Thursday, December 29, 2016

THE PERFECT STORM



Back on March 14, 2008, I wrote the article below for Gather.com, for whom I was a Money Correspondent. Given that the financial crisis began in September, 2008, just six months later, this proved to be somewhat prescient.

I highlighted the numerous problems plaguing the U.S. economy and how they were like spokes on a wheel, converging in a central hub. I could clearly see a crisis unfolding. Many of these problems have not gone away; in some cases they have worsened. Since many of these same concerns still exist today, I thought I would look back and republish this article, along with its longer companion piece, which was originally published just two days later.



Right now, it appears as if the U.S. is in the middle of an economic "perfect storm." The nation is grappling with an eroding dollar, high budget and trade deficits, a mortgage crunch that is resulting in a spreading credit crisis, record oil prices, a weak job market and the continued, massive costs of two simultaneous wars.

It appears that we may be in big trouble.

The U.S. currency is in a free fall and people who survey such things say there is no end in sight. Many believe it will take years for the greenback to recover its former value and prestige.

The dollar fell to a 12-year low against the Japanese yen on Thursday, dropping below 100 yen for the first time since November 1995. Meanwhile, the euro rose to all time high and is currently trading above $1.55.

The dollar has steadily eroded in value against the euro and other currencies since 2002 as U.S. budget and trade deficits have ballooned. But fears of an American recession and credit crisis have sent the dollar to stunning lows amid predictions that the slump will continue for quite some time.

While the dollar has fluctuated for many years, what's different this time is the existence of the Euro. While foreign funds and governments used to buy up U.S. Treasury notes, bonds, and other securities — which had the effect of propping up the dollar — the Euro and other currencies are now seen as safe alternatives and they are paying higher yields.

Simply put, this means better returns on investments can be found elsewhere.

"You have the U.S. still holding this trade deficit, but now you have the possibility of a U.S.-led recession, and you have a weakening currency. So it's a very dark outlook for the dollar," said Gareth Sylvester, senior currency strategist with the British firm HIFX Inc.

"People just don't want to be holding U.S. dollars and U.S.-based equities," he added. "If you are an investor with a million dollars to invest, you look for the highest yield — you're looking at South Africa, Australia, New Zealand."

Meanwhile, oil prices set a new record high on Thursday at $111 per barrel. In fact, crude has set records in 12 of the last 13 trading sessions. Analysts blame the spike on weakness in the dollar. Interest rate cuts further weaken the dollar and have helped fuel oil's rise. Another rate reduction is expected next Tuesday at the Federal Reserve's regularly scheduled monetary policy meeting.

"This cocktail's been whipped up by the Federal Reserve," said James Cordier, founder of OptionSellers.com, a Tampa, Fla., trading firm.

Analysts expect the price of oil to maintain its upward track. "There's really no end in sight to this," added Cordier.

Gas prices are following crude, reaching a record national average of $3.27 a gallon. And gas prices are expected to rise much higher this spring; estimates range from about $3.50 a gallon in the Energy Department's latest forecast to $3.75 or even $4.00 a gallon according to some analysts.

Higher pump prices result in higher costs for food and other consumer goods.

Despite the weak dollar, the U.S. trade deficit still increased 0.6 percent in January, reaching $58.2 billion. Though exports increased 1.6 percent to the highest level ever, the U.S. still buys more from other nations than it sells abroad.

So much for the supposed benefit of a weak dollar.

Perhaps the most troubling news is that the wars in Iraq and Afghanistan are now costing U.S. taxpayers $12 billion per month, according to the nonpartisan Congressional Research Service.

A Nobel Economist just issued a report indicating that the total cost of the war could exceed $2 trillion. That figure is more than four times what the war was expected to cost through 2006, according to congressional budget data. The White House predicted in 2002 that the war would cost between $100 billion and $200 billion.

Add all of these factors together and it's a frightening mix -- a witches brew of economic trouble that may haunt the U.S. for years to come. These imperfect realities are coalescing into what seems to be a "perfect storm."

THE PERFECT STORM, PT. 2



Originally published by Gather.com on March 16, 2008
By Sean Kennedy

Earlier this week, in an article titled "The Perfect Storm," I noted how a confluence of factors could portend serious consequences for the American Economy. I focused primarily on the tumbling U.S. dollar and the spiking cost of oil and gasoline.

In this installment, I'll try to outline, in further detail, the numerous other red flags that are threatening our economic well being and way of life.

The harsh reality is that our economy has been a sort of house of cards for quite some time; it has been built on a bad foundation and a lot of delusion.

Incredibly, 72 percent of the U.S. economy is based on consumer spending. This has numerous associated problems.

The kind of spending that Americans have been engaging in for decades has come to its inevitable conclusion. That's because most of us were spending money we didn't have and burdening ourselves with ever-greater debt. Americans don't save money anymore; instead we spend it all. In fact, our national savings rate has been negative for the past couple of years.

The spending frenzy of this decade was based largely on the premise that home values would continue to increase indefinitely. Many Americans seemed to believe that double-digit annual appreciation was a norm that would go on forever. False.

By now, we all know the resulting story; people bought homes they couldn't afford based on this mistaken notion, with the belief they could then flip these homes for a handsome profit or use the appreciation and resulting equity to refinance. Millions were using their homes like ATMs to fuel their obsessive spending. Then it all fell apart.

Now millions of people have lost, or are about to lose, their homes, while banks and other mortgage lenders have been caught holding the bag. This has led to a credit crisis in which banks are hesitant to lend, or in some cases don't even have the means to lend.

