The Crack in Our Windshield

May 28, 2023

by Stephen Stofka

This week’s letter is about debt, both public and household. Since 9-11, the public federal debt  has grown five times. The causes include costly wars in Iraq and Afghanistan, a global financial crisis followed by a slow recovery, tax cuts passed under the Trump administration and a once-in-a-century pandemic. Ten percent of the $32 trillion debt was added during the first three months of the pandemic. As the deadline approaches when the government will not be able to make timely payments to vendors and bondholders, we ask why do we have this thing called a debt limit?

Denmark is the only other country in the world to require an approval of a debt limit after the spending has been approved. Their legislators raised the limit so high that it might be a century before the issue comes up again. That leaves only the U.S. in the world where a debt limit debate is a threat. Neither party wants to repeal this century old law because it has the potential to be a powerful negotiating tool. It allows one party to negate or modify the funding priorities that the other party passed in the last legislative session. This is a game of chicken played for high stakes.

Some have criticized the Biden administration for not starting negotiations sooner. However, the House did not put anything on the negotiating table until they passed a bill on April 26th, just a month ago. Given the fractured Republican caucus, it was not clear that Speaker McCarthy could get a bill passed in the House. French Hill, R-Ark., told Roll Call “The whole purpose of this is to compel the president to negotiate — and to demonstrate to Washington, D.C., that Kevin McCarthy has the votes to raise the debt ceiling.” Four House members defected and the vote barely squeaked by at 217-215. Although George Santos, R-NY, is facing prosecution for fraud, money laundering and theft of public funds, McCarthy has allowed him to keep his seat at a time when every vote is crucial.

In 2011, the Republican House balked at raising the limit but the only legislation they could pass was an affirmation that they would not raise the limit without some unspecified spending cuts. Republicans were unable to agree on terms that they could pass in the House. Despite that, President Obama made the mistake of negotiating with Speaker John Boehner, and the two struck a so called Grand Bargain. Lacking anything in written legislation from the House, a bipartisan committee in the Senate came up with a different proposal and Obama tried to negotiate a compromise between the two versions with Boehner. Boehner could not get any changes past the most conservative members in his caucus. According to Politico reporter Tim Alberta (2017), the staff of Jim Jordan, R-OH, had been working secretly with outside groups to sway enough House members to vote against Boehner’s bargain. Jordan apologized but the incident exacerbated tensions between the warring factions within the Republican House. As Vice-President at the time, Biden would have learned a valuable lesson. Get something in writing before starting negotiations.

In contrast to the growth of the public debt, the growth in household debt has decreased since the financial crisis and the housing bust. The chart below compares the two types of debt, public and household, in two 13 year periods before and after the financial crisis.  

From 1994-2007, the public debt (GFDEBTN) grew 5% per year while household debt rose 8.7% annually. As a percent of disposable income, household debt jumped from 78% at the end of 1994 to 124% at the end of 2007. Chiefly responsible was the doubling of mortgage debt (HHMSDODNS) during the first seven years of the 2000s. Lax underwriting standards allowed families with poor credit scores of less than 620 to secure mortgages. Millions lost their homes during the housing bust, banks tightened lending standards and Americans were forced to go on a credit diet.

Since the financial crisis, American household balance sheets have improved. Household debt has grown by only 2.2% per year, about half the growth rate of personal income (DSPI). As a result, debt as a percent of disposable income had fallen to 91% at the end of 2022. The public finances have not fared as well. Although federal tax receipts, including FICA taxes, have increased 8% annually, expenditures and social benefit payments have outpaced tax receipts, resulting in a 7.2% annual increase in the public debt since the end of 2009.  

This week David Leonhardt (2023) with the New York Times presented a graph of voter policy preferences derived from recent polls. The fiscal liberals in both parties outweigh the fiscal conservatives, a trend sure to promote the growth of the public debt. In the 2011 debt limit duel, Republican leaders like Paul Ryan championed privatization of Social Security and cutting back on benefit programs. In the decade since, neither of those proposals are popular with the party’s base. Instead McCarthy will appeal to the social conservatives in the party and insist on work requirements for benefit programs. As Leonhardt notes, the fight for Democrat and Republican swing voters is taking place in the quadrant of voters who are socially conservative but fiscally liberal, nicknamed the “Scaffles.”

The government’s spending becomes household income in some form or another, an accounting identity that joins the growth in public and household debt. Our economy, laws and regulatory framework promote financial crises and exacerbate social problems. Policymakers, economists and social scientists can debate the causes, extent and severity of the problems but acknowledge the reality.  We may discover that our experiment in governance does not scale as our population grows and congregates in cities, as our technology advances and we become accustomed to greater energy use. The spread of mass communication and social media since World War 2 has exacerbated rather than resolved our ideological and cultural differences. The growth of our public debt indicates that we expect more from our government than our economy or political framework is able and willing to pay for. Like a crack in our windshield, it will continue to grow.


Photo by Ivan Vranić on Unsplash

Keywords: public debt, household debt, mortgage debt, debt limit

Alberta, Tim. 2017. “John Boehner Unchained.” POLITICO Magazine. (September 27, 2022).

Federal Reserve Bank of New York. (2023, May). Quarterly report on household debt and credit.

The various FRED data series used in this post were HHMSDODNS Mortgage Debt, HCCSDODNS Consumer Credit Debt, GFDEBTN Public Debt, DSPI Disposable Personal Income.

Leonhardt, D. (2023, May 25). Ron DeSantis and the “scaffle” vote. The New York Times.

Wealth-Income Ratio

January 16, 2022

by Stephen Stofka

Analyses of wealth and income inequality engage policymakers and economists and provoke lively discussion on social media. Thomas Piketty (2013) stirred up debate with the publication of Capital in the Twenty-First Century. Five years later came the publication of After Piketty (Boushey et al., 2019), a series of essays by prominent economists. I wanted to tackle a different aspect of this subject – why the ratio of wealth to income has become so erratic in the past two decades. The answers are too complex for a blog post and beyond my capability to understand. But let’s take a short journey down the rabbit hole.

In the past ten years both stocks and housing prices have more than doubled, moving in a synchronized dance. In the graph below I’ve plotted the two series on top of each other to show the similarity in trend.

The Federal Reserve charts a ratio of household wealth to disposable income, which is income less taxes plus transfer payments like Social Security. Although there are some similar components, the ratio is different than the capital-income ratio that Piketty uses. Housing represents the majority of wealth for many households. Many workers own part of the stock market through mutual funds, 401K plans at work or IRA retirement plans. The doubling of these two asset classes has led to a rise in household wealth and raised the wealth-income ratio to historically elevated levels.

