Federal Debt By President

Leave a comment

There are several “factoids” running around the internet that Obama has run up more debt than all past presidents combined.  According to the Treasury Dept that claim is not true but the run up in debt has been outstanding since Obama took office in January 2009.  When Bush left office, the total debt was 10 trillion.  It was 15.5 trillion at the end of February 2012.

As the graph below illustrates, we have been borrowing lots of money for the past thirty years.

Then I wondered:  after adjusting for inflation,what is the annual increase in federal debt for each President?  Adjusting for inflation allows us to compare apples to apples.  The Federal Reserve supplies us with both data on the debt and a deflator to adjust current dollars to real 2005 dollars.  Obama’s average is computed up to Dec 2011.

Remember, these are inflation adjusted dollars.  The big spending started with Reagan but both parties have become very practiced at developing good explanations for why we have to spend a lot of money. 

Like many, I have thought that the severe downturn has dramatically reduced federal receipts.  As a percentage of GDP, it has – receipts have been coming in at 15 – 16% of GDP, when the long term average is 18 – 19%.  But … bigger government spending has inflated GDP about 10%. What have receipts been over the past decade?  During the Bush years, the Federal government pulled in an average of 2.13 trillion dollars a year in 2005 real dollars.  During the Obama years, the average is 2.0 trillion.  The drop in receipts has been relatively slight.  80 – 85% of the responsibility for the big run up in the debt is spending.

Last week, Senator McCain acknowledged the true cost of defense spending at $1 trillion and it is defense spending that led the Bush administration to run up a $5 trillion dollar deficit in eight years despite four years of robust growth, fueled largely by a real estate bubble.  The bubble burst and the severe fallout from that debacle has prompted even more defense spending – social support programs to defend Americans against lost jobs, lost health insurance and lost home equity.

“Too much spending!” Republicans cry but do not want to cut back on defense spending or agricultural subsidies in rural areas where their support is strongest.  Income tax subsidies are another form of spending, one highlighted by the Simpson-Bowles commission.  In this broken, contentious political climate, neither side of the political aisle can agree on any meaningful reductions in tax subsidies because the voters who put them there can not agree. 

Since neither side can agree on spending cuts, there is only one other solution – higher revenues.  Yes, that’s the punch line.  Funny, isn’t it?  If neither side can agree on spending cuts, they surely can’t agree on where to get higher revenues.

Bleeding heart Democrats cry out for tax justice for the poor while Republicans stand strong for tax justice for the rich.  The Tax Policy Center can find no studies showing that taxes on the rich influence job creation, either positively or negatively.  To conservatives who believe that they do, facts are unimportant.  Conservatives are like football fans – all you gotta do is believe.

Democrats suffer from the same “fact blindness,” disregarding several studies showing that long term unemployment subsidies undercut the confidence and skills of the unemployed, making them less employable the longer they are out of work.  Car and home buying subsidies of the past few years have done little but push forward the buying of cars and homes.  When the subsidy programs expired, so too did the buying of cars and homes.  Despite the demonstrated ineffectiveness of these social subsidies, Democrats continue to propound that they are for the working person.  Another month and another proposal of yet another program for the “vulnerable.”

The moderates of either party have either been voted out of office or left in frustration.  Olympia Snowe, a Republican Senator from Maine, is the latest to quit the carnival show of Congress.  She wrote, “I do find it frustrating, however, that an atmosphere of polarization and ‘my way or the highway’ ideologies has become pervasive in campaigns and in our governing institutions.”

We can not agree on spending cuts and we have two large spending items looming in the near future which will only exacerbate the debate.  The Boomers are just beginning to collect on their deferred annuity program – we know it as Social Security.  They are one kind of bondholder expecting the government to make good on the promises it has made.  The really big bond leviathan is that world wide group of holders of U.S. debt – over $10 trillion in treasury bonds and notes.   We have benefited from the “flight to safety” over the past few years as investors around the globe have bought U.S. debt at ridiculously low rates.  Investors will want a more normal return for their money eventually and when that happens, the annual interest expense on our debt will rise.  These two groups of bondholders with demands and expectations will light the fuse.