Bear Stearns, the nation's fifth largest investment bank, just collapsed under the weight of bad mortgages — or mortgage securities — and was bought out in a fire sale by rival JP Morgan Chase. The venerable financial institution was acquired for less than 7 percent of what its market value had been just two days earlier.

Bear is not alone in its troubles. Other financial institutions – Lehman Brothers, Citigroup, Merrill Lynch, Morgan Stanley – have had to write off billions in losses and seek billions more from foreign investors.

The fear is that the implosion of this financial giant could create a domino effect and set off a tidal wave of defaults in the banking industry. The Fed would be significantly challenged in any effort to avert this, though it would surely try. Who wants to jump on a sinking ship?

Quite naturally, all of this has made businesses very leery and they have recently stopped hiring. Though the unemployment rate of 4.8 percent is still historically low, there is plenty of reason for concern. The economy unexpectedly lost 63,000 jobs in February — the most in five years — after declining by 22,000 in January. These job losses could further weaken consumer spending.

Moreover, the number of jobs being created is not keeping up with population growth. Economists say the U.S. needs to add about 250,000 jobs per month to keep pace. That's not even close to happening right now. Another concern is that, according to the Department of Labor, the jobs that have been created in recent years pay, on average, $9,000 less per year than the jobs that have been lost.

One of the fundamental problems with our runaway spending habits is that we buy almost everything from overseas. Relatively speaking, we don't make much here in America anymore. This creates a significant challenge for exports and makes our massive $705 billion annual trade deficit essentially inevitable. If we don't sell much abroad, where will we continue to get the money to buy all this stuff? In fact, U.S. exporters account for only 12 percent of the economy and the Business Roundtable reports that just 10% of all U.S. jobs currently depend on exports.

Despite Asia's red-hot growth, consumers in China and India accounted for only $1.6 billion of the world's spending in 2007, a tiny fraction of the $9.5 trillion spent by Americans.

Just 7 percent of the world's oil is produced in the U.S., yet crude is traded in U.S. dollars. Other oil producing nations are paid in dollars, which are now worth less and less each week. As a result, these nations make less per barrel as the dollar drops — unless they raise prices. Though the market — not individual countries — sets the price of oil, controlling production does affect price. That's the sort of power that OPEC wields.

Since oil prices affect the truckers who transport our goods, the heating that warms factories, businesses and homes, as well as product packaging, even those who don't own or drive a car are indirectly affected.

Since raising interest rates makes borrowing money more difficult for businesses and individuals, it therefore slows inflation. That's how the Fed controls the economy. But raising interest rates also serves to push the dollar down even further because the return on the dollar declines. Why invest in dollars if you can get a better return elsewhere? If you still think the dollar is worth investing in simply for patriotic reasons, try telling that to foreign governments and investment funds.

In the previous installment, I noted the absolutely massive costs of two simultaneous wars; $12 billion per month, according to the nonpartisan Congressional Research Service.

And the total cost of these wars is now expected to exceed $2 trillion, according to Joseph Stiglitz, a professor of economics at Columbia and his associate, Linda Bilmes, a Harvard professor. If credentials are important here, Stiglitz is a Nobel Prize winner and the former chief economist of the World Bank, while Bilmes has a PhD in economics. In short, these people know what they're talking about and we ought to listen and be concerned.

According to the pair, the costs of our engagements in Iraq and Afghanistan will exceed the costs of both World War II and the Vietnam conflict. That's rather stunning. What this means for the U.S. economy in the long-term is quite sobering, if not downright frightening.

As it stands, the U.S. already has a staggering $9.4 trillion debt, which amounts to $31,000 for every single man, woman and child in this country. Since Americans no longer save money, or have any significant means to invest, our government is reliant on foreign governments – such as China, Japan, and Saudi Arabia – to buy Treasuries in order to finance our massive and out-of-control spending. These are simply IOUs that eventually need to be repaid.

Before these wars even started, our government didn't have the means to pay for its future obligations, according to David Walker, the nation's top accountant. Walker, who just resigned his position as the Comptroller General of the United States, says the Medicare program is on course to possibly bankrupt the U.S. treasury.

The problem is that people keep living longer, and medical costs keep rising at twice the rate of inflation. The U.S. spends 50 percent more of its economy on health care than any nation on earth, says Walker.

As he sees it, the survival of the republic is at stake.

"I would argue that the most serious threat to the United States is not someone hiding in a cave in Afghanistan or Pakistan but our own fiscal irresponsibility," he told 60 Minutes.

Walker isn't just some hysterical, partisan government bureaucrat. The Government Accountability Office website says he "has earned a reputation for professional, objective, fact-based, and nonpartisan reviews of government issues and operations."

And this expert says the US. cannot afford the massive entitlement programs promised to 78 million Baby Boomers who, over the next 20 years, will become dependents of U.S. taxpayers.

At present, the government is already borrowing money to pay for the healthcare of its senior citizens. According to Walker, the system is unsustainable. The only way out, he says, is through additional taxes, restructuring the entitlement programs or by cutting other spending.

That last suggestion would be rather difficult. Right now, 80 percent of the federal budget is allocated to just five areas; Social Security, Medicare, Medicaid, the military and interest on the national debt.

What gives credibility to Walker's projections and analysis is that virtually everyone on the left and the right agrees with him. Federal Reserve Chairman Ben Bernanke and ranking Republicans and Democrats on the Senate Budget Committee back his assessments. Everyone knows he's right; they're just afraid to admit it publicly.

