Tuesday, November 17, 2009
Couple 'O Teeny-Tiny Minor Little Details
“The biggest worry to us is that consumption growth has been too strong relative to incomes,” said Hiromichi Shirakawa, chief Japan economist at Credit Suisse Group AG in Tokyo, who used to work at the central bank. ... Without adjusting for prices, Japan’s economy shrank an annualized 0.3 percent last quarter, the sixth straight contraction.2) Since we are turning Japanese, we might want to think about their situation. This is definitely one of our possible futures, and we have the same excess consumption growth relative to our economy as they do - even in the middle of a very steep recession in which we are now seeing quite deflationary signals.
A couple of graphs for you. HI (the 2.9% Medicare tax) is charged on wages and self-employment income. Since it is flat and uncapped, these tax receipts as reported in the Monthly Treasury Statement can be used to check earnings. Without further ado:
Because, after all, we are not in a hugely different situation.
This is going to catch up with us; personal consumption expenditures cannot continue to grow with declining earnings unless a huge amount of debt is written down.
Looking at it this way makes things look better, doesn't it?
And our household debt is dropping rapidly.
It's important to remember that wages and self-employment earnings are not the only money US residents have to spend. The wealthier groups have dividends and interest (no joy recently there - if we figured it over two years most have lost considerably in those quarters too).
Then there are welfare payments, food stamps, unemployment checks and Social Security. One of the purposes of unemployment is to keep incomes from dropping too quickly and gutting a nascent recovery.
3) So aren't we in recovery? I think we are in a mid-recession growth cycle. I also suspect that October-November will be about the peak of this one. A lot depends on what our government wants to do and how realistic we are all going to be about our situation.
We can't keep hiking up our public debt forever by throwing money into personal transfer payments. Even if we resume nominal wage and self-employment growth next year, the Medicare/Social Security bust has been brought years forward. Currently both programs appear to be in deficit, which means that general funds (personal and corporate taxes) have to be diverted for these very necessary programs.
But here are other extraordinary draws on general funds:
- FDIC insurance fund bailout. Easily 700-800 banks could fold this cycle. Congress is going to have to throw in a few hundred billion.
- Fannie bailout. Every quarter they show up asking for just 10-20 billion. We just hope it stays that low.
- FHA bailout. Only Barney Frank doesn't realize this is coming.
- TARP losses. Some already and plenty coming.
- And then there's the Fed. How it gets out of buying mortgages I don't know; just about any way it tries to exit it takes a loss on what it has.
Industrial production growth came in at a marginal 0.1% (not surprising, given the trends at oil refineries), and may be weaker yet in November. As of October we were still down 7.1% over 12 months. Final products:
Materials are still turning in some oomph:
And then there are producer prices. The twelve month changes as of October:
Crude: +5.4%The margins are squeezing; this is not laying the foundation for growth in business investment. The monthly figures for finished food and energy were both +1.6% for October, so the compression is occurring in all other goods, which came in at a staggering -0.6% - by far the deepest drop of the last twelve months. Oops.
Rail employment had been turning up in the early parts of this growth cycle; in September Class I rail employment started to fall again. See STB rail employment. October data should be published soon.
Eventually, we will eliminate enough debt to help disposable incomes. Chargeoffs at banks continued to rise in the third quarter. Seasonally adjusted annualized rates for the quarter:
- Credit cards: 10.24% (08: 5.73%)
- All consumer loans: 5.86% (08: 3.63%)
- Residential mortgages: 2.43% (08: 1.48%)
- Commercial mortgages: 2.58% (08: 1.19%)
- Total Loans and Leases: 2.88% (08: 1.52%)
Between the drag from debt and the drag from the government contraction (which has to happen), there is a lot of quicksand ahead next year.
The Fed doesn’t have to sell their MBS to unwind the position since mortgages, and especially Mortgage-Backed Securities, will retire themselve relatively fast, typically taking five to seven years to be mostly paid off. If the Fed was smart enough to issue plenty of 5 and 10 year Notes to fund its MBS purchases, they can actually be a very profitable hedge fund themselves, holding 4.5% mortgage yields and paying 2.5% on average to fund them. On a trillion dollars, that’s $20 billion a year in positive carry.
They will stick around far longer than would be normal unless they default. That's the problem with long term debt at very low rates - your bad stuff goes blooey and you don't get your capital back on the viable loans, so you take a loss regardless.
Further, the market value of the mortgages will degrade if interest rates go up - but I think the Fed will pull a BOJ and hold interest rates down very low as long as they can.
I'm betting they won't be able to hold rates low as long as they think they can. To the extent that the mortgages are implicitly or explicitly guaranteed, the taxpayers get stuck with the default losses, but the rate-related losses are the Fed's.
Lower interest rate charges on credit card debt would free up more money for the local economies all over the country to spend CASH. Cash creates business, especially when it comes from paycheck money rather than the government as stimulus money.
The concept of velocity is not as simple as it would appear.
Measures that are important are diffusion as well as rate of change. See my next post above.
I generally think of velocity in terms of spending converted to chains of function. The length of the chain controls the rate of diffusion.
The reason why debt overhangs create such a disastrous effect on economies is that they lop off chains of function; creditors want to be paid back. As people pay them back, if the money cannot be placed out to create new chains of function, you are effectively diminishing circulating money.
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