserve.gov/pubs/bulletin/2012/pdf/scf12.pdf

    “The Federal Reserve Board’s Survey of Consumer Finances (SCF) for 2010 provides insights into changes in family income and net worth since the 2007 survey. The survey shows that, over the 2007–10 period, the median value of real (inflation-adjusted) family income before taxes fell 7.7 percent; median income had also fallen slightly in the preceding three-year period. The decline in median income was widespread across demographic groups, with only a few groups experiencing stable or rising incomes.”

    And, “The decreases in family income over the 2007−10 period were substantially smaller than the declines in both median and mean net worth; overall, median net worth fell 38.8 percent, and the mean fell 14.7 percent (figure 2).Median net worth fell for most groups between 2007 and 2010, and the decline in the median was almost always larger than the decline in the mean. The exceptions to this pattern in the medians and means are seen in the highest 10 percent of the distributions of income and net worth, where changes in the median were relatively muted. Although declines in the values of financial assets or business were important factors for some families, the decreases in median net worth appear to have been driven most strongly by a broad collapse in house prices.”

    And, “The only group (by income) with an increase in the median net worth was the top 10%. There is much more in the survey.”

  14. Fed Up says:

    Yet another future reference:

    http://www.econbrowser.com/archives/2012/06/guest_contribut_19.html

    Guest Contribution: “Labor Shares and Corporate Savings”

    “The stability of the labor share, the proportion of an economy’s total income paid out to workers as compensation for their time, has long stood as one of the principal stylized facts of economic growth. While this regularity may very well hold across centuries or in the long run, our recent work demonstrates the failure of this characterization over the last three decades. In “Declining Labor Shares and the Global Rise of Corporate Savings,” (Karabarbounis and Neiman, 2012) we show that labor shares have eroded in most countries around the world, including seven of the eight largest. Globally, corporations paid about 65 percent of their income to labor (as opposed to capital) in 1975, compared with about 60 percent in 2007.1 This trend can be seen in the red dashed line in Figure 1, which plots year fixed effects from a regression of labor shares each year in the eight largest economies that also absorbs country fixed effects.2″

    “Changes in the labor share have broad implications for inequality and for our understanding of how firms operate. We also demonstrate that the labor share declines were associated with increases in corporate profits and corporate savings, which equal the portion of profits which were not paid out as dividends. Indeed, all eight of the world’s largest economies saw an increase in the share of their total savings originating in the corporate sector rather than from households or the government. Corporate savings accounted for a minority of total global savings in 1975 but contributed a majority by 2007. The upward sloping black line in Figure 1 plots year fixed effects from a regression of the share of total savings due to the corporate sector in the eight largest economies after absorbing country fixed effects. The increase of more than 20 percentage points is striking. In essence, thirty years ago global investment was primarily funded by household savings whereas now it is primarily funded by the savings of corporations.

    What caused these trends? …”

  15. Wekasus says:

    I think that it is cool that ‘Fed Up’ continues to add info here! :)

  16. Fed Up says:

    Back again.

    Majority of New Jobs [in the USA] Pay Low Wages, Study Finds

    http://www.nytimes.com/2012/08/31/business/majority-of-new-jobs-pay-low-wages-study-finds.html

    It starts with:

    “While a majority of jobs lost during the downturn were in the middle range of wages, a majority of those added during the recovery have been low paying, according to a new report from the National Employment Law Project.

    The disappearance of midwage, midskill jobs is part of a longer-term trend that some refer to as a hollowing out of the work force, though it has probably been accelerated by government layoffs.

    “The overarching message here is we don’t just have a jobs deficit; we have a ‘good jobs’ deficit,” said Annette Bernhardt, the report’s author and a policy co-director at the National Employment Law Project, a liberal research and advocacy group.”

    Wekasus, thank you! I hope you find the posts informative and useful.

    Thanks to bill for allowing posts this far in the future and an ongoing discussion.

  17. Fed Up says:

    Still at it.

    Labor Day, Income & The Middle Class

    Charts:

    MEDIAN INCOME

    PERCENTAGE OF OVERALL US INCOME

    SIZE OF MIDDLE CLASS

    COSTS OF MIDDLE CLASS LIFESTYLE

    MIDDLE CLASS DEBT LEVELS

    http://www.ritholtz.com/blog/2012/09/the-middle-class/

  18. Fed Up says:

    Still more to be done!

    PRIVATE Debt Is the Main Problem

    http://www.ritholtz.com/blog/2012/09/private-debt-is-the-main-problem/

    I believe gov’t debt can be a problem too.

  19. Fed Up says:

    Will it ever end?

    Income, Poverty and Health Insurance Coverage in the United States: 2011

    http://www.census.gov/newsroom/releases/archives/income_wealth/cb12-172.html

    “In 2011, real median household income was 8.1 percent lower than in 2007, the year before the most recent recession, and was 8.9 percent lower than the median household income peak that occurred in 1999. The two percentages are not statistically different from one another.”

    Behind the Decline in Incomes

    http://economix.blogs.nytimes.com/2012/09/12/behind-the-decline-in-incomes/

    “4. There’s more evidence that the work force is “hollowing out,” as there was significant job growth in the first, second and fifth income quintiles, but not in the third and fourth ones.”

    Average Hourly Earnings:
    Deciphering Historical Trends

    http://advisorperspectives.com/dshort/commentaries/Average-Hourly-Wage-Trends.php

    The End of the Middle Class Century: How the 1% Won the Last 30 Years

    http://www.theatlantic.com/business/archive/2012/09/the-end-of-the-middle-class-century-how-the-1-won-the-last-30-years/262221/

  20. Fed Up says:

    The IMF should not exist, and I don’t agree with everything here but …

    http://blog-imfdirect.imf.org/2012/09/13/united-states-how-inequality-affects-saving-behavior/

    “Saving patterns before the crisis

    To analyze individual household behavior, we used the Panel Study of Income Dynamics, a well-established dataset that collects data from the same households over time. Our key finding is that that households with consistently lower income growth experienced larger declines in their saving rates and a larger rise in their MORTGAGE [MY emphasis & most likely from a BANK] debt before the crisis. We also find that these types of households contributed significantly to the overall decline in the saving rate.

    For instance, the households with the bottom third of income growth over 1999–2007 accounted for half of the decline in the overall saving rate over the same period. This finding is surprising because economic theory would predict that households save less when their income falls temporarily, but not when the fall is highly persistent [NOT if economists & politicians tell them things will get better]. By contrast, we don’t find a large decline in the saving rates of families with consistently lower income levels; their saving rates have always been lower than the saving rates of higher income families.

    Our results suggest that households with disappointing income growth attempted to preserve their living standards in the boom years by tapping into their housing equity [WAGES not keeping up with prices? , monthly budgeting].

    Their decisions did not anticipate the impending correction in house prices, the weaker economy, and lower incomes.The easy availability of home equity financing allowed households with low income growth to at least temporarily “keep up with the Joneses”; in other words, consumption inequalities remained smaller than income inequalities. With the subsequent housing crash, those households already suffering from lowest income growth found themselves more vulnerable, with high levels of debt [MORE monthly budgeting].

    Another interesting finding is that the decline in saving rates was larger for households with bottom third of income growth than for those who experienced the top third of house price increases. On the basis of this finding, it seems worth examining further whether the decline in the saving rate prior to the crisis reflects more the declining opportunities—GRASPING FOR THE LAST STRAW TO PREVENT DECLINING LIVING STANDARDS (MY emphasis)—rather than the story of winners in the “housing lottery” consuming their windfalls.

    Saving patterns after the crisis

    How did households fare after the crisis?

    We found that those more dependent on housing wealth and those with higher debt levels on the eve of the crisis indeed raised their savings sharply after the crisis. Yet, as this sharp correction started from very depressed and even negative saving rates, these households have not yet made meaningful progress in reducing debt and repairing their balance sheets. Hence, these households may face grim future consumption prospects.

    Taken together, our results do suggest that the lower income growth for segments of the income distribution was linked to the drop in saving rates and growing indebtedness of American families. Moreover, households that entered the crisis with a more precarious wealth situation have made limited progress in rebuilding their net worth (the difference between household financial and nonfinancial assets and their debt) by actively saving out of their incomes.

    Recent data on household finances indeed show that at least half of the American families had lower net worth (in inflation-adjusted terms) in 2010 than they did two decades ago (the median American family in 2010 had a net worth of $77,000, compared with $126,000 in 2007 and $79,000 in 1989).

    The data also shows that the share of the population that saved any of their income dropped from 54.6 percent to 52 percent between 2007 and 2010.

    Unless their incomes and house prices pick up robustly, many households will need sustained levels of higher savings to rebuild wealth, making it less likely for the American consumer to drive U.S. growth.”

  21. Fed Up says:

    A few more …

    Is US economic growth over? Faltering innovation confronts the six

    http://www.voxeu.org/article/us-economic-growth-over

    Hard Times Come Again Once More

    http://www.economicprincipals.com/issues/2012.09.23/1419.html

    Hard Times??? My FOOT!

    If the economic situation was handled correctly, there should be very little of the “Hard Times”!

  22. Wekasus says:

    Your a trooper Fed Up! :)

  23. Fed Up says:

    Left out the titles for the ones just above (12:35).

    Labor’s Declining Share of Income and Rising Inequality
    — some talk about Labor Income & Capital Income

    Behind the Decline in Labor’s Share of Income

  24. Fed Up says:

    All stakeholders should be involved. From:

    Higher Wages Are The Key to Rebuilding the American Dream: Pulitzer-Prize Winning Reporter

    http://finance.yahoo.com/blogs/daily-ticker/key-growing-economy-pay-workers-more-says-hedrick-155918542.html

  25. Fed Up says:

    Sort of related to productivity & too much debt. Pimco is actually part of the problem but …

    More People Over 65 Are Still Working

    http://blogs.wsj.com/economics/2012/10/08/more-people-over-65-are-still-working/

    What’s Your Number at the Zero Bound? (Has to do with retirement)

    http://www.pimco.com/EN/Insights/Pages/Whats-Your-Number-at-the-Zero-Bound.aspx

  26. Fed Up says:

    Time for Some More

    The Uncomfortable Truth About American Wages

    http://economix.blogs.nytimes.com/2012/10/22/the-uncomfortable-truth-about-american-wages/

    “This finding of stagnant wages is unsettling, but also quite misleading. For one thing, this statistic includes only men who have jobs. In 1970, 94 percent of prime-age men worked, but by 2010, that number was only 81 percent. The decline in employment has been accompanied by increases in incarceration rates, higher rates of enrollment in the Social Security Disability Insurance program and more Americans struggling to find work. Because those without jobs are excluded from conventional analyses of Americans’ earnings, the statistics we most commonly see — those that illustrate a trend of wage stagnation — present an overly optimistic picture of the middle class.

