(What’s Left of) Our Economy: Is the Fed Taking Us to Economics Infinity – & Beyond?

Tags

big govenment, CCP Virus, coronavirus, COVID 19, credit, economics, Fed, Federal Reserve, finance, fiscal conservatism, Franklin D. Roosevelt, Great Depression, Great Recession, Jerome Powell, moral hazard, New Deal, stimulus package, Wuhan virus, {What's Left of) Our Economy

Since I’ve never liked recycling my own material, I’ve rarely written here on specific arguments I make on Twitter. (And I make a lot of them!) But since these times are so exceptional, and have just generated such an exceptional response from the Federal Reserve, an exception here seems more than justified. So here are three longer-than-a-tweet expressions of concern about the broadest impacts of the massive support for the everyday economy (as opposed to the financial system) just announced by the central bank in response to the CCP Virus.

The first has to do with the perils of super-easy money. Fed Chair Jerome Powell has just again made clear in remarks this morning that there’s “no limit” to the amount of credit the central bank can pump into the economy to create a “bridge” over which imperiled businesses large and small, and now state and local governments, can cross in order to return intact to “the other side” of the pandemic.

Yes there are conditions – mainly, the borrowers need to be creditworthy (though the definition of “creditworthy” has been expanded). So at least in principle, previous individual or business “bad behavior” won’t be rewarded and thereby enabled going forward – a practice economists call incurring “moral hazard.” That’s (again, in principle) different from the previous financial crisis-related bailouts, when lots of bad or incompetent behavior, especially by Wall Street and the automobile industry, was generously rewarded.

(More encouragingly, other, impressive conditions have been placed on beneficiaries of previously announced fiscal economic aid – the type provided with taxpayer money by the Executive Branch and Congress – including temporary bans on stock buybacks.)

But moral hazard doesn’t necessarily result from the behavior of apples that are already bad. The concept is so powerful (and has long been so convincing) in part because it holds that showering borrowers with easy (and now free money) tends to turn good apples bad. That’s because a credit glut greatly reduces the penalties created for poor decisions by the normal relative scarcity of capital and the price (interest rates) that lenders normally demand in order to impose some degree of discipline.

The lack of adequate discipline on borrowers is surely one big reason why the post-financial crisis economic recovery had been so historically sluggish: Capital wasn’t being used very efficiently, and therefore wasn’t creating as much output and employment as usual. Maybe, therefore, all these new stimulus programs, whether desperately needed now or not, are also setting the stage for a dreary repeat performance?

Which brings up the second issue raised by the latest Fed and other federal rescue operations: Their sheer scale, and the Powell’s “no limits” declaration strongly undercuts the most basic assumption behind the very discipline of economics: that resources will be relatively scarce. That is, there will never be enough wealth in particular to satisfy everyone’s needs, much less wants.

Think about it. If all the wealth needed or wanted could somehow be automatically summoned into existence, why would anyone have to think seriously about economic subjects at all? What would be the point of trying to figure out how to use resources most productively, or even how to distribute them most equitably?

I remain deeply skeptical about the idea that money literally “grows on trees” (as most of our ancestors would have put it). But Powell’s statement sure seems to lend it credence. Moreover, I’m among the many who have been astonished that the United States hasn’t so far had to pay the proverbial piper for all the debt that’s been created especially since financial crisis hit. So it’s entirely possible that I – and others who have fretted about the spending and lending spree the economy had already been on before the pandemic struck – have had it completely wrong.

It would still, however, seem important for economists and national leaders to make this point at least more explicitly going forward. For if it’s true, why even lend out money? Why have banks and financial markets themselves? Why shouldn’t the government just print money and distribute it – including to government agencies? Why for that matter tax anyone, rich or poor?

Just as important, if “on trees” thinking remains wrong – and possibly dangerous – folks who know what they’re talking about had better make the possible costs clear, too. Because if enough Americans become persuaded that there is indeed this kind of massive free lunch, what would stop them from demanding it? Why wouldn’t it be crazy not to? And how could elected leaders resist?

In fact, I’m also concerned about the emergence of a shorter term, more humdrum version of this situation. (This is my third worry for today.) Specifically, Powell clearly views the new Fed programs as emergency measures, which will be dialed back once the emergency is over. Similarly, at least some of the nation’s supposed fiscal conservatives are claiming that they’ve supported the sweeping anti-CCP Virus because it amounts “restitution” for all those individuals and businesses whose “property and economic rights” have been taken from them by the government decision to shut down the economy.

