Posts Tagged ‘GDP’
The middle class American worker is in danger of becoming an endangered species. The politicians are not telling you the truth, and the mainstream media is certainly not telling you the truth, but the reality is that there is nothing but bad news on the horizon for workers in the United States. In the old days, when the big corporations that dominate our society did well, that also meant good things for American workers since those corporations would need more of us to work for them. But in the emerging one world economic system that our economy is being merged into, those corporations have other choices now. For instance, the big corporations can now choose to limit the number of “expensive” American workers that they employ by shipping millions of jobs to the other side of the world. And from their perspective, it makes perfect sense. They can make much bigger profits by hiring people on the other side of the planet to work for them for less than a dollar an hour. If they can get good production out of those people, then why should they hire Americans for ten to twenty times as much, plus have to give those Americans health insurance and other benefits? Another major factor in the slow, agonizing death of the American worker is technology. We live during a period when technology is advancing at a pace that is almost unimaginable at the same time that it is steadily becoming cheaper and cheaper. That means that it is going to become easier and easier for companies to replace workers with robots and computers. As I have written about previously, it is being projected that our economy will lose millions of jobs to technology in the coming years. Yes, some of us will still be needed to help build the robots and the computers, but not all of us will. And of course the overall general weakness of the economy is not helping matters either. The American people inherited the greatest economic machine in the history of the world, and we have wrecked it. Decades of very foolish decisions have resulted in the period of steady economic decline that we are experiencing now.
America is simply not the economic powerhouse that it once was. Back in 2001, the U.S. economy accounted for 31.8 percent of global GDP. By 2011, the U.S. economy only accounted for 21.6 percent of global GDP. That is a collapse any way that you want to look at it.
Today, American workers are living in an economy that is rapidly declining, and their jobs are steadily being stolen by robots, computers and foreign workers that live in countries where it is legal to pay slave labor wages. Politicians from both political parties refuse to do anything to stop the bleeding because they think that the status quo is working just great.
So don’t expect things to get better any time soon.
The following are 10 amazing charts that demonstrate the slow, agonizing death of the American worker…
#1 Wages And Salaries As A Percentage Of GDP
As you can see, wages as a percentage of GDP are hovering near an all-time record low. That means that American workers are bringing home a smaller share of the economic pie than ever before.
#2 Average Annual Hours Worked Per Employed Person In The United States
We are an economy that is rapidly trading good paying full-time jobs for low paying part-time jobs. The decline in average annual hours worked that we have witnessed represents the equivalent of losing millions of jobs. There has been an explosion of “the working poor” in the United States, and this trend is probably only going to accelerate in the years to come.
#3 Manufacturing Employment
As you can see, there are less Americans working in manufacturing today than there was in 1950 even though the population of the country has more than doubled since then. The United States has lost more than 56,000 manufacturing facilities since 2001, and yet our politicians stand around and do nothing about it.
#4 Employment-Population Ratio
This is one of my favorite charts. It shows that there has been absolutelyno employment recovery at all since the end of the last recession. The percentage of working age Americans that have a job has stayed under 59 percent for 44 months in a row. How much worse will things get when the next major economic downturn strikes?
#5 Labor Force Participation Rate
This is how the Obama administration is getting the “unemployment rate” to magically go down. They are pretending that millions upon millions of Americans simply do not want to work anymore. As you will notice, the decline of the labor force participation rate has accelerated greatly since Barack Obama entered the White House.
#6 Duration Of Unemployment
The average amount of time that it takes an unemployed worker to find a new job has declined slightly, but it is still far above normal historical levels. It is a crying shame that it takes the average unemployed worker two-thirds of a year to find a new job, but this is the new economic reality that we are all living in.
#7 Delinquency Rate On Residential Mortgages
Since there are not enough jobs for all of us, and since our wages are not rising as rapidly as the cost of living is, a whole bunch of us are falling behind on our mortgages. As you can see, the mortgage delinquency rate has only dropped slightly and is still way, way above typical levels.
#8 New Homes Sold
American workers also don’t have enough money to go out and buy new homes either. Yes, new home sales have rebounded slightly this year, but we are nowhere near where we used to be.