    When we consider all working-age men, including those who are not working, the real earnings of the median male have actually declined by 19 percent since 1970. This means that the median man in 2010 earned as much as the median man did in 1964 — nearly a half century ago. Men with less education face an even bleaker picture; earnings for the median man with a high school diploma and no further schooling fell by 41 percent from 1970 to 2010.

    Women have fared much better over these 40 years, but they started from a lower level, and the same problems faced by their male counterparts are beginning to have an effect. Since 1970, the earnings of the median female worker have increased by 71 percent, and the share of women 25 to 64 who are employed has risen to 71 percent, from 54 percent. But after making significant wage gains over several decades, that progress has slowed and even reversed recently. Since 2000, the earnings of the median woman have fallen by 6 percent.”

  27. Fed Up says:

    Some talk about the “jobs” recovery in the USA:

    http://globaleconomicanalysis.blogspot.com/2012/11/explosion-in-uncovered-employment.html

    “Covered employment is the set of working employees that have unemployment benefits.”

    And, “I added data points to Tim’s chart. Let’s do the math.

    According to the BLS, the economy added 4,951,000 since January 2009. In the same timeframe, uncovered employment rose by 6,573,468! The difference is 1,622,468.

    Got that?

    133% of the jobs created since January 2009 are not covered. Employment rose by less than 5 million while uncovered employment rose by over 6.5 million.”

  28. Fed Up says:

    This Time is Different, Again? The United States Five Years after the Onset of Subprime

    Carmen M. Reinhart and Kenneth S. Rogoff

    http://www.scribd.com/fullscreen/110191703?access_key=key-1gvz59t1cbvkq7nqew4l

    *****

    The Middle Class Is Worse Off Than You Think: Michael Greenstone

    http://finance.yahoo.com/blogs/daily-ticker/middle-class-worse-off-think-michael-greenstone-133855510.html

    *****

    Finding Jobs, But Working For Less Pay

    http://finance.yahoo.com/news/finding-jobs-working-less-pay-010500333.html

    *****

    Tax Cuts for the Wealthiest Don’t Stimulate the Economy: Report

    http://finance.yahoo.com/blogs/daily-ticker/tax-cuts-wealthiest-don-t-stimulate-economy-report-160714639.html

    http://graphics8.nytimes.com/news/business/0915taxesandeconomy.pdf

    *****

    Retirement Plan Shift Is Creating a Generation of Workers Unable to Retire

    http://finance.yahoo.com/news/retirement-plan-shift-is-creating-a-generation-of-workers-unable-to-retire.html

  29. Fed Up says:

    Is it possible that there is wealth/income inequality for businesses too?

    Meet the Four Companies That Together Provided Most of 2012 Earnings Growth in the S&P 500

    Apple, AIG, Goldman Sachs, and Bank of America

    http://www.slate.com/blogs/moneybox/2012/11/26/apple_aig_goldman_sachs_and_bank_of_america_provided_most_of_2012_s_earnings.html

  30. Fed Up says:

    Jobs, Productivity and the Great Decoupling

    http://www.nytimes.com/2012/12/12/opinion/global/jobs-productivity-and-the-great-decoupling.html?_r=0

    “The Great Decoupling is not going to reverse course, for the simple reason that advances in digital technologies are not about to stop. In fact, we’re convinced that they are accelerating. And this should be great news for society. Digital progress lowers prices, improves quality, and brings us into a world where abundance becomes the norm.

    But there is no economic law that says digital progress will benefit everyone evenly. As technology races ahead it can leave a lot of workers behind. In the short run we can improve their prospects greatly by investing in infrastructure, reforming education at all levels and encouraging entrepreneurs to invent the new products, services and industries that will create jobs.

    While we’re doing this, however, we also need to start preparing for a technology-fueled economy that’s ever-more productive, but that just might not need a great deal of human labor. Designing a healthy society to go along with such an economy will be the great challenge, and the great opportunity, of the next generation.

    We have to acknowledge that the old ride of tightly coupled statistics has ended, and start thinking about what we want the new ride to look like.”

    New ride might look like more retirement?

  31. Fed Up says:

    Krugman’s Explanation of Stagnant Real Wages

    http://economistsview.typepad.com/economistsview/2012/12/krugmans-explanation-of-stagnant-real-wages.html

    “Another reader made a similar criticism: “The argument depends on the theory that workers are paid their marginal product. Some people hold to this old idea, however it is not supported by the empirical evidence.” Amen.

    For further discussion of criticisms of marginal productivity theory (a two part paper), see here and here.”

    http://www.paecon.net/PAEReview/issue59/Moseley59.pdf

    http://www.paecon.net/PAEReview/issue61/Moseley61.pdf

    “It is time we stop talking about marginal products and look for other better, logically consistent and empirically supported theories of the distribution of income.

    I agree with Krugman in a subsequent post where he stated: “If you want to understand what’s happening to income distribution in the 21st century, you need to stop talking so much about skills, and start talking much more about profits and who owns the capital.”

    But marginal productivity theory is not a coherent way to talk about profits.

    Fred Moseley
    Mount Holyoke College”

  32. Fed Up says:

    Richard Koo Debunks the “Deleveraging is Almost Done, American Consumer Getting Ready for Good Times” Meme

    http://www.nakedcapitalism.com/2013/01/richard-koo-debunks-the-deleveraging-is-almost-done-american-consumer-getting-ready-for-good-times-meme.html

    “And the implications…

    The answer can also be found in Figure 1:the fact that the latest white bar is below zero means households drew down financial assets in the quarter. And that is hardly a good sign. It has happened only three times since 2000, including the present occasion.

    The first instance (barely visible in the graph) was in 2000 Q4, when the Internet bubble collapsed. The second was in 2008 Q4, when the failure of Lehman Brothers sparked a global financial crisis. People faced cash flow problems in both periods andprobably were forced to draw down existing savings to make necessary payments.

    During the bubble period towards the middle of Figure 1, much attention was paid to the fact that the US household savings rate had turned negative. While the sector did run a financial deficit during this period, the deficit was attributable to the fact that the increase in financial liabilities (ie growth in borrowing) was greater than the increase in financial assets (ie growth in savings). There was no drawdown of financial assets.

    Hence we need to pay attention to the fact that the latest figure shows only the third drawdown of financial assets since 2000 and that this drawdown is responsible for the financial deficit in the broader household sector. The reason: if household consumption is being financed by the drawdown of financial assets, it is not likely to be sustainable.”

  33. Fed Up says:

    Median Household Incomes: Down 0.5% in 2012

    http://advisorperspectives.com/dshort/updates/Median-Household-Income-Update.php

    “Overview: The Sentier Research monthly median household income data series is now complete through 2012. Nominal household incomes rose 1.3% for the calendar year, but adjusted for inflation, household incomes declined by 0.5%. Real household incomes have essentially been flat for the past seven months and are down 7.9% thus far in the 21st century.”

  34. Fed Up says:

    http://www.ritholtz.com/blog/2013/01/job-growth-productivity-and-labor-force-2/

    20 Years – Net Job Creation , Labor Productivity , Labor Force Participation Rate

    See chart(s) there.

  35. Fed Up says:

    http://www.bloomberg.com/news/2013-02-27/what-bernanke-didn-t-say-about-housing.html

    “What Bernanke Didn’t Say About Housing”

    “One of the more interesting exchanges at Ben Bernanke’s testimony to the Financial Services Committee today was the one between the Federal Reserve chairman and Representative Scott Garrett, a Republican from New Jersey.

    Citing Bernanke’s assertion that one of the benefits of QE had been the rise in home prices, Garrett said the following:

    “Previously you have said that the Fed’s monetary policy actions earlier this decade, 2003 to 2005, did not contribute to the housing bubble in the U.S. So which is it? Is monetary policy by the Fed not a cause of inflationary prices of housing, as you said in the past? Or is it a cause of inflating prices of housing? Can you have it both ways?”

    “Yes,” Bernanke said, much to Garrett’s surprise. The increase in home prices now is justified by the low level of mortgage rates, he said. On the other hand, those rates averaged 6 percent in the early part of the last decade and “can’t explain why house prices rose as much as they did.”

    What he didn’t say was that the percentage of adjustable-rate mortgages soared to a record 37 percent of total mortgage volume in 2005. From mid-2003 to mid-2006, ARM volume averaged 30 percent. The interest rate on ARMs is priced off the Fed’s overnight rate. It was this type of loan that witnessed the most egregious underwriting abuses and the highest delinquency and foreclosure rates.

    Garrett 1, Bernanke 0.

    Garrett wasn’t finished. He asked Bernanke about another presumed benefit of QE: higher stock prices.

    “I’m sure you’re familiar with Milton Friedman’s work that says that people only really consume off of their permanent income, which basically means that you don’t consume — increase consumption — because your stocks have gone up in the marketplace,” Garrett said, before wandering off into areas such as how seniors should invest, “risk-taking” and “price discovery” in a market distorted by the Fed.

    These are all good questions. I’ve asked many of them myself, most recently in my column today. The Fed is convinced it has the tools, regulatory wherewithal and forecasting acumen to prevent a misallocation of credit, better known as an asset bubble, with the potential to destabilize the financial system.

    Like Congressman Garrett, I’m not so sure.”

  36. Fed Up says:

    Back for more:

    What Happened to Wages?

    Below are five data graphics from my new book An Illustrated Guide to Income in the United States (pgs 106, 108, 109, 110, 112) that shows the long-term growth in wages in the US.

    http://visualizingeconomics.com/blog/2013/3/4/wages

    And,

    The U.S. Economy in the 1920s

    http://eh.net/encyclopedia/article/smiley.1920s.final

    “Earnings for laborers varied during the twenties. Table 1 presents average weekly earnings for 25 manufacturing industries. For these industries male skilled and semi-skilled laborers generally commanded a premium of 35 percent over the earnings of unskilled male laborers in the twenties. Unskilled males received on average 35 percent more than females during the twenties. Real average weekly earnings for these 25 manufacturing industries rose somewhat during the 1920s. For skilled and semi-skilled male workers real average weekly earnings rose 5.3 percent between 1923 and 1929, while real average weekly earnings for unskilled males rose 8.7 percent between 1923 and 1929. Real average weekly earnings for females rose on 1.7 percent between 1923 and 1929. Real weekly earnings for bituminous and lignite coal miners fell as the coal industry encountered difficult times in the late twenties and the real daily wage rate for farmworkers in the twenties, reflecting the ongoing difficulties in agriculture, fell after the recovery from the 1920-1921 depression.”

