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Watch #880 Rates, Debt, Money Supply.
May 24, 2013
Unless This is Addressed, Little Else matters.
Treasury and home loan rates have taken a hit in the past week. Some of this may be due to selling by the big players (PIMCO) and some of it by Bernanke's words. Add to this that we indicated at the end of January that we are officially in a secular technical bear market (lower prices, higher yields.) For the next 8 months or so we will see higher yields. It is what happens in the next bear cycle (2 - 2.5 years from now) which concerns me more and which I address below.
What moves interest rates around? In order to understand this you need to think like a wealthy person. A "wealthy person" is someone who has all the money they need for the rest of their life. They have one enemy and that is inflation. If the cost of things goes up at a greater rate then the value of their nest egg than the present value of their wealth will not suffice in the future. A wealthy person is less interested in risking the value of their wealth by investing it in equities because they already have enough. What they are interested in is protecting the purchasing power of their present wealth by investing in fixed income securities (government debt, corporate debt and mortgage debt) and having that return greater that or equal to inflation.
So, historically it is inflation which has driven rates for fixed income securities. The nagging question at present is the following: can Treasury (and other fixed income security) rates spike up without inflation? This was addressed on March 26, 2010 by former Fed Chairman Greenspan when he referred to the spike in the 10 year Treasury as a “canary in the mine" meaning an early warning that bleep was about to happen. If investors are skeptical about Treasuries then there are two possible causes: 1) they fear inflation or 2) they are losing confidence in the dollar.
The key sentence from Greenspan is this: historically, there has been “a large buffer between the level of our federal debt and our capacity to borrow. That’s narrowing. And I’m finding it very difficult to look into the future and not worry about that.” Greenspan opens the discussion that not only inflation moves rates up but, worse yet, would be a lack of confidence in the stability of the value of the dollar.
So why would investors lose confidence in the dollar? They may at some point in the future look at the debt/GDP ratio and wonder how Treasury is going to pay the debt. We have been lulled in the past few years because the price of the massive increase in debt has been low because interest rates have been low. Once the cost of Treasury borrowing increases, the cost of debt service will rise dramatically. The day of the Lehman bankruptcy September 15, 2008 Treasury debt totaled $9,634,090,464,815. This Wednesday it was $16,734,032,974,210.
For the present Treasuries have been protected because things are worse in Europe and Asia but this will eventually bite us. Also, the Treasury and MBS markets have been supported to the tune of $85 billion/month in QE purchasing by the Fed. But while the Fed has, in general, control over short-term interest rates it has created a future difficult situation for itself. At some point the Fed has to draw down money supply (sell Treasuries) without sending Treasury yields spiking. The only real question is this: will the demand for Treasuries keep pace with the supply so as not to send yields up sharply?
It is not at all clear if the recent selloff of Treasury debt is indicative of what was discussed above or if this simply the effect of a few large players reducing their positions to a more comfortable level.
This can be avoided if we can start trying to find fiscal sustainability and not depend on borrowing. Apart from libertarians, Simpson-Bowles, and myself no one seems very interested in fiscal sustainability.
The goal should be to keep flat the ratio of debt to GDP a number which has seen a large spike in the past few years.
Dick Lepre
dicklepre@rpm-mtg.com
Web site: www.loanmine.com
Blog: economy.typepad.com
Phone: (415) 244-9383 | Fax: (866) 488-2051
1400 Van Ness Avenue, San Francisco, CA 94109
CA DRE # 01143973 | NMLS # 302379
California Department of Real Estate - Real Estate Broker License #01818035,
NMLS #9472. Equal Housing Opportunity.
Inside the BLS Employment Situation Report
This is my monthly look inside the BLS Employment Situation Report. There are two BLS Surveys: the Establishment and the Household. Establishment surveys about 141,000 businesses and government agencies, representing approximately 486,000 individual worksites. It is taken each month during the week which includes the 12th of the month. Household is a survey of 60,000 households taken each month during the week which included the 12th of the month.
Each item below is suffixed with (H) if it is from the Household Survey, (E) if it is from the Establishment Survey, and (B) if it is from both.
- Nominal Nonfarm jobs was +165,000. (E). The two previous months' gains were revised to +138,000 (March) and +332,000 (February). Those had been +88,000 (March) and +268,000. That is a gain (for March and February) of 114,000 from the previous report making the net gain in jobs since the last report of 279,000.