In the graph above I have highlighted past decades where this percentage found a level and remained there. For almost 50 years following WW2 household wealth was about 5x disposable income. Beginning in the mid-90s, this percentage turned erratic, unable to find any stability until the violent recession following the fiscal crisis. In 2013, stock prices and housing began a steady climb that endured the pandemic shock and continues to this day. Will we establish a new level of wealth at 8x disposable income in the next few years? I doubt it. Such a growth curve is unsustainable.

As I search for the underlying causes, I look back to the mid-90s when the wealth-income ratio first turned erratic. The internet first began to grow into our commercial and personal lives. Heady expectations of rocketing business profits led many investors to make wild bets on companies who had little history, a lot of hype and little profit. Out of the carnage of mis-investment emerged an internet platform that has transformed our personal lives. Apple and Amazon are two success stories. In 1997 giant Microsoft made a $150 million investment in failing Apple Computer that kept Apple out of bankruptcy. This year Apple’s valuation passed the $3 trillion mark, about 13% of the entire GDP of the U.S. That same year Amazon went public. It’s business model? Selling books. For years it struggled to make a profit. Amazon’s market capitalization is now over $1.6 trillion. The so called FAANG stocks of big tech have surpassed the industrial and financial giants of the 20th century. Two researchers at Morningstar studied the decade long impact of the ten largest stocks and the impact they made on the overall return of the entire stock market (Solberg & Lauricella, 2021). Perhaps that concentration of market power is contributing to a more erratic wealth-income ratio.

Low interest rates and leverage have affected household wealth. In the mid-90s, bankers at JP Morgan developed the collateralized mortgage to spread risk. In ten years, misuse and overuse of that idea led to a historic meltdown in housing prices and caused a worldwide fiscal crisis. Since then the supply of new housing has not kept pace with demand. Fueling that demand is a large Millennial generation which is settling down. Persistently low mortgage rates have increased the pool of qualifying buyers. Low rates have raised the present value of the future housing services a homeowner receives from the house they buy. Not enough supply to meet demand has led to higher housing prices.

High inflation this year has grabbed headlines and stirred up comparisons to the stagflation of the 1970s. There are too many differences between now and then but that is a subject for another blog post. A rising federal debt has certainly contributed to a rising level of wealth but does not account for the erratic behavior of the ratio itself. In the mid-90s, the federal debt began falling and the wealth-income ratio rose dramatically.

I suspect that finding an equilibrium in this ratio will be a painful process. To reestablish a sustainable ratio, there are two possibilities. The first is a hard landing where asset valuations fall more than incomes fall. The second scenario is a soft landing in which incomes rise more than valuations rise. Let’s hope for the soft landing.


Photo by Ludde Lorentz on Unsplash

Boushey, H., Bradford, D. L. J., & Steinbaum, M. (2019). After Piketty: The agenda for economics and inequality. Harvard University Press.

Cautero, R. M. (2021, December 28). What is disposable income? The Balance. Retrieved January 15, 2022, from

Piketty, T. (2013). Capital in the Twenty-First Century. (A. Goldhammer, Trans.). The Belknap Press of Harvard University Press.

Solberg, L., & Lauricella, T. (2021, December 1). The FAANG Market is Fading. Morningstar, Inc. Retrieved January 15, 2022, from

Treasured Myths

March 14, 2021

by Steve Stofka

Some liberal economists promote government welfare policies that would enable one earner to support a household. Former Labor Secretary Robert Reich and Vermont Senator Bernie Sanders are champions of the idea that America was once a nation of one earner households. Does the data support their claims? No. But careful presentation of the data perpetuates a myth that forms the bedrock of a class of liberalism called welfare liberalism.

In the 20 years following World War 2, most of the world’s manufacturing capacity was in the U.S. Workers had greater bargaining power and union membership grew. The number of workers per household dipped slightly, then returned to more customary levels. Was there ever a prevalence of one-earner households? No. It is a myth.

In 1966, hours worked per week in manufacturing industries peaked at 41.6, (AWHMAN see endnote). Many dads worked overtime to support their working-class families. There was more overtime available because the U.S. was the manufacturing capital of the world. When the youngest children started school, mom often took a part-time job to bring in extra income. Only a small percent of families could live on a 40-hour per week paycheck.

In the late 1960s manufacturing jobs were 28% of all full-time jobs (MANEMP); today it is 10%. Rarely discussed is the decline in office and administrative workers from 18% in the early 1980s to 11% today (OFFICE). Some of these were entry jobs that helped young workers develop skills. A woman might leave an administrative job to raise young children, then return to a similar job when the children reached school age. The decline began in the early 1990s as computers became more affordable and computer programs could do routine bookkeeping tasks. That percentage decline represents 10.5 million workers at pre-pandemic employment levels, more than the current number of unemployed workers.

Technological improvements change the mix of skills needed in the job market. Almost 2 million full-time workers are employed in the software industry (Software). Many more data entry workers could be employed if governments updated their archaic system architectures. The pandemic revealed how antiquated many state employment systems are. Because they did not have integrated claim verification built into their systems, many were able to file false claims using data gained from data breaches of private companies in years past. State systems could not handle the extra load of unemployment claims.

Our founding documents are based in part on the 17th century writings of John Locke. In his Second Treatise of Government, he wrote that power arises from duty; the power that parents have over children arises from their duty to take care of their children (58:1). Some people may extend that power and duty relationship to the government and a nation’s citizens. Two groups may argue over taxes, regulations, and benefits when the underlying argument is whether governments have some duty to take care of their citizens because it has some power over them.

This pandemic has shown the extent of government power. When states and cities shut down private businesses for public health reasons, this aroused a centuries old debate about the extent of government power. In Plato’s time 2500 years ago, Athenian citizens first rejected government authority and refused military service. That independent spirit contributed to their defeat against Sparta where all citizens were expected to serve two years military service. 2000 years ago, Roman citizens scrawled graffiti on their bridges and refused to join military campaigns to establish yet another colony. In any century, a state enacts laws and exercises powers that are repugnant to some of its citizens. What is the extent of that power and those laws?

We cherish our myths, but they confuse our debates. The one-earner household is a mid-century favorite for some. For others it is that America’s founding was the first time in history that people established their freedom in relation to their government. Each generation thinks that it is at a special point in history, just like children do. We reject the notion that there is a circularity to our history. Through the centuries we revisit these debates about duty, power, rights and responsibilities. We tell ourselves that generations in the past never dealt with these issues, that it’s all different now. Yes, the historical context is different each century, but the central issues change little because the human spirit is an enduring bedrock that forms our institutions.



Photo by Ashim D’Silva on Unsplash

AWHMAN, Federal Reserve (FRED) Series: Average weekly manufacturing hours surpassed the 1966 peak under the Obama and Trump administrations.

MANEMP / LNS12500000: Manufacturing jobs divided by total employees who usually work full-time. These numbers come from different monthly surveys.

OFFICE: Office and administrative worker series divided by total employment, LNU02032207 / PAYEMS Series.

