David Stockman, author of The Great Deformation , summarizes the last quarter century thus: What has been growing is the wealth of the rich, the remit of the state, the girth of Wall Street, the debt burden of the people, the prosperity of the beltway and the sway of the three great branches of government - that is, the warfare state, the welfare state and the central bank... What is flailing is the vast expanse of the Main Street economy where the great majority have experienced stagnant living standards, rising job insecurity, failure to accumulate material savings, rapidly approach old age and the certainty of a Hobbesian future where, inexorably, taxes will rise and social benefits will be cut... He calls this condition "Sundown in America".
SUNDOWN IN AMERICA: THE KEYNESIAN STATE-WRECK AHEAD
Remarks of David A. Stockman at the Edmond J. Safra Center for Ethics, Harvard University, September 26, 2013
The median U.S. household income in 2012 was $51,000, but that’s nothing to crow about. That same figure was first reached way back in 1989--- meaning that the living standard of Main Street America has gone nowhere for the last quarter century. Since there was no prior span in U.S. history when real household incomes remained dead-in-the-water for 25 years, it cannot be gainsaid that the great American prosperity machine has stalled out.
Even worse, the bottom of the socio-economic ladder has actually slipped lower and, by some measures, significantly so. The current poverty rate of 15 percent was only 12.8 percent back in 1989; there are now 48 million people on food stamps compared to 18 million then; and more than 16 million children lived poverty households last year or one-third more than a quarter century back.
Likewise, last year the bottom quintile of households struggled to make ends meet on $11,500 annually ----a level 20 percent lower than the $14,000 of constant dollar income the bottom 20 million households had available on average twenty-five years ago.
Then, again, not all of the vectors have pointed south. Back in 1989 the Dow-Jones index was at 3,000, and by 2012 it was up five-fold to 15,000. Likewise, the aggregate wealth of the Forbes 400 clocked in at $300 billion back then, and now stands at more than $2 trillion---a gain of 7X.
And the big gains were not just limited to the 400 billionaires. We have had a share the wealth movement of sorts--- at least among the top rungs of the ladder. By contrast to the plight of the lower ranks, there has been nothing dead-in-the-water about the incomes of the 5 million U.S. households which comprise the top five percent. They enjoyed an average income of $320,000 last year, representing a sprightly 33 percent gain from the $240,000 inflation-adjusted level of 1989.
The same top tier of households had combined net worth of about $10 trillion back at the end of Ronald Reagan’s second term. And by the beginning of Barrack Obama’s second term that had grown to $50 trillion, meaning that just the $40 trillion gain among the very top 5 percent rung is nearly double the entire current net worth of the remaining 95 percent of American households.
So, no, Sean Hannity need not have fretted about the alleged left-wing disciple of Saul Alinsky and Bill Ayers who ascended to the oval office in early 2009. During Obama’s initial four years, in fact, 95 percent of the entire gain in household income in America was captured by the top 1 percent.
Some other things were rising smartly during the last quarter century, too. The Pentagon budget was $450 billion in today’s dollars during the year in which the Berlin Wall came tumbling down.
Now we have no industrial state enemies left on the planet: Russia has become a kleptocracy led by a thief who prefers stealing from his own people rather than his neighbors; and China, as the Sneakers and Apple factory of the world, would collapse into economic chaos almost instantly---if it were actually foolish enough to bomb its 4,000 Wal-Mart outlets in America.
Still, facing no serious military threat to the homeland, the defense budget has risen to $650 billion----that is, it has ballooned by more than 40 percent in constant dollars since the Cold War ended 25 year ago. Washington obviously didn’t get the memo, nor did the Harvard “peace” candidate elected in 2008, who promptly re-hired the Bush national security team and then beat his mandate for plough shares into an even mightier sword than the one bequeathed him by the statesman from Yale he replaced.
Banks have been heading skyward, as well. The top six Wall Street banks in 1989 had combined balance sheet footings of $0.6 trillion, representing 30 percent of the industry total. Today their combined asset footings are 17 times larger, amounting to $10 trillion and account for 65 percent of the industry.
The fact that the big banks led by JPMorgan and Bank America have been assessed the incredible sum of $100 billion in fines, settlements and penalties since the 2008 financial crisis suggests that in bulking up their girth they have hardly become any more safe, sound or stable.
Then there’s the Washington DC metropolitan area where a rising tide did indeed lift a lot of boats. Whereas the nationwide real median income, as we have seen, has been stagnant for two-and-one-half decades, the DC metro area’s median income actually surged from $48,000 to $66,000 during that same interval or by nearly 40 percent in constant dollars.
Finally, we have the leading growth category among all others----namely, debt and the cheap central bank money that enables it. Notwithstanding the eight years of giant Reagan deficits, the national debt was just $3 trillion or 35 percent of GDP in 1989. Today, of course, it is $17 trillion, where it weighs in at 105 percent of GDP and is gaining heft more rapidly than Jonah Hill prepping for a Hollywood casting call.
Likewise, total US credit market debt---including that of households, business, financial institutions and government--- was $13 trillion or 2.3X national income in 1989. Even back then the national leverage ratio had already reached a new historic record, exceeding the World War II peak of 2.0X national income.
Nevertheless, since 1989 total US credit market debt has simply gone parabolic. Today it is nearly $58 trillion or 3.6X GDP and represents a leverage ratio far above the historic trend line of 1.6X national income---a level that held for most of the century prior to 1980. In fact, owing to the madness of our rolling national LBO over the last quarter century, the American economy is now lugging a financial albatross which amounts to two extra turns of debt or about $30 trillion.
In due course we will identify the major villainous forces behind these lamentable trends, but note this in passing: The Federal Reserve was created in 1913, and during its first 73 years it grew its balance sheet in turtle-like fashion at a few billion dollars a year, reaching $250 billion by 1987---at which time Alan Greenspan, the lapsed gold bug disciple of Ayn Rand, took over the Fed and chanced to discover the printing press in the basement of the Eccles Building.
Alas, the Fed’s balance sheet is now nearly $4 trillion, meaning that it exploded by sixteen hundred percent in the last 25 years, and is currently emitting $4 billion of make-believe money each and every business day.
So we can summarize the last quarter century thus: What has been growing is the wealth of the rich, the remit of the state, the girth of Wall Street, the debt burden of the people, the prosperity of the beltway and the sway of the three great branches of government which are domiciled there---that is, the warfare state, the welfare state and the central bank.
What is flailing, by contrast, is the vast expanse of the Main Street economy where the great majority has experienced stagnant living standards, rising job insecurity, failure to accumulate any material savings, rapidly approaching old age and the certainty of a Hobbesian future where, inexorably, taxes will rise and social benefits will be cut.
And what is positively falling is the lower ranks of society whose prospects for jobs, income and a decent living standard have been steadily darkening.
I call this condition “Sundown in America”. It marks the arrival of a dystopic “new normal” where historic notions of perpetual progress and robust economic growth no longer pertain. Even more crucially, these baleful realities are being dangerously obfuscated by the ideological nostrums of both Left and Right.
Contrary to their respective talking points, what needs fixing is not the remnants of our private capitalist economy ---which both parties propose to artificially goose, stimulate, incentivize and otherwise levitate by means of one or another beltway originated policy interventions.
Instead, what is failing is the American state itself----a floundering leviathan which has been given one assignment after another over the past eight decades to manage the business cycle, even out the regions, roll out a giant social insurance blanket, end poverty, save the cities, house the nation, flood higher education with hundreds of billions, massively subsidize medical care, prop-up old industries like wheat and the merchant marine, foster new ones like wind turbines and electric cars, and most especially, police the world and bring the blessings of Coca Cola, the ballot box and satellite TV to the backward peoples of the earth.
In the fullness of time, therefore, the Federal government has become corpulent and distended---a Savior State which can no longer save the economy and society because it has fallen victim to its own inherent short-comings and inefficacies.
Taking on too many functions and missions, it has become paralyzed by political conflict and decision overload. Swamped with insatiable demand on the public purse and deepening taxpayer resistance, it has become unable to maintain even a semblance of balance between its income and outgo.
Exposed to constant raids by powerful organized lobby groups, it has lost all pretenses that the public interest is distinguishable from private looting. Indeed, the fact that Goldman Sachs got a $1.5 billion tax break to subsidize its new headquarters in the New Year’s eve fiscal cliff bill--- legislation allegedly to save the middle class from tax hikes--- is just the most recent striking albeit odorous case.
Now the American state----the agency which was supposed to save capitalism from its inherent flaws and imperfections----careens wildly into dysfunction and incoherence. One week Washington proposes to bomb a nation that can’t possibly harm us and the next week its floods Wall Street speculators, who can’t possibly help us, with continued flows of maniacal monetary stimulus.
Meanwhile, the White House pompously eschews the first responsibility of government---that is, to make an honest budget, which is the essence of what the Tea Party is demanding in return for yet another debilitating increase in the national debt.
To be sure, the mainstream press is pleased to dismiss this latest outburst of fiscal mayhem as evidence of partisan irresponsibility---that is, a dearth of “statesmanship” which presumably could be cured by stiffer backbones and greater enlightenment. Well, to use a phrase I learned from Daniel Patrick Moynihan during my school days here, “would that it were”.
What is really happening is that Washington’s machinery of national governance is literally melting-down. It is the victim of 80 years of Keynesian error---much of it nurtured in the environs of Harvard Yard---- about the nature of the business cycle and the capacity of the state---especially its central banking branch--- to ameliorate the alleged imperfections of free market capitalism.
As to the proof, we need look no further than last week’s unaccountable decision by the Fed to keep Wall Street on its monetary heroin addiction by continuing to purchase $85 billion per month of government and GSE debt.
Never mind that the first $2.5 trillion of QE has done virtually nothing for jobs and the Main Street economy or that we are now in month number 51 of the current economic recovery--- a milestone that approximates the average total duration of all ten business cycle expansions since 1950. So why does the Fed have the stimulus accelerator pressed to the floor board when the business cycle is already so long in the tooth----and when it is evident that the problem is structural, not cyclical?