- Real (population adjusted) job growth in April was 165,000. This accounts for the changes for February and March which were significant.
- the Unemployment Rate was 7.510% down from 7.574% in March 2013(B).
- Average hourly earnings was $23.83 up from $23.82 in March 2013 (E)
- Average work week was 34.6 hours up from 34.5 hours March 2013 (E)
- Private jobs were +176,000. Government jobs were -11,000 (E)
-Good producing jobs were -9,000. The two previous months were revised to +15,000 and +75,000. (E)
-The size of the civilian labor force rose from 155,028,000 to 155,238,000 an increase of 210,000. (H)
- The labor participation rate (percent of adult noninstitutionalized population who are part of the labor force) was flat at 63.3.%. It was 63.6% a year ago (H). This, not the unemployment rate, is the number which should get everyone's attention. It is this 63.3% of the adult noninstitutionalized population who get pay checks and contribute to GDP.
- the size of the civilian noninstitutional adult population increased by 180,000 in April to 245,175,000 (H). With a labor participation rate of 63.3% 113,940 more jobs were necessary to keep pace with population growth. We had 165,000 more jobs added than that including the changes from February and March. (H) The Employment/Population ratio was 58.6% up from 58.5% the previous month.
The civilian noninstitutional population is 2,391,000 (H) more than 12 months ago. With a labor participation rate of 63.5% we require 1,518,000 more jobs in the past 12 months to keep pace with population growth. We had 1,654,000 (H) more folks working. The increase in real (population adjusted) jobs in the past year is 136,000.
According to the 4 week moving average of Initial Jobless Claims, 1,369,000 people lost their jobs in the last 4 weeks. That normalizes to 1,483,000 lost jobs in a calendar month (there are about 13 4-week periods in a 12 month year.) This is down from the previous month's 1,535,000 jobs lost/month.
In April 2013 BLS measured 4 sets of people entering or leaving the jobs market:
- Job losers and persons who completed temporary jobs was 6,410,000 up 81,000 from March's Job Losers and down 470,000 from April 2012. (H)
- Job leavers was 864,000. This includes anyone who retired or voluntarily left working. This down 122,000 from previous month and down 25,000 from April 2012. (H)
-Reentrants was 3,151,000. Reentrants are previously employed people who were looking for a job and found one. This was -25,000 from the previous month and -185000 from April 2012.(H)
-New entrants were 1,280,000. These are people who never worked before and who are entering the labor force for the first time. This was -+30,000 from previous month and -82,000 from April 2012.
The presentation of the total change in jobs is like looking at the final score of a game. The details tell the story:
- 279,000 more people are working
- 210,000 more people are in the civilian labor force
The unemployment rate fell 0.064% despite the labor force increasing. We are +136,000 real (population adjusted) jobs for the past 12 months.
The economy is failing to produce jobs for people entering the labor force for the first time. A sizable piece of the increase in jobs last month (122,000 out of 165.000) was due to fewer people leaving their jobs. While this report looks good on the surface the fact is that we still have underlying serious issues with the jobs market. These issues are structural not cyclical.
Most telling is the fact that markets are cheering a headline of +165,000. If we are cheering +165,000 it is only because expectations are dismal.
The U.S. economy is no longer producing jobs for folks who do not have a college degree or recognized trade skills. Jobs performed by those without education or skills are either being automated or offshored. The very large increases in the cost of college education are making education less affordable as it becomes more necessary.
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Watch #876 Are Capitalist Free Markets More Moral?
April 26, 2013
The Morality of Free markets
This is something new for me. This section of the newsletter started when I posted on Facebook what I though was an interesting commentary on markets written by Rupert Murdoch. Murdoch's case is that not only are capitalist free markets more efficient but that they are more moral.
I did not really add a lot to what Murdoch said but received several follow-ups from two Facebook friends. One was from Tom Abate. Tom is Editor of The San Leandro Patch. I connected with Tom years ago when he was a writer for the San Francisco Chronicle. I believe that what Tom is doing - online local news is very important. There are many sources for world and national news and newspapers do not cover local news well enough.
The other post came from FB friend Jim Bridgeman. Jim is a Fellow of the Society of Actuaries with a Master's degree in Math and is an Associate Professor of Math at the University of Connecticut. He and I attended Note Dame at the same time. Jim, another math grad student, and I shared an apartment in Berkeley, CA in 1969. They were attending classes at U.C. Berkeley and I was designing safety systems for nuclear weapons at Lawrence Livermore Laboratory.
