Sunday, June 19, 2016
As of June 17, the federal funds rate stood at 0.38 percent.
The funds rate is the Fed’s benchmark rate — the one that affects other interest rates. When you hear about the Federal Reserve raising or lowering interest "rates," it is just raising or lowering this single rate. Other rates simply follow the funds rate.
For perspective, the funds rate has averaged 6 percent since 1971, meaning is extraordinarily low at present and has been since December 2008, when the Fed dropped it to zero in response to the Great Recession.
Two years ago, former Fed Chairman Ben Bernanke commented that he didn’t expect to see the federal funds rate above 4 percent again in his lifetime.
Bernanke was age 60 at the time. I’ll bet he expects to live into his eighties. That’s a mighty long time for the funds rate to remain so historically low.
Lowering the funds rate so drastically was supposed to lift the economy out of its doldrums. That hasn't really happened.
Though we are no longer gripped by the specter of the Great Recession, the economy remains weak by normal standards.
The economy expanded just 0.8 percent in the first quarter, the weakest growth rate in two years. That followed a weak 1.4 percent growth rate in the fourth quarter of 2015.
For all of 2015, the economy grew at a 2.4 percent pace, which isn’t very good from a historical perspective.
From 1947 through 2015, the annual GDP growth rate in the US averaged 3.26 percent.
Yet, last week, the Federal Reserve lowered its forecast for U.S. economic growth in 2016 to 2 percent, down from an earlier 2.2 percent projection. It was the second time this year that the Fed lowered its expectations for economic growth — the projection in December was 2.4 percent.
In other words, the economy is expected to be weaker this year than last year, when it wasn’t all that strong anyway.
The Fed also slightly decreased its projection for economic growth in 2017. This is an ugly pattern.
The U.S. economy added just 38,000 jobs in May, the worst monthly gain since 2010. It shocked many economists and speaks to the trouble that may lie ahead.
Additionally, the labor force participation rate – those with jobs or looking for one – declined again to 62.6 percent. That makes the unemployment number appear better than it really is. People not looking aren’t counted as unemployed. The last time the participation rate was this low was October, 1977.
Consumer spending accounts for about two-thirds of the U.S. economy, and consumers simply don’t have enough income to lift the economy.
According to the U.S. Census Bureau, the median household income for the United States was $53,657 in 2014, the latest data available (2015 Census data will be released in September).
Real median household income peaked at $57,936 in 2007 and is now $4,279 (7.39%) lower.
Since falling to a post peak low of $52,970 in 2012, real median household income in the United States has grown by just $687 (1.30%).
Most striking, household income is now about the same as it was in 1996 — 20 years ago!
Rents, health insurance, prescription drug costs and tuition have all risen -- and are still rising -- much faster than the general rate of inflation and, more importantly, much faster than median family income.
So, let’s circle back to the federal funds rate, where we began.
Banks make their money by lending money and collecting interest payments. They hate interest rates being this low.
The Federal Reserve doesn’t want rates this low because it exists to serve the interests of the private banks that own and control it.
But it can't raise the funds rate because the economy is too weak to handle it.
When the next recession or financial crisis strikes, the Fed will want to be able to lower the funds rate in response as a means of stimulus.
But with the funds rate at 0.38 percent, there is little room to maneuver.
The Fed is out of answers and out of ammunition in its fight to stimulate and invigorate the economy. The lack of results has got to be very frustrating, and frightening, to the central bankers.
History and the economic text books say this isn’t supposed to be happening. After all previous recessions, the economy took off like a rocket.
The Fed has its hands on the wheel, but it has no control. Events have gotten ahead of it, and it is simply along for the ride.
Sunday, June 05, 2016
Lake Mead reached an all-time low in May, falling below the previous record set in June 2015.
Why does this matter?
Well, Lake Mead is the largest reservoir in the United States, in terms of water capacity.
Most critically, Lake Mead provides water to the states of Arizona, Nevada and California, as well as Mexico, serving nearly 20 million people.
Lake Mead was established in 1936. At the time, the populations of the cities it serviced were rather meager.
In 1940, Phoenix had a population of just 65,414 people.
In 1940, the population of Las Vegas was just 8,422, and Clark County had only 16,414 residents.
There are whole lot more people living in those cities today.
