Monday, July 30, 2012

The 2011 Federal US Budget as a Household Budget

An easy way to envision the national debt:

The Federal Receipts and Outlays:
1.US Tax Revenue - $2,303,500,000,000
2.Federal Budget - $3,630,100,000,000
3.Deficit (new debt) - $1,299,600,000,000
4.National Debt - $15,582,100,000,000
5.Proposed Budget Cut - $33,000,000,000
If We Remove 8 zeros and pretend it is a household budget:
1.Annual Family Income - $23,035
2.Money the Family Spent - $36,301
3.New Debt on the Credit Card - $12,996
4.Outstanding Balance on the Credit Card - $155,821
5.Total Budget Cuts - $330

By the way, the numbers are from the various tables available at the St. Louis Federal Reserve, which maintains the fredii database for those that like to play with the numbers.

ECRI's Achuthan Reaffirms that the US is in a Recession

This interview was from July 10, 2012, but it is still relevant.


Monday, July 23, 2012

The 5 Myths of the Great Financial Meltdown: Round 2

About 6 weeks ago I published a blog from about the 5 Myths of the Financial Meltdown.  Apparently this article caused quite a stir among the readers so the author responded to  many of the comments.  The comments basically broke out into 2 groups:  those that thought the free market should have been left to resolve the issue and those that felt the banks should have been largely nationalized.  Below is the author's response to the comments.
Article is in italics from

Critics of our analysis say Uncle Sam should have let the free markets take care of business. They tried. And they failed.

My last column, looking at five myths and misconceptions that have emerged since the financial crisis first surfaced five years ago, clearly hit a nerve. It elicited more than 500 online comments, an unusually large response. Most commenters were critical of what I wrote, which is par for the course.
The major criticism, as I determined with assistance from my colleague Omar Akhtar -- between us, we actually read all the comments -- was of my first point: that having the government do nothing was not a realistic option. Dozens of commenters said that cleaning up the mess should have been left to the private markets, which would have done things better than the Federal Reserve, Treasury, and rest of the government did.
What most of those people probably don't realize, though, and what I had no room to discuss in my last column, is that private markets took the first big swing at recapitalizing troubled financial institutions -- and struck out.
By my count, eight capital-needy U.S. companies – Citigroup (C), Fannie Mae, Freddie Mac, Lehman Brothers, Merrill Lynch, Morgan Stanley (MS), Wachovia, and Washington Mutual -- raised a total of $93 billion from investors from late 2007 through July 2008. That's a lot of money. Much of it came from some of the best, brightest, and richest investors in the world, ranging from TPG Capital (WaMu) to Davis Selected Advisors (Merrill) to sovereign wealth funds from Kuwait and Abu Dhabi (Citi). The full list is at the bottom of this story.  By they way only 2 of the 8 companies actually exist as independent firms.
Oops. Those savvy, deep-pocketed investors sustained staggering losses in the blink of an eye, as the world's financial problems rapidly worsened. After that, without government backing there wasn't going to be much private capital for troubled institutions. That's why Uncle Sam had to step in.
The alternate complaint -- that the government should have nationalized troubled institutions -- sounds plausible too. But that strategy stood no chance of working, regardless of how things played out in other countries. First, seizure would have resulted in endless litigation. Second, there were practical problems. For example, when I looked into the consequences of the government nationalizing Citi, I discovered (from independent third parties) that Citi most likely would have had to surrender lucrative franchises in several foreign countries that don't allow banks there to be owned by foreign governments.
The other widespread criticism was of my last point: that although the government lowered some mortgage loan standards, the debacle is primarily the private sector's fault. I was attacking the oh-so-convenient myth that private markets are blameless and pure, that the whole problem comes from misguided government efforts to help "those people" get homes they couldn't afford. Many commenters were, shall we say, displeased.
Well, let's see. Most of the bad mortgages were made to supposedly qualified borrowers, without pressure from the government. Lenders required little in the way of down payments or credit checks; they wanted to juice up their loan volume. Credit-rating agencies gave AAA ratings to trash, to keep fee income flowing. Yield-hungry investors snapped up garbage that bore the agencies' imprimatur. Private enterprise all the way.
Credit default swaps and other esoterica spread the problems worldwide, magnified losses, and put even the soundest institutions at risk. That's because if giant, less sound institutions had failed en masse, they would have defaulted on their obligations to their sounder trading partners.
We also need to remember that for all the criticism (including mine) of particular tactics, Hank Paulson and Tim Geithner and Ben Bernanke bailed out the U.S. financial system at no net expense to America's taxpayers. An impressive achievement.
Instead of a discussion about what happened, we've gotten into a government-vs.-free-market shoutfest. These fragmented days, many people tend to see things in black and white terms, in ways that reinforce what they want to believe. The real world is more complicated than that. Black and white have their places -- but to understand the financial meltdown, you need to see some gray.

What in the Economy Should Be Stimulated?

Once again another straight forward analysis from AIER.  Basically the relationship between real Personal Consumption Expenditure (real PCE - about 70% of of GDP) and real disposable income is a straight line.  If you want the economy to grow, then you have to increase real disposable income.  That is tough to do with an 8%+ unemployment rate and consumer demand that is weak due to massive de-leveraging.  But, if the government is going to stimulate this is where it has to be done.  If you like this article there is quite a "civil" discussion in the comment section at the website about the value of GDP.

The article and graph are from AIER.

The single greatest driver of the economy is consumer spending. People, not firms, make best use of extra money.

Far and away, the most important factor in determining consumer spending is the buying power in paychecks. Economists call this real personal disposable income. It matters because spending by individuals makes up about 70 percent of all spending. You can’t have a recovery if the consumer stays home.

Through recessions, expansions, and everything in between, the relationship between disposable income and consumer spending is remarkably tight, as the chart above shows. Currently GDP growth is under 2 percent. With the growth of disposable income near zero, it’s not hard to see why the expansion has been anemic.
The relationship between spending and income also has irrefutable policy implications.
Any government policy to speed economic growth should focus on increasing disposable income. That likely means income and payroll tax cuts. Stimulus programs directed toward businesses, and monetary programs directed toward the financial sector such as those established in response to the recent downturn, won’t do the trick. They have resulted in larger cash holdings in corporations and banks, while consumer spending remains low.
Raising taxes might help reduce the deficit, but it would depress consumption. If the Bush-era tax cuts are allowed to expire at year-end, the results could be devastating. Combined with the mandatory spending cuts of the deficit reduction process, every model we have seen projects a decline in GDP of 3-3.5 percentage points. This would easily result in recession in the first half of 2013. Besides the impact of higher taxes on consumer spending, small businesses would have to redirect income to pay taxes rather than to hire. Increases in capital gains and dividends taxes will reduce income and net worth for some, further reducing spending.
Obamacare calls for nearly $300 billion in tax increases in 2013 alone. There are also mandates that imply additional costs to consumers, further reducing the income available for purchases.

Monday, July 16, 2012


The photo on the banner of this blog is Mt. Blodgett just west of Colorado Springs.  It is mostly black now due to the wild fires in the area.  

Due to the wildfires my wife and I were forced to evacuate our home on June 26.  My employer was generous enough to allow me to work out of their headquarters until it was safe to return.  We arrived home last Thursday.  The fires got within 0.5 miles of our home, but it is still standing.

I should start blogging soon.  Just trying to get organized.