Murdoch's piece was in The NY Post on Sunday. Murdoch owns the N.Y Post and also the WSJ along with dozens of newspapers in the U.K and Australia along with a lot of TV and film assets with "Fox" as part of their name. Murdoch's piece is here.
You should read his words - it's a short piece. I will post some excerpts here:
"But while we’ve [capitalist free markets] won the efficiency argument, we have yet to persuade people that the market does better because it is more moral — or that socialism fails because it is largely immoral in its denial of fundamental freedoms.
To the contrary, too many people think that the market succeeds because it is based on a vice — greed. And that socialism is better, because it is based on a virtue — sharing.
... the market doesn’t succeed because of greed. For the truth is just the opposite. The market succeeds because it gives people incentives to put their own wants and needs aside to address the wants and needs of others. To succeed, you have to produce something that other people are willing to pay for."
Murdoch trashes crony capitalism and Wall Street bailouts. He asks "What’s just about a generation of people who rack up government debt for their own health care and retirement — while leaving their children and grandchildren to foot the bill?"
He adds, "Our challenge is to bring our message to such people—whether they work on a factory floor, behind a restaurant counter or at a desk — in a way that lets them understand why they stand to benefit more from a society that rewards their work and initiative than one that pretends to spread the wealth around."
Tom Abate disagreed with Murdoch. This is his post, "Dick Lepre pointed me to Rupert Murdoch's ode to capitalism. I think capitalism is, at best, amoral. Yes, capitalism can reward effort. Millions of private enterprises flourish due to the energy and passion of their owners. They provide products and services, livelihoods and purpose. But the age of robotics is dawning. Capital will soon have little use for labor except as consumers. The challenge will be redistributing wealth without institutionalizing sloth."
Jim responded to Tom's post with, " Tom, you couldn't be more wrong. Capitalism is about giving people what they really want, i.e. want enough to pay for it (the acid test). No business on earth can survive for a month without giving its customers something they are willing to pay for. (Maybe you don't think their customers should want it, but the customers think so.) Capitalism rewards people and organizations who give other people and organizations what they really want. Sadly for the intelligentsia, what people really want can often be pretty ugly so the rentier intelligentsia rejects the process of giving to them as immoral. Robotics will only change things in the direction of more people having to earn their livings making other people feel good in direct ways (entertainment, leisure, games, health care, arts (including culinary), spiritual enrichment, grooming, self-expression, design of the things robots make, etc.) rather than directly making things that people want, since robots will be making more of the things. It will probably be a kinder, gentler world if that's what you want, since more people will be serving their fellows in direct hands-on ways. The invention of mass production generated exactly the same feelings you express. What will all the farmers and craftsmen do? They moved to the suburbs and loved it. Couldn't wait to get off the farm or out of the back-yard shop."
I made this response, "Jim has made an excellent case and I will only add that Murdoch's real point is that Capitalism is more moral that any other system. This morality is based on the fact that, in Murdoch's words, "The market succeeds because it gives people incentives to put their own wants and needs aside to address the wants and needs of others. To succeed, you have to produce something that other people are willing to pay for."
They are willing to pay for it because they want it. Their wants are not to be judged. Their wants are an expression of their liberty.
Capitalism is adaptive. Capitalism created robotics and will adapt to robotics. Nothing else will."
Two of the biggest failure nations on the face of the earth are North Korea and Venezuela. N. Korea is one of the remaining experiments with Communism and Venezuela is a nation whose economy has been ravaged by Socialism. Absent a free market, the infrastructure to produce oil in Venezuela had been wrecked. The citizens of both of these nations are significantly worse off for lack of capitalism and free markets.
Dick Lepre
dicklepre@rpm-mtg.com
Web site: www.loanmine.com
Blog: economy.typepad.com
Phone: (415) 244-9383 | Fax: (866) 488-2051
1400 Van Ness Avenue, San Francisco, CA 94109
CA DRE # 01143973 | NMLS # 302379
California Department of Real Estate - Real Estate Broker License #01818035,
NMLS #9472. Equal Housing Opportunity.