But even with Walker's testimony and warnings, and a fiscal problem that everyone in Washington acknowledges, Congress still behaves like a drunken sailor on shore leave. It just keeps raising the federal debt limit so that it can continue spending money it doesn't have, which only serves to drive us continually further into debt. Each year since 1969, Congress has spent more money than it has taken in.

These costs are already being repaid to the governments who've lent us many billions and the interest payments on that debt account for the fifth biggest piece of the federal budget. Call it money for nothing.

In Fiscal-Year 2007, the U. S. Government spent $430 Billion of our tax dollars on interest payments to the holders of the National Debt. Again, most of them are foreign governments. Compare that to the budgets of NASA – $15 Billion; the Department of Transportation – $56 Billion; and the Department of Education- $61 Billion.

So what does this all mean? Well, I hate to sound alarmist, but it doesn't look good. This is a very ugly picture and we have a government that has ignored these manifold problems for many years.

Politicians are afraid of giving voters bad news for fear of getting voted out of office. Who's ever won an election by telling people he or she plans to raise taxes or cut entitlement benefits?

Our reliance on foreign oil is a very old problem that has been ignored for decades. We have an insane energy policy that was essentially written by Big Oil and Big Energy. This doesn't serve the public good. How about a focus on clean, renewable energy and energy independence?

The massive size of our national debt and our continuous federal deficits have been ignored for decades. This is a form of national suicide. And our massive trade deficit has also been ignored for many years.

Meanwhile our leaders have asked us to soothe ourselves by buying as much as we possibly can, amassing ever-greater personal debt along the way.

This mortgage meltdown, which has turned into a full-fledged institutional crisis, was entirely avoidable. No-money-down loans? Stated-income loans? Interest-only loans? How was this stuff ever allowed?

It's because some in government think that any regulation is a bad thing and that we're all better off without it. But capitalism without regulation just leads some to some sort of Darwinian nightmare, in which only the strongest – or the richest, or the most cunning – survive.

What can we do about our do-nothing Congress?

Well, Democracy is participatory sport, not a spectator sport. It's time for everyone on the sidelines to get in the game.

Call your Senators and Representatives. Write them letters and let them know that you are aware of our bewildering array of economic problems and that you expect them to take action. If you don't know who your representatives are, find out!

Write a letter to the editor of your local paper.

Join a citizens group that is dedicated to progress and to making our politicians accountable to the people. It's time we hold their feet to the fire. In order to be considered leaders, our elected representatives must actually lead.

Get out and vote. Hold your government accountable! Ultimately, we end up with the government we deserve.

Let's just hope, for the sake of all Americans, that it's not too late to right the ship. We've taken our greatness, and our place in the world, for granted for far too long. It's not a right or a guarantee. It has to be earned and maintained.

None of the fixes will be easy, but we can't hide our heads in the sand any longer. Our government must know that we are aware and that they can't try to hide these problems from us, or ignore them, any longer. Then we have to be ready for some rather bitter medicine.

The taste will be harsh, but it will save us in the end.

Monday, December 19, 2016

Millennials Can't Make Up for Cresting Wave of Baby Boomers



Donald Trump has pledged to grow the American economy by 4 percent annually. That’s a lot easier said than done. The average growth rate in the U.S. has been below 2 percent for the last decade. In fact, since 2001, annual GDP growth has averaged just 1.85 percent.

Since 2001, GDP has reached at least 3 percent in just two years: 2004 (3.8 percent) and 2005 (3.4 percent). In every other year, through 2015, GDP failed to crack 3 percent, a number that was once considered customary.

Historically, from 1947 through 2016, the annual GDP growth rate in the US has averaged 3.23 percent.

Aging economies simply do not grow as fast as younger, emerging economies. All of the low-hanging fruit has already been picked in the U.S. and all the available juice has been extracted.

This failure to grow the economy at its historical average is not because presidents Bush and Obama didn’t want more growth, or because the two parties in Congress thought the status quo was good enough. They are simply confronting forces largely beyond their control.

If it were as easy as simply "deciding" to grow the economy by 4 percent or more each year, then all presidents would do it. However, it doesn't work that way.

The Baby Boomers were once the economic engine that drove the U.S. economy. However, those days are now over.

Defined as the generation born between 1946 and 1964, the Boomers comprise nearly a quarter of the US population — or more than 75 million people. They were the largest generation in American history, which made them an unprecedented economic force. However, they are now largely retirees… and dying.

Demographic research shows that people overwhelmingly begin to spend more in their 30s through their 40s. They are typically well established in their careers by that point and are in the midst of buying homes and furnishing them. They are also creating families, which also incurs deeper spending. As people progress in their careers, their pay typically rises, which increases spending power.

According to the work of demographic trend expert and economic researcher Harry Dent, individuals typically hit their peak spending between the ages of 46 to 50. However, once a person reaches the age of 50, spending begins to fall. After the age of 60, the decline in spending is significant, falling below that of even young people in the 18-22 demographic.

Since the last of the Boomers were born in 1960, the final wave of them won’t retire until 2027 — a decade from now. Yet, their absence from the workforce is already being widely felt across the economy.

The labor force participation rate, which indicates the share of the working-age people in the labor force, stood at 62.7 percent in November, according to the Bureau of Labor Statistics (BLS). The figure has been stuck below 63 percent since the start of 2014. When the Great Recession officially began in December 2007, the proportion of adults who either had a job or were looking for one stood at 66 percent.

What all of this means is that a whopping 95 million Americans were not in the labor force as of November, which is a new record. The number of people in the labor force (which the BLS classifies as employed or unemployed, but actively looking for a job) was roughly 159 million.

To put this in simple terms, there are 159 million U.S. workers and 95 million non-working adults. In essence, there are just 1.67 workers for every non-worker.