Nonetheless, let’s keep in mind that as former President Franklin D. Roosevelt was rolling out his New Deal programs to fight the Great Depression of the 1930s, he continually justified them as emergency measures. The President himself tried returning to his previous backing for budget balancing once some signs of recovery appeared.

His optimism, as it turned out, was premature, and helped bring on a second slump. Nonetheless, even had this about-face not failed, is it remotely likely that many other New Deal programs, ranging from Social Security to the Tennessee Valley Authority to the Federal Deposit Insurance Corporation to federal mortgage support agencies wouldn’t be alive and kicking, to put it mildly. Obviously that’s because however much most Americans may talk a small government game, they understandably like big government when it delivers tangible benefits.

As a result, when Powell, and others, promise that “When the economy is well on its way back to recovery…we will put these emergency tools away,” you’re free to smirk. The first clause in this sentence alone is grounds for caution, stating that the aid won’t be withdrawn once the worst is over, or when a rebound starts, but when normality is a certainty. If the national experience following the last financial crisis is any guide, when the Fed, for example, even pre-CCP Virus kept interest rates super low for many years after some growth had returned, “the other side” is going to be a place whose location will keep receding for the foreseeable future.

So the specter of the economy remaining hooked on massive government stimulus both for economic and these political reasons could be another reason for bearishness about a robust near-term rebound. (And no, I’m not trying to give out any investment advice here.)  

I’m not necessarily being critical here of the stimulus packages. Just trying to spotlight the safest bets to make, and the need to examine the future with eyes wide open. Is there any viable alternative?

(What’s Left of) Our Economy: Why Amazon.com Could Kill the Entire Economy

Tags

Amazon.com, bubble decade, bubbles, consumption, credit, Financial Crisis, gig economy, Great Depression, Great Recession, Henry George School of Social Science, housing, housing bubble, production, productivity, Robin Gaster, {What's Left of) Our Economy

Yesterday I was in New York City, on one of my monthly trips to attend board meetings of the Henry George School of Social Science, an economic research and educational institute I serve as a Trustee. And beforehand, I was privileged to moderate a school seminar focusing on the possibly revolutionary economic as well as social and cultural implications of Amazon.com’s move into book publishing.

You can watch the eye-opening presentation by economic and technology consultant Robin Gaster here, but I’m posting this item for another reason: It’s an opportunity to spotlight and explore a little further two Big Think questions raised toward the event’s end.

The first concerns what Amazon’s overall success means for the rough balance that any soundly structured economic needs between consumption and production. As known by RealityChek readers, consumption’s over-growth during the previous decade deserves major blame for the terrifying financial crisis and ensuing Great Recession – whose longer term effects have included the weakest (though longest) economic recovery in American history. (See, e.g., here.)

Simply put, the purchases (in particular of homes) by too many Americans way outpaced their ability to finance this spending responsibly, artificially and unprecedentedly cheap credit eagerly offered by the country’s foreign creditors and the Federal Reserve filled the gap. But once major repayment concerns (inevitably) surfaced, the consumption boom was exposed as a mega-bubble that proceeded to collapse and plunge the entire world economy into the deepest abyss since the Great Depression of the 1930s.

As also known by RealityChek regulars, U.S. consumption nowadays isn’t much below the dangerous and ultimately disastrous levels it reached during the Bubble Decade. And one of the points made by Gaster yesterday (full disclosure: he’s a personal friend as well as a valued professional colleague) is that by using its matchless market power to squeeze its supplier companies in industry after industry to provide their goods (and services, in the case of logistics companies) at the lowest possible prices, Amazon has delivered almost miraculous benefits to consumers (not only record low prices, but amazing convenience). But this very success may be threatening the ability of the economy’s productive dimension to play its vital role in two ways.

First, it may drive producing businesses out of business by denying them the profitability needed to survive over any length of time. Second, Amazon’s success may encourage so many of its suppliers to stay afloat by cutting labor costs so drastically that it prevents the vast majority of consumers who are also workers from financing adequate levels of consumption with their incomes, not via unsustainable borrowing. Indeed, as Gaster noted, it may push many of these suppliers to adopt Amazon’s practice of turning as much of it own enormous workforce into gig employees – i.e., workers paid bare bones wages and denied both benefits and any meaningful job security. And that can only undermine their ability to finance consumption responsibly and sustainably. 