#9 Consumer Credit
Millions of American families continue to resort to going into debt in a desperate attempt to make ends meet. After a slight interruption during the last recession, consumer credit once again is growing at a frightening pace.
#10 Self-Employment At A Record Low
Since there aren’t enough jobs for everyone, why aren’t more Americans trying to start their own businesses? Well, the reality of the matter is that the government has made it exceedingly difficult to start your own business today. Taxes, rules, regulations and red tape are choking the life out of millions of small businesses in the United States. As a result, the percentage of self-employed Americans is at a record low.
The numbers don’t lie. Today, the number of Americans on Social Security Disability now exceeds the entire population of Greece, and the number of Americans on food stamps now exceeds the entire population of Spain.
We are in the midst of a horrifying economic collapse, and the next major wave of that collapse is rapidly approaching.
Are you ready?
The screeching coming from CNBS and elsewhere this morning is amusing.
There’s only one chart that matters, and it will, when recognized, blow up the stock market — sending it down 50% or more.
It’s this one:
That’s it. And the ADP report this morning is showing the pathway to recognition, as construction has stalled and the destruction of job creation in small and mid-sized businesses exposed to Obamacare will finish it off.
I continue to maintain that we’re in a time very similar to 2007, when the facts were on the table. Banks paying dividends with money they didn’t have. Hedge funds that blow. Bubbles in crazy places, then housing, this time in subprime car lending, student loans and even Bitcon.
The transports are telling you that all is not well. CAT is confirming it. Copper is warning that we’re in deep trouble internationally, and irrespective of the claim that “America benefits from everyone else’s pain” that’s only partially true – in the end earnings are what drive stock prices, and the red flags are waving at warp speed on earnings.
To go along with this are rail car loadings. The trouble here is that baseline is in a serious downtrend — and after halting its decline from 2008 to 2009 over the last year it has slid severely once more. There will be those who argue that this is “no big deal”; I disagree.
At the end of the day the premise behind the Fed’s intervention in the market is that “cheap money” promotes hiring through an indirect process. But inherent in that process is a belief that the economic model from 1980 to 2007 can be restarted – a model predicated on ever-larger amounts of leverage in the economy. That model had positive feedback that came from the bond market rally from 1980 to 2008 as well with yield compression helping to fuel the fire.
More than five years into this experiment the results are clear: It doesn’t work.
I believe that by the time we get to the end of the year we will be looking back at these signs and asking “what the hell was I thinking?”
Credit expansion is not going to restart because it can’t — we have reached the terminus of that economic model, like it or not.
I want to focus your attention in one place, and only one place — because it’s the only place that matters.
In the next decade, Social Security will grow at an annual average of 5.8 percent. Medicare will grow at 6.2 percent. And Medicaid—thanks in part to its expansion under the health-care law—will grow at an astounding 9.9 percent. All of these programs are growing substantially faster than the economy…..
Good luck on those astoundingly optimistic figures.
Social Security has expanded at a rate of about 6% annually over the last 30 years. That’s fairly close. But Medicare and Medicaid are not; the expansion from 1980 to today has been at a average compounded rate of approximately 9%and full-charge hospital bills are currently expanding at 10% a year and have been for the last several years.
Note carefully that the latter is not the government’s cost, it’s the cost in the broad economy!
Leave the net interest aside as that’s a consequence of the two pieces directly under it.
Note that Social Security, after rising for a few years, begins to plateau and in fact starts to fall after about 2030. That’s because the Boomers begin to pass on.
The medical explosion is not due to the boomers. It is due to the underlying systemic expansion of cost that in turn is driven by monopoly practices and cost-shifting, mostly to people in the United States.
A particularly outrageous but by no means isolated example is the scorpion antivenom that I wrote about — made in Mexico for $100/dose and north of $35,000 a dose when administered in a US hospital. That’s a mark-up of more than 350 times cost!
But it gets worse. Ryan claims that there’s a “raid” on the Medicare “trust fund.” He’s lying.