    “The shift from coal to oil and natural gas and from raw unprocessed energy in the forms of coal and waterpower to processed energy in the form of internal combustion fuel and electricity increased thermal efficiency. After the First World War energy consumption relative to GNP fell, there was a sharp increase in the growth rate of output per labor-hour, and the output per unit of capital input once again began rising. These trends can be seen in the data in Table 3. Labor productivity grew much more rapidly during the 1920s than in the previous or following decade. Capital productivity had declined in the decade previous to the 1920s while it also increased sharply during the twenties and continued to rise in the following decade.”

    Table 3 says 5.44% growth 1919 to 1929.

  37. Fed Up says:

    Keywords for last post:

    1920 , 1920′s , 1924 , 1927 , 1929

  38. Fed Up says:

    This does not help monthly budgets.

    U.S. Health Care Prices Are the Elephant in the Room

    By UWE E. REINHARDT

    http://economix.blogs.nytimes.com/2013/03/29/u-s-health-care-prices-are-the-elephant-in-the-room/

  39. Fed Up says:

    Census Bureau: More renters with high housing costs

    http://www.housingwire.com/fastnews/2013/04/16/census-bureau-more-renters-high-housing-costs

    “The number of U.S. households that rent rather than own a home rose from 34.1% in 2009 to 35.4% in 2011. Nearly 25% of the nation’s metros saw a rise in renting households, while less than 3% saw a drop.

    The study revealed that more renters are spending a high percentage of their income on rent. In this report, renters spending 35% or more of household income on rent and utilities are considered to have high rental costs.

    The number of renters with high housing costs in the U.S. increased from 42.5% in 2009 to 44.3% in 2011. However, average rental rates in the U.S. declined during the same time period.

    “While we saw a decrease in rental vacancy rates and pricing in some areas, the burden of rental costs on households increased across many parts of the nation,” said Arthur Cresce, assistant division chief for housing characteristics at the Census Bureau.

    He added, “Factors such as supply and demand for rental housing and local economic conditions play an important role in helping to explain these relationships.”"

    Not helping the monthly budget.

  40. Fed Up says:

    http://advisorperspectives.com/dshort/guest/Lance-Roberts-130509-Labor-Hoarding.php

    “Of course, one of the highest “costs” to any business is labor. One way that we can measure this view is by looking at corporate profits on a per employee basis. Currently, that ratio is at the highest level on record.”

    “However, the mistake is assuming that just because initial claims are declining that the economy, and specifically full-time employment, is markedly improving. The next chart shows initial jobless claims versus the full-time employment-to-population ratio.”

    “The current detachment between the financial markets and the real economy continues. The Federal Reserve’s interventions continues to create a wealth effect for market participants, however, it is unfortunate that such a wealth effect is only enjoyed by a small minority of the total population – and it is primarily those at the upper end of the pay scale that have jobs.”

  41. Fed Up says:

    May Employment Report Offers Little Cause for Celebration

    http://www.ritholtz.com/blog/2013/06/may-employment-report-offers-little-cause-for-celebration/

    “The greatest issue plaguing the U.S. economic recovery is the dismal pace of real income and wage growth. As long as incomes do not keep up with the underlying rate of inflation, the economy cannot manage enough growth to foster job creation. Average hourly earnings were unchanged in May, and only 2 percent higher than year ago levels. In other words, consumers are simply running in place. This is particularly frustrating for those at the lower end of the income spectrum.

    According to the report, 96,300 of the 175,000 new nonfarm jobs created last month were in very low wage industries (retail, 27,000), temporary, (25,600), leisure and hospitality (43,000). The industries with the two lowest hourly wages are leisure and hospitality at $11.76 per hour and retail at $13.92 per hour. Even more concerning is that many of these positions are being filled by older, formerly retired persons who are taking away employment opportunities for young people. The unemployment rate for teenagers (16 to 19 years) increased to 24.5 percent in May from 24.1 percent in April.

    This is not a social judgment; it’s economics. That middle income strata — the primary driver of the U.S. economy — has fallen to the low income, and the low income has plunged to poverty. Now it’s just the “haves” in the driving seat, and once the stock market gets hit, it will fall down a rung too.”

  42. Fed Up says:

    Not Just May Employment

    http://www.federalreserve.gov/newsevents/speech/raskin20130322.htm

    “About two-thirds of all job losses resulting from the recession were in moderate-wage occupations, such as manufacturing, skilled construction, and office administration jobs. However, these occupations have accounted for less than one-quarter of subsequent job gains. The declines in lower-wage occupations–such as retail sales and food service–accounted for about one-fifth of job loss, but a bit more than one-half of subsequent job gains. Indeed, recent job gains have been largely concentrated in lower-wage occupations such as retail sales, food preparation, manual labor, home health care, and customer service.3

    Furthermore, wage growth has remained more muted than is typical during an economic recovery. To some extent, the rebound is being driven by the low-paying nature of the jobs that have been created. The slow rebound also reflects the severe nature of the crisis, as the slow wage growth especially affects those workers who have become recently re-employed following long spells of unemployment. In fact, while average wages have continued to increase steadily for persons who have remained employed all along, the average wage for new hires have actually declined since 2010.”

  43. Fed Up says:

    Got some more:

    Wage deflation charts of the day

    http://blogs.reuters.com/felix-salmon/2013/07/09/wage-deflation-charts-of-the-day/

    “This chart shows where a lot of the current stock-market strength is coming from: capital is taking more than 100% of real productivity gains, with labor steadily losing out. This, I fear, is the New Normal: OK for investors, bad for workers.”

    This chart refers to Figure 1.

    Occupational Employment and Wages News Release

    http://www.bls.gov/news.release/ocwage.htm

  44. Fed Up says:

    With more:

    http://www.ritholtz.com/blog/2013/08/is-mckinsey-to-blame-for-skyrocketing-ceo-pay/

    “Anyone who has worked in the corporate milieu knows that the arrival of McKinsey on the scene tends to not be a sign of good news for the rank and file. What is less known is McKinsey’s role in the creation of the CEO-to-worker gap itself. In 1951, General Motors hired McKinsey consultant Arch Patton to conduct a multi-industry study of executive compensation. The results appeared in Harvard Business Review, with the specific finding that from 1939 to 1950, the pay of hourly employees had more than doubled, while that of “policy level” management had risen only 35 percent. If you adjusted that for inflation, top management’s spendable income had actually dropped 59 percent during the period, whereas hourly employees had improved their purchasing power.”

    And, “Crony capitalism and the transfer of wealth from shareholders to insiders goes back much further than you may have guessed.

    Good ideas gradually die of their own accord, replaced with better ones. Bad ideas have a death grip on society, often with wealthy sponsors benefiting from them. That’s why they seem to hang around forever…”

    http://www.cepr.net/index.php/blogs/beat-the-press/nyt-warns-of-a-looming-crises-in-germany-rising-wages

    “Simple arithmetic shows that the impact of productivity growth will swamp the impact of demographics.”

  45. Fed Up says:

    Auto leasing surges to record high

    http://www.cnbc.com/id/101003126

    “Todd Skelton, who oversees AutoNation dealerships in Palm Beach and Broward County, Florida, said customers are now hunting for the lowest monthly payment with a new car or truck, and often that means taking out a lease.

    “People are much more open-minded about leasing. Nowadays, almost any make or model can be leased and that’s attractive to a lot of customers,” noted Skelton.

    Leasing comeback with auto rebound

    Three years ago, just 17.7 percent of vehicles bought with financing were leased.

    But leasing has soared since then due to a combination of more aggressive leasing offers by automakers and buyers searching for the best option to keep monthly payments in check amid rising new car and truck prices.

    “Manufacturers have enhanced their lease options so leasing is often a better deal than financing with a loan,” Skelton added.”

    Hello to the monthly payment consumer from the 1920′s!!!

  46. Fed Up says:

    A Decade of Flat Wages

    The Key Barrier to Shared Prosperity and a Rising Middle Class

    http://www.epi.org/publication/a-decade-of-flat-wages-the-key-barrier-to-shared-prosperity-and-a-rising-middle-class/

    “The nation’s economic discourse has finally shifted from talk of “grand bargain” budget deals to a focus on addressing the economic challenges of the middle class and those aspiring to join the middle class. Growing the economy from the “middle out” has become the new frame for discussing economic policy. This is long overdue; in our view, an economy that does not provide shared prosperity is, by definition, a poorly performing one. Further, such an economy will not provide sustainable growth without relying on consumption fueled by asset bubbles and escalating household debt. The collapse of the housing bubble and the ensuing Great Recession have laid bare the consequences of this model of unbalanced growth.

    The revived discussion of strengthening the middle class, however, has so far failed to drill down to the central problem: The wage and benefit growth of the vast majority, including white-collar and blue-collar workers and those with and without a college degree, has stagnated, as the fruits of overall growth have accrued disproportionately to the richest households. The wage-setting mechanism has been broken for a generation but has particularly faltered in the last 10 years, once the robust wage growth of the late 1990s subsided. Corporate profits, on the other hand, are at historic highs. Income growth has been captured by those in the top 1 percent, driven by high profitability and by the tremendous wage growth among executives and in the finance sector (for more on wage and income growth among the top 1 percent, see Bivens and Mishel 2013).

    President Obama’s July 24 speech in Galesburg, Ill., marking the kickoff of the White House’s “A Better Bargain for the Middle Class” initiative, illustrates both the best of this recent focus on the middle class and the failure to adequately acknowledge and address the economy’s failure to broadly raise wages. The president appropriately looked back in time, noting:

    In the period after World War II, a growing middle class was the engine of our prosperity. Whether you owned a company, swept its floors, or worked anywhere in between, this country offered you a basic bargain—a sense that your hard work would be rewarded with fair wages and benefits, the chance to buy a home, to save for retirement, and, above all, to hand down a better life for your kids.

    And he correctly identified what broke down:

    But over time, that engine began to stall. That bargain began to fray. . . . The link between higher productivity and people’s wages and salaries was severed—the income of the top 1 percent nearly quadrupled from 1979 to 2007, while the typical family’s barely budged.”