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Watch #875 Revisiting Fed Handling of Liquidity Crisis
April 19, 2013
The Fed and the Liquidity Crisis
I got too busy this week (work + baseball) to write a newsletter. I am posting a rerun of a piece I wrote about the Fed's handling of the liquidity crisis. What follows is that which, in my view, deserves most of the credit for the Great Recession not being much worse than it was.
The Federal Reserve last week released the details of the various programs
which it instituted in response to the liquidity crisis which started in 2007.
Between February 2007 when HSBC was the first large bank to make a large write-off
($10.5 billion) and August 2008
banks world wide had written off $500 billion. Banks had a dual problem.
One was a capital problem but the persistent one was a liquidity problem. The
capital problem was partially fixed by raising more capital and diluting the
value of equity position of banks. The liquidity problem was more nefarious.
Banks became suspicious of one another and their normal flow of interbank lending
stopped.
Liquidity implies that an asset can be sold quickly without affecting the price.
The underlying reality was that if banks started to sell their stakes in home loans
the prices would be driven constantly down creating cascading losses as the
value of their stakes deteriorated and their new worth decreased.
The salient point was this: banks needed an extended period of time to get
rid of their lousy assets of pools of bad home loans. This required two things:
1) relaxation of accounting rules to not force banks to genuinely mark these
assets to market 2) a massive injection of liquidity on a scale never before
seen.
What follows are brief synopses of the various Fed created programs to provide
liquidity.
TAF
One solution was the Term
Auction Facility. The TAF was not merely a Federal Reserve thing. It was
the coordinated effort of the Federal Reserve, the European Central Bank, the
Bank of England, Bank of Canada, and the Swiss National Bank.
Under the Term Auction Facility program, the Federal Reserve auctioned term
funds to depository institutions by taking of a larger set of assets as collateral
that the Fed would normally take at its discount window. Cash was provided with
a broader set of assets as collateral.
I am going to sidetrack here with comments on some of what I have read about
this. The Fed was not giving money to anyone. It was lending money. All of these
loans were secured. The Fed lost zero. In fact it made money. It most certainly
took risks because it lowered the standard of the collateral it took.
The details of who got TAF money are
in this spreadsheet.
Primary Dealer Credit Facility (PDCF)
Some of the entities damages by the liquidity crisis were primary dealers.
There are currently 18
primary dealers. These are the entities which the Treasury department uses
to wholesale Treasury auctions. One of the most important elements of this is
what is called a "Tri-party Repurchase Agreement." A repurchase agreement
(repo) is the sale of securities and the agreement by the seller to repurchase
those securities for a given price on a given date. These are Wall Street versions
of a pawn shop. A Tri-party Repurchase Agreement is a repo where there is a third
part which acts as custodian for the securities. With these entities damaged
and lacking the trust of counterparties, the Fed established PDCF as an overnight
loan facility for primary dealers. It was to primary dealers what the Fed window
is to member banks. The dealers of immediate concern were Goldman Sachs, Morgan
Stanley, and Merrill Lynch. Details of all of the PDCF transactions
are in this spreadsheet.
The facility was announced on March 16, 2008, and was closed on February 1,
2010. All loan were repaid with interest.
It should also be noted that the big Wall Street investments banks were subsequently
either acquired by commercial banks or redefined themselves to become bank holding
companies and can now borrow from the Fed window.
Term Securities Lending Facility (TSLF)
This was another
type of support for primary dealers and loaned liquid Treasury securities
with less than totally liquid securities as collateral. These "less than
totally liquid securities" were agency MBS, CMO and bonds with
ratings from AAA to Baa/BBB. The TSLF was announced on March 11, 2008 and closed
on February 1, 2010. All securities loans made under the facility were repaid
in full, with interest.
Agency Home Loan-Backed Securities (MBS) Purchase Program
This was the facility for purchasing residential home loans. This helped Main
Street not Wall Street. These was FNMA, FHLMC and GNMA (FHA and VA) home loans.
The Fed purchased these home loans in bulk from primary dealers. Most of these
remain owned by the Fed and each transaction has its own CUSIP number. In addition
to the interest received there has been much principal repayment as homes are
sold and as those Fed owned home loans were refinanced at lower rates this year.
Understand that the Fed paid zero for the money. It created these fund out of
thin air. All of the interest received (less what is paid to the servicer) is
profit. The notion that this was a dramatic increase in money supply which could
create asset bubbles especially with low interest rates is valid. Asset bubbles
are a collateral effect.