Software: Developers, applications and systems software LEU0254477200A series

Country Roads and the Election

May 12, 2019

by Steve Stofka

I spent the past week traveling with my sister to a family reunion near Dallas, Texas. In our travels, we passed through rural counties in southeast Colorado, western Oklahoma, and northwest and central Texas. In contrast to the signs of a brisk economy in the larger cities, some rural communities show signs of stress. Some roads leading off the main route need repair; some houses could use a fresh coat of paint; some stores have delayed maintenance. In some small towns most of the stores remain boarded up ten years after the financial crisis.

Candidates for the 2020 Presidential election must speak to the two Americas. The Americans who produce the food we eat and the power that lights our businesses and homes are not doing as well as those in the urban corridors. Young people in rural America leave for the larger cities to find a job or pursue an education. Older people with medical needs must move to larger cities with hospital facilities available in an emergency.

Let’s turn to a proposal on the list of issues for the 2020 election – an increase in the Federal minimum wage. A person making a minimum wage of $15 an hour in Los Angeles earns a bit more than half of L.A.’s median household income (MHI). She may work 2-1/2 weeks to pay the rent on a one-bedroom apartment (Note #1). The MHI in rural America is about 20% less than the national average. In Limon, Colorado (population less than 1500), the MHI is about half of the national average (Note #2). $15 an hour in Limon is the MHI.

In 2009 and 2010, the Democrats controlled the Presidency, the House and had a filibuster proof majority in the Senate. They could have enacted a federal minimum wage that was indexed to the living costs in each county or state. Why didn’t they fix the problem then? Because Democrats use the minimum wage as an issue to help win elections. If Congress passes a minimum wage of $15 an hour this year, they will have something new to run on in five years – a raise in the minimum wage to $17 an hour. Voters must begin asking their elected representatives for practical and flexible solutions, not political banners like a federal mandated one-size-fits-all $15 minimum wage.

For decades after World War 2, Democratic Party politicians who controlled the House refused to allow legislation that would index tax rates to inflation. This resulted in “bracket creep” where cost of living wage increases put working people in higher tax brackets automatically (Note #3). The problem became acute during the high inflation decade of the 1970s and the issue helped Ronald Reagan take the White House on a promise to fix the problem.

A week ago, I heard a Democratic Senator running for President say that they knew all along that Obamacare was just a start. The program was poorly drafted and poorly implemented and now we learn that Democrats knew all along that it was bad legislation? Will Medicare For All also be built on poor foundations and require a constant stream of legislative and agency fixes? This provides a lot of work for the folks in Washington who draft a lot of agency rules that require a lot of administrative cost to implement. Democrats are fond of federal solutions but show little expertise in managing the inevitable bloated bureaucracy that such solutions entail.

Some Democratic Party candidates are promising to fix the harsh sentencing guidelines that they themselves passed in the 1990s, which fixed sentencing guidelines enacted 25 years earlier by Democratic politicians in the 1960s and 1970s. This party’s platform consists of fixing its earlier mistakes.

According to a Washington Post analysis of election issues (Note #4), some candidates are concerned about corporate power. A Democratic president would have to work with the Senate’s Democratic Leader Chuck Schumer whose main support comes from large financial corporations based in his home state, New York. While a President Elizabeth Warren might propose regulatory curbs on corporate power, Mr. Schumer would be gathering campaign donations from the large banks who needed protection from those same regulations.

Large scale industrial power production has a significant effect on the climate. The few blue states that supported a Democratic candidate for President in the 2016 election also consume most of the final product of that power production. Have any candidates proposed solutions that lower the demand for power? Temperature control systems in commercial buildings could be set to a few degrees warmer in the summer and a few degrees cooler in the winter. That would have a significant impact on carbon production. Some candidates propose solutions that regulate the production and supply of power – not the demand for power. Most of that production occurs in states that supported a Republican candidate in the 2016 election. Proposals to install wind and wave generating stations in Democratic leaning coastal states in the northeast and northwest have been met with local resistance. Voters in the blue states want green solutions to be implemented in the red states, but not inconvenience residents of the blue states. Voters in the red states see through that hypocrisy.

A viable Democratic candidate must convince independent voters who are wary of political solutions from either party.  Donald Trump won the Presidency without visiting rural folks on their home turf. He landed his plane near a staged rally and the folks came from miles around to hear him. Compare that approach with former Republican candidate Rick Santorum who visited many small towns in Iowa in the months before the 2012 Iowa primary. In small restaurants and rural post offices, Santorum listened to the concerns of voters. Trump’s approach was successful. Santorum was not. Go figure.

Trump convinced rural folks that he was going to go to Washington and drain the swamp. This in turn would help the economy in small town America so that those folks could get themselves a new roof, or a new pickup truck, fix the fence or get a few potholes patched. From what I saw, those folks are still waiting. Some rural folks may run out of patience with Trump by next year. The success of any Democratic candidate depends on that.



  1. One week’s take home pay of $550 x 2.5 weeks = $1375. A 1 BR in L.A. averages $1350 L.A. Curbed
  2. Areavibes.Com assessment of Limon, Colorado.
  3. Tax indexing
  4. Washington Post article on various election issues

Green Incomes


March 10, 2019

by Steve Stofka

Many Americans cross the street if they think a socialist program is walking toward them. We believe that the U.S.A. is the heart of capitalism, but recent history reveals that our financial and legal systems are based on socialism for the very, very rich.

In the past two weeks, I reviewed the infrastructure goals as well as the justice and education goals of the Green New Deal (Note #1). In Part Three this week, I’ll look at the income supports included in the resolution’s economic agenda.

“Guaranteeing a job with a family-sustaining wage.” This is yet another example of clumsy language used to state a goal that some might read as utopian. Some can group the first phrase as ” Guaranteeing a job with a family sustaining wage” meaning that all wages should have a certain minimum. That sounds like the language of Minimum Wage 2.0, but does that mean that each job should be able to support a family of four, or six, or eight?

Others might group the first phrase as “Guaranteeing a job blah, blah, blah” and read the intent as a platform point of a Socialist Manifesto. Is the government going to hand out jobs to everyone that wants one? Only if the government takes over some of the means of production and becomes the nation’s chief employer can it hand out jobs to anyone who wants one. That is the textbook definition of socialism. It is not enough to have good intentions. Clarity of language matters.

Why the clamor for more income redistribution? The real (after inflation) income of poor and working families has lost more than half since 1980. That might not surprise some readers. The trend is even broader and more insidious. Income data from the Congressional Budget Office (CBO) shows that even the top 5% of real incomes have dropped 30%. The real income of a ¼ million families – the very, very rich – have grown in that time. Here are some highlights from the data.

In 2015 and 1980, the number of poor households, or bottom 20%, equaled the number of rich households, or top 20%. In 2015, the government took money from each rich household and gave it to 5-1/4 poor households to raise their income by 65% (Note #2). In 1980, the government took money from each rich household and gave it to 10-1/4 households to raise their income by only 25% (Note #3).