  47. Fed Up says:

    The myth of the modern welfare queen (TANF)

    http://www.cnbc.com/id/100975718

    “An average of about 1.72 million families a month received direct assistance through Temporary Assistance for Needy Families last year, according to the latest data from the federal government’s Office of Family Assistance. That’s about half the 3.94 million families who received TANF in 1997, according to an Urban Institute report funded by the Department of Health and Human Services

    In addition, about 62 percent of never-married moms ages 20 to 49 with a high school degree or less were working in 2011, according to an analysis of Current Population Survey data prepared by the Center on Budget and Policy Priorities, a liberal-leaning think tank. That’s up from about 51 percent in 1992 but down from 76 percent in 2000, before two recessions hit low-skill workers hard.

    Welfare-to-work

    Welfare has not been the same since the mid-1990s, when the old program, called Aid to Families with Dependent Children, was replaced by TANF. The new program’s requirements include that recipients do 20 to 30 hours a week of work-related activities, such as job hunting or community service.

    Most states allow adults to collect TANF for a maximum of five years over the course of their lifetime.

    (Read more: Most would keep job after lottery win)

    “The expectation is that you need to be looking for work,” said LaDonna Pavetti, vice president for family income support policy at the Center on Budget and Policy Priorities. “And if you don’t, you will either have your benefits reduced or lose them entirely.”

    Many more low-educated single mothers did start working soon after the program was introduced, but experts say welfare-to-work cannot take all the credit for that. The late-1990s welfare reform effort also coincided with the expansion of the earned income tax credit—which provides financial assistance to low-wage workers—and a strong labor market.

    “There really were three factors: One was welfare reform, one was expansion of the EITC, and one was (the) economy,” Pavetti said. “Welfare reform was not the biggest role in that.”‘

    Working, but struggling

    These days, Kathryn Edin, a professor of public policy at Harvard University, said the good news is that many single mothers who used to be longer-term welfare recipients are now workers who need assistance only once in a while.

    But the bad news for those with little education and low skills is that, in the past decade or so, it has become increasingly difficult to find a stable, full-time job that pays well. That means some moms may now be working very hard and still find that their families are at or near poverty.

    A person working a full-time, minimum wage job would take home $15,080 a year. That’s below than the Census Bureau’s 2012 poverty threshold for a family of one adult and two children under 18.”

    $7.25 per hour [federal minimum wage] times 40 hours per week times 52 weeks per year = $15,080 per year

  48. Fed Up says:

    Between 2000 and 2012, American wages grew…not at all

    http://www.washingtonpost.com/blogs/wonkblog/wp/2013/08/21/between-2000-and-2012-american-wages-grewnot-at-all/

    “Get a load of that productivity line, and how much steeper it is than the compensation lines. That’s not supposed to happen, and for many decades, it wasn’t. In 1996, Paul Krugman observed that from 1977-1992, “the increases in productivity and compensation have been almost exactly equal. But then how could it be otherwise? Any difference in the rates of growth of productivity and compensation would necessarily show up as a fall in labor’s share of national income — and as everyone who is even slightly familiar with the numbers knows, the share of compensation in U.S. national income has been quite stable in recent decades.” That was true when Krugman wrote it. It’s not true anymore. Labor’s share of national income is experiencing a serious fall. The benefits of productivity growth are going increasingly to owners of capital, not to labor.”

    See chart #3 and Figure 1.

  49. Fed Up says:

    Obamacare, tepid US growth fuel part-time hiring

    http://www.cnbc.com/id/100977130

    ‘Economists and staffing companies are cautiously optimistic that part-time hiring and the low wages environment will fade away as the economy regains momentum, starting in the second half of this year and through 2014.

    But businesses, accustomed to functioning with fewer workers, might not be in a hurry to change course. A study by financial analysis firm Sageworks found that profit per employee at privately held companies jumped to more than $18,000 in 2012 from about $14,000 in 2009.

    “Private employers are either able to make more money with fewer employees or have been able to make more money without hiring additional employees,” said Sageworks analyst Libby Bierman. “The lesson learned for businesses during the recession was to have lean operations.”‘

  50. Fed Up says:

    http://www.cnbc.com/id/101135835

    “Asset bubbles alone don’t cause financial crises like the one in 2008, former Federal Reserve Chairman Alan Greenspan told CNBC on Wednesday. Instead, the combination of bubbles and leverage is the problem, he said.

    “We missed the timing badly on September the 15th, 2008 [the day Lehman Brothers filed for bankruptcy]. All of us knew there was a bubble. But a bubble in and of itself doesn’t give you a crisis,” he said in a “Squawk Box” interview. “It’s turning out to be bubbles with leverage.”

    Take the explosion of the dotcom bubble in the 1990s and even the stock market crash of 1987, he continued, they barely showed up in longer-term economic growth figures.

    In his new book, “The Map and the Territory,” the 87-year-old Greenspan reflected on the 2008 financial crisis and the questions it raised about the economic models used to predict risk. He looked at the shortcomings of current forecasting tools and how they can be updated to take better account of human nature.

    “If you’re looking at the distribution of outcomes, fear is hugely more important than euphoria or greed,” Greenspan told CNBC. “Bubbles go up very slowing and then they go bang.”

    After the 2008 crisis, Greenspan said, he came to realize there was “something fundamentally wrong” with the way he and many colleagues were looking at the economy. “I was shocked, surprised, and since delighted at how many of the aspects of fear, euphoria and time preference … [were] systematic,” not random.”

  51. Fed Up says:

    Japan , Abenomics

    http://www.cnbc.com/id/101142483

    “Many analysts have attributed the recent uptick in inflation data to higher energy import costs, rather than a substantial improvement in consumer spending or corporate investments, which effectively distorts the numbers.

    (Read More: Why Japan stocks may storm higher even if the yen firms)

    With several of Japan’s key nuclear power stations suspended, the country has to rely on imports to meet its energy needs, which have become more costly given the yen’s near 12 percent decline against the dollar this year.

    Schulz, too, attributed the recent rise in inflation to energy costs skewing the data. He also saw the planned consumption tax hike from 5 to 8 percent next April as a potential headwind.

    “Right now we have a build-up of additional demand before the consumption tax hike, which will be implemented next spring, after that we will have a drop,” he said.
    Other analysts were also reluctant to become too optimistic on Japan’s inflation numbers.

    “Even though we’ve seen positive numbers for four consecutive months, it will take a very long time for Japan to meet its 2 percent inflation target,” said Junko Nishioka, chief Japan economist at RBS Securities.

    Nishioka said two main factors were at play: the yen appears to have halted its weakening trend, pulling back to 97 to the dollar from 100 in early July; companies are still struggling to transfer input costs to their output prices.

    (Watch This: Energy imports root of Japan trade deficit: Pro)

    “The pace of [adjusting output prices] is very slow in Japan because most of the price makers have been suffering deflationary costs for a long time. So it’s hard for them to increase output prices despite the more healthy condition of the economy,” she said.

    Meanwhile, Paul Donovan, managing director and deputy head of global economics at UBS told CNBC that although Japan’s inflationary level seemed to be picking up, it was the “wrong sort of inflation.”

    (Read more: Abenomics speeds corporate investment, but not in Japan)

    “You’re seeing food and energy price inflation, wage deflation and consumer durable goods deflation. It’s the worst possible inflation for getting a sustained recovery because it makes the consumer feel really bad,” he said.

    “You really need wage inflation and that isn’t coming through at the moment. If people feel their incomes are higher, then they will be prepared to spend money in a meaningful way,” he added.”

  52. Fed Up says:

    Retirement research:

    Why 401(k) savers don’t have enough to retire

    http://www.cnbc.com/id/101153706

    “Many workers say they would like to put more money into their 401(k) plans but simply don’t have enough left after paying everyday expenses to do it.

    That’s the new reality. Most Americans with 401(k) and other defined contribution plans are accumulating debt faster than they’re saving for retirement, according to a new report from the financial services website HelloWallet.

    The amount that retirement plan participants spent to pay down debts has risen nearly 70 percent in the last 20 years, the study found. Many workers say they are unable to contribute as much as they would like to their 401(k) plan because they have more expenses and less income than they had in the past.

    (Read more: Over 50? Ask your financial advisor this)

    The problem is most pronounced for those closest to retirement. Half of retirement plan savers 50 to 65 are accruing debt faster than they’re building up their savings, according to the HelloWallet study. They’re spending an average of 22 percent of their income paying down debt.

    “It’s remarkable,” says HelloWallet CEO Matt Fellowes. “You’d expect most people at that point to be deleveraging: paying off their mortgage, paying back their student loans or have already paid off their student loans, and not having difficulty paying off credit card debt. But in fact those are the households that are most likely to be building up debt faster than retirement savings.”

    The result is that these older workers have only about two years of retirement income saved. Yet Americans are living longer and will typically need about 17 years worth of retirement income after age 65.”

    Debt Savers in Defined Contribution (401-k) Plans

    http://info.hellowallet.com/rs/hellowallet/images/debtsavers.pdf

  53. Fed Up says:

    Six feet under as a retirement plan?

    http://www.cnbc.com/id/101133464

  54. Fed Up says:

    Recovery’s Great If You Were Already Rich (or Even Modestly Well Off): Ritholtz Chart

    http://www.bloomberg.com/news/2013-11-12/this-recovery-s-great-if-you-were-already-rich.html

  55. Fed Up says:

    http://globaleconomicanalysis.blogspot.com/2013/11/no-money-to-retire-new-american.html

    “Call it the new American nightmare: Running out of money in retirement is scaring the **** out of record numbers of older workers, forcing them to stay in the workforce.

    Now 80 is the new 60 when it comes to retirement. Many older workers who finally clock out have sharply underestimated their financial needs in retirement, raising the specter of personal financial disaster.

    By putting off retirement the Baby Boomers are a large reason for the high levels of unemployment for those looking to enter the workforce. According to the latest Bureau of Labor Statistics the rate of joblessness in people 20- to 25-years old is 12.5 percent, twice the rate of people 25 and older.”

    And, “The percentage of older middle-class Americans who said their day-to-day financial concern is “paying the monthly bills” has climbed from 52 percent last year to 59 percent today, according to Wells Fargo. Saving for retirement comes in second. Four in 10 say saving and paying the bills is “not possible.”

    Older adults are now the fastest-growing share of the US labor force. By 2020, workers 55 and older will comprise a stunning 25 percent of the civilian labor force.”

    Personal finance and monthly budgeting matter macroeconomically.