According to the Census Bureau's 2015 population estimates, Phoenix had a population of 1,445,632, and the Valley had 4,574,351 total residents, making it the 12th largest metropolitan area in the nation by population.
As of the 2015, Las Vegas had a population of 628,711, and the larger metropolitan area had 2,147,641 residents.
Los Angeles County had a population of 2,785,643 in 1940, but it had reached an estimated 10,170,292 by 2015.
The point is, the populations of the regions served by Lake Mead have grown exponentially since the reservoir was created. Meanwhile, the lake's water level has declined precipitously.
Lake Mead receives the majority of its water from snow melt in the Colorado, Wyoming, and Utah Rocky Mountains, via the Colorado River.
However, flows have decreased during 16 years of drought.
In fact, the lake has not reached full capacity since 1983, due to a combination of drought and increased water demand, and is now only about 37 percent full.
As a result, there are valid concerns that the federal government will declare a shortage in 2018, which would trigger cutbacks in the amount of water flowing from the reservoir to Arizona and Nevada.
Lake Mead fell below 1,074 feet for the first time on May 31, 2016 and continues to drop.
If the lake’s level is projected to be below 1,075 feet at the start of next year, the Interior Department will declare a shortage.
California, which holds the most privileged water rights from the Colorado River, would be the last to face reductions. The earliest and most significant cutbacks would be felt by Arizona and Nevada.
The three states will eventually need to reach an agreement on sharing in the cutbacks to prevent an even more severe shortage.
The United States and Mexico also need to negotiate a new agreement on water sharing from the Colorado River.
A water shortage in the region is a really big deal since Lake Mead, nearby Lake Powell and the Colorado River provide at least part of the drinking water supply to nearly 40 million people in the western United States.
The water system also allows for agriculture and energy production.
The current drought and the bleak status of Lake Mead should be of great concern to everyone in Arizona, Nevada, and the entire desert Southwest. This problem is not going away; it will only worsen. It will affect migration, business and property values.
Population growth and heavy demand for water have run head on into a dwindling Rocky Mountain snowpack and a rapidly changing climate.
Supply and demand are divergent and incompatible.
Neither the government or scientists can magically create more supply; they can’t control the weather. All they can do is attempt to lessen demand.
But that is an enormous, perhaps impossible, challenge in the Southwest, which scientists say has millions more inhabitants than nature intended, or for which it can provide.
Eventually, millions of residents, as well as the businesses that serve and support them, may be confronted with an inability to continue living in the arid, parched desert of the American Southwest.
This isn't farfetched or extremist.
A 2008 paper in Water Resources Research stated that at current usage allocation and projected climate trends, a 50% chance exists that live storage in Lakes Mead and Powell will be gone by 2021.
That’s just five short years from now.
Sunday, May 01, 2016
One topic I’ve covered repeatedly over the past decade is the lack of retirement readiness for most Americans. This is really a societal issue. What will become of all the seniors who have no means to cover even basic needs in retirement?
How many years will millions of seniors be able to work beyond the customary retirement age, and what types of jobs are suitable for people in their 70s?
The retirement savings of the typical American is neither healthy or adequate. In fact, the issue has reached crisis levels.
According to the Employee Benefit Research Institute, nearly half of Baby Boomers born between 1948 and 1954 are at risk of not having enough money to pay for basic expenditures in retirement.
When it was conceived, Social Security was intended to be just one leg of a three-legged retirement-support system, also consisting of savings and a pension.
Yet, among elderly Social Security beneficiaries, 53 percent of married couples and 74 percent of unmarried persons receive 50 percent or more of their income from Social Security.
Moreover, 21 percent of married couples and 46 percent of single people receive 90 percent or more of their income from Social Security.
This provides a picture of just how reliant most Americans are on Social Security.
However, the average monthly benefit for the 40.5 million Social Security retirement beneficiaries is just $1,345 at present.
That amounts to just $16,140 annually, which obviously doesn’t go far. Add in near-zero interest rates, and you can see the problem for so many retirees.
For decades, seniors were able to live off interest payments from certificates of deposit (CDs), plus money market and savings accounts. That is no longer the case.
Pension plans have become quite rare in the U.S. Most companies have stopped offering defined-benefit programs altogether.
Today, just 18 percent of private-sector workers are covered by a defined-benefit pension, down from 35 percent in the early 1990s.