The number of Americans in the labor force has continued to fall partly because of retiring Baby Boomers and also because fewer workers are entering the workforce.

The Congressional Budget Office says about half the decline is due to the aging population. Roughly 10,000 Baby Boomers turn 65 every day, and many of them retire.

Millennials surpassed Baby Boomers this year as the nation’s largest living generation, according to population estimates released by the U.S. Census Bureau. This makes sense; given their age, the Baby Boomers are a shrinking generation.

Millennials, defined as those born between 1981 and 2002, now number 75.4 million, surpassing the 75 million Baby Boomers (Generation X, those born from 1965 to 1980, totals just 65 million).

However, the Millennials are not the same economic force as their parents and grandparents. They are hindered by large student debts and low-paying jobs, even among those with college degrees. Think about how many young college grads are working as baristas, bartenders, servers or nannies, for example. These are the types of jobs that don’t set them up for a successful career, financially at least.

Low earnings at the start of a career typically hamper earnings throughout one’s career. Salary is often dictated by history, as well as experience. In many cases, Millennials don’t have much of either.

The U.S. has experienced an explosion of college loan debt, with more than 43 million Americans holding roughly $1.2 trillion in student debt obligations, which has more than doubled in just the last eight years.

Given their high debts and low-paying jobs, these young people cannot come up with the downpayment for a home, and many don’t feel they have enough income to get married and start a family. The delay in starting families will likely lead to smaller families, which will slow population growth and, ultimately, economic growth.

Consequently, just 36 percent of Americans under the age of 35 own a home, according to the Census Bureau. That's down from 42 percent in 2007 and it's the lowest level since 1982, when the agency began tracking homeownership by age.

So, demand is falling due to the aging Boomers and the Millennials are not in a position to pick up the slack. Additionally, older people aren’t more productive; they’re less productive.

Bureau of Labor Statistics data indicates that U.S. productivity growth from 2010-15 averaged just 0.4 percent per year, down from 1.9 percent during the 1990-2010 period and way down from 2.6 percent during the 1950-1970 period. Historically, productivity gains have been an important engine for wage increases as well as GDP growth.

Economists argue about why exactly productivity has declined, but many assert that game-changing new technologies — such as electricity, cars or personal computers — have run their course. The IT boom of the late ‘90s and early 2000s has also lost some steam as that technology has been widely adopted. Another problem is the lack of education and training for the jobs of the 21st Century.

This slump in productivity, which measures hourly output per worker, is a big deal for the economy and for workers. As Fed Chair Janet Yellen has said, “Productivity growth is the key determinant of improvements in living standards.”

With all of the above in mind, there's not a snowball’s chance in hell that the U.S. economy will grow at 4 percent per year under Trump, much less the 5-6 percent growth he assured voters during the October presidential debate.

The decline in demand and spending by the Baby Boomers should not be under-appreciated or under-stated. That, in combination with the financial struggles of the Millennials, are at the heart of our slow economic growth and there are no indications that will change in the coming years.

Then there’s the matter of our enormous debt, which is also hindering economic growth. But I’ve covered that many times in the past (such as here, here, here and here) and it will have to be a topic for a future story.

Suffice to say, debt growth is exceeding GDP growth, and that is highly problematic.

Friday, October 28, 2016

Trade Deficit Slowly Bleeding the U.S. of Money and Jobs



A primary topic in this year’s election cycle has been trade.

Former Democratic presidential candidate Bernie Sanders and Republican presidential nominee Donald Trump have vigorously denounced past trade agreements, noting that they have hurt American workers. Both have taken a strong stance against the Trans Pacific Partnership (TPP).

Their condemnations have resonated with millions of voters.

While serving as Secretary of State, Hillary Clinton praised TPP as a deal that “sets the gold standard in trade agreements."

However, last fall, once the trade pact was finalized after years of negotiations, Clinton said she opposed it. Her change of heart may have been nothing more than political expediency.

Clinton’s history on free trade is mixed. She spoke in favor of NAFTA when her husband signed it into law in 1993, but called it a "mistake" during her 2008 presidential campaign. She voted both for and against trade deals during her eight years in the Senate.

Her running mate, Tim Kaine, recently said that finding more American export markets would “add workers” and result in “more jobs and higher wages.”

That has always been the promise of free trade agreements, but the reality has been something different, as I highlighted previously.

The median household income in 2015 was $56,516, an increase of 5.2 percent over the previous year — the largest one-year rise since at least 1967, the Census Bureau reported in September.

Median household incomes finally rose across virtually every American demographic after years of stagnation or decline, according to the latest government data.

However, the median income is still 1.6 percent lower than in 2007, before the Great Recession. Most troubling, it also remains 2.4 percent lower than the peak reached during 1999.

Consider that for a moment: the typical American household now has less income than in 1999. That’s stunning!

Meanwhile, Americans pay more today for needs like health care and higher education than they did in 1999.

Rents, health insurance, prescription drugs 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.

Anyone arguing that current trade policies somehow benefit America or it’s workers is either woefully ignorant or hopes that he/she is speaking to the woefully ignorant.

The U.S. has run a persistent trade deficit every year since 1976 — yes, for four decades.

As I noted in 2013:

The U.S. has consistently run a gaping trade deficit for decades because we import more than we export. In fact, the U.S. has led the world in imports for decades and is also the world's biggest debtor nation.

Countries with big, persistent trade deficits have to continually borrow to fund themselves. The problem for the U.S. is that we don't export nearly enough to continue paying for all those cheap foreign goods that we've grown so accustomed to.

