Category Archives: Income & Consumption

Universal Basic Income

The left continues to be fascinated with the idea of re-distribution. It believes that the whole notion of some people being paid more than others is fundamentally unfair, that they must have had some advantage – skin color, parents, brains, whatever – which was just a matter of luck. “You didn’t build that,” as Obama famously said.

So the latest brainchild of this idea is the notion of a monthly check from the government that is sufficient to provide a comfortable lifestyle regardless of whether or not the recipient chooses to work.

A single program that replaced the myriad of transfer payment programs, from welfare through Social Security, would save an enormous amount of administration costs at all levels of government and help to pay for the program. The “poverty trap” would be eliminated as the payment could be “universal” that is, not means tested. Minimum wage laws would need to be abolished, of course, since the “living wage” would be redundant. Might not work, but there seems to be some potential anyway.

But that is not what is proposed. In general, it seems that this would be yet another program which would be funded by even more government borrowing. This, it is claimed, would “grow the economy by $2 trillion.” Please.

There are only two ways to grow the economy. One of these is to increase labor utilization, the number of hours worked in a given period. The other is to increase the productivity of that labor, that is the amount of output produced for each hour of labor. That’s it.

Existing programs already provide a major disincentive for work – the “poverty trap.” This would add another. Productivity is improved by investment – in technology, skills, infrastructure, etc. More spending on consumption would not help this, but would certainly provide more inflation, which would act to deter investment. If you want to see the outcome of this kinf of program, just check the news from Venezuela.



Government Shutdown?

Many voices are being raised to warn of the danger of a government “shutdown” should Congress fail to raise the debt limit.

Why, one might ask, is this so dangerous? It is simply the fact that U.S. Federal deficit is still running about 3% of GDP. Cut Federal spending back to match its income and recession will certainly ensue.

Of course, the steady accumulation of debt is even more dangerous, but less immediate. So the voices hope.

A “shutdown” would not need to be anything more than a modest 15% reduction in run rate. Inconceivable.

The Economy In One Chart

Source: WSJ

Unexpected Outcome

People seem to be surprised that the Fed’s rate hikes have resulted in rates declining. Really? It seems pretty clear that the Fed’s outlook is at odds with reality, and that rates are responding to the real outlook, which is that Fed rate hikes are a negative for an economy that is already tanking.

The Future Is Now

Debt pulls demand forward in time. Borrowers use debt to pay for consumption today and commit future income to service the debt.

The amount available for consumption today represents the present value of that committed income, discounted by the prevailing interest rates.

The further that borrowers reach into the future, the more that discount lessens the amount available today. The Fed wants consumption today, so it attempts to induce inflation in order that borrowers are more confident of their future nominal incomes, while holding interest rates low so that the discounting of that income is minimized.

This strategy has sustained consumption in the short term, at the expense of reducing future income available for consumption.

The problem is that the future is now.

As consumption slows, so does production and inflationary pressure. Defaults rise – just look at the subprime auto loans. Yes, defaults eliminate debt – but only at the expense of the creditor who takes an immediate hit to income, charged against net worth or equity capital. Lenders are forced to reduce their assets.  Borrowers find that debt service takes more of their income than they had expected. Purchasing power erodes and deflation sets in. Spending capacity falls even more rapidly and the economy slides into recession and depression.

The larger the accumulation of debt, the longer it takes to purge the financial system and restore it to stability. Debt – credit – is a necessary and healthy part of the economic system. But the economy cannot depend on consumption funded by the continuous growth of debt. Debt must revolve, expanding and contracting within limits proportional to the size of the economy.

No Joy In Mudville

Well the employment report this morning was a big miss to expectations on all fronts. The household report showed a net loss of jobs, and overall the quality of jobs declined as part-time, minimum wage jobs replaced full-time. However, the VIX sellers strode in to pump up stocks, leaving Treasuries as the main beneficiary of the report, with the 30-year yielding 2.86% as I write. TRIN at 2.03 shows that while the VIX sellers hold up the mega-caps, there’s a lot of distribution going on.

Oil is trading weak, in the low 47s. Wages disappointed as the employment mix changed unfavorably, even though shortages of skilled workers are widespread.


Short Memories

Consumer Confidence was reported this morning to have risen sharply, to the highest since December 2000. Stocks rose and bonds fell, taking this news as a sign of economic strength, one presumes. Obviously the buyers do not remember what happened in 2001. when the market fell to a loss of 27% by September.