The shift from defined benefit pension plans to 401(k)s is largely to blame for the retirement crisis.
The Center for Retirement Research at Boston College (CRR) estimates that more than half of all American households will not have enough retirement income to maintain the living standards they were accustomed to before retirement, even if the members of the household work until age 65.
Just how big is the problem?
Alicia Munnell, director of the CRR, testified before the US Senate that the nation’s Retirement Income Deficit (RID) is now a whopping $7.7 trillion, and that it had risen $1.1 trillion in just the previous five years.
The Retirement Income Deficit is the gap between what American households have actually saved today and what they should have saved today to maintain their living standards in retirement.
Trillions are really big numbers, and its hard for most people to get the heads around the scope and magnitude of the retirement crisis. But the following number helps to crystallize the issue:
Today in America, over half of households 55 and older have nothing saved for retirement, according to the Government Accountability Office (GAO).
Think about that for a moment. It’s stunning.
More than half of American households are roughly a decade from a normal retirement age, yet it is inconceivable that they will experience anything remotely resembling a normal retirement.
All of this sounds the alarm that tens of millions of Americans will be unable to adequately fund their upcoming retirement years.
We are already seeing many seniors moving in with their adult children because they can’t make ends meet. This is a necessity, rather than a choice.
Another growing trend is seniors living like 20-somethings, with roommates.
PBS described the movement this way:
"According to an AARP analysis of census data, approximately 490,000 people — 132,000 households — live in a Golden Girls situation. And the number is expected to grow, especially given that one in three Baby Boomers is single and a disproportionate number of them are women.”
While it may be too late for the huge number of people age 55 and older who have no retirement savings, younger workers can plan ahead and start preparing for their senior years now.
Many financial planners recommend that you save 10 percent to 15 percent of your income for retirement, starting in your 20s.
But even if you're in your 30s or 40s, it's not too late to start planning for retirement.
As a general rule, you'll need at least $15 to $20 in savings to cover each dollar of the annual shortfall between your income and your expenses.
The key is to have a plan, and to start executing it now.
If you fail to plan for retirement, you might be planning to fail in retirement.
Tuesday, April 19, 2016
Each April 15th, the media inevitably reports that a significant portion of Americans don’t pay any federal incomes taxes. These yearly news stories lead many taxpayers to feel infuriated and outraged.
Most Americans hate paying taxes. This nation was founded on a tax revolt, after all.
Paying taxes is seen as a necessary evil to have a functioning government (albeit a bloated one on many levels), and most people pay their taxes dutifully, though begrudgingly.
Consequently, no taxpayer wants to hear about freeloaders avoiding their patriotic or civic duty to pay their taxes. It’s a reflexive and justifiable anger.
Here’s a perfect example of such a story this week, from MarketWatch:
An estimated 45.3% of American households — roughly 77.5 million — will pay no federal individual income tax, according to data for the 2015 tax year from the Tax Policy Center, a nonpartisan Washington-based research group.
Roughly half pay no federal income tax because they have no taxable income, and the other roughly half get enough tax breaks to erase their tax liability, explains Roberton Williams, a senior fellow at the Tax Policy Center.
It should be noted that the 45.3 percent figure refers to households, not individuals, and there is a big difference. Additionally, the figure includes retirees, who collect Social Security.
Naturally, retirees (and there are tens of millions of them) no longer pay federal income taxes, so this makes the aforementioned figure quite misleading. In fact, retirees are the majority of those not paying federal income taxes.
Additionally, just because some workers don’t pay federal income taxes doesn’t mean they don’t pay any taxes.
Most workers pay state income taxes, and all workers pay payroll taxes (Social Security and Medicare), property taxes (even renters), and sales taxes — which are levied on almost all goods and services, including utilities.
You’ve surely noticed that your water, electric, gas, cable and phone bills, for example, all include hefty taxes. There’s no getting around them.
Unlike federal income taxes, which are progressive — meaning, the more someone makes the higher their tax bracket — payroll taxes are applied at the same rate to all workers, regardless of income. This means they disproportionately impact lower income earners.
And, let’s face it — payroll taxes are indeed taxes on income paid to the federal government.
The combined tax rate for Social Security and Medicare is 15.3 percent, which is split evenly between employer and employee. However, self-employed workers pay the whole 15.3 percent tax.