Last year Medicare took in $201 billion in tax revenues. But between Medicare and Medicaid the Federal government spent just north of one trillion dollars, or five times what it took in. There is no “trust fund” to raid when you are spending five times the amount you collected in taxes. Any such assertion is a bald lie.
Worse, the attempted shift of Medicaid to the states will bankrupt all of them within five years. That’s the arithmetic — there is no state in the union that can shoulder that expense.
The only solution is to collapse the medical cost structure. It’s politically damnable but it has to be done, and done now. Any budget proposal that doesn’t have this as its centerpiece is un-serious and unworthy of consideration as it is an open, notorious and public fraud.
A beginning point for this could come in the form of a single two-paragraph law that requires that all health providers publish a price list and charge everyone the same price, irrespective of how they pay. This would make direct comparison of cost possible, and while a minority of care is paid in cash the fact remains that the cash customers would prefer competent care at a lower price over one that is five or ten times as expensive, as is often the case now. This would immediately collapse the high-cost outlier providers, forcing them to either cut that crap out or remove them from the market.
The second step is to remove both EMTALA and all anti-trust protection from the entire medical industry. And the third is to require insurance companies to actually sell insurance – once the insured-against event happens you no longer have to pay anything — the company pays you, unlike the present system where you can be co-billed for ridiculous amounts of money and must maintain premium payments or worse, are subject to cancellation even though you paid in for the unexpected and unlikely adverse event!
Ryan’s budget also assumes GDP growth of more than 5% annually over the next ten years with no recessions, a feat that has never been achieved in the post-WWII era according to our government’s own data. The use of the word “cut” in a budget that grows spending by 3.5% compounded annually is an outrageous lie as well.
But while railing against this is appropriate and necessary, none of it will matter if we don’t deal with the medical problem now.
Within approximately two years Medicare, Medicaid, Social Security and interest payments will consume all tax receipts. At some point before that happens the markets are nearly-certain to deduce that we are not serious about attending to the budgetary imbalance as we’re then borrowing to pay the light bill in the Capitol, say much less anything important like Defense.
When, not if, that recognition occurs there is literally nothing that The Fed or the Government will be able to do about the ensuing flight from assets in this country, as the only remaining step available to the government to fund this escalation of spending will be outright confiscation of some form.
As I have no indication at present that anyone on The Hill will even discuss the fundamental arithmetic that lays behind this irrefutable truth, say much less reduce it to legislative language and introduce it as a bill despite severalyears of attempting to do so, I am forced to recommend that you prepare for the worst.
I hereby withdraw my formerly-expressed guarded optimism.
This nation is done folks — Boehner not only has no balls he has no common sense and is trying to cheat mathematics, much like the 5th grader who gets an “F” in arithmetic and whines “but teacher, I did my best!!!!!”
(CNSNews.com) – The Republican-controlled House of Representatives voted 267-151 on Wednesday to approve a $982-billion continuing resolution (CR) to fund the federal government through the rest of fiscal 2013 that fully funds the implementation of Obamacare during that period.
The House Republican leaders turned aside requests from groups of conservative members to include language in the bill that would have withheld funding for implementation of all of Obamacare, or, alternatively, that would have withheld funding for the Obamacare regulation that requires health-plans to provide cost-free coverage for sterilizations, contraceptives and abortion-inducing drugs.
Of course CNS turns this into a “social issue” diatribe, which is BS as well.
The real issue is the ~9% cost escalation in medical spending from 1980 forward that has not slowed materially at all, which is dramatically in advance of GDP, and which just in insurance costs alone is going to explode in the next 12 months with many people taking 100% premium increases.
And this is with the so-called CPI already showing a near-9% increase over the last year — right on track.
Remember the projection forward just two more years?
And what happens when, not if, the market throws up on The Fed’s rate suppression and decides to start pricing Treasury debt “at the market” based on Congressional action?
Let me know how you’re going to “bring the budget into balance”, as Ryan claims, when just Health Care, Pensions and Interest total the all of the tax receipts that the government gets — from all sources!
We’re two years or less from utter and complete disaster and this CR is an act of intentional destruction of the American economy and government.
