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Monday, July 18, 2011

And It Will Require Bravery

First, we read a nice article about GS' recent forecast, along with the chipper comment that good ol' Ben is just gonna have to start throwing money again:
"If the economy returns to recession—not our forecast, but clearly a possibility given the recent numbers—Fed officials would undoubtedly ease anew even if inflation is close to their target," Hatzius writes. ...

One bit of frustration shared by Bernanke and Hatzius is that their models aren't saying what exactly is sapping the demand that they expected to pick up.

"The 'bugbear' is that we are still unsure about the precise reasons for the slowdown in 2011 to date, which is sharply at odds with our expectation at the end of last year that growth would accelerate in 2011," Hatzius writes.
I'm here to help.

HI Receipts (paid on all wages, indexed to 2007):

That blue line is the rate of change each June in nominal wages compared to June 2007. (Because HI is a straight percent of all wages and salaries).

The nasty orange-red line is the rate of change each June of CPI-W adjusted wages compared to June 2007.

So offhand I'd say the puzzlingly slow rate of final demand increase can safely be imputed to lack of real income.

There are other factors. Many SS recipients are low income.
They did receive a 5.8% COLA for 2008, but that was due to prior inflation. CPI-W understates this type of inflation severely for low income SS recipients due to a misallocation of spending percentages and due to the fact that they are already on the low-cost tiers without the ability to substitute. So since then they have lost ground, and they did so very rapidly this year.

Then there's the expiration of unemployment benefits. The max in this downturn was 99 weeks or 23 months. Not everyone qualified for that, though. The highest rate of initial claims came in the first half of 2009, so a very large proportion of those claimants have lost benefits by this summer without being able to find any work or any work paying nearly what their unemployment benefits did. Every month they are still falling off the rolls.

Finally, let's take a look another look at wages and wages ex supplemental benefits. The large increases many employees are paying in the form of increased deductions for medical insurance are not reflected in a reduction of HI receipts, because that is considered consumption. But certainly to the employee who gets less in his or her paycheck, it is an income cut. This too weighs disproportionately on lower paid workers.

And I'm just going to include this because it is such a scary graph:

Even if the Bush tax cuts had never happened, it is clear that the relationship between personal income taxes + FICA and government transfer payments has veered off in a new and frightening direction.

It is non-sustainable. The killer is that a huge new entitlement program paying subsidies for medical insurance and vastly expanding Medicaid is due to kick in at the beginning of 2014.

Lastly, here are the basic components of government personal transfer payments to individuals:

The top intimidating blue line is SS, Medicare and Disability.

Other (the shadow) includes Medicaid (a lot goes to older poor people), food aid and the like.

The little yellow camels at the bottom are unemployment insurance. Vets and traditional type welfare hardly register.

The Fed destroys purchasing power and then wonders why demand is down.

Watching the Federal Government in action is like watching the Cubs play. It's fun as morbid entertainment for an hour or two but it gets disheartening after that.
Charles - what with all the chatter about further stimulus, it leads one to wonder how much purchasing power the average worker will have lost next year.

Every time Bernanke says something about stimulus, oil goes up and so do Treasuries. I think he is panicking as many people as he is calming.

Things are so bizarre right now... over the last 6 months my house has gone down in value while my Prius has increased in value!
Charles - I bought a Ford Focus last year with 39K miles on it. It needed a brake job and I guess the person who traded it in just didn't have the money to do it.

According to everything I see, it has inflated in value by more than $2,500.

But your Prius and that car are economic assets - people need vehicles to get to work - and houses, at this point, are not in nearly as much demand.

The remarkable inflation in used car values over the last year tells its own tale about our economy.
I expect used car values have peaked. With all the
channel stuffing GM has done, i think all the automakers will start aggressively discounting their
product, making the choice between a new car or
a used car a little less clear cut.

Spork, I don't know how much more stuffing GM could do than they've been doing for years. I used to work in an office building with a TSA training facility in it, there were about 7 or 8 TSA employees there but I counted 18 TSA vehicles in the parking lot. During the winter you could see how seldom they were used because of the snow piled on top of them.

This is no different than the 1950's when my father in the service was assigned a job of driving jeeps onto an aircraft carrier. He thought Korea was heating up until the aircraft carrier returned 2 days later empty. The jeeps were dumped somewhere in the Atlantic - the new models were coming in and the government didn't want to destroy the used jeep market.
Health care costs are why people aren't hiring. At least why I'm not. If I hire a guy for $60k in salary it costs me another $30k in benefits. QED.

The remarkable inflation in used car values over the last year tells its own tale about our economy.

No joke!

Trivia time.

The "Used cars and trucks" seasonally adjusted index bottomed at 121.794 in March 2009. It now stands at 150.707. That's a 23.7% increase. Wow.

Meahwhile, the "New cars and trucks" seasonally adjusted index bottomed at 91.234 in December 2008. It now stands at 99.482. That's a 9.0% increase. It is certainly tame by comparison but it is hardly tame.

In any event, seeing the inflation appear much more in used cars than new ones is hardly what Bernanke wants, any more than he wants to see inflation in oil prices exceed the inflation seen in stock market prices.
The Society of Scavengers.

Ripping off graveyards, metal mailboxes, and chunks of houses.

WV "bilikeo"

A general feeling of angst due to the fact that we've been bilked.
CF - of course! That has to be one of the primary reasons why the older workers are shut out of the jobs market and why small businesses just aren't providing any lift in this (erstwhile) recovery.

Good point, it's worth another post on that.

Obama is an economic nincompoop, and unfortunately he managed to hire economic advisors who were also.
But M_O_M, Obama had Volcker, Buffett and Summers on his team! How did it all go wrong?
cf - "But M_O_M, Obama had Volcker, Buffett and Summers on his team! How did it all go wrong?"

He doesn't listen to them. They are window dressing. He has his view of the economy and business as unfair. Unfortunately, no amount of wise advice willl change that view.
The only thing worse than not listening to Summers and Buffet is listening to them.

I think Volcker is a tad overrated myself; his high interest rate policy wreaked havoc on S&L's.
Charles says, "I think Volcker is a tad overrated myself; his high interest rate policy wreaked havoc on S&L's."

Probably true. He proved beyond a doubt (only idiots doubted it, but there were and still are a few) that "runaway" inflation could be stopped quickly by raising interest rates. Yes, it hurt, but it had to be done. It may ruined some S&Ls but it gave me one of the best long term plays I ever saw. Long term zeroes at 15%. Once in a life time.
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