Our greater oil production and independence was supposed to diminish the trade gap, but that hasn't happened.

The U.S. trade deficit in goods and services totaled $351 billion through August, the latest data available. With four months to go this year, that figure will continue to rise and will likely reach $500 billion once again.

As you can see below, half-a-trillion dollar annual trade deficits have been the norm for many years.

U.S. Trade Deficit, past decade (source: U.S. Census Bureau)

2005 - $714 billion
2006 - $762 billion
2007 - $705 billion
2008 - $709 billion
2009 - $384 billion
2010 - $495 billion
2011 - $549 billion
2012 - $537 billion
2013 - $462 billion
2014 - $$490 billion
2015 - $500 billion

Year after year, the trade deficit sucks hundreds of billions of dollars, and millions of jobs, out of the U.S. as we continually buy products from overseas that could instead be made here at home.

Yes, we get cheaper goods at the local Walmart as a result, but is it really worth the lost jobs and the lower paying ones that have replaced those in manufacturing?

Manufacturing employment in the United States fell by 9 percent from 2008 through 2014, according to the Congressional Research Service (CRS). However, the CRS also notes that Canada, France, Italy, Japan, Sweden, and the United Kingdom all saw similar declines over that period.

The United States’ share of global manufacturing activity declined from 28 percent in 2002 to 16.5 percent in 2011. Since then, the U.S. share has risen to 17.2 percent, according to the CRS. Yet, the evidence shows that manufacturing still contributes significantly less to our economy today than it did in 2002.

As the CRS notes, “Part of the decline in the U.S. share was due to a 23% decline in the value of the dollar between 2002 and 2011, and part of the rise since 2011 is attributable to a stronger dollar.”

While manufacturing’s share of GDP in the U.S. stood at 24.3 percent in 1970, it now contributes less than half that amount.

Manufacturing amounted to just 12.1 percent of total U.S. gross domestic product in 2014, according to United Nations calculations.

To be fair, even the U.S. Chamber of Commerce refers to this trend as “a global phenomenon,” noting that this issue is plaguing advanced economies around the world.

The Chamber observes that, “The decline in manufacturing’s share of U.S. GDP over the last forty years is nearly identical to the decline in world manufacturing as a share of world GDP, which fell from 26.6% in 1970 to 16.2% in 2010."

That’s because Big Business (i.e., capital) always seeks cheap, or cheaper, labor, which developing economies provide.

This has created undesirable outcomes for the U.S., since lost manufacturing has led to greater importing of the things we no longer make, which hurts our economy.

While exports add to GDP, imports subtract from it. Quite simply, a trade deficit creates a drag on the economy.

Every $1 billion of a larger deficit subtracts about 0.1 of a percentage point from the annualized GDP growth rate. That's bad news for an economy that is currently struggling to eek out a mere 2 percent annual growth rate.

Ultimately, America’s greatest export over the past few decades has been its own jobs. This is a terribly self-destructive trend.

America needs to produce more, export more and save more. For more than four decades, we've done exactly the opposite.

No nation can continually buy more from abroad than it sells. It's simple arithmetic. Where will the money for all these purchases come from?

It’s a very simple logic: You can't buy more than you sell indefinitely.

Saturday, October 08, 2016

Brazil and Venezuela: from Bad to Worse



Brazil has South America’s largest economy (and the second largest in the Western Hemisphere, behind the U.S.), with an output of $3.26 trillion for its roughly 200 million citizens.

Venezuela has South America’s second largest economy, with an economic output of $953 billion for its roughly 30 million citizens.

The two Latin American nations are now facing economic situations ranging from crisis to chaos.

Brazil has been mired in recession since early 2014, its longest since the 1930s.

However, the IMF estimates the country may finally return to meager growth next year. The Brazilian economy shrank 3.8% last year and the IMF now forecasts it will fall another 3.3% this year.

If so, it will mark the first time the Brazilian economy has contracted by more than 3% for two consecutive years in more than a century.

In the second quarter, Brazil’s economy contracted 3.8% and that was after it already shrank 5.4% in the first three months of the year. This has crushed tax collections.

As a result, the government’s budget deficit was the largest ever recorded in the 12 months through February.

About 12 million Brazilians are now out of work, up from 8.8 million a year ago. The unemployment rate has soared to 11.8%, up from 8.7% a year ago and 6.8% two years ago.

Even those who have jobs are suffering; wages declined 3% in August.

The country is currently embroiled in wildly turbulent political upheaval.

Brazil’s president, Dilma Rousseff, was removed from office in August following an impeachment vote in the Senate. Her dismissal came on the heels of a corruption scandal involving the state-controlled oil company Petrobras.

An investigation found that Brazil’s biggest construction firms overcharged Petrobras for building contracts. Part of their windfall would then be handed to Petrobras executives and politicians who were in on the deal.

Billions of dollars are said to have been diverted or swindled. Former President Luiz Inacio Lula da Silva was also implicated in the scandal.

Yet, as bad as things are in Brazil, they are even worse in Venezuela, which is in the midst of a full blown economic collapse.

The plunging price of crude oil, the country’s primary export and means of income, has crippled Venezuela. The country relies on oil and gas for 95% of its export revenue. This means the nation cannot fund desperately needed imports and businesses cannot not replenish their inventories.

Venezuela is suffering through shortages of basic food and basic medicine; virtually everything is in short supply. The nation is presently facing a widespread famine. Lines at state-run supermarkets begin at 3 a.m., yet sometimes there is no food at all. The government introduced food rations at its grocery stores in 2014.