Why did poor households need so much more support in 2015 than they did in 1980? Because their real incomes before transfers and taxes (BTT) lost more than 50% (Note #4). The real BTT incomes of the top 5%, the very rich, have lost more than 30% . It is only the very, very rich, the top 1%, that have fared well in this fight against inflation. Their BTT income has grown 15% in the past 35 years. The bulk of those gains have probably come from the top .1%, or less than ¼ million families.

Why? Where has the money gone? The high interest rates of the 1980s made the dollar so strong that manufacturers began to move their operations to lower cost markets in Asia. Japan kept the value of the yen low relative to the dollar and attracted much of this investment. The Japanese economy and real estate boomed. American exports of manufactured goods declined, and commodity prices crashed, destroying a lot of income producing wealth, particularly in rural areas (Note #5). Bankruptcies during this decade far exceeded those filed during the Financial Crisis ten years ago (Note #6). Older readers may remember the charity concerts to raise money for farmers (Note #7). Today, many commercial buildings in small towns throughout the country stand empty. As rural clinics and nursing homes close, people must move to urban areas where medical services are available (Note #8).

As real incomes declined in the late 1980s, households and governments borrowed to make up for the loss of income. Who did they borrow from? Financial institutions who managed the assets of the very, very rich. As the financial sector grew in proportion to the size of the entire economy, the top managers of financial firms became very, very rich themselves (Note #9).

In the past twenty years, lobbying by the financial sector has quadrupled (Note #10). It paid big dividends during the latest crisis. After the initial bailout by the Bush administration in the fall of 2008, the Obama administration brought in a team led by Robert Rubin, Larry Summers, and Timothy Geithner. The first two helped dismantle the safeguards between deposit banks and investment institutions during the Clinton administration. Geithner was a protégé of Rubin. All were deeply embedded in the interests of the banks, not the creditors and governments who had trusted the judgment of financial managers.

The lack of separation between deposit banks and investment banks helped spread a cancer from the investment banks to banking institutions throughout the world. As Obama’s Treasury Secretary, Geithner continued to protect the bonuses of top managers despite massive losses. To preserve the wealth of the very, very rich, the Federal Reserve loaded up their own balance sheet with toxic bonds bought at full value.

After a 35-year period of rising real incomes and wealth because of favorable fiscal and monetary policy in Washington –
after Washington protected their wealth and income during the financial crisis at the expense of middle-class families who lost their savings and houses –
it is time for the very, very rich to pay taxpayers back.
You have eaten well. Here is the check.



1. Politifact article
2. In 2015, the bottom 20% of households (24.3 million) averaged $20,000 in income before taxes and transfer payments. The top 20% (25 million) earned almost $300,000. After taxes and transfer payments, the incomes of the bottom 20% rose 65% to $33,000. CBO report on household income in 2015, updated Nov. 2018
3. Number of households underlying CBO report is in Sheet “1. Demographics” of Supplemental Data spreadsheet linked on last page of report. Dollar amounts are in Sheet “3. Avg HH Income”, of same spreadsheet.
4. The impact of high interest rates on investment and commodities during the 1980s Secrets of the Temple pp.590-604
5. Using BLS calculator to compare CPI January 1980 to January 2016 prices, $1 in 1980 = $3.05 at the end of 2015. Average income amounts from Sheet 3. See Note #3 above.
6. Four decades of bankruptcies chart at Trading Economics
7. Farm aid timeline
8. Nursing centers in rural areas are closing NYT
9. The financial industry’s increasing share of GDP
10. Increase in financial lobbying since 1998

Optical Illusions

May 12, 2018

by Steve Stofka

I have long enjoyed optical illusions. Is that a picture of a rabbit or a duck? Which way is the cube facing, right or left? (Some examples) Is that two people facing each other, or a vase? (Image page) These can be even more fun when shared with a friend or sibling. Can’t you see the rabbit? No, it’s a duck!!!

Moving images present a selective attention deception. When asked to count the number of basketball passes, we may not see the gorilla that walks across our field of view. (Video)

These examples excite our curiosity and fascination as children and carry important lessons for us as adults. We sometimes misinterpret the data our senses receive. Those with a strong ideological bent may focus narrowly on only that data that supports their view of the world, or that makes them feel comfortable.

Let’s look at an example. Real (inflation-adjusted) median (middle of the pack) household income peaked in 1999 at $58,665. In 2016, income climbed to $59,039. However, personal income did not peak till 2007, at $30,821. Like household income, personal income finally rose above that peak in 2016.


In the household series, the past twenty years have been especially tough. In the personal series, only the past ten years have been that difficult. What accounts for the difference in the two series? Households have grown faster than the population. Population Income / Households will be lower when households increase.

But what is income? Household income is money income received and does not include employer-provided benefits and retirement contributions (Census Bureau Defs). The BLS does track total compensation costs which do include these benefits, and those costs are 67% higher today than they were in 2001.


If an employer gave an employee $500 a month for health care expenses and the employee sent the money to the health insurance company, that would be counted as income in the data. But because the employer sends the money directly to the insurance company, that income is not counted. Because of World War 2 wage and price controls, and to avoid being taxed under the income tax system, most employee benefits never touch the employee’s pocket, and are not counted as income. This becomes important when something not counted, benefits, grows much quicker than the income that is counted, or money received.

Since 1970, real hourly wages have grown only 3%. Bernie Sanders and other Democrats use a similar figure to press for more social welfare programs. Total hourly compensation has grown 60% (Fed Reserve blog) and most of that is not included in household income.


Is it a rabbit or a duck?


Do Millennials have it worse than Boomers did at this age?

I’ll call them the Mills and the Booms, so I don’t wear out my fingers. The Mills were born about 1982-2001 so they are 17 – 36 years old today.  A decade after the worst recession since the Great Depression, home and apartment prices are rising fast in many urban areas.  Mills are now the largest generation alive and are at an age when a majority of  them are independent and increasing the demand for housing.

Some Mills are trying to provide shelter for their families when the competition for housing puts constant upward pressure on prices. Some Mills are paying off student loans, while paying $800 to $1000, or more in California, to share a 3 bedroom house with  two other people. It is stressful.

The Booms were born approximately 1946 – 1964. The youngest are 54; the oldest are 72. When the Booms were 17-36, the year was 1982, and oh, what a year it was. The Booms had just endured a decade of double-digit inflation rates (it is now less than 2%), four recessions, mortgage rates that were considered a “bargain” at 9% (4% today), and high housing and apartment prices because there was so much demand for living space from this post war baby boom.

Oh, and tax increases. Tax rates were not indexed for inflation till 1985, so higher wages each year to keep up with that double-digit inflation meant that many workers were kicked up into a higher tax bracket each year. One of Ronald Reagan’s campaign promises was to stop the sneaky practice of dipping deeper into worker’s pockets every year. He got elected President, beating President Jimmy Carter who had told workers to turn the heat down and put a sweater on.