I tried to identify a possible silver lining: The pricing pressures exerted by Amazon could force many of its suppliers to compensate, and preserve and even expand their profits, by boosting productivity. Such efficiency improvements would be an undeniable plus for the entire economy, and historically, anyway, they’ve helped workers, too, by creating entirely new industries and related new opportunities (along, eventually, with higher wages). Gaster was somewhat skeptical, and I can’t say I blame him. History never repeats itself exactly.

But to navigate the future successfully, Americans will need to know what’s emerging in the present. And when it comes to the economic impact of a trail-blazing, disruption-spreading corporate behemoth like Amazon, I can think of only one better place to start than Gaster’s presentation yesterday –  his upcoming book on the subject. I’ll be sure to plug it here on RealityChek as soon as it’s out.

(What’s Left of) Our Economy: Smart Phones, Dumb Economy?

Tags

cell phones, consumers, credit, CreditSesame.com, debt, deflation, inflation, Maria Lamagna, Marketwatch.com, millennials, smartphones, telecommunications services, {What's Left of) Our Economy

I’m always wary of drawing conclusions about the American economy from what I see in everyday life for reasons that should be obvious. All such anecdotes should be viewed suspiciously because individual observations or incidents are much more likely to result from randomness or unique circumstances than to reflect a genuine trend. And I’d be the last to claim that my own experiences have ever been representative of anything larger.

Still, it’s undeniably, and understandably, gratifying when some actual data seems to bear out something that’s had me (figuratively) scratching my head for some time. It’s the seeming tendency of folks who at least appear to be well into the lower depths of the “99 percent” of non-uber-wealthy Americans owning what look (to my admittedly non-expert eye) like state-of-the-art smartphones. Although all sorts of reasonable explanations are possible, a recent survey of consumer finances at least has supported my suspicion that something genuinely peculiar – and not so encouraging – really is going on here.

First, let’s examine some of the extenuating circumstances. Prices for smartphone services have been falling steadily – and steeply over the last few months, thanks largely to the spread of unlimited data plans. Just check out this chart:

Younger consumers in particular also have shown some tendency to value buying experiences (like the extraordinary connectivity provided by modern personal communications) over goods. Some of these millennials and others in the post-baby-boom categories (especially students) may be getting help from their families – and that doesn’t necessarily raise red flags. More disturbing, however, are the odds that many of the young are avoiding or deferring goods purchases (especially big ones they used to make in the twenties and thirties, like cars and homes) because they simply can’t afford them, and are therefore substituting relatively cheap indulgences like phones with every conceivable bell and whistle.

Nonetheless, that consumer finance survey – from the Credit Sesame website – sadly suggests that many low-income earners who use smartphones of some kind (it’s not possible to say that they’re the latest and greatest) literally can’t afford them. Instead, they’ve bought them with seriously over-extended credit.

According to Marketwatch.com reporter Maria LaMagna, Credit Sesame examined the finances of 5,000 consumers and found that those whose cell phone accounts are considered delinquent were carrying an average balance of $887. I couldn’t find any information about what percentage of the 5,000 consumers analyzed were carrying such cell phone debt, but here’s a reason to think that the share carrying significant amounts is pretty big: phone service companies don’t usually report customers’ payments histories to credit bureaus until the collections process formally begins. I also wish that the article indicated how credit card-related debt has changed over time.

But it’s hard to believe that a reputable site like Marketwatch would have reported these numbers had they been more the exception than the rule. And the amounts of cell phone-related debt are especially striking given how services are now cratering in price.

It’s entirely possible that cell phone debtors will take advantage of these price plunges to pay up and stay fully paid up. In principle, the companies could start cracking down, too. But there’s also a real chance that the debtors will simply start paying their minimums on time, and that the service companies – currently engaged in price wars determined to get and keep customers practically at all costs – will keep treating them leniently (and milking them as cash cows for as long as they can). Raise your hands if you think this is any way to run an economy for any serious length of time.

Making News: Podcast of Connecticut Radio Interview on Trade Policy and Financial Crises

Tags

bubbles, Connecticut, consumption, credit, Financial Crisis, Global Imbalances, Larry Rifkin, Making News, Trade, Trade Deficits, Waterbury, WATR-AM

I’m pleased to present the podcast of my September 30 interview with Waterbury, Connecticut radio host Larry Rifkin on why wrongheaded U.S. trade policies could bring on a rerun of the 2007-08 global financial crisis.  Click on this link for a provocative conversation originally broadcast on WATR-AM about subjects completely neglected by the Mainstream Media –how huge American trade deficits and the flood of cheap credit they sent into the U.S. economy contributed to the spending and housing bubbles that eventually burst so disastrously, and how they’re building up again.

