Friday, January 13, 2012
Gold Bonds - Because Reality Always Wins
Ugly truth number 1:
By many measures, the US economy is already in a recession. It isn't quite in one yet, because the correlations haven't totally formed a controlling downward interaction.
Take a good look at this graph. It has YoY changes for real retail sales (through November, blue), real disposable personal income (red, through Q3), and government current receipts (gross, not real, in green).
Real disposable personal income is at 0% increase over the year. This doesn't usually happen in the run-up to a normal US recession, much less in a recovery. It's a dire signal.
Here is a long time series of government current receipts and real disposable personal income:
Reminder: real disposable personal income is calculated by subtracting taxes from income plus adjusting for inflation.
The mid 1970s recession is kind of similar, and it was caused mostly by high structural inflation which cut real incomes. One of the problems was energy. That accounted for a lot of the problem. Another problem was that tax brackets weren't pegged to inflation, so many persons ended up with constantly declining real incomes.
Thus, during the 70s sequence you see the apparent paradox of very high growth in government current receipts while growth in real personal disposable income lagged and then collapsed. Both the mid-70s recession, which was a very deep one, and the early 81 recession were caused by falls in real disposable personal income.
Usually in the US big drops in real disposable personal income are at least partly the result of the recession, with two counter-balancing factors coming into play - costs tend to drop as consumption and spending drop, which raises real incomes for all the people who don't lose employment or income, and many people do lose employment or income, which causes a drop in real personal income.
One of the major factors in the last recession was that as inflation dropped out, early in the recession real incomes rose sharply. That helped a great deal, but as the housing and credit bubbles kept popping, the downward drag took over again. However it was not until late 2010, when the misguided QE2 pumped a lot more money into commodities, that inflation really took off and choked off the slow recovery in real personal income.
Now it should be obvious that the FICA payroll tax cut has impaired government revenues, although it did support real disposable personal income. Therefore, without increasing the federal deficit, real personal disposable incomes would look worse since late 2010.
Inflation will remain in the system through the next year. It may in fact be boosted by efforts to deal with the European debt crisis and the ripple effects, plus structurally slower real global growth.
US real retail sales do not show the normal pre-recession pattern of either continuously falling down to zero or getting stuck at no real growth. This is largely because of the FICA tax cut, which has to be one of the most ill-designed economic stimulus packages the US ever instituted post WWII. The FICA tax cut gave thousands in additional real income to a very small portion of the US population that already accounts for a disproportionate amount of personal consumption (because they have the money). This masked the fact that most of the population was seeing declining real incomes:
No problem at all, right? Or maybe it is.
The problem in the US is not wealthy people - it's that job creation has just stopped, and this plus inflation is depressing real incomes for most people. You don't have income mobility without jobs.
Living wage jobs have dropped over the course of a decade.
That red line is the number (absolute, not as a percent of working-age population) of full-time jobs. In eleven years, it hasn't increased.
The blue line is all jobs. We have added many part-time jobs, which diffuses the same level of income among a larger number of people who have less in the way of benefits.
Needless to say, we are supporting personal consumption with income transfers to the population. That's the black line.
The fundamentals for job creation have shifted slightly positively, despite the best efforts of our national government to destroy the economy. We cannot approach a real jobs recovery in less than 10 years, and if Obama gets another term make it 15 years.
The really strong element in the US economy preventing another recession is simply increased government transfers to the population.
So that's the structure. The government financing gap I guess will go in another post.
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