How do today’s monthly debt payments compare? Household Debt Service Payments as a percent of disposable personal income are 5.8% today compared to 5.6% in 1982. The 37-year average is 5.7% (Federal Reserve).

What are those average debt service payments buying? Better cars, more education, more square footage of housing space per person, and computers and electronics that didn’t exist in the 1980s. People are paying more for housing but are enjoying 30% more square footage per person (Bloomberg). In 1982, 17% of the population 25 years and older had a college degree. Today, it is double that percentage (Census Bureau table A-1), an achievement that the Mills can be proud of.

The Mills do have it better than the Booms, who had it better than the generations before them. That “good old days” talk that we heard from Bernie Sanders on the campaign trail are based on some foggy memories. The reality was way tougher than Sanders remembers or talks about because his perception is clouded by his ideology. He only sees the data that tells him it’s a rabbit. He doesn’t see the duck.

The Poor and the Not Poor

October 15, 2017

No worries. Among the 25 OECD countries, Americans have historically had the lowest percentage of their financial assets in cash and savings deposits. After the financial crisis, we became the second lowest, just ahead of Chile. The percentage for the most recent available year (2015) was 13.5%.

In the heady optimism of the dot-com boom in 1999-2000, Americans had less than 10% of their assets in cash and savings. In the long downturn from 2000 – 2003, Americans bumped up their percentage in safe assets to almost 13%. As the economy recovered, that need for safety declined slightly but not to the levels of the 1990s. The financial crisis in 2008 caused Americans to reach for safety. Safe assets rose to 14.3% of total financial assets and we have still not recovered the level of confidence we once had.

You can click on this OECD link to see a comparison of current percentages. On the bottom right below the chart you can drag the year slider and look at some historical data.

Below the chart on the left is a category labeled “Perspectives.” Select “Total” to see total financial assets, which does not include home equity. Americans have the second highest total, just below Switzerland.

On the other hand, the U.S. has a comparatively high poverty rate of 17.5% using the OECD standard,  a simple measure that an economist would use.The poverty threshold is half the median income.

The U.S. publishes a poverty rate that is several percent lower because it uses a complex definition first set in 1963 when families spent an estimated 1/3 of their income on food. The complexity of the definition hints that politicians had a hand in crafting the definition but it is attributed to one person in the Social Security Administration, who based her standard on a combination of foods that the Department of Agriculture thought would meet minimum nutritional needs. The history of this standard and its many revisions is an interesting read.

The threshold is set at three times the cost of this 1960s era minimum food diet. Efficiencies in food production over the past 50 years have dramatically lowered food costs for U.S. families. In 1978, the BLS estimated that the average family spent only 18% of their income on food. In 2014, it was a bit more than 14% (BLS).

Using food costs as the basis for measuring poverty has enabled politicians in this country to claim success in lowering poverty over the past half century. In 1978, the calculation of the U.S. poverty threshold produced one that was slightly more than the OECD standard. Today, the U.S. threshold is 16% less than the OECD standard.

Let’s look at a family of four making $28K in 2016. They were above the official U.S. poverty threshold of $24,300 for a family of four. By the OECD definition, that American family was below half of the median $59K in income and would be counted as poor.

Housing costs are higher in urban areas, where half of the U.S. population lives. That family of four living in Chicago might pay $15000 per year for a 2 BR apartment in Chicago. Further south in the same state, Springfield, IL, they might pay $11,000. That $4000 difference in housing cost is not calculated into the poverty rate that the U.S. publishes. In effect, poverty is undercounted in urban areas and overcounted in rural areas.

The simplicity of the OECD standard better captures poverty among both urban and rural low-income families because it is based on median income. So why doesn’t the U.S. adopt this much clearer standard? We can turn to the last sentence of the previous paragraph for a clue. Politicians in rural areas want a standard that overcounts poverty in their districts. A higher headcount of poverty equals more subsidies for their constituents. When this standard was set, rural areas in the southern states were primarily Democratic and Democrats dominated the Congress under a Democratic President, Lyndon Johnson. Those politicians wanted the adoption of a food based standard that overcounted those voters.

Today, most rural areas are predominantly Republican and the standard works to the advantage of Republicans and the disadvantage of Democrats. As a rule of thumb, whenever we see excessive complexity in rule-making, there’s usually a very sound political reason for that obfuscation. Former President John Adams lamented this unfortunate characteristic of lawmaking in the crafting of the Constitution itself.

The intentional lack of clarity in lawmaking ensures that any nation’s population will be at odds with each other. A small and smart part of the population makes money from conflict and confusion. People argue on Facebook; Facebook makes money. Trump did what? There’s a video. Got to see that, right? Click bam boom, Google makes money by placing some ads next to the video.  Controversy is profitable. Politics as carnival show.

Crown Publishing, a division of Random House, publishes both the fringe right author Ann Coulter, and the way out on the left author and MSNBC host, Rachel Maddow. Worried that the liberals are taking over the country? Frightened that the conservatives will destroy the very institutions that have made America the greatest nation on earth?  Crown has something for you.

On the other hand, the record low volatility of the stock and bond markets in the past year have made it difficult for financial firms who depend on controversy to make a good profit.  Active fund managers have struggled to outperform their benchmark indexes.  The volume of derivatives and other products that insure against volatility have fallen.  People are not worried enough.  That’s the problem.  We need to worry about not being worried.

And those poor families?  If we lower the poverty threshold even more, we won’t have to worry about those poor people as much.

Young Beasts of Burden

October 8th, 2017

The Federal Reserve recently released their triennial survey of household income, debt and wealth. Rising asset values have lifted the fortunes of many, but younger families are struggling.  I’ll show a reliable indicator of recessions as well as some trends peeking out behind the numbers. The incomes below are denoted in inflation adjusted 2016 dollars.

The good news is that lower income workers have recently seen some income gains, which the Federal Reserve attributes to the enactment of minimum wage laws in 19 states at the start of 2017. However, single parent families have struggled with income gains, as they have for three decades. The decade from the late 1990s to the financial crisis in 2008 lifted the incomes of single parents but they have struggled during the recovery. Median incomes for this group remain below the 2007 level.


That this group needed back-to-back historic asset bubbles in order to see some income gains shows just how vulnerable they are.