The answer is capture by its clients, that is, it is doing the bidding of Wall Street and the vast machinery of hedge funds and speculation that have built-up during decades of cheap money and financial market coddling by the Greenspan and Bernanke regimes. The truth is that the monetary politburo of 12 men and women holed up in the Eccles Building is terrified that Wall Street will have a hissy fit if it tapers its daily injections of dope.
So we now have the spectacle of the state’s central banking branch blindly adhering to a policy that has but one principal effect: namely, the massive and continuous transfer of income and wealth from the middle and lower ranks of American society to the 1 percent.
The great hedge fund industry founder and legendary trader who broke the Bank of England in 1992, Stanley Druckenmiller, summed-up the case succinctly after Bernanke’s abject capitulation last week. “I love this stuff”, he said, “…. (Its) fantastic for every rich person. It’s the biggest redistribution of wealth from the poor and middles classes to the rich ever”.
Indeed, a zero Federal funds rate and a rigged market for short-term repo finance is the mother’s milk of the carry trade: speculators can buy anything with a yield----such as treasuries notes, Fannie Mae MBS, Turkish debt, junk bonds and even busted commercial real estate securities--- and fund them 90 cents or better on the dollar with overnight repo loans costing hardly ten basis points.
Not only do speculators laugh all the way to the bank collecting this huge spread, but they sleep like babies at night because the central banking branch of the state has incessantly promised that it will prop up bond prices and other assets values come hell or high water, while keeping the cost of repo funding at essentially zero for years to come.
If this sounds like the next best thing to legalized bank robbery, it is. And dubious economics is only the half of it.
This reverse Robin Hood policy is also an open affront to the essence of political democracy. After all, the other side of the virtually free money being manufactured by the Fed on behalf of speculators is massive thievery from savers. Tens of millions of the latter are earning infinitesimal returns on upwards of $8 trillion of bank deposits not because the free market in the supply and demand for saving produces bank account yields of 0.4 percent, but because price controllers at the Fed have decreed it.
For all intents and purposes, in fact, the Fed is conducting a massive fiscal transfer from the have nots to the haves without so much as a House vote or even a Senate filibuster. The scale of the transfer---upwards of $300 billion per year----causes most other Capitol Hill pursuits to pale into insignificance, and, in any event, would be shouted down in a hail of thunderous outrage were it ever to actually be put to the people’s representatives for a vote.
To be sure, all of this madness is justified by our out-of-control monetary politburo in terms of a specious claim that Humphrey-Hawkins makes them do it---that is, print money until unemployment virtually disappears or at least hits some target rate which is arbitrary, ever-changing and impossible to consistently measure over time.
In fact, however, this ballyhooed statute is a wholly elastic and content-free expression of Congressional sentiment. In their wisdom, our legislators essentially said that less inflation and more jobs would be a swell thing. So the act contains no quantitative targets for unemployment, inflation or anything else and was no less open-ended when Paul Volcker chose to crush the speculators of his day than it was last week when Bernanke elected (once again) to pander obsequiously to them.
In truth, the Fed’s entire macro-economic management enterprise is a stunning case of bureaucratic mission creep that has virtually no statutory mandate. Certainly the author of the Federal Reserve Act, the incomparable Carter Glass of Glass-Steagall fame, abhorred the notion that the central bank would become a tool of Wall Street.
To that end, the Fed originally had no authority to own government debt or to conduct open market operations buying and selling treasury securities on Wall Street. And Carter Glass would be rolling in his grave upon discovery that the Fed was rigging interest rates, manipulating the yield curve, providing succor to financial speculators by propping-up risk asset markets, placing a Put under the S&P 500 or bragging, as Bubbles Ben did recently, that he had levitated an ultra-speculative stock index called the Russell 2000.
Summing up a wholly opposite Congressional intent in the early 1920s, Senator Glass was almost lyrical: “We cured this financial cancer by making the regional reserve banks, not Wall Street, the custodian of the nation’s reserve funds… (And) by making them minister to commerce and industry rather than the schemes of speculative adventure. The country banks were made free. Business was unshackled. Aspiration and enterprise were loosened. Never again would there be a money panic.”
Except…except….except that the Fed eventually strayed from its original modest mandate to be a “banker’s bank”----and in due course we got the crashes of 1929, 1974, 1987, 1998, 2000, and 2008, to name those so far. In the original formulation, however, these cycles of bubble and bust would not have happened: the Federal Reserve’s only job was the humble matter of passively supplying cash to member banks at a penalty spread above the free market interest rate.
In this modality, the Fed was to function as a redoubt of green-eyeshades, not the committee to save the world. Central bankers would dispense cash at the Fed’s discount window only upon the presentation of good collateral. Moreover, eligible collateral was to originate in trade receivables and other short-term paper arising out of the ebb and flow of free enterprise commerce throughout the hinterlands, not the push and pull of confusion and double-talk among monetary central planners domiciled in the nation’s political capital.
Accordingly, the Federal Reserve that Carter Glass built could not have become a serial bubble machine like the rogue central banks of today. The primary reason is that under the Glassian scheme the free market set the interest rate, not price controllers in Washington.
This meant, in turn, that any sustained outbreak of speculative excess---- what Alan Greenspan once warned was “irrational exuberance” and then promptly hit the delete button when Wall Street objected---would be crushed in the bud by soaring money market interest rates. In effect, leveraged speculators would cure their own euphoria and greed by pushing carry trades---that is, buying long and borrowing short---to the point where they would turn upside down. When spreads went negative, the bubble would promptly stop inflating as overly exuberant speculators were carried off to meet their financial maker---or at least their banker.
And, yes, Carter Glass’ Fed did function under the ancient regime of the gold standard, but there was nothing especially “barbarous” about it----J. M. Keynes to the contrary notwithstanding. It merely insured that if the central bank was ever tempted to violate its own rules and repress interest rates in order to accommodate speculators and debtors, more prudent members of the financial community could dump dollar deposits for gold, thereby bringing bank credit expansion up short and aborting incipient financial bubbles before they swelled-up.
Needless to say, a central bank which could not create credit-fueled financial bubbles could not have become today’s monetary central planning agency, either. Indeed, the remit of the Glassian banker’s bank did not include managing the business cycle, levitating the GDP, targeting the unemployment rate, goosing the housing market or fretting over the rate of monthly consumer spending.
Certainly it did not involve worrying whether the inflation rate was coming in below 2 percent---the current inexplicable target of the Fed which Paul Volcker has rightly pointed out amounts to robbing the typical laboring man of half the value of his savings over a working lifetime of 30 years.
In short, in the Glassian world the state had no dog in the GDP hunt: whether it grew at an annual rate of 4 percent, 1 percent or went backwards was up to millions of producers, consumers, savers, investors, entrepreneurs and, yes, even speculators interacting on the free market. Indeed, the so-called macroeconomic aggregates----such as national income, total employment, credit outstanding and money supply----were passive outcomes on the market, not active targets of state policy.
Needless to say, no Glassian central banker would have ever dreamed of levitating the macro-economic aggregates through the Fed’s current radical, anti-democratic doctrine called “wealth effects”.
Under the latter, the 10 percent of the population which owns 85 percent of the financial assets---and especially the 1 percent which owns most of the so-called “risk assets” managed by hedge funds and fast money speculators---are induced to feel richer by the deliberate and wholly artificial inflation of financial asset values.
In the case of the Russell 2000 which is Bernanke’s favorite wealth effects tool, for instance, the index gain from 350 in March 2009 to 1080 at present amounts to 200 percent and that is for un-leveraged holdings; the Fed engineered windfall actually amounts to a 400 or 500 percent gain under typical options, leverage and timing based strategies employed by the fast money.
In any event, feeling wealthier, the rich are supposed to spend more on high end restaurants, gardeners and Pilate’s instructors, thereby causing a “trickle-down” jolt to aggregate demand and eliciting a virtuous circle of rising output, incomes and consumption----indeed, always more consumption.
Having been involved in another radical experiment in “trickle down”----the giant Reagan tax cuts of 1981----I no longer believe in Voodoo economics. But at least the Gipper’s tax cuts were voted through by a democratic legislature. The Greenspan-Bernanke-Yellen version of “trickle-down”, by contrast, is a pure gift from a handful of central bank apparatchiks to the super-rich.
Nevertheless, the more virulent form of “trickle-down” being practiced in 2013 is rooted in the same erroneous predicate as the mistake of 1981----namely, the Keynesian gospel that the free enterprise economy is inherently prone to business cycle instability and perennially under-performs its so-called “potential” full employment growth rate. Accordingly, enlightened intervention---if that is not an oxymoron--- by the fiscal and monetary branches of the state is claimed to be necessary to cure these existential disabilities.
The truth of the matter, however, is that Keynesian monetary and fiscal stimulus has never really been needed in the post-war world. Among the ten business cycle contractions since 1950, two of them were unavoidable, self-correcting dislocations resulting from the abrupt cooling down of hot wars in Korea and Vietnam.
The other eight downturns were actually caused by the Federal Reserve, not cured by it. After the Fed first got carried away with too much stimulus and credit creation in 1971-1974, for example, it had to trigger a short-lived inventory correction to halt the resulting inflation and speculative excesses in financial, labor and commodity markets. But once these necessary inventory corrections ran their course, the economy rebounded on its own each and every time.
To be sure, the Reagan tax cut intervention of 1981 came in a quasi-libertarian guise. By getting the tax-man out of the way, GDP growth was supposed to be unleashed throughout the economic hinterlands, rising by something crazy like 5 percent annually--- forever and ever, world without end.
But in practice, “supply-side” was just Keynesian economics for the prosperous classes---that is, it ended-up being a scheme to goose the GDP aggregates by drawing down Uncle Sam’s credit card and then passing along the borrowings to so-called “job creators” thru tax cuts rather than to dim-witted bureaucrats thru spending schemes.
Indeed, the circumstances of my own ex-communication from the supply-side church underscore the Reaganite embrace of the Keynesian gospel. The true-believers---led by Art Laffer, an economist with a Magic Napkin, and Jude Wanniski, an ex-Wall Street Journal agit-prop man who chanced to stuff said napkin into his pocket--- were militantly opposed to spending cuts designed to offset the revenue loss from the Reagan tax reductions.