Commercial Paper Funding Facility (CPFF)
Commercial paper is short-term (<270 days) borrowing usually by businesses
and governments to fund short-term operating expenses. Some commercial paper
is backed with assets and some is unsecuritized. This is a critical source of
funding for many businesses. While a business can issue commercial paper itself,
most commercial paper is sold to broker-dealers (investment banks and bank holding
companies) and those entities find retail buyers for this paper. To a large
extent is was money market mutual funds which provided the cash for commercial
paper. On September 16, 2008, consequent to the Lehman BK investors started
moving money out of money market mutual funds and these funds had to liquidate
assets at a bad time. On
that day the Reserve Primary Fund, the oldest money fund in existence, and
a holder of $785 million in Lehman Brothers commercial paper "broke the
buck" meaning that every dollar invested there was worth less than $1.00.
Before that day, in the entire 37 year history of money market funds this had
only happened twice. The notion that other than cash and bank deposits money
market funds were the safest investments had gotten a serious jolt.
When the liquidity crisis happened the money market funds were reluctant to
purchase commercial paper. We were facing a serious recession and the sources
of credit to many businesses disappeared almost overnight.
The Federal Reserve created the CPFF and the Federal Reserve Bank of New York
provided three-month loans to the CPFF LLC, a specially created limited liability
company (LLC) that used the funds to purchase commercial paper directly from
eligible issuers.
The facility was announced on October 7, 2008, began purchases of commercial
paper on October 27, 2008, and was closed on February 1, 2010. Net portfolio
holdings of the CPFF LLC peaked at $351.4 billion on 1/23/2009. The CPFF LLC
was dissolved on August 30, 2010. All loans that were made to the CPFF LLC were
repaid in full.
This is a
link to the CPFF page at the site of the Federal Reserve Bank of New York.
This is a spreadsheet
of all CPFF purchase transactions. This is a spreadsheet
loans that FRBNY made to the CPFF.
Term Asset-Backed Securities Loan Facility (TALF)
This addressed asset based securities (ABS). Asset based securities
are what banks, for example, use to finance auto loans, credit card debt and
student loans. When the liquidity crisis happened investors were reluctant to
purchase ABS. While TALF lending was done through intermediaries the people
who benefited were everyone who wanted an auto loan, a credit card, a student
loan or a small business loan. TALF loans were collateralized by assets. The
value of the assets always exceeded the value of the loan. This helped Main
Street not Wall Street.
The facility was announced on November 25, 2008, and began lending operations
in March 2009. TALF lending was authorized through June 30, 2010.
Central Bank Liquidity Swap Lines
These are foreign exchange swaps. Two types were enabled one for foreign banks
wanting to temporarily exchange their currency for U.S. dollars and one for
providing liquidity for foreign currency assets of U.S. banks. The later were
never activated. Since I am bad at explaining FOREX in my down-to-earth fashion
I will merely plagiarize the Fed.
"To address severe strains in global short-term dollar funding markets,
the Federal Reserve established temporary central bank liquidity swap lines
(also referred to as reciprocal currency arrangements) with a number of foreign
central banks. Foreign central banks then could draw on those lines to provide
dollar liquidity to institutions in their jurisdictions. In the swap transactions,
the Federal Reserve deals only with the foreign central bank. The transaction
is structured so that the Federal Reserve does not bear any foreign exchange
risk. In May 2010, dollar swap lines were reestablished with certain foreign
central banks because of the reemergence of strains in dollar funding markets.
The FOMC authorized temporary dollar liquidity swap arrangements with 14 foreign
central banks between December 12, 2007, and October 29, 2008. The arrangements
expired on February 1, 2010. All transactions were executed in full, in accordance
with the terms of the swap arrangements.
In May 2010, in response to the reemergence of strains in short-term dollar
funding markets abroad, the FOMC re-authorized dollar liquidity swap lines with
five foreign central banks through January 2011."
The Special Case
The Fed thought that there were some special cases which needed their own facilities.
(The Fed, Treasury and FDIC put together special liquidity facilities for BofA
and Citigroup but these were never used.) The notable special case was AIG.
AIG was (in theory) an insurance company with headquarters in New York City.
To oversimplify things the London unit of AIG became heavily invested in Credit
Default Swaps on collateralized debt obligations (CDOs) and the large decrease
in the value of these created a liquidity crisis for AIG. AIG was starting to
look like Lehman Brothers 2.0 (Lehman had declared bankruptcy and AIG had a
similar portfolio.) AIG had large positions in subprime and Alt-A home loans.