In June, the NY Times reported the following:

A staggering 87 percent of Venezuelans say they do not have money to buy enough food, the most recent assessment of living standards by Simón Bolívar University found.

About 72 percent of monthly wages are being spent just to buy food, according to the Center for Documentation and Social Analysis, a research group associated with the Venezuelan Teachers Federation.

In April, it found that a family would need the equivalent of 16 minimum-wage salaries to properly feed itself.

The nation is facing a humanitarian crisis of a magnitude that is unprecedented in the Western Hemisphere.

But the country also suffers from political corruption, which has led to widespread civil unrest.

The government refuses to accept humanitarian aid. Instead, it denies there is any economic or humanitarian crisis at all. It claims there is nothing wrong and that stories to the contrary are a plot by outside forces hoping to take down the socialist government.

For president Nicolás Maduro, to admit the existence of the crisis would be to admit that the revolución has failed.

Meanwhile, Venezuela has the highest inflation rate in the world, a staggering 470%.

The International Monetary Fund has predicted that, if current trends continue, inflation could reach 1,700% this time next year.

Though the oil price crash – from more than $100 per barrel in 2014 to roughly $50 today, after reaching a low of about $30 per barrel earlier this year – has played a role in Venezuela’s misery, the government’s policies are largely to blame.

This shouldn’t be happening in a country with the world’s largest proven oil reserves.

A new revolución appears inevitable.

Sunday, September 11, 2016

Soaring Student Loan Debt and Tuition Costs are Hindering U.S. Economy



I’ve long argued that debt is holding up consumer spending, which in turn is holding back the US economy.

Many households have four types of debt: credit card debt, mortgages, auto loans and student loans.

For those with all four, the combined average is $263,259. That translates into an average of $6,658 a year in interest payments alone.

According to the U.S. Census Bureau, the median household income for the United States was $53,657 in 2014, the latest data available.

That means these households are spending 12% of their gross income on interest payments alone.

Though household debt fell after the Great Recession, it is once again on the rise.

According to the New York Fed:

Aggregate household debt balances increased in the first quarter of 2016. As of March 31, 2016, total household indebtedness was $12.25 trillion, a $136 billion (1.1%) increase from the fourth quarter of 2015. Overall household debt remains 3.3% below its 2008Q3 peak of $12.68 trillion.

In other words, household debt is now just $43 billion below its all-time high, set eight years ago.

Among the above four types of consumer debt, mortgage debt, at $8.37 trillion, is by far the biggest. This makes sense; everyone needs a place to live and mortgage payments can be fixed so that inflation makes them relatively smaller through the life of the loan. Additionally, a homeowner can eventually pay off a mortgage and live “rent” free.

Moreover, homes generally increase in value over time, allowing owners to gain some profit if they hold their homes long enough, maintenance and repairs notwithstanding.

The price of new homes increased by 5.4% annually from 1963 to 2008, on average, according the Census Bureau. That period includes the enormous price bubble of the last decade.

However, taking a longer view, the average annual home price increase in the U.S. from 1900 - 2012 was only 3.1% annually. So, the bubble years were truly an anomaly.

The two fastest growing segments of debt are auto and student loans, which have climbed to $1.1 trillion and $1.4 trillion respectively -- both record highs.

Debt payments leave consumers with little else to spend, which is why consumer spending has fallen.

In other words, borrowing in recent years has impinged consumers' ability to spend today. And borrowing today will impede spending in coming years.

The rapid rise in student loan debt is particularly troubling, since it keeps college graduates from buying cars and, more importantly, homes. That is affecting the entire housing market.

“The muted housing recovery in recent years can be traced in part to slower household formation among young adults,” notes the Federal Reserve Bank of San Francisco.

The San Francisco Fed notes that for nearly five decades, the pace of household formation exceeded population growth about 0.2 percentage point per year, on average. But from from 2007 to 2015, household growth fell relative to adult population growth fell by an average of –0.5 percentage point annually.

In essence, even as the population of young adults has increased over the past nine years, their ability to form their own households has fallen each year.

The consequences have been rather obvious and ominous.

Researcher Harry Dent recently had this to say on the matter:

More 18- to 34-year-olds are now living with their parents than at any time since 1960, when the number hit an all-time low of 20%.

It’s now jumped up to 32.1%, and is as high as 36% for those with a high school education or less. The number jumped to 28% in 2007, with the Great Recession catapulting it to 32% in just seven years.

For the first time in history, living with parents has surpassed living with a spouse or partner, with over 30% of children now living with parents, as the chart below from Pew Research shows. Fourteen percent live alone or as a single parent, with more women at 16% than men at 13%.

There was only one time in modern history where a higher percentage of kids lived with parents and that was 35% in 1940 – in the late years of the Great Depression.



Student loan debt, and the inability to afford a high-priced college education, is driving this troubling trend. Kids who can’t afford college must accept low-paying jobs, which prevent them from moving out on their own to start their adult lives.

While student loan debt is limiting the ability of young graduates to buy homes and autos, it’s also affecting the choices of millions of American kids, who are deciding to forego college altogether due to the cost.

“College enrollment has declined every year since peaking in 2011.” notes Bloomberg. “The reasons include an aging population, rising tuition costs and a healthy rate of hiring that lessens the demand for learning.”

Though graduates earn, on average, about 90 percent more than non-graduates, only about a third of Americans get degrees.

Just 60 percent of college students in the U.S. completed a four-year degree within the six-years through 2014, according to the National Center for Education Statistics.

This is bad news for the country as a whole. The jobs of the 21st Century demand higher and greater education levels. People with only a high school diploma are no longer competitive in the modern, globally connected economy.