  56. Fed Up says:

    Striking it Richer:
    The Evolution of Top Incomes in the United States
    (Updated with 2012 preliminary estimates)
    Emmanuel Saez, UC Berkeley•
    September 3, 2013

    http://elsa.berkeley.edu/~saez/saez-UStopincomes-2012.pdf

    See page 7 thru page 10. (table and figures)

    http://www.cnbc.com/id/101207907

    “An analysis of income gains between 2009 and 2012, released last month by economists at University of California, Berkeley, found that the top 1 percent of incomes grew by 31.4 percent during that three-year period of economic recovery, while the remainder saw income gains of just 0.4 percent.”

  57. Fed Up says:

    http://www.ritholtz.com/blog/2013/11/a-limited-central-bank-2/

    “Congress established the current set of monetary policy goals in 1978. The amended Federal Reserve Act specifies the Fed “shall maintain long run growth of the monetary and credit aggregates commensurate with the economy’s long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.” Since moderate long-term interest rates generally result when prices are stable and the economy is operating at full employment, many have interpreted these goals as a dual mandate with price stability and maximum employment as the focus.

    Let me point out that the instructions from Congress call for the FOMC to stress the “long run growth” of money and credit commensurate with the economy’s “long run potential.” There are many other things that Congress could have specified, but it chose not to do so. The act doesn’t talk about managing short-term credit allocation across sectors; it doesn’t mention inflating housing prices or other asset prices. It also doesn’t mention reducing short-term fluctuations in employment.

    Many discussions about the Fed’s mandate seem to forget the emphasis on the long run. The public, and perhaps even some within the Fed, have come to accept as an axiom that monetary policy can and should attempt to manage fluctuations in employment. Rather than simply set a monetary environment “commensurate” with the “long run potential to increase production,” these individuals seek policies that attempt to manage fluctuations in employment over the short run.”

    It seems to me the idea that real AD is unlimted is written into law. There is the problem. I don’t believe real AD is unlimited.

  58. Fed Up says:

    http://www.businessspectator.com.au/article/2013/11/26/economy/end-depression-never?

    End this Depression? Never

    Larry Summers

    Paul Krugman

    beggar thy working class

    household debt

  59. Fed Up says:

    The Monthly Payment Car Consumer

    http://globaleconomicanalysis.blogspot.com/2013/12/auto-lending-standards-plunge-new-car.html

    “The average loan on a new car climbed to $26,719 in the third quarter, up by $756 from a year earlier, and the most in at least five years, according to data collected by Experian Plc.

    Despite borrowing so much more, average monthly payments on new car loans rose only $6 to $458. That is because banks and finance companies were willing to lend at lower rates and grant borrowers more time to repay.

    Lenders made 26.04 percent of their loans on new cars to buyers with subprime credit scores, up from 24.84 percent a year earlier, said Experian, which collects car title and financing information to compile its reports. For loans on used cars, the portion to subprime borrowers rose to 54.95 percent from 54.43 percent.

    As the lenders made bigger loans, they also extended credit further beyond the value of the vehicles. The average loan-to-value on new cars rose to 110.6 percent, up by 1.17 percentage points. On used cars it rose to 133.2 percent, up by 2.18 percentage points.

    Auto lenders often provide loans that exceed the value of cars they are financing because borrowers want cash to pay sales taxes and fees.

    Extra-long loans are becoming more common. Some 19 percent of new car loans were made for more than six years, up from 16.4 percent a year earlier.

    The percentage of loans 30-days delinquent was down in the third quarter to 2.58 percent from 2.67 percent a year earlier, Experian said.

    However, the average loss on loans gone bad jumped to $7,770 in the third quarter from $7,026 a year earlier and repossessions increased sharply, particularly for subprime borrowers.”

  60. Fed Up says:

    More on U.S. auto sales
    http://advisorperspectives.com/dshort/guest/Michael-Lombardi-131211-Auto-Sales.php
    “Auto sales in the U.S. economy look solid on the surface.
    According to Autodata, in November, the annual rate of auto sales
    in the U.S. economy was 16.41 million units. In October, the annual
    rate of auto sales was reported to be 15.23 million and in the same
    period a year ago (November 2012), it was 15.32 million. (Source:
    Autodata web site, last accessed December 10, 2013.) Cleary, auto
    sales are increasing. By looking at the auto sales numbers, one
    could be easily tempted to suggest consumer spending is increasing.
    But this is not the case. A deeper look at the numbers reveals a
    large increase in subprime lending to finance consumer auto
    purchases. According to Experian, an information services company,
    loans issued for new vehicles to nonprime, subprime, and deep
    subprime borrowers made up 26.04% of all auto loans in the third
    quarter of this year. In the same period a year ago, this number
    was 24.84%. For used vehicles, loans issued to nonprime, subprime,
    and deep subprime borrowers made up an astonishing 54.95% of all
    auto loans in the third quarter. (Source: Experian, December 4,
    2013.) But this is not all. We are also seeing more and more
    consumers interested in buying vehicles on credit. For example, in
    its “Household Debt and Credit Developments” report for the third
    quarter of 2013, the Federal Reserve Bank of New York reported that
    in the third quarter, 168 million inquires for auto loans were
    made. In the second quarter of 2012, that number was only 159
    million. (Source: Federal Reserve Bank of New York, November 2013.)
    All of this shouldn’t be taken lightly. We know what happens when
    this kind of behavior prevails. Just look at what happened to the
    housing market of the U.S. economy when subprime borrowers became
    so prevalent. A significant amount of money was lent to subprime
    borrowers, they defaulted, and we saw a housing crash. Auto loans
    in the U.S. economy are increasing. In the third quarter of 2013,
    auto loans reached their highest level since the third quarter of
    2007; they increased to $97.4 billion. I question if auto loans are
    taking on the shape of a bubble. Low interest rates in the U.S.
    economy have encouraged consumers to borrow to buy cars, hence the
    increase in auto sales. But lending to subprime borrowers can be
    problematic when interest rates increase. Another bubble, this time
    in auto sales? I’m afraid so.”

  61. Fed Up says:

    http://www.debtdeflation.com/blogs/2013/12/09/dont-do-the-math/
    When economic theory fails the maths exam
    http://www.businessspectator.com.au/article/2013/12/9/economy/when-economic-theory-fails-maths-exam
    “Eight years ago, in December 2005, I began warning of an impending
    economic crisis that would commence when the rate of growth of
    private debt started to fall. My warnings hit a popular chord:
    journalists throughout the world picked it up and publicised my
    views – as well as similar arguments from Nouriel Roubini, Dean
    Baker, Ann Pettifor, Michael Hudson, Wynne Godley, and a few
    others. But our arguments were ignored by the economics profession
    because, according to mainstream economic theory, private debt
    should have no impact on aggregate demand. As Bernanke put it,
    lending simply transfers spending power from lender to borrower,
    and “pure redistributions should have no significant macro-economic
    effects” (Bernanke, Essays on the Great Depression, p. 24).” And,
    “The authors found the implications of their study for democracy
    rather depressing, since it implies that both evidence and
    intelligence make precious little difference to how people will
    vote on contentious issues – which are after all the only ones we
    do vote on. The need to preserve a sense of identity matters more
    than the evidence – and this can’t be treated as “irrational”
    behavior either, because it’s quite rational to want to retain
    membership of a group that is immediately important to you.
    Numeracy can make you blind. Who’d a thought? Someone who did
    belatedly reach the same conclusion was one of history’s great
    numerates, Max Planck – the father of quantum mechanics. He found
    it near impossible to convince his fellow physicists to accept his
    new – and empirically far more accurate – characterisation of the
    nature of energy, and he ultimately concluded that: A new
    scientific truth does not triumph by convincing its opponents and
    making them see the light, but rather because its opponents
    eventually die, and a new generation grows up that is familiar with
    it. (Max Planck). Planck’s pessimism might well turn out to be
    optimism when compared to how economics “evolves”. As John Quiggin
    put it in his book Zombie Economics (which hands down has the best
    cover of an economics book that I’ve ever seen), ideas that
    manifestly conflict with empirical data continue to exist long
    after reality killed them. The data on private debt and employment
    should long ago have killed the “Loanable Funds” model of lending
    that led Bernanke and his tribe to ignore private debt before the
    crisis hit, but I expect they’ll hang on to their pet theory and
    find a way to make it appear compatible with the data instead—and
    Larry Summers may well have given them the means to remain part of
    The Great Undead with his “secular stagnation”
    hypothesis.”

  62. Fed Up says:

    http://www.ritholtz.com/blog/2013/12/why-do-measures-of-inflation-disagree/

    Why Do Measures of Inflation Disagree?

    “The Bureau of Labor Statistics (BLS) first developed the CPI in 1913. The index is based on reports from retailers and tracks the price level for a basket of goods and services purchased by a typical urban consumer. The PCEPI is produced by the U.S. Commerce Department’s Bureau of Economic Analysis (BEA) based on the same national accounts data used to estimate gross domestic product. For most of its history, the Federal Reserve used the CPI to set policy and forecast inflation. However, in February 2000, the FOMC began using the PCEPI to frame its inflation forecasts.

    The PCEPI and CPI share many of the same features. For example, the PCEPI, like the CPI, is designed to track the prices of goods and services consumed by households, and it includes much of the same data. However, the PCEPI differs from the CPI on many dimensions. The FOMC cited three of these as reasons for switching its focus from the CPI to the PCEPI (Board of Governors 2000). First, the PCEPI’s formula adjusts to changing consumption patterns, while the CPI is based on a basket of goods and services that is largely fixed. Second, the PCEPI is revised over time, allowing for inflation to be tracked as a more consistent series. Third, the PCEPI’s larger scope of goods and services provides a more comprehensive picture of the nation’s consumer spending than the CPI.”

    “Figure 1 shows the year-over-year change in core CPI and PCEPI inflation over the past 10 years. These core measures exclude food and energy prices, reducing volatile short-run movements in the indexes. Core measures are better able to capture the underlying longer-term trends in inflation. The figure shows that core CPI and core PCEPI inflation measures are highly correlated, but that gaps frequently arise between them. Since August 2011, annual core CPI inflation has outpaced annual core PCEPI inflation by a minimum of 0.20 percentage point and an average of 0.34 percentage point. This is the longest sustained gap between these measures in the past 10 years.”

    “One way to see how the difference in the weights has affected the gap between CPI and PCEPI inflation is by looking at shelter prices. Importantly, neither index uses actual house prices to determine owner-occupied shelter prices. Rather, these prices are based on the BLS’s Consumer Expenditure Survey, which asks households how much their homes would cost to rent on the open market. Shelter currently takes up 32% of the CPI consumption basket, but only 15% of the PCEPI basket. This difference reflects the larger scope of goods in the PCEPI, which dilutes the weight of shelter in its consumption basket. Overall, the CPI’s larger weight on shelter means that it is more sensitive to shelter price movements than the PCEPI. The BEA estimates that, since 2011, the difference in these shelter weights has caused a 0.31 percentage point difference between CPI and PCEPI inflation. This accounts for more than half of the 0.56 percentage point weight-based effect over the recent period.”