If you think the past decade has been contentious, you ain’t seen nothin’ yet.

The Long Run

Leave a comment

Now the really big picture.  Reflecting the severity of the market downturn that began in late 2007, the 4 year average (50 month) of the S&P500 index is getting close to crossing below the 17 year (200 month) average.  Remember, this is years.  In the normal course of affairs, inflation tends to keep the shorter average above the longer average.  The crossing or “nearing” of these two averages reveals just how sick the past decade has been.  The last time the market showed this indicator of prolonged market weakness was in the first half of 1978, after a 43% market drop in the bear market of 1973-74 and a 19% drop in 1977.

In the last 60 years, was the October 2008 market drop of 17% the deepest monthly plunge in equity prices?  No, that honor goes to the almost 22% dive in October 1987.  For a consecutive 3 month drop, 2008 does barely nudge out 1987, both falling 30%.

Although headlines will speak of the downturn in the Fall of 2008 as the worst since the depression, it is important for Boomers to remember that our parents’ generation suffered through some pretty severe market declines as well.  In 1987, most Boomers were in their thirties and probably had relatively few dollars in the stock market.  We may remember “Black Monday”, October 19, 1987, for the headlines but it was not as personal as the 2008 decline because we were decades before retirement and had less at stake.  What particularly distinguishes the two years is that the unemployment rate continued to fall during the 1987 decline.

Young people don’t remember market crashes the way that older people do.  When we are young, we have – like forever – before we are going to be old.  For the echo boomer generation born in the eighties and nineties, also known as the  “millennials”, or Generation Y, the crash of 2008 will be a faint or non-existent memory when they reach their fifties decades from now.  They will probably get to have their own crash – one that they will remember because they will have more at stake.

When we are in our twenties, someone should prepare us.  We are going to work hard and save money.  We are probably going to put some of that hard earned money in the stock market.  Then, when we are in our fifties, sixties or seventies, we are going to flip out when our stock portfolio drops by 40%.  Would we listen to or remember that sage advice?  Probably not.

Labor Report – February

Leave a comment

This past Friday, the Bureau of Labor Statistics (BLS) released their monthly assessment of the labor market, reporting a net increase of 227,000 jobs during the month of February.  This marked the third consecutive monthly increase of more than 200,000 jobs, giving many hope that the tepid economic recovery is gaining a firmer foothold.  Consumer spending accounts for more than 2/3 of the economy.  Any improvements in the overall economy are fragile without a strengthening labor market.  Almost 1/2 million people who had previously given up looking for work became available for work again.  This influx of job seekers offset the rise in jobs, causing the unemployment rate to remain unchanged at 8.3%.

The monthly survey of businesses showed job gains in many industries:  Business services, leisure and hospitality, health care, mining and manufacturing. In 2011, government jobs disappeared at the rate of 22,000 per month.  That job attrition has slowed to zero, indicating that the cut backs in government are largely over and will no longer weigh down any growth in the private sector.

The bad news is that there are many critical elements of the jobs report that were unchanged.  The long term unemployed remained about the same at 5.4 million.  The participation rate of the 155 million civilian labor force is a bit less than what it was a year ago but the employment population ratio is slightly above Feb. 2011’s rate.  The average workweek remained unchanged at 34.5 hours.  Involuntary part time workers, those who would like a full time job but can’t find one, remained the same at 8.1 million. 

As encouraging as February’s data is, the 5.4 million who have been unemployed for 27 weeks or more is a troubling sign of the underlying weakness of the job market.  Below is a BLS historical comparison of the unemployment rate and the long term unemployment rate.  The 70 year timeline of the graph illustrates the ongoing crisis levels of long term unemployment.