We may not like it, but it’s true.

The fact that higher-education costs are playing a role in keeping young people form pursuing more education is awful and intolerable. We are heading toward a dystopian situation in which only the children of the most wealthy parents have the privilege of a college degree.

While vocational degrees from technical colleges are honorable, vital and highly useful, they can produce students who are really good, or skilled, at one single thing, whereas a college education can produce a more broadly educated young person who has (hopefully) developed some critical thinking skills.

Everyone has a stake in this: all employers -- from big corporations to small businesses -- the government (which collects more tax revenue from higher earners and hopes to avoid the costs of social welfare) and even those who don’t have children but want to live in an educated, productive, globally competitive society.

The Organization for Economic Cooperation and Development (OECD) calculated in 2012 the proportion of residents in 34 countries that had obtained a college degree or an equivalent, determining the top 10 “most educated” countries. The U.S. ranked No. 4.

If we want to remain there, much less improve, we must take great steps toward relieving student loan debt and reversing the irrepressibly high cost of a college education.

It’s not just our young people that depend on this; our entire economy depends on it.

Tuesday, August 02, 2016

Oil Caught in Vicious Circle



The price of oil on Tuesday closed below $40 per barrel for the first time since April. Rising oil supplies are putting downward pressure on prices once again.

Oilfield services firm Baker Hughes reported that drillers increased the number of rigs operating in U.S. fields for a fifth straight week.

Rising prices in recent months made drilling more economical than at the beginning of the year. However, increased drilling has also led to increased supplies.

The U.S. Energy Information Administration reported last week that inventories and production both rose, which is driving down prices.

You can see the vicious circle at play.

Oil companies are grappling with rising debts due to the collapse in prices over the past two years.

From 2010 through mid-2014, world oil prices were fairly stable, at around $110 a barrel. However, persistent oversupply pushed the price of oil down to $27 per barrel in February, before rising above $50 in late May and June. But the price fell back below $40 today.

This isn’t merely a problem for U.S. oil companies; it is also affecting entire countries that rely on oil for their budgets and economies.

Low oil prices have led to huge Saudi budget deficits, which led to near-record oil pumping, which led to greater supply, which led to even lower prices. It’s a vicious circle.

The Saudis, like all other major producers, are afraid of losing market share, so they won’t cut production. Iran has re-entered the global oil market after a long absence and Libya is not far behind.

Many oil producing countries are facing huge budget constraints and sinking economies. They simply can’t afford to cut production with the hope that it will lead to price increases. So, they keep pumping at breakneck speed, determined not to let other producers cut into their slice of the pie.

Even the OPEC-member countries — the global cartel for oil — cannot agree to production cuts. That’s raised an obvious question: If it’s every man for himself, what’s the point of the cartel? It seems to have lost its unity, power and effectiveness.

Some analysts now predict that oil will fall back to $35 per barrel this year.

This is happening even though Venezuela’s production has collapsed due to a crippling economic crisis. If Venezuela ever recovers its production capacity, who knows how far the price of oil could fall?

U.S. drivers won’t complain, though we’re now driving less than at any time in the last 60 years, according to a study by the Frontier Group:

The Driving Boom – a six decade-long period of steady increases in per-capita driving in the United States – is over.

Americans drive fewer total miles today than we did nine years ago, and fewer per person than we did at the end of Bill Clinton's first term. The unique combination of conditions that fueled the Driving Boom – from cheap gas prices to the rapid expansion of the workforce during the Baby Boom generation – no longer exists. Meanwhile, a new generation – the Millennials – sees a new American Dream that is less dependent on driving.

That’s bad news for oil producers and refiners alike.

Dozens of energy companies have gone bankrupt in the last couple of years. This has resulted in tens of thousands of layoffs in the energy sector (99,000 directly and indirectly in Texas alone) and billions in bad debt for the banks that backed them.

Law firm Haynes and Boone reports 83 energy industry bankruptcies have been filed since the beginning of 2015, with an aggregate debt of more than $13 billion.

Back in January, I wrote that all of the energy sector failures would ultimately result in bank failures, and the pressure has only mounted since then.

You can bet on this: energy companies are desperately working to service their debts and remain operational. So, they will keep pumping. Any momentary increases in the price of oil will suddenly make some idle fields and wells profitable to operate.

However, that will only lead to more pumping and increased supplies. Simply put, higher prices spur more output, which pushes prices back down again.

In a world that continues to struggle with weak economic growth, disinflation, deflation, negative interest rates and central banks actively devaluing their national currencies, demand for oil will remain weak, as will the price of oil.

All of this currency devaluation has served to strengthen the dollar and since oil is priced in dollars, oil prices will remain depressed.

In essence, a strong dollar has greater purchasing power, meaning it can buy more oil.

We are in a secular (long term) cycle of low oil prices, which is a boon to American consumers and drivers.

However, these are desperate times for energy companies and the banks that funded them.

It may be years before supply and demand are able to rebalance.

Yet, by that point, electric cars and renewables may have irrevocably altered oil’s hegemony in the energy sector, as well as its influence over our lives.

Friday, July 29, 2016

We've Stepped to the Precipice of Debt and are Staring Into the Abyss



Debt levels around the world are absolutely enormous. This is particularly troubling because these massive levels of debt are choking off economic growth.

Borrowing money to pay for something today leaves less available money for future purchases. Of course, there’s also the matter of interest, which makes whatever you’re borrowing for today more expensive in the long run.

Debt enables future consumption to be brought forward, which means that debt essentially denies future consumption. Borrowed money must be paid back in the future, meaning there will be less money for future purchases.