They called this “root canal” economics and insisted that the Republican Party could never compete with the Keynesian Democrats unless it abandoned its historic commitment to balanced budgets and fiscal rectitude, and instead, campaigned on tax cuts everywhere and always and a fiscal free lunch owing to a purported cornucopia of economic growth.
So supply-side became just another campaign slogan---a competitive entry in the Washington beltway enterprise of running-up the national debt in order to perfect and improve upon the otherwise inferior results of the free market economy. In the fullness of time, of course, supply-side economics degenerated into Dick Cheney’s fatuous claim that Reagan proved “deficits don’t matter”.
From there came two giant unfinanced tax cuts and two pointless unfinanced wars under George W. Bush. And then there arose, finally, the GOP’s descent into fiscal know-nothingism during the Obama era--- wherein it refused to cut defense, law enforcement, veterans, farm subsidies, the border patrol, middle class student loans, social security, Medicare, the SBA and export-import bank loans to Boeing and General Electric, among countless others--- while insisting that no tax-payer should suffer the inconvenience of higher taxes to pay Uncle Sam’s bloated bills.
We thus ended up with the New Year’s Day Folly of 2013. Save for the top 2 percent of taxpayers who were being generously taken care of by the Fed already, all of America got a huge permanent tax cut----amounting to $2 trillion over the coming decade alone.
Never mind that the Democrats had spent the entire prior decade denouncing the Bush tax cuts as fiscal madness. Now, the tax bidding war which had started in the Reagan White House in May 1981 became institutionalized in the Oval Office.
The so-called Progressive Left was in charge of the veto pen, of course, but the latter was found wanting for ink and in that outcome the nation’s fiscal demise was sealed. There was no progressive case whatsoever for extending the Bush tax cuts because, as Willard M. Romney had so inartfully taught the nation during the Presidential campaign, the bottom 47 percent of households don’t pay any income tax in the first place!
In short, the most left-wing President ever elected in America was showering the upper middle-class with trillions in extra spending loot for no reason of policy----except to ensure that they would buy more Coach Bags and flat screen TVs.
The fiscal end game---policy paralysis and the eventual bankruptcy of the state---thus became visible. All of the beltway players----Republican, Democrats and central bankers alike----are now so hooked on the Keynesian cool-aid that they cannot imagine the Main Street economy standing on its own two feet without continuous, massive injections of state largesse.
Indeed, the lunacy of the Fed’s trickle-down-to- the-rich was justified last week by Bernanke himself on the grounds that the minor fiscal pinprick owing to the budget sequester was keeping the GDP from growing at its appointed rate.
Based on the same logic the GOP’s most fearsome fiscal hawk, Congressman Paul Ryan, proposed a budget which actually increased the deficit by $200 billion over the next three years on the grounds that the economy was too weak to tolerate fiscal rectitude in the here and now. In the manner of St. Augustine, the Ryan budget got to balance in the by-in-by---that is, in 2037 to be exact--- pleading “Lord, make me chaste--- but not just now”.
In other words, the entire fiscal and monetary apparatus of the state has become a jobs program. Progressives pleasure households earning a quarter million dollars annually with tax cuts so that they will hire another gardener; conservatives support modernization of our already lethal fleet of 10,000 M-1 tanks to keep the production line open in Lima, Ohio----notwithstanding that no nation in the world can invade the US homeland and that the American people are tired of invading the homelands of innocent peoples abroad.
In the same vein, by all accounts the US income tax code is a disgrace--- a milk-cow for the K-street lobbies, a briar patch of screaming inequities and the leakiest revenue raising system ever concocted.
But it also amounts to 70,000 pages of jobs programs. None of these can be spared, according to the beltway consensus, so long as GDP and job growth is not up to snuff---that is, as long as they fall short of the American economy’s so-called full employment potential. The latter is an ethereal number known only to the Keynesian priesthood, led by the great thinker’s current vicar on earth, professor Larry Summers, who during his tenure in the White House turned Art Laffer’s napkin upside down and wrote “$800 billion” on the back.
That was the magic number which, when multiplied by another magic number called the fiscal multiplier, would generate an amount of incremental GDP exactly equal to the gap between actual GDP in early 2009 and potential GDP, as calibrated by the vicar.
This might be called the bath-tub theory of macroeconomics because according to Summers and the White House, it didn’t matter much what was in the $800 billion package----the urgent matter was to get Washington’s fiscal pumping machinery operating at full-tilt.
Accordingly, once the magic number had been scribbled on the White House napkin, the nation’s check-writing pen was handed off to Speaker Nancy Pelosi and Harry Reid, who conducted the most gluttonous feeding frenzy every witnessed along the corridors of K-Street.
In exactly twenty-two days from the inauguration, the new administration conceived, drafted, circulated, legislated and signed into law an $800 billion omnibus package of spending and tax cutting that amounted to nearly 6 percent of GDP. I had been part of a new administration that moved way too fast on a grand plan and had seen the peril first hand. But the Reagan fiscal mishap did not even remotely compare to the reckless, unspeakable folly conducted by the Obama White House.
In fact, the stimulus bill was not a rational economic plan at all; it was a spasmodic eruption of beltway larceny that has now become our standard form of governance.
Stated differently, the stimulus bill was a Noah’s ark which had welcomed aboard every single pet project of any organization domiciled in the nation’s capital with a K-street address. Most items were boarded without any policy review or adult supervision, reflecting a rank exercise in political log-rolling that proceeded straight down the gang planks to the bulging decks below.
Indeed, the true calamity of the Obama stimulus was not merely its massive girth, but the cynical, helter-skelter process by which the public purse was raided. At the end of the day, it was a startling demonstration that the power of a bad idea----the Keynesian predicate----when coupled with the massive money power of the PACs and K-Street lobbies, has rendered the nation fiscally incontinent.
This unhinged modus operandi undoubtedly accounts for the plethora of sordid deals that an allegedly “progressive” White House waived through. Thus, the homebuilders were given “refunds” of $15 billion for taxes they had paid during the bubble years; manufacturers got 100 percent first year tax write-offs for equipment that should have been written off over a decade or longer; and crony capitalist investors got $90 billion for uneconomic solar, wind and electric vehicle projects under the fig leaf of “green energy”.
Likewise, insulation suppliers got a $10 billion hand-out via tax credits to homeowners to improve the thermal efficiency of their own properties; congressman on the public works committees got $10 billion earmarked for pork barrel water and reclamation projects in the home districts; and the already corpulent budget of the Pentagon was handed another $10 billion for base construction it most definitely didn’t need---to say nothing of a new headquarters for the insanely bloated and incompetent Homeland Security Department
Moreover, the big ticket stuff was far worse. Nearly $50 billion was allocated to highway construction---much of it for repaving highways that didn’t need it or building interchanges where the traffic didn’t warrant it; and, in any event, it should have been paid for with user gasoline taxes, not permanent debt on the general public.
Still, the real pyramid building gambit was the $30 billion or so for transit and high speed rail. Forty-five years of mucking around with the abomination know as Amtrak proves unequivocally that cross-country rail can never be viable in the US because it cannot compete with air travel among the overwhelming majority of city-pairs.
Presently, every single ticket sold on the Sunset Limited from New Orleans to Los Angeles, for example, requires a subsidy that is nearly double the cost of an airline ticket, and is indicative of why we pour $1 billion down the drain each year subsidizing the public transit myth ---a boondoggle that will become all the greater owing to the distribution of billions of high speed rail “stimulus” funds which were not subject to even a single hour of hearings.
Then there was $80 billion for education but the only rhyme or reason to it was the list of K-Street lobbies that had lined-up outside Speaker Pelosi’s door: to wit, the National Education Association, the school superintendents lobby, the textbook publishers, the school construction industry, the special education complex, the pre-school providers association, and dozens more.
In a similar manner, the nursing home lobby, home health providers, the hospital association, the knee and hip replacement manufactures, the scooter chair hawkers and the Medicaid mills were all delighted to pocket an extra $80 billion of Federal funding, thereby relieving pressures for reimbursement reductions from the regular state Medicaid programs.
Finally, there was the Obama “money drop” whereby $250 billion was dispersed in helicopter fashion to 140 million tax filers and 65 million citizens who receive social security, veterans and other benefit checks. But there was virtually no relationship to need: tax filers with incomes up to $200,000 were eligible, or about 95 percent of the population.
And among the beneficiary population receiving a $250 stimulus check, less than 10 percent were actually means-tested--- while millions of these checks went to affluent social security retirees happy to have Uncle Sam pay for an extra round or two of golf.
Indeed, there was no public policy purpose at all to Obama’s quarter trillion dollar money drop except filling the Keynesian bath-tub with make believe income, hoping that citizens would use it to buy a new lawnmower , a goose-down comforter, dinner at the Red Lobster or a new pair of shoes.
Yet ensnared in the Keynesian delusion that society can create wealth by mortgaging its future, the stimulus-besotted denizens of the beltway blew it entirely on the one true domestic function of the state---even under the regime of crony capitalism that now prevails. That imperative is to maintain and adequately fund a sturdy safety net to support citizens who cannot work due to age or health, and to supplement the incomes of families whose marketplace earnings fall below a minimum standard of living.
Yet notwithstanding the feeding frenzy on K-Street to fill-in the Keynesian vicar’s $800 billion blank check in a record twenty-two days, only 3.8 percent of the total----a mere $30 billion---was allocated to means-tested cash benefits which actually fund the safety net for the needy. Yet with $17 trillion of national debt on the books already, and the certainty that will double or triple in the decades immediately ahead, indiscriminately filling the Keynesian bathtub with borrowed money is not only reckless, but also a cruel insult to any reasonable standard of equitable justice.
The fiscal madness of the Obama era cannot be excused on the grounds that the nation was faced with Great Depression 2.0. We weren’t and the widespread belief that we were so threatened is almost entirely attributable to Ben Bernanke’s faulty scholarship about the Fed’s alleged mistake of not undertaking a massive government debt buying spree to counter-act the Great Depression.
The latter, in turn, was borrowed almost entirely from Milton Friedman’s primitive quantity theory of money which was wrong in 1930 and ridiculously irrelevant to the circumstances of 2008. Nevertheless, it was the basis for Bernanke’s panicked flooding of Wall Street with indiscriminate bailouts and endless free liquidity after the Lehman event.
