Source: The Federal Reserve Bank of Dallas (h/t Barry Ritholtz)
Ray Dalio, founder of Bridgewater Associates (which manages about $150 billion in assets), has released this 30 minute video explaining his vision of “How the Economic Machine Works.” It is well worth watching, particularly for his description of the potential for a “beautiful deleveraging.” Dalio concludes with three helpful rules of thumb for individuals and policy-makers: (1) Don’t have debt rise faster than income (because your debt burdens will eventually crush you); (2) Don’t have income rise faster than productivity (because you’ll eventually become uncompetitive): and (3) Do all that you can to raise your productivity (because, in the long run, that’s what matters most).
Fed Chairman Ben Bernanke gave a speech on the economy yesterday. He was clear in outlining his employment objectives and in his commitment to keeping interest rates low even after the economy begins to improve (at least through mid-2015). In general, Wall Street loved it. Matt Yglesias loved it. Joe Weisenthal loved it. Of course, it makes sense that Wall Street would generally be supportive. Bernanke’s policy tract is designed to support asset prices and keep the cost of capital low. Win-win.
In the speech Bernanke made the case that the Fed is not enabling fiscal profligacy (despite all evidence to the contrary), is not monetizing the debt (really?), is capable of handling inflation when the time comes (we’ll see), and is highly transparent and open (that’s why he doesn’t want to be audited). He also asked Congress to address the “fiscal cliff,” just not yet. Jon Stewart dealt with an earlier version of claims of this sort here.
Bernanke also tried to debunk the idea that the Fed’s interest rate policy is not screwing savers. In this regard he focused on the need to deal with the financial crisis and the ongoing economic weakness. He then went on to argue that because savers “wear many economic hats,” low rates need to be viewed in context. In Bernanke’s view, policies leading to a stronger economy trump all other concerns.
The best and most comprehensive solution is to find ways to a stronger economy. Only a strong economy can create higher asset values and sustainably good returns for savers. And only a strong economy will allow people who need jobs to find them. Without a job, it is difficult to save for retirement or to buy a home or to pay for an education, irrespective of the current level of interest rates.
This viewpoint carefully ignores the basic economic principle that incentives work. When savings returns are less than zero (after inflation) and close to zero nominally, we can’t expect people to save. Indeed, the personal-saving rate stood at just 3.7% in August 2012. That’s up from the 1.5% low of 2005, but half the 7.5% average recorded in the last three decades of the twentieth century. As my friend Joe Calhoun points out, Bernanke wants us to spend today — and not on stuff with guarantees attached. Meanwhile “[w]e’re running out of future from which to borrow” in order to pay for what we buy.
What’s worse, even if we conceded that it’s okay to screw savers and mortgage the future to get the economy moving, we simply can’t expect the economic recovery Bernanke’s policies are supposed to achieve unless and until the economic benefits the Fed doles out to major banks and major corporations via lower interest rates and bond purchases and to banks and the well-to-do via frothy markets trickle-down to the masses. Do we have good reason to expect that to happen? For example, the S&P has risen roughly 80 percent since the lows of 2009 with only meager economic improvement and dreadful ongoing unemployment.
The overall idea behind all this is obviously to “stimulate demand.” Only once demand is restored will companies begin hiring again, or so this thinking goes. Yet despite the Fed’s best efforts, from the first quarter of 2008 through the second quarter of 2012, annualized growth in real consumption spending has averaged a mere 0.7% — all the more extraordinary when compared with the pre-crisis trend of 3.6% in the decade ending in 2007. Recent data have been terrible too.
Following a decade of profligate spending fueled by debt and credit bubbles, American households (fearful for their jobs and nervous about the future) are simply trying to repair the damage to their household balance sheets. The overall level of household indebtedness is at 113% of disposable personal income as of mid-2012. That’s down from its pre-crisis peak of 134% in 2007, but still well above the 1970-1999 norm of around 75%.
Even so, the Fed still tries to get demand going by – you guessed it – offering lower interest rates and supporting asset prices. Déjà vu all over again.
Savers will continue to get screwed. Bernanke essentially admits it. Meanwhile, those with first access to money (think banks, Fortune 500s and the wealthy) are the primary beneficiaries of the Fed’s largesse. Earlier rounds of quantitative easing haven’t helped much (if at all). Bernanke pleaded his case, but is there any reason to think that the benefits of the Fed’s free-money policies will trickle-down to the general population?