On September 16, 2008, AIG's stock dropped 60 percent. The Federal Reserve tried
to broker a massive non-government line of credit for AIG but there were no
takers. AIG's potential losses were diverse and the opinion of the Fed was that
it was easier to bail out AIG that to let it fail and bail out wherever counterparties
would be destroyed by an AIG bankruptcy. See this New
York Times post of that day.
That day the Fed decided to act on its own and provided AIG with a credit line
of up to $85 billion, AIG was aided both by the Fed's line and Treasury's TARP
program. The Fed created 2 LLCs to lend money to AIG. These were called Maiden
Lane II and Maiden Lane III. (The Federal Reserve bank in Manhattan is at the
corner of Liberty Street and Maiden Lane. For you movie trivia freaks, Maiden
Lane is also the street in San Francisco where the scene in the pet shop at
the opening of Hitchcock's "The Birds" was filmed.)
AIG went from being a Dow company to a company 79.9% owned by the US government.
(Note that the 79.9% ownership thing is designed to keep this off the books
of the Fed or Treasury. If the government owned 80% or more these would appear
on the government's balance sheet.) The ongoing plan has been to recapitalize
AIG and sell off pieces and repay Treasury and the Fed.
So What?
Since this was announced I have read countless criticisms of the Fed's
actions as detailed in this report. The fact is this: the Fed acted independently
in most of these cases. It acted under authority granted to it by of Section
13(3) of the Federal Reserve Act, which permitted the Board, in unusual and
exigent circumstances, to authorize Reserve Banks to extend credit to individuals,
partnerships, and corporations. If these were not unusual and exigent circumstances
then I am not sure what constitutes such.
The Fed did not give money away to any entity. It reacted in a most dramatic
way to a massive liquidity crisis which, if not immediately addressed, could
have created a worldwide depression. The Fed provided liquidity for funding
home loans, credit card debt, student loans and auto loans. As far as I can tell
the only long term loans are the home loans purchased by the Fed from FHLMC,
FNMA and GNMA. The Fed helped Main Street as well as Wall Street. All of the loans
made to increase liquidity to commercial banks and investment banks are repaid.
The Fed acted boldly and may someday be judged to have averted a worldwide
economic catastrophe and the end of 2009 transferred more than $45+ billion
in profit to Treasury. The discussion about whether the Fed should have the
dual mandate of controlling inflation and keeping unemployment low misses the
fact that real mandate of the Fed is preservation of the banking system.
The elements of the dual mandate are secondary and we do not normally think
about the Fed's first purpose because things such as this liquidity crisis do
not occur often.
The Fed gets criticized by folks of all political beliefs.
To me criticizing the Fed is like criticizing the fire department. Building
owners complain that they do water damage and the arson squad complains that
they destroy evidence. Like the fire department, as the Fed puts out economic
fires it does create collateral damage. That collateral damage takes the form
of asset bubbles created by low interest rates and large increases in money
supply. The Fed quite possibly averted a major worldwide depression and it so
doing made enough money that is gave Treasury $45 billion in 2009. So before
anyone bitches about the Fed they should perhaps think about that.
The liquidity crisis unfolded with such speed that there was no time for any
entity other than the Fed and other central banks to act. The Fed needed to
act without proximate input from politicians. Congress gave the Fed its agenda.
Listening to people in Congress and comedians on TV question Bernanke is, to
me, laughable. With these programs the Fed helped Main Street and Wall Street.
When it helped Main Street it also helped Wall Street. When it helped Wall Street
it also helped Main Street. The notion that Wall Street and Main Street have
opposing interests is one of the dumbest fallacies to come from all the discussion
about what the Fed did.
Dick Lepre
dicklepre@rpm-mtg.com
Web site: www.loanmine.com
Blog: economy.typepad.com
Phone: (415) 244-9383 | Fax: (866) 488-2051
1400 Van Ness Avenue, San Francisco, CA 94109
CA DRE # 01143973 | NMLS # 302379
California Department of Real Estate - Real Estate Broker License #01818035,
NMLS #9472. Equal Housing Opportunity.
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Watch #874 A Very Large Problem Lurks
April 12, 2013
I am now posting my daily commentary and more on Twitter. @dicklepre to connect. Daily macroeconomic commentary is posted there along with au courrant topics such as Bitcoin.