But what was actually happening was that the giant credit and housing bubble, which had been created by the Greenspan-Bernanke Fed in the wake of the bursting dotcom bubble, which it had also created, was being liquidated. Most of the carnage was happening within the gambling halls of Wall Street because it was the wholesale money market and the shadow banking system that was experiencing a run, not the retail banks of main street America.
The so-called financial crisis, therefore, consisted first and foremost of a violent mark-down of hugely leveraged, multi-trillion Wall Street balance sheets that were loaded with toxic securities--- that is, the residue of speculative trading books and undistributed underwritings of sub-prime CDOs, junk bonds, commercial real estate securitizations, hung LBO bridge loans, CDOs squared---- and which had been recklessly funded with massive dollops of overnight repo and other short-term wholesale money.
This was just one more iteration of the speculator’s age old folly of investing long and illiquid and funding short and hot.
By the time of the frenzied bailout of AIG on September 16th, led by Bernanke and Hank Paulson, the most dangerous unguided missile every to rain down on the free market from the third floor of the Treasury building, it was nearly all over except for the shouting. Bear Stearns, Lehman and Merrill Lynch were already gone because they were insolvent and should have been liquidated----including the bondholders who have foolishly invested in their junior capital for a few basis points of extra yield.
Likewise, Morgan Stanley was bankrupt, too----propped up ultimately by $100 billion of Fed loans and guarantees that accomplished no public purpose whatsoever, except to keep a gambling house alive that the nation doesn’t need, and to rescue the value of stock held by insiders and bonds owned by money manager who had feasted for years on its reckless bets and rickety balance sheet.
Indeed, at the end of the day the only real purpose of the September 2008 bailouts was to rescue Goldman Sachs from short-sellers who would have taken it down, had not Paulson and Bernanke bailed out Morgan Stanley first, and then outlawed the right of free citizens to sell short the stock of any financial company s until the crisis had passed.
The case for bailing out AIG was even more sketchy. It had around $800 billion of mostly solid assets in the form of blue chip stocks, bonds, governments, GSE securities and long-term, secured aircraft leases, among others.
So the great global empire of dozens of insurance and leasing companies that Hank Greenburg had built over the decades wasn’t really insolvent: the problem was that its holding company, which had written hundreds of billions of credit default swaps, was illiquid.
It couldn’t met margin calls against the CDS it had written because state insurance commissioners in their wisdom had imposed capital requirements and dividend stoppers on AIG’s far flung insurance subsidiaries----precisely so that policy-holders couldn’t be fleeced by holding company executives and Boards needing to fund their gambling debts.
In short, virtually none of the AIG subsidiaries would have failed; millions of life insurance policies and retirement annuities would have been money good, and the fire insurance on factories in Peoria would have remained in force.
The only thing that really happened was that something like twelve gunslingers based in London, who sold massive amounts of loss insurance on sub-prime mortgage bonds to about a dozen multi-trillion global banks, would have had to hire protection on their lives in the absence of the bailout. These CDS policies issued by the AIG holding company, in fact, were almost completely bogus and would have generated about $60 billion in losses among Goldman, JPMorgan, Barclays, Deutsche Bank, SocGen, BNP-Paribas, Citi bank and a handful other giants with combined balance sheet footings of $20 trillion.
So the loss would have been less than one-half of one percent of the aggregate balance sheet of the global banks impacted---that is, a London Whale or two, and nothing more
But by dishing out around $15 billion of bailout money to each of the above named institutions, the American taxpayer kindly protected the P&L of these banks from a modest one-time hit, and kept executive bonuses in the money, too. It also left AIG under the care of unreconstructed princes of Wall Street whose claims to entitlement know no bounds, as exemplified by Mr. Benmosche’s recent stupefying inability to distinguish between a lynching and the loss of undeserved bonuses.
But as they say on late night TV, there’s more. We were told that ATMs would go dark, big companies would miss payrolls for want of cash and the $3.8 trillion money market fund industry would go down the tubes.
All of these legends are refuted in the section of my book called the Blackberry Panic of 2008----the title being a metaphor for the fact that the Treasury Department of the US government was in the hands of Wall Street plenipotentiaries who could not keep their eyes off the swooning price charts for the S&P 500 and Goldman Sachs flickering red on their blackberry screens.
But just consider this. Fully $1.8 trillion or 50 percent of total money market industry was in the form of so-called “government only” funds or Treasury paper. Not a single net dime left these funds during the panic and for the good reason that treasury interest payments were never in doubt.
Likewise, the other half of the industry consisted of so-called “prime” funds which included modest amounts of commercial paper along with governments and bank obligations. About $400 billion or 20 percent of these holdings did leave these “prime” funds.
Yet, the overwhelming share of these withdrawals---upwards of 85 percent---simply migrated within money fund companies from slightly risky “prime” funds to virtually riskless “government only” funds. In effect, the much ballyhooed flight from the money market funds consisted of professional investors hitting the “transfer” button on their account pages.
Worse still, the only significant investor loss in this $4 trillion sector, which was supposedly ground zero of the meltdown, was on about $800 million of Lehman commercial paper held by the industry’s largest operation called the Reserve Prime Fund. The loss amounted to 0.002 percent of the money market industry’s holdings on the eve of the crisis.
In a similar vein, the $2 trillion commercial paper market was said to be melting down, but this too is an urban legend fostered by the nation’s leading crony capitalist, Jeff Imelt of GE. Unaccountably, the latter did manage to secure $30 billion of Fed guarantees for General Electric’s AAA balance sheet, thereby obviating any need to do the right free market thing---that is, to make a dilutive issue of stock or long-term debt to pay down some cheap commercial paper that could not be rolled during the crisis.
Accordingly, GE Capital’s practice of funding long-term, sticky assets with short-term hot money should have caused shareholders to take a hit, and the company’s executives to be brought up short on the bonus front.
Instead, the bailout of GE’s commercial paper gave rise to the urban legend that companies could not fund their payrolls, when the truth is that every single industrial company that had a commercial paper facility also had back-up lines at their commercial bank, and not a single bank refused to fund, meaning no payroll disbursement was every in jeopardy.
What actually shrank, and deservedly so, was the $1 trillion asset-backed commercial paper market---a place where banks go to refinance credit card and auto loan receivables so that they can book the lifetime profits on these loans upfront---literally the instant your card is swiped--- under the “gain-on-sale” accounting scam.
Consequently, the subsequent sharp decline of the ABCP market has been entirely a matter of bank profit timing. It never prevented a single consumer from swiping a credit card or obtaining an auto loan.
In short, by the time of TARP and the massive liquidity injections into Wall Street by the Fed------when it doubled its 94 year-old balance sheet in seven weeks thru October 25, 2008---the meltdown in the canyons of Wall Street had pretty much burned itself out.
Had Mr. Market been allowed to have his way with the street, a healthy purge of decades’ worth of speculative excesses would have occurred. Indeed, the main effect would be that perhaps a half-dozen “sons of Goldman” would be operating today, not the vampire squid which remains----and they would be run by chastened people who would have lost their stake during the free market’s cleansing interlude.
In a similar manner, the one-time hit to GDP and jobs which resulted from economically warranted collapse of the housing, commercial real estate and the consumer credit bubbles was actually over within nine months.
The ensuring rebound that incepted in June 2009 reflected the regenerative powers of the free market, and not the Fed’s mad-cap money printing or the Obama fiscal stimulus. The Fed did lower interest rates to zero, and thereby it revived the speculative juices on Wall Street. But the plain fact is that household and business credit continued to contract on Main Street long after the June 2009 bottom, and for good reason: both sectors were massively over-leveraged after three decades of continuous, pell mell credit expansion.
The household sector, for example, had $13 trillion of debt which represented 205 percent of wage and salary income---compared to the historic ratio of under 90 percent which had prevailed during healthier times prior to 1980. So the Fed’s massive balance sheet expansion did nothing to cause higher borrowing, spending, output or employment on Main Street, even as it put the hedge funds back into the carry-trade business---now with essentially zero cost of funds.
By the time the rebound began in June 2009 not even $75 billion of the stimulus bill—that is, one-half of one percent of GDP---- had hit the spending stream, meaning, again, that the recovery already underway was self-generating.
As it happened, the initial wave of business inventory liquidation and labor-shedding triggered by the Wall Street meltdown had burned itself out quickly during the first nine months after the Lehman crisis. Thus, business inventories totaled $1.54 trillion in August 2008, and dropped by a total of $215 billion or 14 percent during the course of the recession. Yet fully $185 billion of that liquidation occurred before June 2009, and inventories started to actually rebuild a few months later.
The story was similar for non-farm payrolls. Nearly 7.6 million jobs were shed during the Great Recession but fully 6.6 million or 90 percent of the adjustment was completed by June 2009. Indeed, the idea that this short but sharp recession had anything to do with the Great Depression is essentially ludicrous, and fails completely to note the vast structural differences between the two eras.
During the early 1930, the US was the great creditor and exporter to the world, with 70 percent of GDP accounted for by primary production industries----agriculture, mining and manufacturing--- which have long pipelines of crude, intermediate and finished inventory.
By the time of the 2008 Wall Street meltdown, however, the primary production sector had become a mere shadow of its former self, accounting for only 17 percent of GDP. Accordingly, when recession hit the American economy this time, the downward spiral of inventory liquidation was muted----with the total inventory liquidation amounting to 2 percent of GDP in 2008-09 compared to 20 percent in the early 1930s.
Indeed, the inherent recession dynamics of the contemporary US service economy--- with its massive built-in stabilizers in the form of transfer payment and huge government payrolls--- militated against the entire scare story of a Great Depression 2.0.
During the nine months thru June 2009, for example, government transfer payments for foods stamps, unemployment insurance, Medicaid, cash assistance and social security disability soared at a $300 billion annual rate, thereby more than off-setting the $275 billion drop in total wage and salary income.
Likewise, government wages and salaries actually rose during the period, and the vast US service sector payrolls were tapered back modestly, rather than going dark in the form of traditional factory shutdowns. Aerobics class instructors, for example, experienced modestly reduced paid hours, but unlike factories and mines, fitness centers did not go dark in order to burn off excess inventories; they stuck to burning off calories at a modestly reduced rate.