To Boehner and the rest of the pukes who voted for to destroy America, which unfortunately includes all of the Republicans save 14:
Having pumped the system with liquidity non-stop since the Crash of 2008, the Fed now realizes it’s in big trouble and needs to manage down expectations of further stimulus.
As we noted earlier this year, the Fed, while attempting to appear committed to endless money printing via its QE 3 and QE 4 programs, was in fact decidedly split on whether to commit to more as well as the risks inherent to additional QE. Indeed, the Fed FOMC minutes indicate that some Fed members were concerned about whether QE even worked as a monetary policy.
Below are the notes from the Fed’s December 2012 FOMC minutes (the meeting during which the Fed announced QE 4). I’ve added highlights to emphasize the shift in tone.
With regard to the possible costs and risks of purchases, a number of participants expressed the concern that additional purchases could complicate the Committee’s efforts to eventually withdraw monetary policy accommodation, for example, by potentially causing inflation expectations to rise or by impairing the future implementation of monetary policy.
Participants also discussed the implications of continued asset purchases for the size of the Federal Reserve’s balance sheet. Depending on the path for the balance sheet and interest rates, the Federal Reserve’s net income and its remittances to the Treasury could be significantly affected during the period of policy normalization.
Participants noted that the Committee would need to continue to assess whether large purchases were having adverse effects on market functioning and financial stability. They expressed a range of views on the appropriate pace of purchases, both now and as the outlook evolved. It was agreed that both the efficacy and the costs would need to be carefully monitored and taken into account in determining the size, pace, and composition of asset purchases.
There are three key implications here:
1) The Fed acknowledged that QE causes inflation expectations to rise (red text)
2) The Fed was divided on the efficacy of QE (green text)
3) The Fed was not committed to employing QE forever despite its public declarations to that effect (blue text)
This shift in tone went largely unnoticed by the media. However, the implications are very serious. By way of explanation, let’s quickly review the Fed’s primary moves in the post-Crisis era.
In 2008 the Fed had its back against the wall in terms of saving the system. Since that time every new Fed intervention (verbal or monetary) has been aimed at propping up the Too Big To Fail Banks and pushing the stock market higher.
The first wave of this came via QE 1 and QE 2 in which the Fed collectively monetized nearly $2 trillion in assets. However, once QE 2 ended in 2011, we noted the Fed began to realize that it could get the “positive” effects of additional stimulus (higher asset prices) without actually having to engage in more stimulus, simply by issuing verbal interventions at critical moments.
Thus, between QE 2’s end (June 2011) and the start of QE 3 (September 2012), the Fed became increasingly reliant on verbal intervention as opposed to actual money printing.
During this period, any time the markets began to dip, a Fed official, usually an uber-Dove such as NY Fed President Bill Dudley or Chicago Fed President Charles Evans, would indicate that the Fed was ready to act aggressively if need be and VOOM the markets would take off again.
This changed in May 2012, when the entire financial system began to implode courtesy of Spain (see our issue The “C” Word for an explanation of this). At that time the Fed switched back into aggressive monetary policy mode, first promising to provide more QE before launching QE 3 in September 2012 and then QE 4 in December 2012.
Unlike previous QE programs, which had definitive timelines, QE 3 and QE 4 were open-ended, meaning that they can continue forever. This was the Great Global Rig we referred to earlier this year. And while it did push the stock market higher, it did next to nothing for the US economy.
Which brings us to today. The US economy is contracting sharply again (without the massaged data inflation, real GDP growth would have been -1% last quarter) right as stocks close in on new all-time highs (the S&P 500 and Dow) or have already broken to new highs (the Russell 2000).
This is happening at a time when earnings are falling (despite companies booking profits), the economy is slowing, and stocks are closing in on all-time highs.
In plain terms, the stock market has become totally detached from economic realities. There is a term for when asset prices become detached from fundamentals, it’s called “A BUBBLE.”
THIS is the reason the Fed is beginning to shift its tone. It realizes it has blown another bubble and that we’re likely headed for another Crash. And this time around the Fed will be totally out of ammo to stop it. Unlike 2008 which was just a warm-up, this will be the REAL CRISIS featuring full-scale systemic failure.