Much has been written about income inequality among households. During booms, there is a growing inequality even among those in the top 10% of incomes. The median in any data set is the halfway point in the numbers, and is usually less than the average of the numbers. If the numbers are evenly distributed the median is closer to the average and the percentage of median to average is high.  When there are a lot of outliers that raise the average far above the median, as in home prices, the percentage is lower.  During boom times there is growing inequality, even among the top 10%  of incomes. (Data from survey)


The growth of inequality of income obeys a power law distribution. Think of a 1’x1’ square. The area is 1. Now double the sides to 2’x2’. The area quadruples to 4. Triple the sides to 3’x3’ and the area increases by a factor of 9. Let’s imagine that the area inside of a square is money. How fair is it that the 2’ square has four times the money that the 1’ square has? Politicians may pass tax and social insurance laws to take some of that money from the 2’ square and give it to the 1’ square.  The redistribution of income and wealth can’t change the fundamental characteristics of a power law distribution. Despite the political rhetoric, solutions are bound to be temporary.

The income figures most cited are for households but this data has only been collected since the mid- 1980s. A fall in real median income usually precedes a recession except for the latest fall in 2014 when oil prices began to slide.


Let’s turn to the data for family household income that has been collected since the mid-1950s. What is the difference between a household and a family? By the Census Bureau definition, a family household consists of at least one person who is related to the householder by blood, marriage or adoption. A fall in family income has preceded every recession except a mild one in the 1960s. Family incomes rose very slightly just before that recession, due in part to a new optimism about the presidency of JFK and the promise of tax cuts.


Because this family income data is released annually at mid-year, this indicator is usually coincident with the start of a recession. However, it has proven quite reliable in marking the start of recessions.

Non-family households are not related. This includes roommates or a childless couple living together but not married. Non-family households are generally younger and their income is less than the income of family households. Over the past three decades, the ratio of the incomes of all households to family households has declined.


Although younger people are experiencing slower growth in incomes, they will face increasing pressure to meet the demands of older generations expecting social insurance benefits like Social Security and Medicare. As the oldest Americans begin living in nursing homes in increasing numbers, they are expected to put an ever-growing burden on the Medicaid system (CMS report).  It is the Medicaid system, not Medicare, which covers nursing home costs for seniors after they have depleted their resources. Although the number of nursing homes and certified nursing home beds have declined slightly in the past decade (CMS Report page 21), Medicaid spending still increased a whopping 10% in 2015 as enrollment expanded under Obamacare.

Colorado Governor John Hickenlooper has said that many states are expecting an increase in Medicaid spending on nursing home care as the first of the large Boomer generation turns 75 at the beginning of the next decade. CMS expects total health spending to increase 5.6% per year for the next decade. The last time we had nominal GDP growth that high was in 2006, at the peak of the housing boom.

The demands of both low income families and seniors on the Medicaid system will strain both federal and state budgets.  The federal government can borrow money at will; states are constitutionally prevented from doing so.

What will drive the high growth needed to sustain the promises of the future?  New business starts are at an all-time low (CNN money). How did we get here? The financial crisis caused the failure of many small businesses, many of which are funded with a home equity loan by an entrepreneur.  Home equity loans are down 33% from their peak in early 2009. At the end of last year, the Case-Shiller home price index finally regained the value it had in 2006. In the past decade there has been no home equity growth to tap into.


Imagine a couple in their late 30s or early 40s who bought a home 10 to 15 years ago. They may have only recently recovered the value of their home when they bought it. One or both may long to start a new venture but how likely are they to take a chance? In some of the bigger metro areas where home prices grew much stronger during the boom, prices are still below their peak ten years ago.


The market has priced in a tax cut package that will lower corporate taxes. Investors are expecting a third or more of those extra profits in dividends. Investors are expecting a compromise that will enable companies like Apple to “repatriate” their foreign profits to the U.S. and for that money to be used to buy back stock or pay down debt, both of which are positive for stocks. The IMF projects 3.6% global GDP growth in 2018. There’s good cause for optimism.

Investors have not priced in the long term effects of this year’s hurricanes, the volatility of commodities, the future risk of conflict with North Korea, the risk that the debt bubble in China, particularly in real estate, could escape the careful management by the Chinese government. Add in the several fault lines in household finances that the Federal Reserve survey reveals and there is good cause to season our optimism with caution.

Individual investors surveyed by AAII are cautiously optimistic, a healthy sign, but the sentiment of actual trading by both individuals and professionals shows extreme optimism, a negative sign.  The VIX – a measure of volatility – just hit a 24-year low this past week, lower than the low readings of early 2007.  Sure, there was some froth in the housing market, investors reasoned at that time, but nothing that was really a problem.

Then, oopsy-boopsy, and stocks began a two year slide. So, don’t run with joy, Roy. Don’t go for bust, Gus. Pocket your glee, Lee. Stick with your plan, Stan. There are at least “50 Ways To Leave Your Money,”  and one of them is investing as though the future is predictable.


High Optimism

June 18, 2017

Last week I looked at two simple rules: 1) don’t bet on which chicken will lay the most eggs, and 2) don’t put all your eggs in one basket. This week I will look at index averages and I promise I won’t mention chickens.  Lastly, I will look at a metric that disturbs me.

When I first started investing in Vanguard’s SP500 index mutual fund VFINX, I thought I was buying the average performance of the top 500 companies in America. Like many index funds, VFINX is weighted by market capitalization. With this methodology, a relatively small number of companies have more influence on the movement in the index than their numbers might warrant.

Let’s turn to Vanguard’s breakdown of the top ten stocks in their VFINX fund. These ten stocks are household names, including Apple, Microsoft, Google (Alphabet), Amazon, and Facebook. These five tech stocks are 1% of the 500 companies in the index but make up 13% of the fund. The ten companies make up 20% of the fund.

For investors who want to cast a wider net, there is an alternative: equal weighted funds. Guggenheim’s RSP is an equal weighted ETF first offered in 2003. Using Portfolio Visualizer, I started off in 2004 with $100,000 and invested $500 a month. Despite the higher expense ratio, RSP had a better return, besting a conventional market cap index by 1% annually.


Why does RSP outperform VFINX?  Funds that mimic the SP500 are heavily weighted to large cap stocks. Equal weight funds have a greater percentage of mid-cap companies which may outperform large caps in a particular decade but that outperformance may come at a price: volatility.

Standard deviation is a statistical measure of the zig and zag of a data series, like measuring how much a drunk veers as he stumbles along his chosen path. The standard deviation (Stdev column above) of RSP is slightly higher than VFINX, and the maximum drawdown of RSP is almost 5% higher during the 2008-2009 financial crisis.  The Sharpe ratio is a measure of risk adjusted return, and the higher the better. As we can see in the Sharpe column, the two strategies are within a few decimal points.  In the past 13 years, an equal weighted strategy produced higher returns with only a slightly higher risk.

If I want to mimic some of the diversity of an equal weight index, I can spread out my investment dollars among large-cap, mid-cap and small-cap funds. As SP500 index products, neither RSP or VFINX includes small cap stocks, but let’s add a small percentage into our mix.

Into my comparison of strategies, I’ve added a portfolio with a 40% allocation to VFINX, 40% to VIMSX, a mid-cap Vanguard index fund, and 20% to VISVX, a Vanguard-small cap value index fund. The performance is almost as good as the equal weight RSP and the Sharpe ratio, or risk adjusted return, is similar.