Economic Fundamentals continue to disappoint with Retail Sales and Inventories down. Both are GDP components. Economic Growth (GDP) appears to be stalling again.
Long Term Concerns
Below is a graph of Total Federal Public Debt as a percent of GDP. What concerns me is not the fact that debt is more that 100% of GDP but that the level is rising so rapidly. Fiscal sustainability is something we must strive for. I define fiscal sustainability as this graph staying more or less flat or even turning down. The question then is "Why is this graph rising and what is it likely to do in the future?
The fiscal problem is not with so-called discretionary spend but with entitlements. The expression "entitlements" does not even mean that anyone has legal entitlement to even to a return on the funds they put into Social Security. In Flemming v. Nestor the Supreme Court "... ruled that no such contract exists, and that there is no contractual right to receive Social Security payments. Payments due under Social Security are not “property” rights and are not protected by the Takings Clause of the Fifth Amendment. The interest of a beneficiary of Social Security is protected only by the Due Process Clause.
"Entitlements" means only that Congress does not have to vote on funding of these. The problem is that by deliberately choosing to ignore the underfunding of entitlements for its political convenience Congress has created a massive fiscal time-bomb.
The present value of the underfunding of the future expenses of Medicare and Social Security is about $77.9 trillion. Details here: The Fiscal Cliff Is a Molehill Compared to Entitlement Underfunding
The question then is: can an increase in taxes make these funds solvent?
Total household wealth as of 4Q2012 was, according to the Federal Reserve, $66.072 trillion. Note that "household wealth" includes the most of the value of all U.S. corporations because those corporation are owned mostly by U.S. households in the form of direct ownership, mutual funds, and pension holdings.
If all of the net wealth of all Americans were seized and donated to the entitlement trust funds they would still be underfunded.
In addition of this liability which exceeds all household wealth by $11.9 trillion the Federal government also has debt of $16.8 trillion.
If that does not scare you try this: these estimates assume that the future care of medical expenses will rise at CPI-U +1%. Take a look at this chart which shows medical care rising at a higher rate than CPI. This sharp difference between the rate of increase in the cost of medical care and CPI means that the shortfall is even worse. Add to this the uncertain change in the cost of Health Care consequent to Obamacare.
In short it is Medicare and Social Security underfunding which is going to create a massive problem. Obama just suggested a modest correction to Social Security which was from the Simpson-Bowles report. Democrats dissed him big time. Obama's suggestion fixes less that 1% of the underfunding problem.
Clearly there is no political will to fix the problem. Getting reelected is incompatible with fiscal sustainability. I do not blame this on Congress but on the voters.
Keeping interest rate low on government debt is allowing us to not face the music. Once interest rates rise debt service will be painful.
The point here is that these promises cannot be kept by only raising taxes. Expenses must be reduced. The change from Simpson-Bowles which Obama suggested last week would save $339 billion over 10 years. Let's call this $300 billion of present value. We only need to do this 260 more times to have solved the entitlement underfunding problem.
Despite reading this, have a nice weekend.
Dick Lepre
dicklepre@rpm-mtg.com
Web site: www.loanmine.com
Blog: economy.typepad.com
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Watch #869. Inside Another Dismal Jobs Report.
April 5, 2013
You can now follow my daily posts on the economy on Twitter @dicklepre
Today's BLS Employment Situation Report is once again disappointing - details below.
One of the worst ideas conceivable has been suggested by the Administration. Someone has decided that since the GSE’s are making profits it would be a good time to mandate their destruction once again. Read my piece on the National Homeownership Strategy and the idea from the Washington Post to revise it. The National Homeownership Strategy started out as a seemingly good idea but HUD constantly mandated that the GSE’s purchase an ever-increasing portion of bad loans.
The issue is the same as ever. Almost no one in Washington is capable of thinking beyond immediate results. Lowering lending standards may increase housing starts and construction jobs just when we need them to recover from the results of lowering lending standards to increase housing starts and construction jobs.
“Those who cannot learn from history are doomed to repeat it.” – George Santayana
My thanks to Rob Chrisman for bringing this issue up.