So if you have not already taken steps to prepare for systemic failure, you NEED to do so NOW. We’re literally at most a few months, and very likely just a few weeks from the economy taking a massive downturn, potentially taking down the financial system with them. Think I’m joking? The Fed is pumping hundreds of BILLIONS of dollars into financial system right now trying to stop this from happening.
More at the link…
While retching my (late) coffee this morning, I got to read (and hear) this, along with the alleged “questioning”….
Chairman Ben S. Bernanke
Semiannual Monetary Policy Report to the Congress
Before the Committee on Banking, Housing, and Urban Affairs, U.S. Senate, Washington, D.C.
February 26, 2013
Chairman Johnson, Ranking Member Crapo, and other members of the Committee, I am pleased to present the Federal Reserve’s semiannual Monetary Policy Report. I will begin with a short summary of current economic conditions and then discuss aspects of monetary and fiscal policy.
Current Economic Conditions Since I last reported to this Committee in mid-2012, economic activity in the United States has continued to expand at a moderate if somewhat uneven pace. In particular, real gross domestic product (GDP) is estimated to have risen at an annual rate of about 3 percent in the third quarter but to have been essentially flat in the fourth quarter.1 The pause in real GDP growth last quarter does not appear to reflect a stalling-out of the recovery. Rather, economic activity was temporarily restrained by weather-related disruptions and by transitory declines in a few volatile categories of spending, even as demand by U.S. households and businesses continued to expand. Available information suggests that economic growth has picked up again this year.
Consistent with the moderate pace of economic growth, conditions in the labor market have been improving gradually. Since July, nonfarm payroll employment has increased by 175,000 jobs per month on average, and the unemployment rate declined 0.3 percentage point to 7.9 percent over the same period. Cumulatively, private-sector payrolls have now grown by about 6.1 million jobs since their low point in early 2010, and the unemployment rate has fallen a bit more than 2 percentage points since its cyclical peak in late 2009. Despite these gains, however, the job market remains generally weak, with the unemployment rate well above its longer-run normal level. About 4.7 million of the unemployed have been without a job for six months or more, and millions more would like full-time employment but are able to find only part-time work. High unemployment has substantial costs, including not only the hardship faced by the unemployed and their families, but also the harm done to the vitality and productive potential of our economy as a whole. Lengthy periods of unemployment and underemployment can erode workers’ skills and attachment to the labor force or prevent young people from gaining skills and experience in the first place–developments that could significantly reduce their productivity and earnings in the longer term. The loss of output and earnings associated with high unemployment also reduces government revenues and increases spending, thereby leading to larger deficits and higher levels of debt.
The recent increase in gasoline prices, which reflects both higher crude oil prices and wider refining margins, is hitting family budgets. However, overall inflation remains low. Over the second half of 2012, the price index for personal consumption expenditures rose at an annual rate of 1-1/2 percent, similar to the rate of increase in the first half of the year. Measures of longer-term inflation expectations have remained in the narrow ranges seen over the past several years. Against this backdrop, the Federal Open Market Committee (FOMC) anticipates that inflation over the medium term likely will run at or below its 2 percent objective.
Monetary Policy With unemployment well above normal levels and inflation subdued, progress toward the Federal Reserve’s mandated objectives of maximum employment and price stability has required a highly accommodative monetary policy. Under normal circumstances, policy accommodation would be provided through reductions in the FOMC’s target for the federal funds rate–the interest rate on overnight loans between banks. However, as this rate has been close to zero since December 2008, the Federal Reserve has had to use alternative policy tools.
Actually, you didn’t have to do any such thing if you hadn’t yet first poisoned the economy with massive, unbridled debt accumulation throughout the system, unbacked by anything!