Yet, the maximum taxable income is $118,500, meaning that any income above that level is not subject to the payroll tax. That favors high earners and the rich (yes, there is a difference).
The fact that 45 percent of households don’t pay federal income taxes speaks to the fact that they earn so little income, which is the really troubling matter.
A recent report by the Social Security Administration has some rather stunning findings:
- 38% of all American workers made less than $20,000
- 51% made less than $30,000
- 63% made less than $40,000
- 72% made less than $50,000
Pause to reflect on that for a moment.
Given that more than half of all workers make less than $30,000 annually, it’s not all that surprising that they don’t pay federal income taxes. They simply don’t earn enough money.
Even a mere 10 percent federal income tax — which would amount to $3,000 — would be punitive to a worker who earns so little.
For perspective, we should consider the federal poverty guidelines for this year.
The poverty threshold for a family of three is $20,160.
The poverty threshold for a family of four is $24,300.
It’s not hard to imagine one parent working, while the other stays home with an infant or toddler(s).
The real outrage is not that so many American workers aren’t paying federal income taxes; it’s that they earn so little.
That means they aren’t helping to create adequate demand and consumption to spur the economy, and move it substantially forward.
Even worse, many of these people are full-time workers who earn so little that they qualify for federal subsidies for things like food, housing and medical. That’s the real scandal and injustice.
There are plenty of large employers (such as Walmart) who pay their workers so little that the rest of us need to subsidize them with our federal income taxes.
That’s the true outrage in this story.
Sunday, April 10, 2016
In case you hadn't noticed, the U.S. national debt has now eclipsed $19 trillion.
Despite the federal deficit being well within the limits that international economists recommend (3 percent, or less), the size of the underlying debt makes what were customarily viewed as reasonable deficits quite cumbersome.
For example, a 3 percent deficit would result in $570 billion being added to the existing $19 trillion debt. When the underlying debt is so large, even relatively small percentages of it add up to enormous sums. The bigger the debt becomes, the bigger the deficits become.
It’s called exponential growth.
The heart of the issue is that Congress has never reconciled spending with revenues. It either needs to collect more, spend less, or both. But that never happens.
Debt can be productive if it is used for investments that result in positive returns. Unfortunately, the U.S. (like many other countries) is malinvesting, while facing ever increasing debt-to-GDP ratios.
The worst form of debt, which undermines an economy and can be crippling, is that which is used to finance existing debt.
The Congressional Budget Office projects a $534 billion deficit in fiscal year 2016, about $100 billion more than in 2015.
In essence, the federal government must borrow in excess of half-a-trillion dollars this year to keep paying those whom it already owes enormous sums of money. We owe our creditors continually more, year after year, decade after decade.
This money cannot be used to build, or rebuild, our infrastructure — things such as aging roads, bridges, railways, power stations, electrical grids, water lines, sewer systems, etc. These are the things that make the country run smoothly, allowing us to transport people, goods, water, electricity, and more.
Infrastructure is the stuff that ultimately pays for itself, and helps the economy grow.
I’ve long advocated that the US should rebuild its infrastructure for the 21st Century. It would create jobs and make the economy more productive, which would ultimately create more tax revenue.
The specific infrastructure categories that need the most immediate attention and investment are debatable.
Some might argue that more roads are the wrong investment, noting that unless we all shift to all electric cars our fossil fuel addiction will be our demise. More light rail in and around urban centers and their suburbs might be a wiser choice.
Regardless, our roads are crumbling and bridges are collapsing. This is a matter of national safety. Lives are quite literally at risk.
But that’s not the only public safety hazard resulting from our antiquated infrastructure.
“Excessive lead levels have been found in almost 2,000 water systems across all 50 states, affecting 6 million Americans” reports USA Today. “At least 180 of the water systems failed to notify consumers.”
This is why infrastructure matters. America’s is antiquated, crumbling and unfit for the 21st Century.
However, with our existing $19 trillion debt, any further massive deficit burdens would be politically and fiscally risky. But with interest rates historically low, if we’re ever going to make these much-needed investments, the time is now.
It’s just hard stomach our debt having now risen to such extraordinary levels. By next year, it will reach $20 trillion. This massive debt is already hindering economic growth, which leads me to wonder, how much more will growth be constricted by our debt in the coming years?