Inside the BLS Employment
Situation Report
This is my monthly look inside
the BLS Employment Situation Report. There are two BLS Surveys: the Establishment
and the Household. Establishment surveys about 141,000 businesses and government
agencies, representing approximately 486,000 individual worksites. It is taken
each month during the week which includes the 12th of the month. Household
is a survey of 60,000 households taken each month during the week which included
the 12th of the month.
Each item below is suffixed with
(H) if it is from the Household Survey, (E) if it is from the Establishment
Survey, and (B) if it is from both.
- Nominal Nonfarm jobs was +88,000.
(E). The two previous months' gains were revised to +268,000 (February) and
+148,000 (January). Those had been +119,000 and 219,000. That is a gain (for February and January) of
70,000 from the previous report making the net gain in jobs since the last
report of 158,000.
- Real (population
adjusted) job growth in March was 53,000. This accounts for the changes for January and February which were almost as large as the headline +88,000.
- the Unemployment Rate was 7.561% down from 7.736% in
February 2013(B). This decline is not so much due to more people working as it is to people giving up looking for jobs.
- Average hourly earnings was $23.82 up from $23.81 in February 2013 (E)
- Average work week was 34.6 hours up from 34.5 hours February 2013 (E)
- Private jobs were +96,000. Government jobs were -7,000 (E)
-Good producing jobs were +16,000.
The two previous months were revised to +41,000 and +37,000. (E)
-The size of the civilian labor
force fell from 155,524,000 to 155,028,000 a decrease of 496,000. (H)
-The labor participation rate (percent
of adult noninstitutionalized population who are part of the labor force)
fell from 63.5% to 63.3%. It was 63.8% a year ago. (H) This, not the unemployment
rate, is the number which should get everyone's attention. It is this 63.3% of the adult noninstitutionalized population who get pay checks and contribute to GDP.
- the size of the civilian noninstitutional
adult population increased by 166,000 in March to 244,995,000 (H). With
a labor participation rate of 63.3% 105,078 more jobs were necessary to keep
pace with population growth. We had 53,000 more jobs added than that including the changes from January and February. (H)
The Employment/Population ratio was 58.5% down from 58.6% the previous month.
The civilian noninstitutional population
is 2,391,000 (H) more than 12 months ago. With a labor participation rate
of 63.5% we require 1,518,000 more jobs in the past 12 months to keep pace
with population growth. We had 1,268,000 (H) more folks working. The decrease
in real (population adjusted) jobs in the past year is 250,000.
According to the 4 week moving
average of Initial Jobless Claims, 1,417,000 people lost their jobs in the
last 4 weeks. That normalizes to 1,535,000 lost jobs in a calendar month (there
are about 13 4-week periods in a 12 month year.) This is up from the previous
month's 1,511,000 jobs lost/month.
In March 2013 BLS measured 4
sets of people entering or leaving the jobs market:
- Job losers and persons who completed
temporary jobs was 6,329,000 down 193,000 from February's Job Losers and down
692,000 from March 2012. (H)
- Job leavers was 986,000. This
includes anyone who retired or voluntarily left working. This up 30,000 from
previous month and down 125,000 from March 2012. (H)
-Reentrants was 3,176,000. Reentrants
are previously employed people who were looking for a job and found one. This
was -164,000 from the previous month and -88,000 from March 2012.(H)
-New entrants were 1,316,000. These
are people who never worked before and who are entering the labor force for
the first time. This was -+37,000 from previous month and -105,000 from March 2012.
The presentation of the total change
in jobs is like looking at the final score of a game. The details tell the
story:
- 158,000 more people are working
- 496,000 fewer people are in the
civilian labor force
The improvement in the unemployment rate has been due to folks leaving the labor force. The gains in jobs have not kept pace with population growth. We are -250,000 real (population adjusted) jobs for the past 12 months.
Lurking beneath this cold look at numbers is this fact: the U.S. economy is no longer producing jobs for folks who do not have a college degree or recognized trade skills. Jobs performed by those without education or skills are either being automated or offshored. The very large increases in the cost of college education are making education less affordable as it becomes more necessary.
Dick Lepre
dicklepre@rpm-mtg.com
Web site: www.loanmine.com
Blog: economy.typepad.com
Phone: (415) 244-9383 | Fax: (866) 488-2051
1400 Van Ness Avenue, San Francisco, CA 94109
CA DRE # 01143973 | NMLS # 302379
California Department of Real Estate - Real Estate Broker License #01818035,
NMLS #9472. Equal Housing Opportunity.
|
