Tag: economics

Grinding downward

I knew that housing prices had declined since their 2006 apex, but I hadn’t realized just how far they had fallen. The highwater mark of NAR’s median existing home price was $227,100, which is $71,000 more than last month’s $156,100. That amounts to a 31.3% decline in home prices, which is 37.4% when corrected for CPI-U inflation. The chart below puts it in perspective.

U.S. Median home price

It may be worth keeping this ongoing price collapse in mind before concluding that rising metal, commodity, and stock market prices prove the inflationary case, especially since the effects of that price collapse still remain unaccounted for.

2037

I thought Paul Ryan’s comments were interesting, in that we finally have a politician who is, unlike all the mainstream economists, actually looking at debt levels instead of GDP and the money supply.

“We’re on a debt crisis path. We are on a path where the government goes from 20 percent of GDP, to 40 percent then 60 percent of GDP. We’re on a path where our debt goes from about 68 percent of GDP to 800 percent of GDP over the three-generation window,” Ryan said.

“I asked CBO to run the model going out and they told me that their computer simulation crashes in 2037 because CBO can’t conceive of any way in which the economy can continue past the year 2037 because of debt burdens,” said Ryan.

I also found the CBO simulation crash of 2037 to be fascinating, given that I have predicted 2033 to be the date by which the United States will have either disintegrated or lost its national sovereignty. What Ryan, like Sean Hannity yesterday, leaves out is that government debt is only part of the equation and a relatively small part at that. The combined Federal/State & Local debt has increased from 16% of the total to 22.5% since 2005. If private debt continues to decline, from 31.5% to 27% for financials and 28% to 24.3% for households, then government debt will have to increase in order to prevent the economy from shrinking.

This is why I said that there is no easy way out of it. The Ryan plan isn’t awful, but it isn’t sufficient either.

Explaining Econ 101 to Krugman

The Nobel prizewinner finds himself in over his head:

There is, if you think about it, an immediate logical problem here: Republicans are saying that job destruction leads to lower wages, which leads to job creation. But won’t this job creation lead to higher wages, which leads to job destruction, which leads to …? I need some aspirin. Beyond that, why would lower wages promote higher employment?

Seriously? Krugman is seriously asking why lower prices promote higher demand? Unbelievable. Apparently the devotees of the Keynesian Cross have forgotten how to draw a basic SD curve. Because lower prices promote higher demand, ergo lower wages promote higher employment.

As for Mellonism, it was never put into practice… which brought about Great Depression I.

Bitch, meet slap

Le Cygne Gris demonstrates that John Case doesn’t know the first thing about Austrian economics, which somehow didn’t prevent him from attempting to critique the theoretical school:

The role of the state in Austrian and now Libertarian theory is more confused than its transparently false propositions on the business cycle. The first Austrian, von Hayek, was actually a social democrat and strongly supported standard social democratic policy on the key role of the state in providing services that were market failures. He differed only on whether the post office should be public or private.

Actually, the Austrian school was founded by Menger, Bahm-Bawerk, and Wieser, so 0 for 1 there.

I am not sure what is more remarkable. The fact that more people are attempting to critique Austrian economics than ever before, or the fact that they think they can do so without so much as cracking open a single work of Austrian economic theory. Of course, based on how little they know about the Neo-Keynesian theories to which they nominally subscribe, I suppose they are accustomed to opining in near-complete ignorance.

The sure tell is a critic mentioning Hayek or Schumpeter. If he doesn’t even mention Mises or Menger, there is virtually no chance he knows any more about Austrian theory than Paul Krugman does.

That didn’t take long

Economic Prediction #7: The national median existing-home price will fall below 160k from the present 170,600.

The median home price dropped 5.2 percent in February from a year earlier to $156,100, the lowest since April 2002. “If the price declines persist, even with the job market recovery, that could hamper recovery in the housing market,” said NAR chief economist Lawrence Yun.

Needless to say, this doesn’t bode well.

Florida is empty

Relatively speaking, anyhow:

On Thursday, the Census Bureau revealed that 18% — or 1.6 million — of the Sunshine State’s homes are sitting vacant. That’s a rise of more than 63% over the past 10 years…. In Florida, the worst-hit county is Collier — home of Naples — with a whopping 32% of homes empty. In Sarasota County, 23% of the housing stock sits vacant, while Lee County (Cape Coral) has a 30% vacancy rate. And Miami-Dade County has a vacancy rate of about 12%.

This isn’t quite as bad as it sounds, since Naples is one of the primary second-home markets in the country. No one was actually living in a lot of those houses outside of “the season” as they called it down there. But it is really bad from financial and real estate perspectives, as it indicates that a) rich people can’t afford those second homes anymore and b) the housing market is far more overstocked than the real estate statistics indicate. It’s a classic example of Austrian malinvestment in action, with the perverse incentives created by the credit expansion of the last ten years.

Tsunami stimulus

Jeffrey Tucker points out that it didn’t take long for the Neo-Keynesians to resort to the Broken Window Fallacy:

“It may lead to some temporary increments, ironically, to GDP, as a process of rebuilding takes place. In the wake of the earlier Kobe earthquake, Japan actually gained some economic strength” – Lawrence Summers, president emeritus of Harvard University and former director of the White House National Economic Council.