The U.S. Census Bureau released its annual report on poverty, income, and health insurance today. It is a comprehensive analysis of the financial status of Americans. The news is mixed at best. Some highlights follow.
- The real median household income in 2011 was $50,054, a 1.5 percent decline from 2010, an 8.1 percent drop from 2007 (the pre-recession peak) and an 8.9 percent drop from 1999 (the all-time peak). The West has experienced the greatest decline by region.
- Income inequality increased again in 2011, this time by1.6 percent from 2010. The top 20 percent saw their income share rise 1.6 percent to 51.1 percent and the income share for the top 5 percent rose 4.9 percent to 22.3 percent of the national total. The middle (the group between the 40th and the 80th percentiles) saw its share of national income drop from 38 percent to 37.3 percent.
- The poverty rate remains at 11.8 percent, meaning that 9.5 million people are living in poverty (the equivalent of a family of four with an annual income of $23,021 or less). Moreover, this level is still worse than in all but two years since the mid-1960s. Fully 6.2 percent of married-couple families, 31.2 percent of families with a female householder and 16.1 percent of families with a male householder lived in poverty in 2011.
- 13.7 percent of people 18 to 64 (26.5 million) lived in poverty in 2011 compared with 8.7 percent of people 65 and older (3.6 million) and 21.9 percent of children under 18 (16.1 million).
- In 2011, the median earnings of women who worked full-time, year-round ($37,118) was 77 percent of that for men working full-time, year-round ($48,202) ─ not statistically different from the 2010 ratio.
- 15.7 percent of people did not have health insurance in 2011, but that’s down from 16.3 percent in 2010. The proportion of people with private health insurance did not go down (it’s 63.9 percent).
- The number of “shared households,” (households with at least one adult who isn’t in school or one of two other adults) has risen by 2.6 million from 19.7 million in 2007 to 22.3 million, an increase of 13.2 percent. These households are now 18.4 percent of all households, up from 17 percent in 2007.
Overall, this can’t be seen as good news.
Next week, the Census Bureau will release single-year estimates for 2011 of median household income, poverty and health insurance coverage for all states and counties, places and other geographic units with populations of 65,000 or more from the American Community Survey (ACS), along with estimates for numerous social, economic and housing characteristics including language, education, the commute to work, employment, mortgage status and rent.
Source: Political Calculations
As ever, I was frustrated in that the best approach to the fiscal and economic problems we face seems pretty obvious to me but nearly impossible to implement. It has three component parts.
- The top priority is a healthy and growing economy. All sides agree that economic growth is absolutely necessary to escape the morass we’re in. There will be lots of political arguing about this, but the unfortunate reality is that the government can’t do a lot to rescue the economy except at the margins and around the edges.
- We also desperately need fiscal responsibility which includes a comprehensive plan to deal with government spending and deficits. Our current path is simply unsustainable.
- That said, now is not the time to be cutting programs designed to help people in trouble and survive what is still a very lousy economic environment. Moreover, firing government workers when there are few job prospects for them in the private sector doesn’t strike me as a good plan for fixing things.
All of this suggests a pretty straightforward (if difficult to execute) solution — use governmental resources to keep things from getting worse in the near-term and go about doing those things that only governments can do (like fixing our collapsing infrastructure). Even though it is a monumental longer-term problem, we can borrow money today at extremely cheap rates to do so. When economics conditions improve, we can then attack the fiscal problems head-on.
But here’s the problem. There is not a whit of evidence that our bloated and entitled government will ever have the discipline to impose austerity by curbing its spending habits without being forced into it by political mandate. Even worse, it is least likely to do so when times are good, revenues are high and political largesse is easy to bestow.
Sadly, that means I have no clue what is the best way forward. The approach most likely to succeed in the long-run is probably to impose austerity now since there seems to be some real support for it, election results allowing. But if we follow that approach we need to recognize that doing so will force some dreadful near-term impacts, many of them forced upon those least able to manage them successfully.
The better solution (assuming a more perfect world) risks longer-term financial ruin without responsible government and leadership (how often have we seen that recently?) and has potentially nightmarish consequences for our children, who already assume that they will never have Social Security and Medicare benefits even as we Boomers are whining about any potential cuts to that which we are “entitled” (in a social compact we made with ourselves without the consent of our children, who we expect to pay for it).
If anybody has a plausible solution, I’d love to hear it.
Source: The New York Times
Source: The Wall Street Journal