And be sure to keep checking in at RealityChek for news of recent and upcoming media appearances and other events.

P.S. Sorry for sounding a little out of breath at the beginning!  I’d just run to the phone to answer Larry’s call on time!

 

(What’s Left of) Our Economy: Big New Signs of Re-Bubble-Ization

Tags

2016 elections, Allison Schrager, auto loans, balance sheets, Ben Bernanke, Bloomberg, bubbles, bubbles Federal Reserve, credit, credit cards, debt, Financial Crisis, Fox Business Debate, Goldman Sachs, housing, interest rates, leverage, loans, Matt Phillips, mortgages, quantitative easing, Quartz, revolving credit, Tracy Alloway, zero interest rate policy, ZIRP, {What's Left of) Our Economy

One of the more praiseworthy features of the Fox Business Republican debate was the discussion of the last mega-financial crisis and how to prevent a repeat. Although at their debate on CNN the Democratic presidential candidates were quizzed on the bubble and its bursting and possible remedies, the Milwaukee event marked the first time these subjects came up for the Republicans.

Better late than never, but that’s pretty strange given that the last bubbles inflated and the crisis broke out on the GOP’s watch. In fact, it’s downright disturbing. For a new meltdown remains by far the greatest economic threat to America’s future due to the Federal Reserve’s overly easy money policies – despite the latest reassurances from former Fed Chair Ben Bernanke that such warnings are ludicrous. Maybe not so coincidentally, two important new signs of re-bubble-ization have just appeared.

The first was reported by Quartz’s Matt Phillips, who pointed out that the Federal Reserve’s latest figures on Americans’ borrowing behavior showed that consumers in September took out an all-time record $28.9 billion in new loans in September. In the process, they broke a record set 14 years ago, and increased their credit outstanding by the greatest percentage since 1943 – when these records started to be kept. And even if you adjust for inflation, household borrowing is at lofty levels historically.

Many economists view such increases as a bullish economic sign – signaling that Americans are so confident about their future prospects (and repayment potential) that they’re willing to take on more debt. That may be true, but the data on wages and incomes strongly indicate that this confidence is really overconfidence. And if interest rates really are going to be raised by the Federal Reserve, even gradually, this overconfidence may be tomfoolery.

Also not so bullish – the makeup of these new loans. As economist Allison Schrager has sagely pointed out, not all borrowing decisions are created equal, even for individuals with comparable incomes. Some, like student loans, are arguably sensible investments in one’s own human capital and potential (though signs of diminished returns from a college education seem to be popping up everywhere). Others, like mortgages, are arguably sensible investments in an asset that could well appreciate in value (though the inflation and bursting of the housing bubble should have taught everyone that real estate is no longer a sure thing). And still other loans simply finance consumption – which lacks any capacity to increase one’s wealth.

Unfortunately, much of the September surge in consumer borrowing was in auto and credit card debt – which won’t bring any financial benefits.

The second sign of reb-bubble-ization was reported by Bloomberg News’ Tracy Alloway, who covered a Goldman Sachs study showing that leverage levels in Corporate America are at their highest levels in a decade – during the bubble years. In other words, thanks largely to the super-easy monetary policy pursued by the Federal Reserve since the crisis peaked, even though corporate profits have surged to new records, American business has gone on such a frantic shopping spree that its debt load has grown much faster. Indeed, according to Goldman Sachs, these debts are now at twice the levels they hit in the pre-crisis era.

Just as with consumers, rising interest rates could wreak havoc with the balance sheets of U.S. companies. And just as with consumers, relatively little of this borrowing is being devoted to strengthening these firms in what might be called the old-fashioned way – i.e., through the development of new products and services. Instead, much of this new debt has been used to fund mergers and acquisitions, and stock buybacks.

The Fox Business debate, however, does deserve criticism in one sense. It followed an entirely conventional course in focusing on crisis-proofing American finance by improving Wall Street regulation. Certainly such improvement has been warranted. But the financial crisis was rooted in weaknesses in the real economy. Until presidential candidates start presenting realistic plans for fostering more good jobs and the incomes they generate, and for spurring more production and the earnings they generate – which would reduce the need for binge borrowing in the first place – a new financial crisis looks much more like a matter of “when,” not “if.”