Oh, and by the way, there is essentially no historical correlation between changes in the reported Consumer Confidence and changes in actual retail spending. Just sayin’


The Atlanta Fed GDPNow forecast for Q1 GDP now stands at 1.2% annualized growth. This despite outrageously bullish sentiment everywhere you look.

1937, anyone?

Awash In Oil

Given the record level of oil inventories, it is amazing to me that the crude price is being sustained in the low $50s. This price is encouraging the shale producers to keep pumping, having sold forward their product into the futures market.

Now it seems that gasoline shipments are being diverted from New York as there is nowhere to put the stuff. Demand is down and everyone is carefully avoiding the obvious explanation – there is a recession underway.

Which rather surprises me – I would have thought that Trump’s Goldman advisers would want him to take the recession now, while there is still room to blame it (justly) on Obama, rather than further postpone and aggravate the inevitable outcome.

I don’t think the stock market will head lower until oil does. But it seems that Treasuries may be starting to reject the “Trumpflation” scenario.

Going Out On A Limb

I think the end of this bubble is beginning, as yields spike and the dollar soars:

“Our revels now are ended. These our actors,
As I foretold you, were all spirits and
Are melted into air, into thin air:
And, like the baseless fabric of this vision,
The cloud-capp’d towers, the gorgeous palaces,
The solemn temples, the great globe itself,
Yea, all which it inherit, shall dissolve
And, like this insubstantial pageant faded,
Leave not a rack behind. We are such stuff
As dreams are made on, and our little life
Is rounded with a sleep.”

― William Shakespeare, The Tempest

The economy is not strong. There are 100+ million adults not working (“not in the labor force”) out of a total population of 325 million, to say nothing of the myriad of government employees who are employed, but not contributing any value to the economy.

Consumption is being sustained by debt, both private borrowing and government money-printing. By January 2009, the United States had accumulated $10.6 trillion in debt. The gross national debt – just federal government debt – stands at $19.7 trillion as of the end of FY2016. Spending is on a pace to add another $2.4 trillion this fiscal year (2017), surpassing $21 trillion by next September. Krugman applauds, and of course this is Obama, not Trump. Yet.

Debt-funded consumption in excess of income has crowded out savings and therefore investment. As investment has declined, so, logically enough, productivity growth has fallen (see previous post). Simultaneously, government has been growing, making a lethal cocktail for real household disposable incomes, which have been declining for years. Pensioners who think they are in good shape are not noticing that defined-benefit pension funds are already starting to cut benefits and many, especially state and local government funds, are woefully under-funded. Social Security is in negative cash flow, and drawing on the general tax revenue pot to make up the difference. The stock market is ludicrously over-valued and promises zero or negative returns to pension funds for years to come. As Margaret Thatcher notably said “Socialist governments traditionally do make a financial mess. They always run out of other people’s money. It’s quite a characteristic of them.”

Powerful deflationary forces are being unleashed. The world is awash in oil and efforts to keep the price up will eventually fail. OPEC in aggregate will not cut supply because its governments (as well as the non-OPEC ones) depend on the flow of oil money to stay in power. I expect oil to reach the lower $20s if not below. Most of the world is engaged in a race to the bottom, cutting interest rates to devalue their currencies and boost exports. They are therefore exporting deflation to the US. I expect to see CAD in the 0.60s and the EUR in the 0.80s. Consumer price inflation in the US appears comparatively strong due to the inclusion of OER¹ in the CPI, which is not done elsewhere, and due to the uncontrolled rise in healthcare and education prices, funded by government subsidies and debt. These prices end up being a form of taxation by the 0.01%, who are on the receiving end. The protest vote in the US election should be no surprise.

OER, a completely fictional number to start with, is high as a result of low interest rates financing housing bubbles. These will end as badly as the previous lot. I choose not to be a homeowner, largely because I don’t want to face a huge capital loss.

In short, the economy is a Potemkin village. Things are not as they are made out to be. Even a fractional increase in rates may trigger a deflationary crisis, especially considering the shortage of dollar liquidity outside the US.

¹ OER, Owner’s Equivalent Rent, is weighted about 25% of the CPI basket. It is estimated by a telephone survey of selected homeowners, asking them how much they think it would cost to rent their a property like theirs.It has nothing to do with what it actually costs them to own and live in their properties.  I am not kidding. Now do you think CPI means anything?