In fact, by 2008 China, Australia and Brazil had become the world’s new mining and manufacturing economy---that is, the US economy of the 1930s. When upwards of 50 million Chinese migrant workers were sent home from idle Chinese export factors, the villages of China’s vast interior became the “Hoovervilles “of the present era.
In short, Bernanke’s depression call was reckless and uninformed. The real challenge facing the American economy was to get off the massive credit binge which had bloated and inflated output, jobs and incomes for more than two decades.
Instead, Washington poured gasoline on the fire, thereby re-igniting an even great bubble that will ultimately end in state-wreck—that is, in the thundering collapse of the financial markets. Indeed, the nation’s rogue central bank will eventually be engulfed in the Wall Street hissy fit it fears---undone by waves of relentless selling when the monetary politburo finally loses control of panicked day traders and raging robo trading machines.
Likewise, the Federal budget has become a doomsday machine because the processes of fiscal governance are paralyzed and broken. There will be recurrent debt ceiling and shutdown crises like the carnage scheduled for next week, as far as the eye can see.
Indeed, notwithstanding the assurances of debt deniers like professor Krugman, the honest structural deficit is $1-2 trillion annually for the next decade and then it will get far worse. In fact, when you set aside the Rosy Scenario used by CBO and its preposterous Keynesian assumption that we will reach full employment in 2017 and never fall short of potential GDP ever again for all eternity, the fiscal equation is irremediable.
Under these conditions what remains of our free enterprise economy will be buckle under the weight of taxes and crisis. Sundown in America is well-nigh unavoidable.
"Everybody, sooner or later, sits down to a banquet of consequences." Robert Louis Stevenson
"They don't have intelligence. They have what I call thintelligence. They see the immediate situation. They think narrowly and they call it 'being focused.' They don't see the surroundings. They don't see the consequences." Michael Crichton
The Fed is faced with a problem that is best represented by the first two charts below.
Velocity of money is a simple ratio measure of money supply and GNP. It intends to represent the number of times a unit of money is exchanged in a transaction over a period of time.
As you can see, the velocity of the two broad money supply measures is dropping to historic lows.
Is this because the great mass of people are 'hoarding money,' which implies that one should lower real interest on savings, even taking them more deeply into the negative through monetary inflation in order to encourage spending through fear of de facto confiscation?
The third chart gives some insight into the true nature of the economic problem. Most of the income gains this century and for the past two or three decades of the past have been flowing to the top few percent of US households. The median household, the middle if you will, has been steadily losing ground in large part to Fed and political policy decisions driven by a mistaken ideology and a top down or trickle down approach to prosperity.
If the Fed pursues monetary inflation, without taking strong steps, even through the use of its bully pulpit and actions as regulator, to correct the severe policy imbalances that lopsidedly favor the wealthy financiers, it will drive the US middle class over an economic cliff and destroy the very system which it is attempting to save.
That is the basis of the tragic policy error of the Fed and the ruling class. Jeffrey Sachs has noted it in a recent talk to the Philly Fed shown below, and Bill Black has some particularly scathing words today for the 'Hyper-meritocracy Led by Criminal Morons.' I might have said self-delusional narcissists or even sociopaths rather than morons. The majority of those who enable the abuse of power are merely careerists.
One can make the strong case that the primary responsibility for this is in the political leadership. But one cannot also deny that as policy influencer and regulator the Fed has favored, quite actively, the growth of imbalances and social and economic injustice by pursuing a blind allegiance to a mistaken theory of deregulation and oligopoly of banking capital.
An audacious oligarchy needs someone to rescue them from themselves. And this will not be an easy task because the system is corrupted and the powerful have been blinded by greed. The current political deadlock in Washington is a symptom of the problem. There is always an element that believes in a long range plan consisting of repression as required, disinformation, and plundering the weak.
The monied class do not 'create jobs.' Genuine organic and systemic demand for good and services creates jobs, and those who have the means respond to that demand. It is a virtuous cycle that begins with consumer demand, and the willingness and the ability to pay for it. Yes there may be a role for inorganic demand such as stimulus to 'kick start' an economy caught in a policy error trap, but it is the reforms that allow for organic growth that make it sustainable.
Moving offshore to find new demand for markets while abandoning one's domestic base to decline and failure, in the true colonial fashion of past economic empires, is a form of neurotic failure. It often lights a fire in men's minds, and becomes a sort of self-fulfilling cultural suicide. And perhaps this is embodied in the latest corporatist deal which is the infamously secretive Trans-Pacific Partnership.
How fitting that, having overturned most of the financial reforms of the past century, we stand here now on the brink, on the 75th anniversary of the New Deal, with essentially the same set of problems facing us that brought the world down so low in The Great Depression, and opened the door to the madness that followed.
"I believe we have a crisis of values that is extremely deep, because the regulations and the legal structures need reform. But I meet a lot of these people on Wall Street on a regular basis right now. I’m going to put it very bluntly. I regard the moral environment as pathological...
If you look at the campaign contributions, which I happened to do yesterday for another purpose, the financial markets are the number one campaign contributors in the U.S. system now. We have a corrupt politics to the core, I’m afraid to say, and no party is – I mean there's – if not both parties are up to their necks in this. This has nothing to do with Democrats or Republicans. It really doesn’t have anything to do with right wing or left wing, by the way. The corruption is, as far as I can see, everywhere.
But what it's led to is this sense of impunity that is really stunning and you feel it on the individual level right now. And it's very very unhealthy, I have waited for four years, five years now to see one figure on Wall Street speak in a moral language.
And I've have not seen it once. And that is shocking to me. And if they won't, I've waited for a judge, for our president, for somebody, and it hasn't happened. And by the way it's not going to happen any time soon, it seems...
The final point, of course, is separating the politicians from the crooks, but maybe that’s so close together that they can’t actually be separated. Maybe it’s just the same community."
Jeffrey Sachs, Fixing the Banking System For Good, Philadelphia Fed, April 17th, 2013
Since it began in late 2008, QE has spurred a vigorous debate about its merits, both positive and negative.
On the positive side, the easy money and low interest rates resulting from quantitative easing have been a shot in the arm to the economy, fueling the stock market and helping the housing recovery. On the negative side, The Fed accomplished QE by "printing money" to buy Treasurys, and through the massive power of its purchases drove interest rates to record lows.
But in the process, the Fed accumulated an unprecedented balance sheet of more than $3.6 trillion which needs to go somewhere, someday.
But we know all this.
I believe that one of the most important reasons the Fed is determined to keep interest rates low is one that is rarely talked about, and which comprises a dark economic foreboding that should frighten us all.
Let me start with a question: How would you feel if you knew that almost all of the money you pay in personal income tax went to pay just one bill, the interest on the debt? Chances are, you and millions of Americans would find that completely unacceptable and indeed they should.
But that is where we may be heading.
Thanks to the Fed, the interest rate paid on our national debt is at an historic low of 2.4 percent, according to the Congressional Budget Office.
Given the U.S.'s huge accumulated deficit, this low interest rate is important to keep debt servicing costs down.
But isn't it fair to ask what the interest cost of our debt would be if interest rates returned to a more normal level? What's a normal level? How about the average interest rate the Treasury paid on U.S. debt over the last 20 years?
(Read more: Fed in 'monetary roach motel,' won't taper: Schiff)
That rate is 5.7percent, not extravagantly high at all by historic standards.
So here's where it gets scary: U.S. debt held by the public today is about $12 trillion. The budget deficit projections are going down, true, but the United States is still incurring an annual budget deficit by spending more than we take in in taxes and revenue.
The CBO estimates that by 2020 total debt held by the public will be $16.6 trillion as a result of the rising accumulated debt.
Do the math: If we were to pay an average interest rate on our debt of 5.7 percent, rather than the 2.4 percent we pay today, in 2020 our debt service cost will be about $930 billion.
Now compare that to the amount the Internal Revenue Service collects from us in personal income taxes.
In 2012, that amount was $1.1 trillion, meaning that if interest rates went back to a more normal level of, say, 5.7 percent, 85 percent of all personal income taxes collected would go to servicing the debt. No wonder the Fed is worried.
Some economists will also suggest that interest rates may go much higher than 5.7 percent largely as a result of the massive QE exercise of printing money at an unprecedented rate. We just don't know what the effect of all this will be but many economists warn that it can only result in inflation down the road.
(Read more: Did the Fed just pop the stock market bubble?)
As of today, interest rates are rising, and if this is a turning point, it is a major one.
Rates in the U.S. peaked in 1980 (remember the 14 percent Treasury bonds?) so if we are at the point of reversing a 33-year downward trend, who wants to predict how this will affect the economy?
One thing is clear: Based on CBO projections, if interest rates just rise to their 20-year average, we will have an untenable, unacceptable interest rate bill whose beneficiaries are China, Japan, and others who own our bonds.
And if Americans find out that the lion's share of their income tax payments are going to service the debt, prepare for a new American revolution.
Peter J. Tanous is president of Lepercq Lynx Investment Advisory in Washington D.C. He is the co-author (with Arthur Laffer and Stephen Moore) of The End of Prosperity (2008), and co-author (with CNBC.com's Jeff Cox) of Debt, Deficits, and the Demise of the American Economy (2011).
It seems like another life. At the height of his corporate career, Tom Palome was pulling in a salary in the low six-figures and flying first class on business trips to Europe.
Today, the 77-year-old former vice president of marketing for Oral-B juggles two part-time jobs: one as a $10-an-hour food demonstrator at Sam’s Club, the other flipping burgers and serving drinks at a golf club grill for slightly more than minimum wage.
While Palome worked hard his entire career, paid off his mortgage and put his kids through college, like most Americans he didn’t save enough for retirement. Even many affluent baby boomers who are approaching the end of their careers haven’t come close to saving the 10 to 20 times their annual working income that investment experts say they’ll need to maintain their standard of living in old age.
For middle class households, with incomes ranging from the mid five to low six figures, it’s especially grim. When the 2008 financial crisis hit, what little Palome had saved -- $90,000 -- took a beating and he suddenly found himself in need of cash to maintain his lifestyle. With years if not decades of life ahead of him, Palome took the jobs he could find.