In 2011, Vanguard published an analysis (PDF) of various approaches to indexing that may be of interest to those who want to dive into the topic.


Household Net Worth

Let’s turn from indexing strategies to stock market valuation. We base our expectations of the future on the recent past. Those expectations are the primary driver of valuation. If we expected an affordable self-driving car in the next few years, the current value of today’s cars would be lower.

I have written before about a store of value compared to a flow of value. Savings are a store of value. Income is a flow. The historical ratio of wealth (store) to income (flow) reveals a trend that should give us caution.  The Federal Reserve charts estimates of  both household wealth and disposable income. The current ratio of wealth to income is now higher than the peaks in 2006 and 2000 when the real estate and dot-com booms inflated wealth valuations.


The current ratio is far above the 70 year average but a moving ten year average of the ratio may better reflect trends in investment allocation over the past few decades. Using this metric, today’s ratio is still very high. Rarely does the wealth-income ratio vary by more than 10% from its 10 year average.

When the wealth-income ratio dips as low as 90% of its ten year average, extreme pessimism reigns, as in the early 1970s.  A ratio that is 10% more than the ten year average indicates extreme optimism as in the late 1990s, mid-2000s and now. Today’s ratio is 13% above its ten year average.

In early 2000, the ratio was 16% above its ten year average when the enthusiasm of dot-com expectations began to deflate and the price of the SP500 fell from its lofty heights. The ratio reached 14% above its ten year average in 2005 and remained above 10% till mid-2007 when the first cracks in the housing crisis began to surface and the SP500 said goodbye to its peak.

A picture is worth a 1000 words so here’s a chart of the Household Wealth to Income ratio divided by its ten year average. I have highlighted the periods of extreme pessimism and optimism.


If history is any guide, the ratio of wealth to income can stay elevated for a few years. The “haves” keep trading with each other in a game of muscial chairs until people begin to leave the game and move their dollars into other assets, other markets, or bonds and cash. Unfortunately, many slow moving casual investors are left in the game with deteriorated portfolio values.

Economist Robert Shiller, author of Irrational Exuberance and developer of the long term CAPE ratio, recommended a strategy of shifting allocation in response to periods of exuberance and pessimism.  When valuations were historically low or average, an investor might allocate 60% or more of their portfolio to stocks.  As valuations became overextended, an investor might shift their stock allocation to 40%.  The investor is not trying to predict the future. The portfolio remains balanced but the stock and bond weights within the portfolio changes.

Using this wealth-income ratio as a guide, the casual investor might gradually implement an allocation shift toward safety in the coming year.

The Un-Recovery Machine

December 4, 2016

I’ve titled this week’s blog “The Un-Recovery Machine” for a reason I’ll explain toward the end of the blog as I look at the lack of growth in household income for the past 16 years.  Lastly, I will show how easy peasy it is to do a year end portfolio review. First, I’ll look at the latest job figures and a quick five year summary of a few key stats of stewardship under the Obama administration.

The economy added 180,000 jobs in November, close to estimates.  Obama will leave office with an average monthly gain of 206,000 jobs over the past five years, a strong track record. The president has a minor influence on the number of jobs created each month but each president is judged by job growth regardless.  We need to have a donkey to pin the tail on when something goes wrong.

The real surprise this month was the drop of .3% in the unemployment rate to 4.6%.  Some not so smart analysts attributed the drop to discouraged workers who dropped out of the labor force.  However, the number of dropouts in November was the same as October when the unemployment rate declined only .1%.  Seasonal factors, Christmas jobs and variations in survey data may have contributed to the discrepancy.  What is clear is that the greatest number of those who are dropping out of the labor force are the increasing numbers of boomers who are retiring every month. I’ll look further at this in a moment.

The number of involuntary part-timers has dropped from 2.5 million five years ago to 1.9 million, about 1.3% of workers. This is a lower percentage than the 1970s, the 1980s, and the first half of the 1990s.  It is only when the tech boom and housing bubble grew in the late 90s and 2000s that this percentage was lower.

Growth in the core work force is a strong 1.5%, a good sign.  These are the workers aged 25-54 who are building families, careers and businesses.  The change in the Labor Market Conditions Index (LMCI) turned positive again in October.  This is a composite labor index of twenty indicators that the Federal Reserve uses to judge the overall health of the labor market.  They have not released November’s LMCI yet.  This index showed negative growth for the first part of the year and was the chief reason why the Fed did not raise interest rates earlier this year.

The quit rate is back to pre-recession levels at a strong 2.1%.  This is the number of employees who have voluntarily quit their jobs in the past month and is used to gauge the confidence of workers in finding another job quickly. The highest this reading has ever been was 2.6% just as the dot com boom was ending in 2001.  Too much confidence. When the housing boom was frothing in the mid-2000s, the quit rate was typically 2.3%, a level of over-confidence. 2.1% seems strong without being too much.

Another unwelcome surprise this month was a .03 decline in the average hourly wage of private workers.  On the heels of a welcome .11 increase in October, this decline was disappointing. One month’s increase or decrease of a few cents is statistical noise.  The year-over-year increase gives the longer term trend.  For the past five years, the yearly increase in wages has been unable to get above 2.5%, which was the annual growth in November.

The greatest challenge that the incoming president will face is the ever growing ranks of Boomers who are retiring.  In 2007, the number of those Not in the Labor Force was 78 million.  These are adults who can legally work but are not looking for work, and includes retirees, discouraged job applicants, women staying home with the kids, and those going to college.  That number has now grown to 95 million, an increase of 2 million workers per year, and will only keep growing as the 80 million strong boomer generation continues to retire each month.   The millenials, those aged 16 to 34, are a larger generation than the boomers but will not fully offset the number of retirees till the first half of the 2020s.  If any president can explain this in very simple terms, it is Donald Trump, who has mastered the art of communicating a message in short bursts.


Construction and Local Employment

Construction employment matters.  When growth in this one relatively small sector drops below the growth of all employment, that signals a weakness in the overall economy that indicates a good probability of recession within the year.  It’s not an ironclad law like the 2nd law of thermodynamics but has proven to be a reliable rule of thumb for the past forty years.  Fortunately, the economy is still showing healthy growth in construction employment that has outpaced broader job gains for the past four years.

The puzzle is why construction spending is an economic weathervane.  It has fallen from 11% of GDP in the 1960s to slightly over 6% of GDP today. (Graph )   Yet when this  relatively small part of the economy stops singing, there’s something amiss.