These alternative tools have fallen into two categories. The first is “forward guidance” regarding the FOMC’s anticipated path for the federal funds rate. Since longer-term interest rates reflect market expectations for shorter-term rates over time, our guidance influences longer-term rates and thus supports a stronger recovery. The formulation of this guidance has evolved over time. Between August 2011 and December 2012, the Committee used calendar dates to indicate how long it expected economic conditions to warrant exceptionally low levels for the federal funds rate. At its December 2012 meeting, the FOMC agreed to shift to providing more explicit guidance on how it expects the policy rate to respond to economic developments. Specifically, the December postmeeting statement indicated that the current exceptionally low range for the federal funds rate “will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored.”2 An advantage of the new formulation, relative to the previous date-based guidance, is that it allows market participants and the public to update their monetary policy expectations more accurately in response to new information about the economic outlook. The new guidance also serves to underscore the Committee’s intention to maintain accommodation as long as needed to promote a stronger economic recovery with stable prices.3
The second type of nontraditional policy tool employed by the FOMC is large-scale purchases of longer-term securities, which, like our forward guidance, are intended to support economic growth by putting downward pressure on longer-term interest rates. The Federal Reserve has engaged in several rounds of such purchases since late 2008. Last September the FOMC announced that it would purchase agency mortgage-backed securities at a pace of $40 billion per month, and in December the Committee stated that, in addition, beginning in January it would purchase longer-term Treasury securities at an initial pace of $45 billion per month.4 These additional purchases of longer-term Treasury securities replace the purchases we were conducting under our now-completed maturity extension program, which lengthened the maturity of our securities portfolio without increasing its size. The FOMC has indicated that it will continue purchases until it observes a substantial improvement in the outlook for the labor market in a context of price stability.
So what happens when there is no substantial improvement in the labor market?
Gee, The FOMC has run four years sequentially of extraordinary monetary policy and there has been not one bit of positive movement in the labor market.
So for exactly how long will Bernanke continue this charade? You’re either a liar or you’re insane, tilting at windmills and accomplishing exactly nothing goodbut dramatically increasing the risk of very bad, and very violent, negative side effects.
The Committee also stated that in determining the size, pace, and composition of its asset purchases, it will take appropriate account of their likely efficacy and costs. In other words, as with all of its policy decisions, the Committee continues to assess its program of asset purchases within a cost-benefit framework. In the current economic environment, the benefits of asset purchases, and of policy accommodation more generally, are clear: Monetary policy is providing important support to the recovery while keeping inflation close to the FOMC’s 2 percent objective. Notably, keeping longer-term interest rates low has helped spark recovery in the housing market and led to increased sales and production of automobiles and other durable goods. By raising employment and household wealth–for example, through higher home prices–these developments have in turn supported consumer sentiment and spending.
So home prices are not inflation? Nor are stock prices? Nor gasoline and food prices? How about health insurance prices, or health spending in general, up approximately 9% a year over at the Federal level since 1980 and, incidentally, reported as up nearly that much annually in the latest CPI report!
None of this is inflation? I don’t exchange money for any of those things?
Highly accommodative monetary policy also has several potential costs and risks, which the Committee is monitoring closely. For example, if further expansion of the Federal Reserve’s balance sheet were to undermine public confidence in our ability to exit smoothly from our accommodative policies at the appropriate time, inflation expectations could rise, putting the FOMC’s price-stability objective at risk. However, the Committee remains confident that it has the tools necessary to tighten monetary policy when the time comes to do so. As I noted, inflation is currently subdued, and inflation expectations appear well anchored; neither the FOMC nor private forecasters are projecting the development of significant inflation pressures.
Of course you’re confident. You were also confident that subprime would be contained, remember?
How’s your record on these prognostications, if I may be so impolite to ask?
Another potential cost that the Committee takes very seriously is the possibility that very low interest rates, if maintained for a considerable time, could impair financial stability. For example, portfolio managers dissatisfied with low returns may “reach for yield” by taking on more credit risk, duration risk, or leverage. On the other hand, some risk-taking–such as when an entrepreneur takes out a loan to start a new business or an existing firm expands capacity–is a necessary element of a healthy economic recovery. Moreover, although accommodative monetary policies may increase certain types of risk-taking, in the present circumstances they also serve in some ways to reduce risk in the system, most importantly by strengthening the overall economy, but also by encouraging firms to rely more on longer-term funding, and by reducing debt service costs for households and businesses. In any case, the Federal Reserve is responding actively to financial stability concerns through substantially expanded monitoring of emerging risks in the financial system, an approach to the supervision of financial firms that takes a more systemic perspective, and the ongoing implementation of reforms to make the financial system more transparent and resilient. Although a long period of low rates could encourage excessive risk-taking, and continued close attention to such developments is certainly warranted, to this point we do not see the potential costs of the increased risk-taking in some financial markets as outweighing the benefits of promoting a stronger economic recovery and more-rapid job creation.5
So let me see if I get this right.