    “Conclusion

    Core CPI inflation is currently 0.5 percentage point higher than core PCEPI inflation. Historically, gaps of this size are not unusual and have primarily been driven by the differences of the weights the two indexes put on various items in their consumption baskets. For the most recent gap, the CPI’s larger weight on shelter is a major reason why that index has exceeded PCEPI inflation. Based on historical patterns, we expect core CPI inflation to move back gradually toward PCEPI inflation.”

    What about price inflation based on the budget of a lower/middle class person?

  63. Fed Up says:

    http://www.ritholtz.com/blog/2013/12/mainstream-economists-finally-admit-that-runaway-inequality-is-hurting-the-economy/

    by Washingtons Blog – December 23rd, 2013, 1:30am

    “As one example, Paul Krugman used to doubt that inequality harmed the economy. As the Washington Post’s Ezra Klein wrote in 2010:

    Krugman says that he used to dismiss talk that inequality contributed to crises, but then we reached Great Depression-era levels of inequality in 2007 and promptly had a crisis, so now he takes it a bit more seriously.

    Krugman writes this week in the New York Times:

    The discussion has shifted enough to produce a backlash from pundits arguing that inequality isn’t that big a deal.

    They’re wrong.

    The best argument for putting inequality on the back burner is the depressed state of the economy. Isn’t it more important to restore economic growth than to worry about how the gains from growth are distributed?

    Well, no. First of all, even if you look only at the direct impact of rising inequality on middle-class Americans, it is indeed a very big deal. Beyond that, inequality probably played an important role in creating our economic mess, and has played a crucial role in our failure to clean it up.

    Start with the numbers. On average, Americans remain a lot poorer today than they were before the economic crisis. For the bottom 90 percent of families, this impoverishment reflects both a shrinking economic pie and a declining share of that pie. Which mattered more? The answer, amazingly, is that they’re more or less comparable — that is, inequality is rising so fast that over the past six years it has been as big a drag on ordinary American incomes as poor economic performance, even though those years include the worst economic slump since the 1930s.

    And if you take a longer perspective, rising inequality becomes by far the most important single factor behind lagging middle-class incomes.

    Beyond that, when you try to understand both the Great Recession and the not-so-great recovery that followed, the economic and above all political impacts of inequality loom large.

    ***

    Inequality is linked to both the economic crisis and the weakness of the recovery that followed.”

  64. Fed Up says:

    http://globaleconomicanalysis.blogspot.com/2013/12/haircut-deficit-kids-living-in.html

    “The recession ended in mid-2009. Since then spending on services has lagged spending on durable goods by a huge margin.

    Why? A record number of Millennials, adults aged 18 to 32, put off household formation and stay at home to live with parents.

    Why? No job and/or huge college debt with no way to pay it back.

    The jobless rate for Americans aged 18 to 19 years old stood at 19.2%. Unemployment among 20- to 24-year-olds is 11.6 percent. In contrast, the overall unemployment rate is 7%.

    Kids Living in Basements a Drag on U.S. Services Spending”

    http://www.bloomberg.com/news/2013-12-13/service-spending-lag-called-culprit-in-slow-u-s-growth-economy.html

    Back to Mish’s post:

    “What’s Next?

    Via email, a close friend “BC” commented on “What’s Next”

    The top 1-10% receive 50% of income in an economy in which 72% of GDP is Personal Consumption Expenditures (PCE). Unless the top 10% increase spending ~6%/yr., US real final sales per capita will be near 0% at the trend population and reported deflator.

    The bottom 90%, who receive the other 50% of income, are not experiencing any growth of purchasing power after factoring in taxes, inflation, and debt service. They contribute little-to-nothing in growth of real final sales per capita.

    Once the Boomer top 10-20% replace their auto fleets, real retail sales and real final sales per capita will again contract.

    Wealth Effect

    I would add that some of the spending, especially on autos, is due to the wealth effect of rising stock market and recovery in home prices. A substantial (and lengthy) decline in the stock market is long overdue. And when it comes it will pressure sales and services in general.

    What’s coming isn’t pretty even though the precise timing is unknown.”

  65. Fed Up says:

    http://houseofdebt.org/2014/03/15/household-debt-and-the-great-depression.html

    “In November 1930, before anyone knew how Great the Depression would be, Charles Persons published an article in the Quarterly Journal of Economics called “Credit Expansion, 1920 to 1929, and Its Lessons.” His thesis was stated forcefully in the first paragraph:

    “The thesis of this paper is that the existing depression was due essentially to the great wave of credit expansion in the past decade.”

    He then meticulously documented data on the stunning growth in borrowing by households during the 1920s. As is common in the run-up to severe economic downturns, there was a tremendous growth in mortgage debt. “The great field of credit expansion in the last decade lies in the realm of urban real estate mortgages”, Persons wrote. In nominal terms, outstanding mortgage debt grew by more than eight times from 1920 to 1929, according to Persons.

    Persons also highlighted the rise in installment debt, or consumer debt used to purchase new furniture, clothing, sewing machines, and cars. Martha Olney at Berkeley examined the rise in purchases of cars and other durables during the 1920s, and concluded that “societal attitudes toward borrowers changed radically between 1900 and 1920; by the mid-1920s, buying on credit was considered normal, not sinful.”

    Persons concluded his 1930 article with a statement that is eerily similar to many we here today: “The past decade has witnessed a great volume of credit inflation. Our period of prosperity was based on nothing more substantial than debt expansion.”

    Both the Great Depression and our recent Great Recession were preceded by large increases in household debt driven by new lending technologies. The 1920s had the installment loan; the mid-2000s had the subprime mortgage loan. Is it a coincidence that the two most severe recessions in the last 150 years were preceded by a dramatic expansion in household debt driven by new lending technologies? This is a central question of our book.”

  66. Fed Up says:

    http://houseofdebt.org/2014/03/18/the-most-important-economic-chart.html

    “If you must know only one fact about the U.S. economy, it should be this chart:

    See Chart

    The chart shows that productivity, or output per hour of work, has quadrupled since 1947 in the United States. This is a spectacular achievement by an advanced economy.

    The gains in productivity were quite widely shared from 1947 to 1980. Real income for the median U.S. family doubled during this time just as output per hour of work performed doubled. The rising tide was lifting all boats.

    However, what we want to focus on today is the remarkable separation in productivity and median real income since 1980. While the United States is producing twice as much per hour of work today compared to 1980, a small part of the gain in real income has gone to the bottom half of the income distribution. The gap between productivity and median real income is at an historic all-time high today.

    So where are all of the gains in productivity going? Two places:

    First, owners of capital are getting a bigger share of GDP than before. In other words, the share of profits has risen faster than wages. Second, the highest paid workers are getting a bigger share of the wages that go to labor.

    The net result is that families at the higher end of the income distribution have received more of the income produced by the economy since the 1980s. The latter fact has been documented meticulously by the brilliant research of Thomas Piketty and Emmanuel Saez.

    The widening gap between productivity and median income is a defining issue of our time. It is not just about inequality – important as that issue is. The widening gap between productivity and median income has serious implications for macroeconomic stability and financial crises. Our forthcoming book takes up these issues in more detail.

    We will also discuss some of these issues in coming posts.”

  67. Fed Up says:

    http://www.ebri.org/surveys/rcs/2014/

    http://finance.yahoo.com/news/americans-only-have–1-000-saved-for-retirement-ebri-report-134741117.html

    “More Americans are confident about their retirement prospects for the first time in seven years, but even so, more than one-third of workers (36%) have a measly $1,000 saved for their later years, according to a new study by the Employee Benefit Research Institute. (Compare that to the 28% of workers who said they had $1,000 saved in last year’s survey, and the picture gets a little more grim.)

    As a whole, however, Americans are feeling more confident about retirement, with 18% saying they’re “very confident,” up from 13% in 2013. But this year’s confidence numbers are still lower than they were before the Great Recession, when one-quarter of Americans were feeling very confident about their golden years.

    “We’re definitely moving in the wrong direction,” said Greg Burrows, senior vice president of retirement and investor services with the Principal Financial Group, which co-sponsored the report. “Increasingly, workers realize they need to save a lot more for retirement, and yet their actions aren’t following through.”

    At a time when research has shown time and again how ill-prepared most workers are to support themselves through their golden years, the study offers a glimpse into what the “very confident” 18% have that, well, the rest of us don’t.

    They know their number. A lot more goes into saving for the future than dollars and cents. You have to have some idea of how much you need to save. And people who take the time to calculate their retirement needs ahead of time are more likely to be on track.

    About 44% of workers say they’ve run their numbers through a retirement calculator, helping them to save a whopping 40% more than the rest of us.

    “Everyone else is really just guessing,” said Burrows. “Using savings calculators is a really important trigger for improving actions and savings rates. When we look at our own customers who use calculators, they take action and are more likely to make a change.”

    You don’t need to hire a pricey financial planner to get your number. EBRI offers a free tool, as well as Bankrate, the AARP, and Kiplinger.

    They’ve got money (and they know how to use it). Obviously, saving for the future is easier when there’s more to start with. Workers earning more than $75,000 a year were far more likely to report feeling more confident about retirement than those earning less, according to the EBRI. On the other hand, of those workers who say they’ve saved less than $1,000 for retirement, 68% reported earning $35,000 or less.

    When asked, more than half of workers blamed their low savings rates on day-to-day living expenses. But in many cases, daily budgets aren’t static and can be rearranged to free up funds for savings. What some people lack is the time and energy to revamp their entire household budget — especially for a goal that seems far off.

    “In order to have a good opportunity to save, you have to develop an understanding and a plan for managing your spending and saving,” Burrows said. “It’s not easy, but it’s doable if people make the effort to understand their spending patterns and have a good command of their dollars and where they’re being spent.”

    They have a designated retirement account. Saving is also easier when you’ve got a vehicle in place to do so. A whopping 90% of households who have a designated retirement account (like an IRA or 401(k)) actually contribute to it, according to EBRI. On the flipside, just 20% of workers who don’t have a retirement savings account say they’ve saved.

    Not surprisingly, people who invested in retirement plans during the economic recovery saw the biggest spike in confidence this year, thanks to a much-needed boost from a bull market. Between 2013 and 2014, the rate of plan-holders who said they were confident about retirement jumped from 14% to 24% — twice as high as workers who didn’t have a retirement plan.