There is presently less money to pay for today’s needs due to the cost of servicing our past debts. This applies to both households and governments. Debt payments for past spending leave less money to spend on the things we would like to purchase today. In a manner of speaking, debt steals from the future.

For example, last year the federal government spent $402 billion on debt service, according to the Treasury Dept. That money was used to cover past spending and could not be utilized for things such as infrastructure spending this year. Infrastructure ultimately increases economic activity and pays for itself in the long run.

There is a large and considerable difference between productive debt and non-productive debt.

Debt that allows for an increase in productivity and/or income is useful when it is easily serviced. For example, education or infrastructure not only generally pay for themselves, but allow for even greater income-generating capacity.

Simply put, debt that ultimately generates more than enough cash flow to repay itself is productive.

Unnecessary or redundant military spending (including fighting our recent wars) or providing tax breaks to highly profitable industries are examples of non-productive debt. They do not add to add to the productive capacity of the economy, much less pay for themselves.

The U.S. national debt has now reached $19.4 trillion and will surpass $20 trillion next year. But the U.S. government is not unique or alone when it comes to debt.

Though excessive debt sparked the worst global financial and economic meltdown since the Great Depression in the fall of 2008, quite incredibly, overall world debt is even bigger today than it was then.

Just eight years later, total outstanding government debt worldwide has since doubled to $59 trillion, according to Economist Intelligence.

The next recession — and we all know it’s coming because they always do — will make servicing those huge debts crippling or impossible, which would set off a domino effect of global defaults.

However, government debt is just one portion (albeit a huge one) of the total global debt pie. When household, corporate and bank debt are added to the tally, the total sum reached a staggering $199 trillion in mid-2014, amounting to a 40 percent increase in just seven years, according to a study last year by McKinsey Global Institute.

The overall effect has been to stifle growth rather than promote it.

Real global growth averaged just 2.4% a year from 2012 through 2015. By contrast, growth averaged a robust 3.7% from 2001 through 2010, including the Great Recession years.

The sum and rapid expansion of global debt are stunning. Debt caused the crisis in 2008, yet it’s now significantly larger. In fact, government debt has doubled — and this has occurred during a time of alleged austerity.

Not only does debt service rob from more productive uses, it also results in more debt-spending to pay for budget items that can’t be covered due to debt service. It’s a vicious cycle.

The GDP numbers don’t lie: global growth has slowed to an anemic rate and all of this debt is a direct causation.

You can’t help but think this will not end well.

As BlackRock’s Jeffrey Rosenberg told the L.A. Times, some kind of global debt blowup has occurred roughly every seven or eight years since the early 1980s. That means 2016 would be right on schedule.

That’s a scary notion, and it does indeed seem that we’re continually creeping closer to the precipice.

The central banks are owned by private banks, whose mission is to indebted others — particularly sovereign nations, since they are the biggest borrowers. These bankers want perpetual debt that can never be paid off. It seems they have finally achieved that goal.

Government debt is unsustainably high in some countries. Unsustainable means this situation can’t last indefinitely.

“China’s total debt has nearly quadrupled, rising to $28 trillion by mid-2014, from $7 trillion in 2007,” wrote McKinsey. “At 282 percent of GDP, China’s debt as a share of GDP is larger than that of the United States or Germany."

McKinsey went on to say the following:

Rather than reducing indebtedness, or deleveraging, all major economies today have higher levels of borrowing relative to GDP than they did in 2007.

Debt-to-GDP ratios have risen in all 22 advanced economies in the sample, by more than 50 percentage points in many cases.

Government debt in some countries has reached such high levels that new ways will be needed to reduce it.

As the L.A. Times recently noted, “The concept of a modern debt jubilee [wiping out borrowers’ debts] has been finding its way into some mainstream financial market discussions.”

What would that do to the global financial system? Could it cause a total implosion? When debt goes away money goes away, since money is debt.

Again, it’s not just governments that have a massive debt problem. Household debt is reaching new peaks.

McKinsey also said:

Only in the core crisis countries—Ireland, Spain, the United Kingdom, and the United States—have households deleveraged. In many others, household debt-to-income ratios have continued to rise. They exceed the peak levels in the crisis countries before 2008 in some cases, including such advanced economies as Australia, Canada, Denmark, Sweden, and the Netherlands, as well as Malaysia, South Korea, and Thailand.

Much, if not most, of that debt is non-productive. It is just a ball and chain, and the world now finds itself in rapidly rising waters.

Meanwhile, total U.S. household debt rose $136 billion in the first quarter (a 1.1% increase), climbing to $12.25 trillion. It now stands just $430 billion below the $12.68 trillion peak reached in 2008, during the Great Recession.

U.S. household debt has risen for seven consecutive quarters and it won't be long before we reach a new peak.

Although household debt relative to GDP is still below the 2008 level (for now), it remains higher than it was in almost all of postwar history.

All debts must eventually be reconciled. There is a reckoning coming, and it will likely arrive sooner than later.

Brace yourself.

Sunday, June 19, 2016

As Economy Continues to Wither, Fed Remains Powerless to Stop It



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 actively looking for work 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

Dwindling Lake Mead Should be a Wake Up Call to Southwest



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

America is in the Midst of a Retirement Savings Crisis



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

Lots of Americans Don't Pay Federal Income Taxes, but That's not the Real Outrage



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:

In 2014:

- 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

Our Crumbling Infrastructure vs. Our National Debt



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

Americans Have Big Debts and Little or No Savings



“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

Is the New Housing Bubble About to Burst?



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.