- It’s good to have low rates because that supports the recovery.
- Low rates “might” encourage excessive risk taking.
- Excessive risk-taking would be bad.
- But low rates are not an explicit and inevitable subsidy to bad behavior, including in the Congress, because they do not make the cost of borrowing money artificially low and therefore drive decisions that are inherently uneconomic — and which would not take place but for those low rates?
I love it when Bernanke screws himself with his own words. That’s the problem with lying, you see — you eventually fail to scrub all the interconnections between the lies and miss a few.
Another aspect of the Federal Reserve’s policies that has been discussed is their implications for the federal budget. The Federal Reserve earns substantial interest on the assets it holds in its portfolio, and, other than the amount needed to fund our cost of operations, all net income is remitted to the Treasury. With the expansion of the Federal Reserve’s balance sheet, yearly remittances have roughly tripled in recent years, with payments to the Treasury totaling approximately $290 billion between 2009 and 2012.6However, if the economy continues to strengthen, as we anticipate, and policy accommodation is accordingly reduced, these remittances would likely decline in coming years. Federal Reserve analysis shows that remittances to the Treasury could be quite low for a time in some scenarios, particularly if interest rates were to rise quickly.7 However, even in such scenarios, it is highly likely that average annual remittances over the period affected by the Federal Reserve’s purchases will remain higher than the pre-crisis norm, perhaps substantially so. Moreover, to the extent that monetary policy promotes growth and job creation, the resulting reduction in the federal deficit would dwarf any variation in the Federal Reserve’s remittances to the Treasury.
So let me see if I get this right. If the blended average interest rate on the Federal Debt goes to just 3.5%, what is the total interest expense of the Federal Government on $17 trillion? (Answer: About $600 billion a year.) What percentage is this of tax revenues? And who’s accounting for the additional $400+ billion a year load on the federal budget of this, which is approximately half of current Social Security, Medicare/Medicaid or Defense expenditures!
Thoughts on Fiscal Policy Although monetary policy is working to promote a more robust recovery, it cannot carry the entire burden of ensuring a speedier return to economic health. The economy’s performance both over the near term and in the longer run will depend importantly on the course of fiscal policy. The challenge for the Congress and the Administration is to put the federal budget on a sustainable long-run path that promotes economic growth and stability without unnecessarily impeding the current recovery.
Riiight. Just like it was in 2000, when Greenspan intentionally produced a bubble, and just as it was into the 1990s, when he intentionally glad-handed and ignored rampant and unbridled speculation — including outright bogus projections in various public companies that were being backed by and promoted through regulated financial institutions?
I seem to remember that one Ben Bernanke was on the FOMC for the latter bit of chicanery.
I think it’s the same Ben Bernanke that’s there now.
Significant progress has been made recently toward reducing the federal budget deficit over the next few years. The projections released earlier this month by the Congressional Budget Office (CBO) indicate that, under current law, the federal deficit will narrow from 7 percent of GDP last year to 2-1/2 percent in fiscal year 2015.8 As a result, the federal debt held by the public (including that held by the Federal Reserve) is projected to remain roughly 75 percent of GDP through much of the current decade.
The CBO, as I have repeatedly pointed out, is constrained to count every law that will expire as one that has in its forward projections. Because it is required to account for current law and not likely or even nearly-certain revisions, such as occurred with the (until-recently) annual AMT patch, the CBO has an unbroken history of producing “estimates” that always underestimate spending and debt levels.
It’s not their fault — they have to operate within their mandate. Their mandate is broken.
But the FOMC has no requirement to take these “estimates” at face value without adjusting them for these policy mandates. So it is one thing for the CBO to produce an estimate but when the FOMC takes same as valid work product it is lying, because the FOMC is well-aware of the limitations — intentional limitations — of those “estimates” and the track record that the CBO has of historically radically underestimating both deficits and debt levels.