However, it should be noted that as our debt has grown continually larger through the years, so has the economy. The IMF estimates the U.S. economy will reach $19 trillion this year.
Rebuilding our infrastructure, much of which dates back to the early and mid-20th Century, will put a lot of people to work in well-paying jobs. But those jobs will be temporary, not permanent.
China executed its own massive infrastructure build out in recent years, and now that it’s completed they have millions of idle workers. Such work doesn’t last forever.
But while the employment and economic stimulus will be temporary, the infrastructure could last more than a half century. And ours is in desperate need of repair, upgrade and modernization.
These are really big, thorny, difficult issues, and Congress doesn’t even address them honestly. Instead, it’s all typical, bullshit politics. Yet, the problems cannot be ignored.
The American Society of Civil Engineers issues a report every four years on the state of our national infrastructure. The most recent was conducted three years ago.
In its 2013 Report Card, the ASCE gave America’s Infrastructure an overall grade of D+ across 16 categories, up just slightly from the D given in ASCE’s 2009 Report Card. The ASCE gave the U.S. infrastructure a cumulative grade of D in its 2005 report card.
As you can plainly see, our failing, antiquated infrastructure is an ongoing problem that is not being given the attention, or funding, it desperately needs.
Yet, whenever there is a war that Congress deems important enough, they always find (aka, borrow) the money to fight it.
If protecting the American people is the government’s highest duty or objective, then our infrastructure is a top priority.
But that won’t leave me any less worried about our massive, and continually growing, national debt.
The only consolation is that infrastructure will almost always pay for itself in the end.
Wednesday, March 02, 2016
“Financially, I’m set for life… if I’m shot tomorrow." — Mitch Helberg
Though the Great Recession officially ended in 2009, a rather large segment of Americans continues to struggle. Seven years later, large debt loads and absent savings haunt tens of millions of Americans.
According to a recent survey of more than 1,000 adults by Bankrate.com, nearly one in four Americans have credit card debt that exceeds their emergency fund or savings. That’s due, in part, to the fact that many people do not have any emergency savings.
Another Bankrate survey released last year found that 29% of Americans have no emergency savings at all.
Consequently, many Americans are “teetering on the edge of financial disaster,” says Greg McBride, Bankrate.com’s chief financial analyst. “Not only do most of them not have enough savings, they’ve all used up some portion of their available credit — they are running out of options.”
Financial experts recommend that you have no credit card debt and at least six months of savings in an emergency fund, or more if you have dependents.
Yet, just 52% of Americans have more emergency savings than credit card debt, the Bankrate survey revealed.
That’s because debt is so costly. The average household is paying a total of $6,658 in interest per year, according to NerWallet.com.
Credit card debt is particularly costly, carrying higher interest rates than secured forms of debt, such as homes or cars. The average U.S. household with debt carried $15,355 in credit card debt last year.
The problem isn’t due to a lack of responsibility, or to reckless spending.
Household income has grown by 26 percent in the past 12 years, but the cost of living has gone up 29 percent in that time period.
Not only has this driven up household debt levels over time, it has also kept millions of Americans from saving, even though they might like to.
U.S. household borrowing reached its highest level since 2010 in the third quarter of last year. Household debt climbed by $212 billion, reaching $12.07 trillion.
Though that’s down from the all-time high of $13.8 trillion in 2008 when the bubble burst, household debt is once again on the rise.
People are still struggling. Everyone knows the dangers of debt in the aftermath of the financial crisis and subsequent Great Recession. Yet, people must survive, and they are going further into debt to do so.
The end result is that one in four Americans is living on the edge, facing financial disaster.
Chances are, you might be one of them, or perhaps it’s one of your friends or family members.
Sadly, many people are likely suffering in silence, too ashamed to tell anyone of their struggle. That means, you may never know who is on the verge of financial disaster.
If you’re puzzled by this year’s primary season, and by the rise of an ideologue like Donald Trump, or the self-described democratic socialist Bernie Sanders, this awful state of affairs should help to explain it.
Sunday, February 21, 2016
The most critical aspect of any housing market is affordability. Even in the wealthiest enclaves, buyers must still be able to afford their properties.
Even in the case of all-cash sales, in which buyers need not seek a mortgage from a bank, the buyer must be able to afford the all-in, up-front cost of the home purchase (all-cash sales were 24 percent of transactions in December, down from 27 percent in November).