- How a 91-Year-Old Geek Helped Keep the Aged Independent
- Aging Boomers Befuddle Marketers Aching for $15 Trillion Prize
- Germans Export Grandma to Poland as Costs, Care Converge
The youthful and perennially optimistic grandfather considers himself lucky. He’s blessed with good health, he said. He’s able to work, live independently and maintain his dignity, even if he has to mop the floors at the club grill before going home at 8 p.m. and finally getting off his feet.
“That’s part of the job,” he said. “You have to respect the job you’re doing and not be negative -- or don’t do it.”
Low-income Americans have long had to scrape by in old age, relying primarily on Social Security. The middle class, with its more educated and resourceful retirees, is supposed to be better prepared, with some even having the luxury to forge fulfilling second acts as they redefine retirement on their own terms. Or so popular culture tells us.
The reality is often quite another story. More seniors who spent much of their careers as corporate managers and professionals are competing for low-wage jobs. For these growing ranks of seniors with scant savings, it’s the end of retirement.
About 7.2 million Americans who were 65 and older were employed last year, a 67 percent increase from a decade ago, according to government data. Yet 59 percent of households headed by people 65 and older currently have no retirement account assets, according to Federal Reserve data analyzed by the National Institute on Retirement Security.
“People who built successful careers, put their kids through college and saved what they could, are still facing downward mobility,” said Teresa Ghilarducci, an economist at The New School, who has studied the finances of seniors.
It’s about to get worse. Right behind the current legions of elderly workers is the looming baby boomer generation, who began turning 65 in 2011 and are reaching that age at a rate of about 8,000 a day. They’re the first generation expected to fund their own retirements, even as they live longer lives.
They, too, are coming up short. Company-paid pensions are mostly a thing of the past, replaced in the last three decades by 401(k) accounts primarily funded and managed by employees. The median 401(k) balance for households headed by people aged 55 to 64 who had retirement accounts at work was $120,000 in 2011, according to the Center for Retirement Research at Boston College.
Those savings will provide $4,800 a year, assuming seniors withdraw 4 percent annually, the amount recommended by retirement experts to ensure retirees don’t run out of money in their lifetimes.
Little wonder that half of baby boomers aged 50 to 64 don’t think they’ll ever have enough to retire, according to a 2011 survey by AARP.
“The current retirement savings systems isn’t working, and that’s becoming a crisis as Americans who make it to 65 in good health are now living at least two more decades,” said Larry Fink, chief executive officer of BlackRock Inc. (BLK), the world’s largest asset manager.
“Longevity should be a blessing, but if you haven’t planned for it, you’re going to work much longer than you ever dreamed of doing,” he said. “Or you better be good to your children because you’re probably going to be living with them.”
That’s the last thing Tom Palome wants to do -- even though his children have offered to take him in. After decades of keeping his body trim -- at 5-foot, 10-inches tall, he weighs a fit 170 -- and his hair colored a dark brown, he’s often mistaken for a 60-year-old and has no intention of giving up his independence.
On the job at Sam’s Club, Palome is easy to spot amid shoppers pushing carts down the aisles. It’s not just the bright green apron he’s wearing with the words “Tastes and Tips” printed across the front nor the matching green baseball cap that set him apart in the Brandon, Florida, store near Tampa. It’s also his charisma and determination.
He waves to a mother with a toddler in tow and insists she sample the blueberry-flavored crackers he has stacked neatly on a tray at his aluminum work station.
“They’re multigrain, and healthier for kids than cookies,” said Palome, who researches the products he pitches on the Internet.
He’s supposed to sell two boxes of the crackers during his seven-hour shift. He sells 24 by clean-up time, then grabs a garbage bag and gathers containers and leftover food from demonstration carts around the store.
The next day, a humid Sunday in August, Palome is at his second part-time job, an eight-hour shift as a short-order cook and bartender at Rogers Park Golf Course in Tampa. Working solo, he’s in perpetual motion, rushing between the take-out counter at the golf course’s cafe and indoor counter to collect orders and operate the cash register, while grilling hot dogs and hamburgers and grabbing soft drinks from the refrigerator.
It’s a busy day at the 18-hole municipal course, and he serves 70 customers before closing time. Then he scrubs down the grill and sweeps and mops the floors.
Palome earns about $80 for his day’s work, $7.98 per hour in wages, plus tips.
“I earn in a week what I used to earn in an hour,” he said, adding that he understands seniors can’t easily keep or get jobs that pay middle-income wages.
Palome, who said his jobs keep him active and learning new things, could survive without working. He receives $1,200 from Social Security and a $600 a month pension from his last corporate job. Still, his $1,400 in monthly wages allows him to bolster his savings and provides for some extras. He goes to the theater, pays for plane tickets to visit his children and grandsons and takes occasional vacations.
“I know seniors like me who hardly ever leave their homes because they don’t have money to do anything,” Palome said. “They could work, but won’t take a lesser job.”
To stretch his income, Palome runs his dishwasher once a week and turns off his hot water heater every morning after he showers. He buys airline tickets six months in advance, booking rental cars for as little as $13.80 a day.
Palome grew up in Poughkeepsie, New York. His parents were both immigrants, and his father worked as a laborer. After a stint in the Navy, Palome had a chance to work at a local International Business Machine Corp. (IBM) plant. The work was steady, with solid pay and benefits. Instead, he enrolled at Fordham University to study business, relying on veteran benefits to pay tuition. His father was so angry Palome turned down the plant job that he didn’t speak to him for months.
“I knew that anyone who got into that plant never got out,” he said. “You just got stuck because of the steady pay.”
Palome landed a job at Shulton Co., the maker of Old Spice after-shave lotion and cologne, then moved to Yardley of London as a brand manager. His big break came in 1975 when he was recruited to The Cooper Cos. as vice president of marketing for the Oral-B dental-care business.
The job gave him a high five-figure income and an executive’s life at age 39. He flew first class to Cooper offices in the U.S. and in England, Sweden and Germany. He helped win an endorsement for the Oral-B toothbrush from the U.S. Olympic Committee. He had a closet filled with business suits, and on weekends he played golf with other executives.
That life turned upside down when his wife, Edna, was killed in a car accident in 1983. Palome’s daughter, then a college student, offered to come home to take care of her brothers, who were 14 and 16 years old. Palome insisted she stay in school. He took charge of the parenting and the housework.
“I was numb, in shock and trying to hold everything together,” he said. “And my sons didn’t want anyone in the house besides me, not even a housekeeper.”
When Cooper relocated from New Jersey to California, Palome didn’t want to uproot his family. So in 1980, when he was 44, he started a consulting company, with Cooper as his main client. He also did consulting for Sandoz Pharmaceuticals, Johnson & Johnson and others.
In flush years, Palome had several clients and earned about $120,000. Though he saved for his kids’ college and helped his elderly parents, retirement wasn’t on his radar.
“I never thought I’d live this long,” he said.
Because he was self-employed, Palome didn’t have a 401(k) account, and he has never had a tax-deferred IRA, or Individual Retirement Account. It’s the same for most Americans. Only about half of private-sector workers were covered by an employer-sponsored retirement plan of any kind in 2011. And fewer than 40 percent of those participated, according to the Employee Benefits Research Institute.
Many now approaching retirement began saving too late, stopped saving when they lost jobs, or borrowed against their 401(k) accounts to finance their children’s college tuition. They also often chose investments that failed to yield the best results, or they bailed out of the stock market after the financial crisis battered their savings, then missing the rebound.
“How is the average middle-class person going to amass $1,000,000 by the time they’re 65, which is what they’ll need to get $40,000 a year in income from their retirement savings?” Ghilarducci said.
Palome had lean years when he couldn’t easily save. He decided to take a job running a Friendly’s restaurant in Parsippany, N.J., from 1990 to 1993. He figured he’d acquire new skills, which have since proved useful.
“Tom always did what he had to do to keep going,” said his younger brother Peter, who’s 66 and lives in the same senior community.
Palome later ran a restaurant at a New Jersey golf club while he continued his consulting. At 64, when an 800 square foot manufactured home he’d seen in Plant City, a Tampa suburb, became available for $21,500, he purchased it with a credit card to amass frequent flier miles. He then sold his New Jersey home for $180,000, kept what he needed to quickly pay off his credit card debt and divided the rest among his children so they’d have down payments for their own homes.
“The house was theirs as much as mine, and that’s their inheritance from me,” he said.
At first everything went according to his plan. Palome enjoyed the year-round warm weather and he avoided dipping into savings by doing part-time bar-tending and catering. Then the financial crisis hit. Palome’s part-time work evaporated. His savings, which he’d invested mostly in stocks, shrank from about $90,000 to less than $40,000.
“I was shocked by how fast I lost so much,” he said.
Palome didn’t panic. He rewrote his resume, taking out references to his corporate career so he wouldn’t appear overqualified for restaurant and hotel jobs. He searched online jobs sites and local papers for leads. Between 2008 and 2011 he figures he applied for about 100 jobs.
He came close to getting two of those until his prospective employers learned his age. He was never told explicitly that he was too old for a job. Yet hiring managers who asked when he could start working never called again after he submitted required copies of his driver’s license with his birth date.
“I was in a foreclosure city in a foreclosure state,” he said. “So many people were out of work. Who wants to hire a 75-year-old?”
Two years ago, Palome saw an advertisement in a local paper for an AARP Foundation job training program. He met with Maxine Haynes, the program’s Tampa project director, who helped him get an interview at Advantage Sales & Marketing LLC, which runs food demonstrations for Sam’s Club and other stores.
“He had so much energy and enthusiasm when he walked through the door here, I knew I had to try to help him,” Haynes said.
Palome aced the interview with a spontaneous pitch on how to sell a simple magic marker. Still, he worried his age would be a deal breaker.
“You ought to know I’m 75,” he offered.
“Age is only a number,” Wanice Matthews, Palome’s current boss at Advantage Sales & Marketing, later said. “If I had 10 more Toms on my team, I’d have the best team in the business.”
Every other morning, Palome does 70 sit-ups and 70 squats and almost as many leg lifts and arm strengthening exercises. He alternates his at-home exercises with two or three 10-mile bike rides each week.