However, a substantial portion of the recent progress in lowering the deficit has been concentrated in near-term budget changes, which, taken together, could create a significant headwind for the economic recovery. The CBO estimates that deficit-reduction policies in current law will slow the pace of real GDP growth by about 1-1/2 percentage points this year, relative to what it would have been otherwise. A significant portion of this effect is related to the automatic spending sequestration that is scheduled to begin on March 1, which, according to the CBO’s estimates, will contribute about 0.6 percentage point to the fiscal drag on economic growth this year. Given the still-moderate underlying pace of economic growth, this additional near-term burden on the recovery is significant. Moreover, besides having adverse effects on jobs and incomes, a slower recovery would lead to less actual deficit reduction in the short run for any given set of fiscal actions.
Since GDP = C + I + G + (x – i) it is axiomatic that all spending cuts will reduce GDP. Trying to claim that this is somehow “bad” is immaterial since it cannot be avoided.
At the same time, and despite progress in reducing near-term budget deficits, the difficult process of addressing longer-term fiscal imbalances has only begun. Indeed, the CBO projects that the federal deficit and debt as a percentage of GDP will begin rising again in the latter part of this decade, reflecting in large part the aging of the population and fast-rising health-care costs. To promote economic growth in the longer term, and to preserve economic and financial stability, fiscal policymakers will have to put the federal budget on a sustainable long-run path that first stabilizes the ratio of federal debt to GDP and, given the current elevated level of debt, eventually places that ratio on a downward trajectory. Between 1960 and the onset of the financial crisis, federal debt averaged less than 40 percent of GDP. This relatively low level of debt provided the nation much-needed flexibility to meet the economic challenges of the past few years. Replenishing this fiscal capacity will give future Congresses and Administrations greater scope to deal with unforeseen events.
Nine percent increase annualized in medical spending for the last 30 years.
This has not abated at all; the last 12 months in health insurance, if you believe the CPI, increased at nearly that level. Further there are alreadyannounced 100% increases coming for many policyholders for the next 12 months due to Obamacare!
To address both the near- and longer-term issues, the Congress and the Administration should consider replacing the sharp, frontloaded spending cuts required by the sequestration with policies that reduce the federal deficit more gradually in the near term but more substantially in the longer run. Such an approach could lessen the near-term fiscal headwinds facing the recovery while more effectively addressing the longer-term imbalances in the federal budget.
The longer an exponential trend goes on the worse the consequence of addressing it.
This is arithmetic, not politics.
The sizes of deficits and debt matter, of course, but not all tax and spending programs are created equal with respect to their effects on the economy. To the greatest extent possible, in their efforts to achieve sound public finances, fiscal policymakers should not lose sight of the need for federal tax and spending policies that increase incentives to work and save, encourage investments in workforce skills, advance private capital formation, promote research and development, and provide necessary and productive public infrastructure. Although economic growth alone cannot eliminate federal budget imbalances, in either the short or longer term, a more rapidly expanding economic pie will ease the difficult choices we face.
Senator Corker reamed Bernanke good, directly calling him out on the fake “wealth effect” he has been targeting along with more.
Incidentally, Bernanke’s claim that he won’t have to “sell assets” and will simply “let them run off” is a nice fantasy.
But if that turns out to be true then there will be no economic growth for the entire period, since it is precisely those assets that provide the “lever” by which monetary policy is enacted. At present the interest-insensitive portion of the Fed Balance Sheet is zero (bills); as such the only way he can get away with that will be if there is never a need to sell assets in the SOMA account to implement policy.
In addition as rates rise the pincer closes on the FOMC and will destroy it, because as rates rise in order to keep the excess reserves on the balance sheetThe Fed will have to pay higher and higher interest on those reserves. At the same time it cannot remove liquidity by selling assets or it will take a huge capital loss!
So which is it Ben? The only way you can do what you claim is if we become Japan and are unable to generate any meaningful long-term economic growth which you said you would avoid because you’re smarter than they were and are.