Real construction spending (in 2016 dollars) is currently at a healthy level of $175K per employee, 16% above the low of $151K in the spring of 2011.  Although we have declined slightly in the past year, the average is about the same level as late 2006 – 2007 and is above the spending of the 1990s.  As a rule of thumb in the construction industry, an employee is going to average 33% in wages and salaries. That doesn’t include the cost of employee benefits, insurance and taxes which will bring the total cost of the employee above 40% of the total cost.   So, if spending is $175K, we can guesstimate that the average worker is making about $58K.  When I check with the BLS, the average weekly earnings in construction is $1120, or almost $58K.  As a side note: that 40% employee cost is used by some contractors as a rule of thumb for a bid total when estimating a job.

During the recession many workers dropped out of the trades.  Older workers with beat up bodies cut back on hours, went on disability or took early retirement.  Younger workers who saw the layoffs and lack of construction employment during the recession turned their sights to other fields.  Workers who do come into the trades find that the physical transition takes some getting used to.  Even workers in their twenties discover that muscles and joints working 8 – 10 hours a day need some time to adapt.

The average workweek hours for construction workers hit at a 70 year high in December 2015 and is still near those highs at 39.8 hrs a week.  In some areas the lack of applicants for construction jobs is constraining growth.  In Denver, construction jobs grew by almost 20% in the past year and that surge is helping to attract  workers from other states.  The unemployment rate in Denver is 2.9%, below the 3.5% in the entire state.  (BLS Denver  Colorado)  This pattern is not confined to Colorado. Very often economic growth may be strong in the cities but weak and faltering in rural communities throughout the state.  For decades this has caused some resentment in rural communities who feel that politicians in the cities dominate policy making in each state.

Local employment

The Civilian Labor Force, those working and actively wanting work, is growing in all states except Alaska, Louisiana, Minnesota, New Jersey, New York, Nebraska, Nevada, Oklahoma and Wyoming (BLS here if you want to look up your city or state stats).  Some of the changes may be demographic.  I suspect that is the case in New York and New Jersey. The decline in some states are those related to resource extraction.  Employment in states with coal mining and oil production has taken a hit in the past two years.  In Colorado, the 11% gain in construction jobs has offset a 12% decrease in mining jobs.


Household Income

On a more sobering note…In 1999 real median household income touched a high $58,000 annually.  Sixteen years later that median was $56,500, a decline of about 3%.  There’s a lot of pain out there.

For readers unfamiliar with the terminology, “real” means inflation adjusted.  “Median” is the halfway point.  Half of all incomes are above the median, half below.  Economists and market analysts prefer to use the median as a measure of both incomes and house prices to avoid having a small number of large incomes or expensive houses give an inaccurate picture of the data.

Both parties can take responsibility for this – two Republican administrations (Bush) and two Democratic (Obama) terms. There have been a number of different party configurations in the Presidency, House and Senate, so neither party can reasonably lay the blame at the other party’s feet.  The “new” more idealogically pure Republicans  in the House regard the “old” Republicans of the two Bush terms as traitors to conservative ideals.  Never mind that a lot of those “old” silly Republicans are still taking up room in the House.

Both parties have borrowed and spent a lot of money but little has flowed down to the American worker.  So much for the imaginativeness of trickle down economic theory.  When George Bush assumed office in January 2001, the Federal Public debt totalled $5.6 trillion.  When he left office in January 2009, the debt had almost doubled to $10.7 trillion.  Under Obama’s two terms, the debt nearly doubled again, crossing the $19.4 trillion mark in June 2016.  $14 trillion dollars of Federal borrowing and spending since early 2001 has not helped lift the incomes of American families.  It is a damning indictment of both major parties who have lost touch with the everyday concerns of many American families.

Can Donald Trump be the catalyst that miraculously turns the Washington whirlpool of money into an effective machine?  Doubtful, but let’s stay hopeful. 535 Congressmen and Senators, each with an outlook, a constituency, and an agenda funded by a coalition of lobbyists, are going to fight against giving up control.  Spend the money on my constituents. they will say.  Republicans throw out the phrase “limited government” to their base voters who whuff, whuff and chow down.  Once elected, many Republican politicians are as controlling as their Democratic counterparts, only in different areas of our lives. A Republican controlled government will push for more regulations on women’s health, regulations on people’s moral and social behaviors, a proposal to reinstitute the draft, and threats to private companies who move jobs out of the U.S.   Donald Trump recently enacted Bernie Sanders’ prescription for keeping jobs in America.  He no doubt threatened Carrier’s parent corporation, United Technologies, that they would lose defense contracts if Carrier moved all those 1000 jobs to Mexico.

So Donald Trump, the leader of the Republican Party, is following a socialist play book.  We are going to see more of this because Trump is the leader of the Trump party, not wedded to any particular ideology.  He is a transactional leader who plays any card in the deck to win, regardless of suit. Chaining oneself to ideals is a good way to drown in the political soup.

Republicans in Washington have consistently betrayed conservative ideals of financial responsibility and a smaller government imprint on the daily lives of the American people.  Democratic politicians cluck, cluck about progressive principles but Democratic voters find that their leaders have left them a pile of chicken poop. Unlike Republican voters, Democrats haven’t developed the organizational skills to make personnel changes in party primaries. Both parties are infected with old ideas, loyalties and prejudices.

Because of this, retail investors – plain old folks saving for their retirement – can expect increased volatility in the next two years.  We may look back with fondness at these last two years, a peaceful time of few accomplishments in Washington, and a sideways market in stocks and bonds.  A balanced portfolio will help weather the volatility.

Mutual fund companies and investment brokers track this information for us and we can access it fairly easily online at the company’s website.  Even if we have several places where we keep our funds, it is a relatively simple paper and pencil process to calculate our total allotment to various investments. We don’t need to be precise.  We are not launching a rocket to Mars.

If I have $198,192.15 at Merry Mutual and they say I have 70% stocks and 30% bonds, I can write down $140 in stocks, $60 in bonds.   Then over to my 401K at the Ready Retirement Company to find out that I have $201,323.39 balance, with 80% stocks and real estate funds and 20% bonds.  I write down $160 for stocks and $40 for bonds.  Then over to my savings account at Safety Savings where I have $39,178.64, which I include with my bonds.  I write down $40.  Finally, over to my CDs at the First Best Bank in my neighborhood where I have $32,378.14 in CDs of various maturities.  I include those with my bonds and write down $32. Maybe I have an insurance policy with some paid up value that I want to include in my bonds.

So, adding it all up, my stocks (more risk) are $140 + $160 = $300.  My bonds/cash (less risk) are $60 + $40 + $40 + $32 = $172.  $300 + $172 = $472 total portfolio value.  $300 stocks / $472 total = .635 which is about 64%.  So I have a 64% / 36% stock / bond split and I have figured this out without expensive software, or an investment advisor.

Depending on my comfort level, knowledge and expertise I may want some software or some advice from a professional but I know where my allocation lies.  I am on the risky side of a perfectly balanced (50% / 50%) portfolio and how do I feel about that?  If I do talk to an advisor or a friend I can tell them up front what my allocation is and we will have a much more informed conversation.