At Sam’s Club, his single 30-minute break during his seven-and-a-half hour shift is not enough time to prevent backaches and leg cramps after standing all day.
“Make sure you rest when you get home and don’t do any housecleaning,” Palome recently advised a new employee, a widow who hasn’t worked in years.
When Palome gets home, he stretches out on his couch, tucking a heating pad behind his back before preparing a light supper. He goes to bed by 10 p.m.
If Palome has one regret, it’s that he didn’t get better retirement investing advice somewhere along the line. “I thought I could do it on my own,” he said.
Still, he’s proud of his accomplishments. He built a career in marketing, raised a family following a tragic loss and helped his kids get a start in life.
“I’m not going to sit on my laurels and say I was an executive making six figures and traveling the world,” he said. “I tell people I demonstrate food and I do short-order cooking. I don’t mind saying it. What’s important is that I can work today.”
To contact the reporter on this story: Carol Hymowitz in New York at [email protected]
To contact the editor responsible for this story: Jonathan Kaufman at [email protected]
As Wall Street, CNBC, and feckless politicians tout American energy independence from the miracle of shale oil, reality is already rearing its ugly head. Production grew by 24% over the first six months of 2012. Production has grown by only 7% over the first six months of 2013. That is a dramatic slowdown. The fact is that these wells deplete at an extremely rapid rate. Oil companies will always seek out the easiest to access oil first. They have already accessed the easy stuff. This explains the dramatic slowdown. Peak Bakken oil production will be below 1 million barrels per day. The last time I checked, we consumed 18 million barrels per day. I wonder when that energy independence will be achieved? Reality is a bitch.
Bakken Oil Production Growth Has Slowed Significantly In 2013
By: Devon Shire
The headlines ring of “booming” American oil production and “gluts” of oil (USO ). I’m here to tell you that while the boom is real, there is no glut of oil and we need to be aware that the huge production growth of the past eighteen months is going to slow.
It already is slowing.
I’ve been watching what is going on in the Bakken pretty closely because I think it is going to be an excellent proxy for what will happen across the country.
Let’s take a look at what happened to production in North Dakota during the first six months of last year (2012). Here is the raw data  detailing barrels of oil production per day:
December 2011 – 535,000 boe/day
January 2012 – 547,000 boe/day
February 2012 – 559,000 boe/day
March 2012 – 580,000 boe/day
April 2012 – 611,000 boe/day
May 2012 – 644,000 boe/day
June 2012 – 664,000 boe/day
Daily production in North Dakota increased by 129,000 barrels per day from December 2011 to June 2012.
Now let’s look at the same period for this year (2013):
December 2012 – 768,000 boe/day
January 2013 – 739,000 boe/day
February 2013 – 780,000 boe/day
March 2013 – 785,000 boe/day
April 2013 – 793,000 boe/day
May 2013 – 811,000 boe/day
June 2013 – 821,000 boe/day
Where last year production increased by 129,000 barrels per day in the first six months of the year, this year production is up by only 53,000 barrels per day.
Yes, the rate of growth in the Bakken has slowed considerably in 2013.
To understand why, a person needs to look at the production profile for these horizontal oil wells.
By the end of the first year of production, a new well is producing at a rate that is 30% of where it was the year before. That means a huge amount of drilling each year has to be done just to offset the production lost due to these steep decline rates.
Without a continuous step change each year in the number of wells being drilled and the capital available to do so, production in the Bakken is going to flatten.
Good things are still happening, but we can’t repeat every year the hyperbolic growth that we saw in 2012.
What this means for investors is that we shouldn’t expect oil prices to fall much from where we have seen them over the past three years.
For the past three years WTI oil prices have ranged from $85 per barrel to $105 per barrel. I think $85 is about as low as we can go for an extended period of time because that is likely just about the marginal cost of production for oil in the world today.
Production growth in the Bakken is slowing and so too will production growth in the Eagle Ford. That is the nature of these horizontal oil fields. We get an initial surge in production as capital comes into the play. Then that growth rate slows steadily until it flattens and enters a decline.
Jeffrey H. Anderson
The question at the core of most of today’s debates in American politics is whether all people have an unalienable right to keep the fruits of their own labor—as the Founders believed and the Declaration of Independence (properly understood) asserts—or whether the government should funnel vast sums of money to the nation’s capital and then magnanimously redistribute it back to the tributaries. Well, the stats are in, and it seems that neither of these two notions is really being fulfilled. To be sure, Americans’ money is flowing to the nation’s capital. But it’s not flowing back.
Indeed, the metropolitan area of Washington, D.C., a city with little identifiable industrial output, dominates the Census Bureau’s newly updated list of America’s wealthiest counties. Here are some highlights from that list:
Based on the median family income in 2012, the wealthiest county in America—by far—is Arlington Co., Va., located just across the Potomac River from D.C. In fact, Arlington’s median family income ($137,216) is more than $10,000 higher than that of any other county in the United States.
The county with the 2nd-highest median family income ($127,192) is Loudoun Co., Va., also located in the D.C. metro area (according to the White House Office of Management and Budget’s list of metropolitan areas). The 3rd-highest tally ($125,162) belongs to Howard Co., Md., which technically isn’t part of the D.C. metro area but is located between D.C. and Baltimore and is home to many people who commute to D.C. The 4th-highest tally ($124,831) belongs to Fairfax Co., Va., yet another county located in the D.C. metro area.
In other words, in a nation that ranges from the Pacific to the Atlantic and boasts such grand and affluent cities as New York, San Francisco, Los Angeles, Chicago, Dallas, San Diego, Boston, and Seattle (among others), the four wealthiest counties in the land are all within commuting distance of the capital.
In the fifth spot, the New York metro area finally makes the list, as that position is held by Hunterdon Co., N.J. ($123,454). California finally makes the list in the sixth spot, which is held by Marin Co. ($115,513), located just across the Golden Gate from San Francisco. The seventh spot, however, is filled by Montgomery Co., Md. ($113,588), which borders D.C.
Thus, the D.C. metro area (population: 6 million) claims 4 of the top 7 spots, while the nation’s 380 other metro areas (total population: 308 million) combine to claim just 3. Is this what President Obama means by “fairness”?
Looking just a bit further down the list, there are only 26 counties where the median family income is over $100,000. Texas, Florida, and Illinois are among the 40 states that do not have a single $100,000 county. California has only 2. But the states bordering D.C.—Virginia and Maryland—have 7 and 4, respectively; and not one of those is in southern Virginia or northern Maryland.
Below are the metro areas that, based on median family income, have the most $100,000 counties.
Metro areas with the most $100,000 counties:
1. Washington, D.C., 9
2. New York, N.Y., 7
3. (tie) Baltimore, Md., 2 (both centered within 40 miles of D.C.)
3. (tie) Boston, Mass., 2
5. (tie) Bridgeport, Conn.; Denver, Colo.; Nashville, Tenn.; Philadelphia, Pa.; San Francisco, Calif.; San Jose, Calif., 1
Note that the metro areas of Chicago, San Diego, Seattle, Miami, Dallas, Houston, and even Los Angeles don’t include a single $100,000 county among them, while the D.C. metro area has 9. Note also that New York’s metro area (population: 20 million) is more than three time the size of D.C.’s, yet the former has fewer $100,000 counties than the latter.
The eye-opening affluence of D.C.’s surrounding areas might make one wonder whether all of that city’s wealth has merely moved out of the city proper. Alas, this clearly hasn’t been the case. In addition to D.C.’s extraordinarily affluent suburbs, the median family income in the city itself ($82,268) is higher than the median family income in 46 of the 50 states.
The seemingly inescapable conclusion is that a great deal of Americans’ hard-earned money is flowing to the nation’s capital and simply staying there. Decades of efforts to centralize and consolidate money and power in D.C. have, not surprisingly, made D.C. an unparalleled center of money and power.
About 175 years ago, Alexis de Tocqueville, referring to the unfortunate mindset of so many of “the ambitious and capable” in our society, wrote, “It is a waste of one’s time to want to prove to them that extreme centralization can be harmful to the state, since they centralize for themselves.”
The stats suggest he was right.
Anderson is executive director of the newly formed 2017 Project, which is working to advance a conservative reform agenda.
As we noted earlier, Bernanke's actions this week make it very clear that between "financial conditions" and the fragility of growth, the US is incapable of surviving without ZIRP and QE (for now). As Barclays notes, ultimately, normalisation should proceed according to a timeline that does not threaten recovery, yet will result in a neutral monetary policy by the time the economy reaches full capacity and the desired inflation rate. However, there are many uncertainties along this path.
Chairman Bernanke has said it might take "two or three years after 2016" to reach a 4% fed funds rate (the FOMC’s ‘longer-run’ expectation), but, as the disturbing chart below highlights, even an adjustment to 2.0% (the median FOMC expectation for December 2016) entails formidable adjustment of monetary policy once allowance is made for the tapering of QE. Given we now know that 'tapering is tightening' , the implicit rate hike from a reduction in QE will mean a 600bps tightening in financial conditions. Do you believe in miracles?
There is a wide variation of econometric estimates of the impact of LSAP, but one rule of thumb is that net purchases of $800bn have, very approximately, a similar impact on US GDP to a 100bp reduction in the fed funds rate.
This implies that the Fed’s cumulative LSAP (set to approach $3.0trn by Q1 2014) might be considered equivalent to lowering the fed funds target rate by 370bp. We have tried to represent this in terms of a negative equivalent fed funds rate in the chart above, which illustrates that a return to ‘normality’ in terms of the Fed’s balance sheet and reaching even a 2-2.5% fed funds rate would represent a formidable tightening of US monetary conditions.
Just when you think that the worst has come, been and gone, there will be more stuff hitting the fan in the very near future and that should serve as a lesson to the next head of the Federal Reserve that central banks don’t usually necessarily have the people in mind when they take things over and end up doing a pitiful job. But little reminders are just nudges in the ribs and there is a lot more needed than somebody elbowing the Federal Reserve of the United States right now.
Inflation is set to rise in the United States and that will be beset the people that have savings as well as drag the retirees down and create more hardship than is being experienced and endured by the people already today.