Based on this logic, the U.S. military should set off a series of nuclear explosions in the Atlantic, the Gulf of Mexico and off the California coast to trigger a series of tidal waves that will trigger instant economic growth all along the coasts. I’m not sure what we could do to help the Upper Midwest, but perhaps our intrepid biologists could do something about breeding a horde of giant rampaging beavers to destroy all the dams and bridges from Michigan to Idaho.

Now, as I explained in RGD, there are certain specific situations where broken windows will lead to economic growth, but earthquakes and tsunamis aren’t among them.

Debt outstanding 2005 – 2010

The Z1 report released earlier this week looks superficially positive from a mainstream perspective.  Total credit increased from $52.3 trillion to $52.6 trillion, which is nearly back to the pre-bust level of $52.9 trillion in Q1 2009.  This is in keeping with the theme of a fragile, but real economic recovery.  However, a closer look at the debt by sector reveals that it is merely more of the same pretend-and-extend at work, with public debt filling in the gap created by deflating private debt.  Whereas the financial sector debt has contracted $2.9 trillion (16.7%) and the household sector has contracted $500 billion (3.7%), the federal government sector debt has nearly doubled with an increase of $4.1 trillion (78%).   This means that the government debt (federal, state, and local), has now increased from 16% of the total debt market in 2005 to 22.5% now.

Notice that state and local government debt has been increasing even as their ability to service their debt has dramatically declined.  This increase cannot continue, which is why more political conflicts like the one in Wisconsin can be expected and why more state and local governments will be expected to default on their debts.  Moreover, we can expect the decline in household debt to pick up speed in the near future, since many defaults are not being registered yet and the only area of growth has been student loans.  As more home defaults enter into the system and more prospective students begin to understand the declining value of university credentials, we can be confident that the household sector will begin to contract at a rate approximately 5x faster than before.

This will put more pressure on the federal government to increase its rate of debt expansion beyond the 5.5 percent per quarter growth that it has been averaging since the crisis began in Q3 2008.  I estimate that in 2011, the federal government will have to continue expanding its debt at a rate of at least 6% per quarter in order to prevent total credit from contracting.

One-third there

Americans speed along the road to socialism and economic contraction:

Government payouts—including Social Security, Medicare and unemployment insurance—make up more than a third of total wages and salaries of the U.S. population, a record figure that will only increase if action isn’t taken before the majority of Baby Boomers enter retirement. Even as the economy has recovered, social welfare benefits make up 35 percent of wages and salaries this year, up from 21 percent in 2000 and 10 percent in 1960, according to TrimTabs Investment Research using Bureau of Economic Analysis data.

It is certainly fascinating to see that people are still decrying the evils of capitalism when more than one-third of all wages and salaries are actually socialist distributions. We can’t even call them “transfer payments” anymore because the money isn’t being taken from anyone prior to being distributed, it is being created through credit expansion.

Furthermore, we can deduce from this that the economy is only about two-thirds as productive as it is purported to be. What we’re seeing here is a Great Depression-sized economic contraction being masked by massive federal borrowing and distributing. Keep in mind that this is the same sort of masking that preceded the Soviet collapse, although the pretense necessarily took a different form due to the pretense of a market structure in the United States.

Most Americans recognize that having the federal government pay 100 percent of the nation’s wages and salaries is not possible. At this rate, it will have to pay 50 percent or more by 2020, which I note tends to correspond nicely with my long-standing prediction that by 2033, the U.S.A. will no longer be an independent, sovereign nation.

They never learn

Just in time to get burned again:

As a historic bull market reaches its second birthday, everyday investors are piling back into stocks, finally ready for more risk and hoping the rally has further to go. The Standard & Poor’s 500 index has almost doubled since March 9, 2009, when it hit a 12-year low after the financial crisis. And the Dow Jones industrials are back above 12,000, about 2,000 points shy of their all-time high.

Little-guy investors appear to be on board. Since the beginning of the year, investors have put $24.2 billion into U.S. stock mutual funds, according to the Investment Company Institute. They withdrew $96.7 billion in 2010.

The March 2009 rally has certainly lasted longer than I thought it would, but I very much doubt it has much more left in the tank given that valuation ratios are higher than they were in 2000 and the strong hands are passing on stocks to the weak ones. With QE2 winding down, consumer credit growth coming entirely from the federal student loan industry. Karl Denninger notes:

This is one of the most-outrageous abuses I’ve ever seen perpetrated on anyone. It radically exceeds anything done to the subprime and ALT-A borrowers in that the young adults abused by this practice are by definition simply due to age and experience ill-equipped to understand what they’re getting into. They are relying on the adults advising them, from High School and College counselors to “Financial Aid” officers and their parents. To put a number on this abuse the cumulative damage inflicted on our youth between the first of 2009 and January of 2011, just two short years, is almost two hundred and twenty-four billion dollars.

Very little of that expanded credit is going to be paid back. And it can’t be defaulted, which means that the interest payments are going to cripple consumer spending from 2009 forward. With the market up, the positive GDP numbers and declining U3 unemployment, I understand why the unsophisticated buy into the recovery story. But it’s all a credit-inflated illusion and the illusion isn’t going to last much longer.

How much longer? I couldn’t possibly say with any degree of certainty. But back in 2008, I warned of coming problems in March. So, if the pattern repeats, the problems should come to a head in September.