    They’d love to work through retirement — but they don’t count on it. EBRI found that confident workers are more likely to have a realistic idea of when they’ll retire — and in most cases that means earlier rather than later.

    There’s something of a reality gap between when today’s workers think they’ll retire and when they actually do. For example, only 9% of workers say they plan to retire early (before age 60) but nearly four times that number (35%) report actually retiring that early, according to the report. And just 18% of workers say they’ll retire before age 65, but again, far more people found themselves retiring in that age range than expected (32%).

    “This difference between workers’ expected retirement age and retirees’ actual age of retirement suggests that a considerable gap exists between workers’ expectations and retirees’ experience,” the report says.

    The biggest reason for early retirement: unexpected health issues. Overestimating your retirement age can be just as costly as underestimating it. For example, if you think you’ll work until 75, you might not consider things like long-term health insurance, which could make all the difference for the 70% of Americans expected to need long-term nursing care at some point in their lives.

    “When you build a plan for retirement, don’t count on the ability to work in retirement,” Burrows said. “If you do get the opportunity, that’s fantastic. But it’s not something you should build your plan around because the reality is that the majority of workers don’t.””

  68. Fed Up says:

    http://advisorperspectives.com/dshort/guest/Lance-Roberts-140324-Replay-the-90s.php

    It’s Impossible To Replay The 90′s

    “This drive to increase profitability did not lead to increased economic growth due to increased productive investment and higher savings rates as personal wealth increased. The reality was, in fact, quite the opposite as it resembled more of a “reverse robin-hood effect” as corporate greed and monetary policy led to a massive wealth transfer from the poor to the rich.

    It is easy to understand the confusion the writer has from just looking at the stock market as a determinant of economic prosperity. Unfortunately, what was masked was the deterioration of prosperity as debt supplanted the lack of personal wage growth and a rising cost of living.

    The chart below shows the rise in personal debt, which was fostered by 30 years declining borrowing costs, to offset the declines in personal income and savings rates.

    As the author correctly states above, it was the “borrowing and spending like mad” that provided a false sense of economic prosperity. The problem with this assumption is clearly shown in the chart below.

    In the 1980′s and 90′s consumption, as a percentage of the economy, grew from roughly 61% to 68% currently. The increase in consumption was largely built upon a falling interest rate environment, lower borrowing costs, and relaxation of lending standards.

    In 1980, household credit market debt stood at $1.3 Trillion. To move consumption, as a percent of the economy, from 61% to 67% by the year 2000 it required an increase of $5.6 Trillion in debt. Since 2000, consumption as a percent of the economy has risen by 1% over the last 13 years. In order to support that increase in consumption it required an increase in personal debt of $6.1 Trillion.

    The importance of that statement should not be dismissed. It has required more debt to increase consumption by 1% of the economy since 2000 than it did to increase it by 6% from 1980-2000.

    The problem is quite clear. With interest rates already at historic lows, consumers already heavily leveraged and economic growth running at sub-par rates, there is not likely a capability to increase consumption as a percent of the economy to levels that would replicate the economic growth rates of the past.

    It is quite apparent that the ongoing interventions by the Federal Reserve has certainly boosted asset prices higher. This has further widened the wealth gap between the top 10% of individuals that have dollars invested in the financial markets, and everyone else. However, while increased productivity, stock buybacks, and accounting gimmicks can certainly maintain an illusion of corporate profitability in the near term, the real economy remains very subject to actual economic activity. It is here that the inability to releverage balance sheets, to any great degree, to support consumption provides an inherent long term headwind to economic prosperity.

    In my opinion it is likely quite impossible, from an economic perspective, to replay the secular bull market of the 80-90′s. While I would certainly welcome such an environment, the more likely scenario is a repeat of the 1970′s. The trick will be remaining solvent for when the next secular bull market does indeed eventually arrive.”

  69. Fed Up says:

    America’s Wal-Mart Economy: Checks Clear At Midnight; Savings Wiped-Out By One Emergency

    http://davidstockmanscontracorner.com/americas-wal-mart-economy-checks-clear-at-midnight-savings-wiped-out-by-one-emergency/

    http://www.mybudget360.com/how-many-americans-live-paycheck-to-paycheck-income-wealth/

    “A really big reason why Americans are losing ground is because inflation has eroded purchasing power. Simply put the average dollar is not going as far anymore. Going back to the survey, it also detailed how 66 percent of households making $100,000 or less would hit a big brick wall if an unexpected $10,000 expense came up. This is not such a big emergency. Consider a major house repair or a mild medical emergency would wipe this amount away.

    Americans are simply seeing their standard of living erode. Take housing for example. Housing eats up the biggest portion of household spending:”

    See chart.

    “Housing eats up about 30 to 40 percent of disposable income. With a low rate environment large banks have decided to take a liking to housing. This has pushed housing values up and rents have also increased during this time. Conversely, incomes have not grown. So what occurs is more money is getting dumped into the housing bucket. How is this good? It really isn’t unless real wages also were keeping track with changes in costs. It also means less money for saving which is the core issue.

    Americans think the nation is wealthier than it really is. Whenever you see the financial press trying to define middle class, they usually throw out an annual income of $200,000 or $250,000 per year. That is absolutely not the case (the statistical middle class is $50,000 per year). Take a look at income in the US:”

    “To be in the top 10 percent of households, you would need an annual income of $135,000. 75 percent of households fall under $85,000 a year or less for their annual income. The survey sheds light on how addicted to spending Americans are. It also shows the growing struggles in saving money because the cost of living is outpacing income growth.

    The largest growing sectors of employment in the US are part of the low wage economy:”

    Only “high-wage” job listed in the “for largest USA occupations” is nursing.

    “What was illuminating from the survey was that nearly 50 percent of Americans mentioned that if they lost their current job, it would be very difficult to find another similar paying job in the market. This isn’t some paranoia but reality based. Look at the top employment fields above. The market is flooded with low paying jobs.

    Many Americans are living paycheck to paycheck simply because the bills eat up every penny of net disposable income. Saving for retirement? That is simply not a pressing matter for most. When we look at retirement surveys the facts are grim:

    The typical working household only has $3,000 saved for retirement! That is absolutely nothing. One to two months of bills. You would think things are better today with a record in the stock market but this would assume Americans had savings invested in the market in any meaningful way. Hard to do that when you are living paycheck to paycheck.”

  70. Fed Up says:

    Goodbye American middle class: New report reveals that 62 percent of Americans earn $20 or less per hour. Household income stuck in neutral for a generation.

    http://www.mybudget360.com/goodbye-american-middle-class-median-income-household-wages/

    “The latest figures from the Bureau of Labor and Statistics (BLS) reveals that 62 percent of Americans earn $20 or less per hour. And this only examines those that actually have a job. Most of the new jobs added since the Great Recession ended have come in the low-wage segment of our economy which seems to be adding the bulk of employment. These are certainly interesting times that we live in. The US has close to 130 million jobs. 18 million jobs pay less than $10 an hour and 63 million pay between $10 and $20. These two segments makeup 81 million jobs so it is understandable why the two income household is more of a necessity rather than a luxury. The median household income in the US is roughly $50,000 per year. Adjusting for inflation income is back to levels last seen in the 1980s. Americans feel poorer because their purchasing power has been eroded by inflation and also the swarm of lower paying jobs that now dominate the market. The US middle class is shrinking and to ignore this is to ignore the actual facts.

    What is causing the middle class to disappear?

    The mainstream press rarely talks about the disappearing middle class. If this issue is brought up it is in the context of the inevitable. The middle class is declining simply because of global competition and a race to lower prices, or so the argument goes. There simply isn’t enough money to go around. However, compensation at the top has never been better. What is occurring is basic items like health benefits, access to affordable schooling, and livable wages are being neglected for fast profits.

    If you really want to feel how little purchasing power you have you need to travel outside of the US. Take a look at what has happened to the US dollar in the last generation:

    The US dollar has lost more than 50 percent of its purchasing power since the 1980s. The impact of all of this is reflected with inflation. Inflation is problematic in itself but it is much more challenging when prices are going up but wages remain stuck in neutral.

    All you need to do is look at household incomes to see this stagnation:

    Adjusting for inflation household incomes are back to levels last seen in the 1980s. Are you noticing a pattern here? The middle class has been losing ground for a generation here. Some mitigated this impact by going deep into debt to finance the following items:

    -Housing

    -College tuition

    -Automobile purchases

    Most of these big ticket items have seen massive price increases but if you look at monthly payments, they are moving up slowly to stay on pace with many struggling Americans. It once was thought to be shocking for a student to graduate with $50,000 or $100,000 in debt but those stories are all too common today. The sticker shock is stunning but the Fed has forced rates to as low as they can go to keep this debt binge going.

    Wealth distribution is highly tilted today because most of the gains in productivity are flowing to a small group:

    Wealth is the best measure of financial success. Most Americans in the past were able to build up wealth in housing but that avenue is being closed off thanks to Wall Street and the Fed turning this market into another speculative vehicle. The result? The home ownership rate in the country continues to decline. This used to be a major cornerstone and brass ring of the middle class. Not anymore.

    Lower paying jobs, stagnant wages, and rising costs. Will politicians bring this up in the 2014 elections? It doesn’t seem like the middle class is on their radar.”

    See the charts too!

  71. Fed Up says:

    Hand-to-mouth nation: Roughly 40 percent of US households living paycheck to paycheck but two thirds of these families are not considered poor by economic definitions.

    http://www.mybudget360.com/paycheck-to-paycheck-people-living-paycheck-to-paycheck/

    People have a hard time believing that in the wealthiest country in the world, we have close to half of our population living hand-to-mouth bouncing from one paycheck to another. A recent paper released by the Brookings Institution’s BPEA conference shows that people living hand-to-mouth are largely those with “middle class” incomes. Of course middle class doesn’t say much in a world where banks are inflating our debt away and the US dollar has lost considerable purchasing power over the last generation. What was telling from the report was that 40 percent of US households live paycheck to paycheck. This might not be a surprise given the vast number of people working in low wage jobs. What was telling from the report was that two out of three of these households represent a part of the “wealthier” income segment of our society. The paper discusses how many of these people are house rich but cash poor. These people basically live in their retirement fund.

    Hand-to-mouth nation

    The paper was telling but also had a very low threshold as to what it considers “substantial” holdings. The paper placed the bar at $50,000 where a family would be considered “wealthy” which is rather low. What the paper found was that many of these families that hold some chunk of wealth are actually living very similar lives to the poor in America. This all makes sense. If you own a home and most of your net worth is tied up in your property, this does very little in addressing short-term cash flow issues which unfortunately are extremely common.