The Federal Reserve has been unable so far to bring about any form of positive inflation level in the US economy and the current inflation rate stands at 2%. But the economy is not growing enough and it is certainly not seeing worker salaries approaching anything near the increases in prices that are taking place. Prices are just outpacing salaries and jobs aren’t being created.
That’s the problem with using U3 unemployment levels and not U6  unemployment levels (including all the people that have been discouraged from seeking employment as well as those that are underemployed in the economy). The latter stands at nearly double the official figure issued by the Bureau of Labor Statistics. Just looking at the figures for Friday 6th September that were issued by the Bureau it can be seen that 312, 000 people gave up looking for employment and dropped out of the job market due to discouragement through not finding work. In one survey carried out people actually stated that they were dissatisfied with the job market and they would prefer to wait for the right job to come along.
The Federal Reserve has expanded its balance sheet by $3.6 trillion and the administration is touting the benefits of what it believes Quantitative Easing  has actually done in the job creation area. But, if for one moment we do take U3unemployment as the rate, then it doesn’t look like money well spent. Since we are still in the area of just-in-time economics applied to the employment sector. The jobs are few and far between and they are certainly not being stored somewhere for someone to come along later and snap up; they are being created slowly and sluggishly, if at all. Whatever happens, whether that be a push or pull in the Federal Reserve balance sheet the effect ripples into the lives of people slowly but surely, for good or for bad.
Inflation has been fixed at the target rate of 2.5% by the Federal Reserve and unemployment needs to come down to under 6.5% (from the official 7.3%). Then interest rates can be raised. For the time being however it’s only the speculators that have managed to reap the rewards of low interest rates. The American people have just temporarily imagined that they were wealthy by being able to contract cheap loans and get granted easy credit. But, soon they will realize that they are only debt-wealthy and that will be the crunch in the future when interest rates rise again.
Financial imbalances and excessive inflationary pressure can only be hiding just round the corner in the not too distant future. Some analysts believe that we will be in for a period of stagflation, unemployment will be high and inflation will have set in in a stagnant economy. It has been predicted that prices will rise for the US consumers by at least 10% in the next 30 years.
So the Federal Reserve wants inflation and it will most certainly end up getting it. But, it will probably get more than it bargained for. Although, it is very much debatable as to whether or not the guys at the Fed have actually considered what will happen afterwards.
Or do they also actually believe that the improvements are really there and the figures are a true representation of the economic health today of the USA?
In a moment of surprising clarity, Deutsche Bank's Jim Reid pointed out what is largely taboo in the financial industry - the truth. "Looking back, real GDP growth in the US through the latter half of the 2000s and the 2010s has been at the lowest levels since the cyclically scarred decades of the Great Depression and the First World War."
What is amusing, is the constant state of shock of supposedly serious people who are stunned that despite the Fed being constantly in the markets, and buying up trillions in securities, the US economy has not responded in a favorable manner. Of course, nobody has pointed out that if all it took to generate growth out of thin air without consequences was for the Fed to print, i.e., monetize debt, this would have started 100 years ago in 1913, and by now the US economy would be so advanced it would be colonizing Uranus. Logic, however, is not a Keynesian economist's best friend.
That said, the reasons surrounding the lack of US growth are secondary for the time being. A bigger question is what happens from here, now that even respected banks, and even ivory tower economists have admitted that QE has been a complete failure for the broader economy, and the common American, benefiting only the uber-wealthy. Which leads us to a different topic. Syria.
With much of the discussion behind the motives for the Syrian (at first, then coming to a city near you) war focusing on gas pipelines, chemical weapons, moral right, exceptionalism or the lack thereof, boosting deficit spending and permitting the untaper, one issue has been left unaddressed. Perhaps the most important one. Economic growth. Which is surprising, it is not as if the US has not found itself in a position in which its real economic output was far lower than its potential output.
For an uncanny historical analogue of the current economic predicament, we have to go back only 70 years or so back, to the time of the first Great Depression: that was the first and ostensibly last time, when the US economy was performing in a comparably subpar fashion to trendline.
So in an extreme (if logically forthcoming) scenario when the Fed's final proposed fallback strategy of "forward guidance" which is destined to replace QE now that tapering is on the table, were to fail, as many already suggest it will (just look at the BOE), the final solution for the US central bank is one - Nominal GDP Targetting, which stripped of its fancy title is really a euphemism for "print until you drop", or rather monetize securities and inject money without regard for inflation (paradropping bundles cash may well be allowed as Ben Bernanke would be happy to admit), with the only intention of promoting growth at any cost.
So here is what Deutsche has to say about this potential outcome:
There has been some debate about possibly targeting the level of NGDP and perhaps such a policy should get more airtime. Such a policy was first mooted in the late 1970s and by the late 1980s was offered as a possible successor to the money targeting of that decade. A NGDPT would embody two major changes from current policy. First the central bank would act to stabilise nominal GDP, rather than inflation, at some constantly increasing level. Second it would target the level of nominal GDP rather than its rate of change.
The special feature of NGDPT is this second distinction. Currently if a central bank aiming to hit a 2% annual inflation target were to undershoot and achieve only a 1% rate then when the next year came around, the central bank would have to enact monetary policy still with the aim of hitting a 2% inflation rate. It’s 1% miss the previous year is forgotten. With a level target if the central bank’s objective is to hit a level of NGDP 2% higher at the end of the year then at the start, and it achieved only a 1% increase, then in the next year it has to make up for lost ground and put in place expansionary policies to grow the nominal economy by an extra 1% on top of the +2% it would have been expected to hit anyway.
This demand to correct for past mistakes can have big implications down the road. Let’s continue with the above example of the central bank who undershoots by 1%. After 5 years (see Figure 90) the central bank would have to try to generate 7% nominal growth in the next year. After 10 years it would need 13% nominal growth. After 100 years the hapless undershooter would need to almost treble (x2.7 or +170%) the size of the nominal economy.
This last and rather extreme figure isn’t far away from where a nominal GDP targeting Fed would have found itself in 1933 (see Figure 91, LHS). If the Fed had been told to achieve a level of nominal GDP consistent with a 5%-a-year growth rate (the 1790-1929 average) after 1929 then by 1933, after 3 years of Depression, the Fed would have had to have generated 135% growth in 1934 to get back on “target”. As it turned out, the US economy managed to grow at an average of 13.5% a year over the next 10 years and was back on ‘target’ by 1944.
We'll get back to this key bolded sentence in a second, but first let's conduct a thought experiment of a world in which the Fed was expected to "catch up" to its trendline growth rate until the collapse of Lehman:
Fast forward to the end of 2012 and assuming the central bank was targeting a level of NGDP consistent with an increase post-2007 at its NGDP 1990- 2007 average growth rate of 4.7% (see Figure 91, RHS) then the central bank would need to ensure a 2013 growth rate of 18%. Assuming a more spaced out catch up rate of reducing the gap by 2% a year then the US economy would be back on track by 2019 (see Figure 92), requiring an average growth rate of 6.7% a year.
The key difference between a nominal GDP target and an inflation target is that central banks would, after a period of economic slowdown, be ready to accept a higher inflation level and/or (ideally) above-trend real GDP growth for a time to get the economy back on track. Inflation picking up to 3%, 4% or even 5% a year would no longer be viewed as a failure of the central bank. Indeed it would likely be a central aim of its policy as it seeks to eliminate the nominal GDP “gap”. For this reason adopting a Nominal GDP target would mark a fundamental change in monetary policy, far beyond what has so far been seen. Would it be a change for the better or for the worse?
Rhetorical questions aside, the problem with 5% or higher inflation, aka "central bank success" is now a non-starter for the simple reason highlighed earlier, namely that over the past five years the US has generated $1 of GDP for every $18 of debt, leading to a G7 debt/GDP of a mindboggling 440%, the function of $140 trillion in consolidated "developed world" debt .
And since inflation brings with it a comparable rise in rates, suddenly this mountain of debt would be forced to generate cash interest payments. As Deutsche Bank opined:
In an ultra low interest rate environment (short and long-term rates), it’s possible to carry this debt in a low growth environment but with little deleveraging taking place it creates a fragile environment that leaves these economies vulnerable to shocks and policy errors.
If rates were to rise notably from these ultra low levels, this could be just such a shock. This is why in spite of the recent sell-off, rates are likely to stay lower for longer as the alternative could be highly destabilising given the extreme debt burden being carried across large parts of the world.
In other words, targeting GDP for the sake of GDP, concerns about inflation aside, when soaring inflation would also lead to surging interest rates, has become impossible.
So what is the only possible way out left for a country in which monetary policy has failed on all fronts except to inflate asset prices to stratospheric levels, and yet the economy still refuses to budge? For the answer we go to Deutsche Bank one last time:
During the US Great Depression the huge declines in consumer and businesses confidence in the face of mass unemployment can be seen in the extremely and persistently low level of velocity.... As it turned out, the US economy managed to grow at an average
of 13.5% a year over the next 10 years and was back on ‘target’ by 1944.... Velocity also moved during the recovery from the Great Depression as the US war machine swung into action in the early 1940s.
In other words, at a time when the US was in almost an identical predicament and GDP catch up would have been impossible by any other means, what happened? World War. Luckily, for the US it generated unprecedented growth and cemented its status as the world's super power, and the USD as the reserve currency. Others were not so lucky.
Are we the only ones who suggest that the only outcome is a military one? No. Recall from Kyle Bass :
Trillions of dollars of debts will be restructured and millions of financially prudent savers will lose large percentages of their real purchasing power at exactly the wrong time in their lives. Again, the world will not end, but the social fabric of the profligate nations will be stretched and in some cases torn. Sadly, looking back through economic history, all too often war is the manifestation of simple economic entropy played to its logical conclusion. We believe that war is an inevitable consequence of the current global economic situation.
Which also means preconceived from the start. So despite a recent sense of detente in Syria, pay close attention: never since the cold war has the world been so close to the edge of a full-blown global military conflict. Whether or not the Syria "trigger" has been produced as the catalyst that will spark growth, or is merely a precursor to such an event is still unclear. However with every passing day, the US economy lags ever more behind its "trendline" and the common man gets left ever further behind the superclass of financial asset oligarchs, a state which the president opined recently was unacceptable. The question is whether millions of war casualties for the sake of yet another economic "golden age" aren't.