Following Up: All Looks Clear on America’s Foreign Borrowing Front

Tags

bonds, China, credit, debt, fixed income, Following Up, foreign holdings, Treasury Department, yields

What kind of a cockamamie time is 4 PM to release economic data? That’s when the Treasury Department normally puts out its new figures on foreign holdings of U.S. government debt. Whatever the reason, the October statistics came out late yesterday afternoon, and show a second straight month of downward drift in these stockpiles – which the historical data reveal hasn’t happened since last year, when they fell for four straight months (between April and July). China’s holdings fell for the second straight month, too, and reached their lowest level since last February.

Last month, I expressed some concern that foreigners’ willingness to lend to Americans might be waning a bit. But this new data spotlight more encouraging aspects of the picture (that is, if humongous levels of national indebtedness don’t bother you). They usefully remind how far the nation and world are from even the beginnings of any de-dollarization of the global economy, and how strongly U.S. investors still influence both exchange rates and America’s borrowing costs.

Despite the decline in overall foreign Treasury debt holdings, the October level of $6.0589 trillion was still the third highest on record. Foreign governments – including central banks – reduced their holdings for a second straight month as well, which hadn’t been done since June-August, 2013. But half of the latest 0.38 percent monthly dip was offset by an increase in private foreign investors’ Treasury holdings.

Moreover, global credit markets as a whole displayed no reluctance whatever to lend the U.S. government cheap money. Quite the contrary: From September 30 to October 31, the yield on the benchmark 10-year Treasury note sank from 2.51 percent to 2.33 percent. Today, it’s below 2.10 percent. It’s true that much of this “generosity” reflects the U.S. economy’s widely noticed status as the cleanest shirt in an increasingly filthy global laundry basket, but that’s the universe in which investors operate. Until that global macro landscape changes significantly, expect foreign Treasury stockpiles to hold pretty steady – at the very worst.

(What’s Left of) Our Economy: America’s Foreign Creditors Curbing their Enthusiasm?

Tags

China, credit, foreign holdings, interest rates, Japan, national debt, Treasuries, yield, {What's Left of) Our Economy

That geek’s delight, the Treasury Department’s newest monthly report on international capital flows into and out of the United States, just came out this afternoon, and the data for September showed something that hasn’t happened since last June: The U.S. Treasury debt holdings of China, Japan, foreign governments and central banks overall, and all foreign purchasers, went down on a monthly basis. All four categories of U.S. creditors hadn’t decreased their holdings on net since June, 2013.

These declines aren’t yet anywhere near big enough to endanger the nation’s ability to borrow heavily to finance its expenses and living standards. In fact, total foreign holdings of U.S. official debt, along with the holdings of most major creditors, remain near record highs. Further, these modest September declines followed substantial foreign net purchases in August. The massive monetary easing program announced by the Bank of Japan at the end of October could significantly change the global picture all by itself. And no one should forget that Americans still hold about two-thirds of all the debt issued by the federal government.

But for now, the September figures add to evidence that willingness abroad to finance American over-spending is waning. For example, between December, 2013 and this past September, total foreign holdings of U.S. Treasury debt rose by 4.62 percent. That’s higher than the 1.42 percent increase during the same period between 2012 and 2013. But it’s less than half the 9.37 percent jump between December, 2011 and September, 2012.

Foreign government holdings of Treasury debt have followed the same pattern. From last December to September, 2014, they rose by 2.10 percent. During the same period the year before, they fell a bit (by 0.43 percent). But from December, 2011 through September, 2012, their holdings grew by 9.32 percent.

Finally, America’s two largest foreign creditors, China and Japan, respectively, have become more reluctant to hold Treasury securities as well. From December, 2013 to September, 2014, Chinese holdings fell by 0.30 percent, after rising by 6.01 percent during the previous comparable period. From December, 2011 to September, 2012, they increased by only 0.15 percent – but they still rose.

Japan’s changes look less dramatic. During the September-December periods of 2011 to 2012, and 2012 to 2013, its Treasury holdings increased by a robust 6.65 percent and 6.02 percent, respectively. During this latest such period, the grew more slowly, but the rate was still 3.26 percent. Yet nearly half the increase occurred between December and January alone.

The strongest reason not to overreact to signs of diminished foreign appetite for U.S. Treasury debt is that overall global demand for this debt remains healthy – as evinced by its historically strong prices and low yields, and by the recent surge in thd dollar. Indeed, I remain as confident about this continuing demand as when I wrote about it earlier this year.

But it’s inarguable that the foreign holdings numbers now look somewhat different. If overseas investors remain more standoffish creditors, their American counterparts and possibly the Federal Reserve will need to do even more heavy lifting to keep the national credit card humming. Which means they’ll have to assume more of the risk, too.