    Those that are considered to be “wealthy hand-to-mouth” tend to be older and more educated:

    What is significant about the paper is how low the bar is getting for someone to be considered wealthy. After all, we do have over 47 million people on food stamps with virtually no liquid savings. The median net worth for young Americans is actually negative thanks to the mountains of debt they are carrying via student loans. What you realize is that slowly the avenues towards wealth are being closed off or are certainly becoming much harder to pass through. This ties in with policy actions from the Fed which amount to a large wealth transfer to the rich. It was interesting to hear the President of the Dallas Fed mention this in regards to QE.

    When we look at where jobs are being created, we can only forecast that those living hand-to-mouth will be increasing in the next decade:

    While the US lost 4 million good paying jobs since the recession hit we have added 3.6 million low-wage jobs. We now have the largest number of Americans working in low-wage jobs as a percentage of our entire work force.

    This hand-to-mouth living may not seem like a big deal but it does say more about how we view economic policy and the impact of larger scale bailouts. The financial sector is doing well thanks to targeted bailouts but it is certainly not trickling down. This much is clear and the above figures merely reflect a slow erosion of the middle class.

    It should matter that our nation is seeing a dramatically higher number of people living paycheck to paycheck. The income and wealth inequality in the nation is staggering. Just take a look at where wealth stands:

    The top 1 percent control 43 percent of all available wealth. The top 5 percent control 72 percent of all available wealth. The bottom 80 percent only has control of 7 percent of total wealth.

    It isn’t a surprise that many middle class families are living hand-to-mouth. I wouldn’t consider $50,000 in savings to be substantial especially if you are nearing retirement age and the only asset you have is a home. Yet this is how low the bar is now being placed for someone to be considered financially well off.

    It almost seems like things that were once accepted as part of the middle class like good healthcare, quality education, and access to affordable housing are now becoming items of luxury. Do people still think that inflation is a good policy action especially when the inflation is being spurred on by bailouts to the financial sector? I’m sure those living hand-to-mouth have something to say about this.

    See the charts too!

  72. Fed Up says:

    America’s Consumers Are Dropping, Not Shopping: McDonald’s Posts Worst Q1 Same Store Comps In A Decade

    Sales Growth ; S&P 500 Companies Latest Quarter Year / Year Change

    http://davidstockmanscontracorner.com/americas-consumers-are-dropping-not-shopping-mcdonalds-posts-worst-q1-same-store-comps-in-a-decade/

    “Current projections for the first quarter add up to about 2.5% revenue expansion across S&P 500 companies, but, as last quarter showed, that is likely overly optimistic (fourth quarter revenue was believed to be expanding at near 3% at the outset of earnings season in January 2014, only to be revised lower to almost 0%).”

    And, “Janet Yellen’s comment above, from June 2008, sounds no different than what is being said right now. What looked like “drags” on tepid growth trajectories was, at that moment, something worse – and would only grow far, far more destructive further on.

    If there is one striking difference between then and now, it would have to be the evident bifurcation and stratification of economic station. There is a very narrow channel into which financial and asset inflation is fostering the impression of economic activity on the mend (autos, mostly, now that housing is in reverse). However, these results shown here conclusively dismiss any and all ideas that expect such narrow benefits to be the catalyst for more widespread economic revival. In fact, what we see, particularly in the comparisons to the first phase of the Great Recession, is that such doctrine of asset inflation and the “wealth” effect are wholly incorrect toward this updated “trickle down.””

  73. Fed Up says:

    The End of the Gold Standard

    http://www.advisorperspectives.com/dshort/guest/Bryan-Taylor-140422-End-of-the-Gold-Standard.php

    “It was 100 years ago, in 1914, that the Gold Standard died. When World War I began, most countries went off the Gold Standard and attempts to return to a Gold Standard since have all failed. Some people have called for a return to the Gold Standard as a way of disciplining governments and ensuring that they do not inflate their way out of their current fiscal problems. If it were only that easy.

    What many people don’t understand is that in the long run, the International Gold Standard was a very brief phenomenon, and the fact that the world moved to a Gold Standard in the late 1800s was a sign of weakness in the role of gold and silver in the economy, not of strength. The reality was that Europe was on a bimetallic standard, not a Gold Standard, from the Middle Ages until World War I, and gold triumphed in the nineteenth century because bimetallism had failed. This should have been taken as a sign that the gold standard too would inevitably fail, not that it was the result of teleological inevitability.

    The first gold and silver coins were issued by Croesus in Lydia around 600 BC. Before that, both gold and silver were used as a store of for wealth, for conspicuous consumption, or to value other goods, but no coins existed. The value of gold relative to silver, the gold/silver ratio, changed over time. In 2700 BC it was around 9 to 1; under Hammurabi in 1800 BC it was 6 to 1; and by the time Croesus issued the first gold and silver coins, rather than electrum coins, it was 12 to 1.

    The gold/silver ratio remained around 12 to 1 for the next 2500 years, though it could range as low as 9 to 1 or as high as 16 to 1. Athens built its empire on the silver mines of Laurium; Alexander the Great plundered the treasuries of the Persians; and the Romans seized this stolen bullion when they conquered the Mediterranean. Constantine took the gold of the Pagan temples for his needs, and whoever controlled Egypt could rely upon the mines in Nubia as a source of gold. When the Arabs spread Islam through the world, they seized the gold and silver of the lands they conquered. When they gained control over northern Africa, the Arabs also gained power over the gold coming from sub-Saharan Africa.

    Europeans minted a few coins during their Dark Ages, but mainly they relied upon Arab gold coins. It wasn’t until the Europeans sacked Constantinople during the Crusades, taking its gold, and the Venetian cities developed trade surpluses with the Arabs that Europe found a need to mint gold on a regular basis, starting in 1252.

    The chart below shows the gold/silver ratio over the past 750 years. In the thirteenth century, the gold to silver ratio was around 10 to 1. It was the scarcity of gold in the fifteenth century that drove the Portuguese to go south and east to seek gold and silver, and the Spaniards to go west, discovering the Americas instead of reaching China.

    The discovery of America released not only the gold of the Americas which the Spaniards seized, but the silver of Potosí and Mexico which supplemented the silver mines of Germany that produced silver Thalers. Galleons filled with silver crossed the seas to Europe and China every year, causing global inflation in the seventeenth century.

    The chart, which uses the gold/silver ratio for the United Kingdom through 1800 and the United States after that, shows that between 1250 and 1850, the value of gold relative to silver gradually increased, rising from around 10 to 1 in 1250 to 15 to 1 around 1850. Despite all the discoveries of gold and silver, the seizing of gold and silver by conquerors from the conquered, or the changes in the global economy during those intervening 600 years, the ratio of the price of gold to silver saw no dramatic changes.

    This stability enabled the Bimetallic standard to prevail for those 600 years. As one country changed the domestic ratio of gold to silver, gold would leave one country and go to the other. If the gold/silver ratio was 12 in France and 11.5 in the Netherlands, gold would flow to France where it was more highly valued, and silver would flow to the Netherlands. If the Netherlands changed the ratio to 12.5 to 1, gold would flow from France to the Netherlands.

    Anyone who thinks governments didn’t debase their currency before paper money was introduced knows nothing about history. Paper money only enabled governments to speed up the process of debasement. The English silver Shilling had 16.2 grams of silver under William I in 1066, but only 2.6 grams under Henry VIII in 1546. The French Livre Tournois had 84 grams of gold under Philip Augustus II in 1200, but 4.5 grams when the French Revolution began in 1789. The worst offender was Spain whose Maravedí had 52 grams of silver in 1200, but only 0.031 grams of silver in 1808.

    What happened in the 1800s to change the gold/silver ratio forever? There were new discoveries of gold in California, Australia, South Africa and the Yukon, but what really changed things irrevocably was the huge discoveries of silver in Nevada and Colorado which caused a collapse in the price of silver, as well as its price relative to gold, as the graph below shows.

    It wasn’t that countries chose to move to the Gold Standard because it was the right thing to do, but because they had no choice. The collapse in the price of silver made silver a token commodity. The relationship between gold and silver that had held for 600 years was irrevocably broken. Although almost every developed country was on the Gold Standard by 1900, few realized it was the lull before the storm. When World War I broke out in August 1914, the Gold Standard was dead.

    Attempts to resurrect the Gold Standard after World War I, World War II and today were doomed to fail because the relationship between gold and silver had been changed forever. Could a country like the United States return to a Gold Standard? In theory, yes, as I have demonstrated in my paper “Returning to the Gold Standard in Five Easy Steps”. In practice, it is highly unlikely.

    It wasn’t governments who destroyed the Gold Standard through their fiscal ineptitude. Governments from the Roman Empire until today have run deficits and debased the currency regularly. It was the new discoveries of gold and silver and the technology to exploit those discoveries which destroyed the price relationship between gold and silver forever.

    Governments, and the people who vote for them, will have to learn to change their behavior if the debasement of currencies is to end. Whether that is possible, remains to be seen.”

  74. Fed Up says:

    The Earnings Season: “House Of Cards”

    http://streettalklive.com/analysis/daily-x-change.html?id=2181

    Just like the hit series “House Of Cards,” Wall Street earnings season has become rife with manipulation, deceit and obfuscation that could rival the dark corners of Washington, D.C. From time to time I do an analysis of the previous quarters earnings for the S&P 500 in order to reveal the “quality” of earnings rather than the “quantity” as focused on by Wall Street. One of the most interesting data points continues to the be the extremely low level of “top line” revenue growth as compared to an explosion of the bottom line earnings per share. This is something that I have dubbed “accounting magic” and is represented by the following chart which shows that since 2009 total revenue growth has grown by just 31% while profits have skyrocketed by 253%.

    As I have discussed previously:

    “Since 2000, each dollar of gross sales has been increased into more than $1 in operating and reported profits through financial engineering and cost suppression. The next chart shows that the surge in corporate profitability in recent years is a result of a consistent reduction of both employment and wage growth. This has been achieved by increases in productivity, technology and offshoring of labor. However, it is important to note that benefits from such actions are finite.”

    As we enter into the tsunami of earning’s reports for the first quarter of 2014, it will be important to look past the media driven headlines and do your homework. The accounting mechanizations that have been implemented over the last five years, particularly due to the repeal of FASB Rule 157 which eliminated “mark-to-market” accounting, have allowed an ever increasing number of firms to “game” earnings season for their own benefit.”

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