The law of supply and demand is always at work. A limited supply of homes will drive up prices if it cannot meet existing demand.
Total housing inventory at the end of December dropped 12.3 percent to 1.79 million existing homes available for sale, and is now 3.8 percent lower than a year ago (1.86 million), reports the National Association of Realtors.
That brings us to the vital issue of cost.
The median sales price of a new home in the US was $288,900 in December 2015, which was down slightly from the all-time high sales price of $307,600 set in September, according to government data.
The average price of a new home in December was even higher: $346,400.
All things being equal, existing homes tend to have a lower cost than new homes, which brings down both median and average prices.
The median home price for all housing types (both new and existing) in December was $224,100, up 7.6 percent from December 2014 ($208,200). That price increase marked the 46th consecutive month of year-over-year gains, according to the National Association of Realtors.
That sort of upward trend seems quite unsustainable, and it’s reasonable to wonder if we’re in the midst of a new housing bubble.
Historically, home prices have appreciated nationally at an average annual rate between 3 and 5 percent, according to Zillow, though different metro areas can appreciate at markedly different rates than the national average.
The San Francisco Bay area, for example, has far exceeded that average, while prices in other regions have been below the average.
This historical average is important to consider as we look for signs of another housing bubble.
What's most worrisome is that the current increase in home prices far exceeds the general rate of inflation, which was just 0.7 percent through the 12 months ended in December 2015, the most recent figure published by the government.
Again, home prices surged 7.6 percent in that same period.
More important than home prices is affordability. Can people pay their mortgages with their current incomes?
In order to consider affordability, we must take into account median household income.
The Census Bureau estimated that real median household income was $53,657 in 2014 (the latest available figure), which was down from $54,462 in 2013, and well below the peak of around $57,000 in 1999.
Consider for a moment that the median price of a new home in December 1999 was $222,600, while median household income was around $57,000.
Fast forward to December 2015, and the median price of a new home had leapt all the way to $288,900, while median household income had slid backward to $53,657.
In short, home prices have surged higher even though incomes have gone in reverse.
New home prices are now 5.4 times household income. Yet, home prices have a long term average of 3.3 times household income, according to the Economist.
If we take all homes into consideration, both new and existing, the median sales price in December was, again, $224,100, which is 4.2 times median household income. That is still well above the long term average.
If this doesn’t make sense to you, it’s because it simply doesn’t make any sense at all.
When you dig deeper into the income numbers, it makes you wonder how most Americans afford houses at all.
A new report by the Social Security Administration has some rather stunning findings.
In 2014, 38% of all American workers made less than $20,000; 51% made less than $30,000; 63% made less than $40,000; and 72% made less than $50,000.
This is likely why there are fewer homeowners now than at any time in the last two decades.
The US homeownership rate fell to 63.8 percent in the fourth quarter of 2015, the lowest level since early 1995. First-time buyers have been kept out of the market by strict lending standards and low wages.
A National Association of Realtors survey released in late 2015 revealed that the annual share of first-time buyers was at its lowest level in nearly three decades, falling to just 32 percent. The long–term historical average is nearly 40 percent.
The trouble is that the US population has grown significantly over the last two decades, rising from 266.3 million people in 1995 to more than 320 million in 2015.
The addition of 54 million new residents should have resulted in a massive increase in the homeownership rate. Yet, the opposite is true. There are just more renters now. Houses are simply unaffordable for millions upon millions of Americans.
All of this leads me to believe that we are indeed in the midst of yet another real estate bubble, and the one truism of bubbles is that all of them eventually burst — every single one of them.
Remember, home prices are much higher now than they were when the last real estate bubble began collapsing in 2007. Yes, the problem is even worse today!
The median home price reached an all-time high of $236,300 last June, and then began falling. It may be the first sign that the next housing collapse has already begun.
This is what the Fed’s zero interest rate policy (ZIRP) has given us. The central bankers wanted to re-inflate the housing bubble, and it worked. But a housing bubble is what caused all of our economic and financial troubles the last time.
The numbers are clear — they don’t lie. Homes are currently overpriced and clearly unaffordable for huge numbers of Americans. It’s a simple matter of prices exceeding incomes once again, and we saw how that story played out less than a decade ago.
My fear is that we are facing the same scenario all over again.