On Monday, March 12th, the BLS will release the monthly JOLTS job openings report for January 2012.  In December, there were 3.4 million seasonally adjusted job openings, an increase of almost 10% from the previous month.  This is better but – always that but – the graph below shows non-seasonally adjusted (NSA) December job openings from the previous ten years to show the improving but still weak number of job openings.

As I have mentioned in past blog posts, there is some concern that the seasonal adjustments that the BLS uses may have some weaknesses due to the severe downturn in the fall of 2008 which affected the winter seasonal adjustments.  The BLS makes one set of seasonal adjustments for the six months from May through October and another set of adjustments for the November through April period.  With advances in statistical modeling that the Census Bureau has introduced over the past 50 years, the BLS has refined their methodology of making seasonal adjustments.  The concern is not with their methodology but with the data itself of late 2008 and early 2009, an “outlier” that was so extreme that it “contaminates” the data set in subsequent years. The BLS incorporates 5 years of data in their projections of seasonal adjustments, so this “hangover” will last into the spring of 2014.  You can read an overview of the adjustment methodology used by the BLS here.  Without seasonal monthly adjustments, January’s job data each year would look dismal, with job losses regularly in the 2.5 to 3 million range, as employers lay off workers who were hired for the Christmas season.

A comparison of the raw numbers for job gains in February of each year do give an indication of labor market momentum.  As the chart below shows, the gains in February have been one of the strongest of the past decade.

But we saw strong gains last year throughout the spring only to see the momentum fade, explaining why the reaction to this month’s gains have been one of “cautious optimism”.  Some attribute the loss of momentum last year to the tsunami, the unrest of the Arab spring and rising gas prices, the ongoing sovereign debt problems in Europe, and the embarrassing budget battle.  But there may be more to it than the events of last year.  I contend that there is a structural weakness in our labor market that makes us more susceptible to the “winds” of current events.

As I have done before, let’s look at the core working population, 25 – 54 years old.  These are non-seasonally adjusted figures for February in each of the past ten years.

These are the “middlers”, those of us who are buying homes for the first time, raising families, buying appliances and cars and they are the backbone of a consumer economy.  The job growth of this population backbone has been flat and remains at levels below those of the early part of the decade, as this country pulled out of the 2001 – 2003 downturn.

The largest part of the increase in employment have come from those who are older than 54, as shown in the chart below of the larger data set of those 25 and older who are employed. Partially this is due to an aging population – the graying of the Boomers – but it shows a structural weakness in the labor market which undercuts the resilience of the economic recovery.

The takeaway is that we are once again seeing improvement but our economy and labor force suffers from a brittleness that the labor data exposes.  Part of that brittleness is due to an aging population; part is due to the continued de-leveraging and slow recovery typical of major financial crises; part is due to political indecision in government which reflects the indecision and disagreement among the voters; part is due to a very “accommodating” (translation: low interest rates) Federal Reserve policy that attempts to distribute financial pain, reward and risk throughout the economy using the few monetary tools that it has.

The stock market is encouraged but stuck. After rising for the past two years, the 200 day moving average of the SP500 has leveled off for the past 6 months, a phenomenon not seen since April to October of 1994.  October 1971 to March 1972 and May through September 1957 saw a similar 6 month plateau.  The Indians in the market are hunched over with their ears to the ground, not certain whether the distant sounds they hear are buffalo or thunderstorms.

Golden Cross

Leave a comment

A few weeks ago, I wrote about a long term trading strategy using the 200 day moving average of a popular index, the S&P500, which captures 75% of the corporate activity in the U.S.  As corporate profits of larger companies increasingly come from overseas, the S&P provides some foreign stock exposure as well.  Over the past decade, the strategy worked pretty well, getting out of the market before the 2008 downturn, enabling an investor to pick up shares at a cheaper price in 2009.  That is, after all, the point of adopting any type of trading strategy – sell when shares are expensive, buy them back when they are cheap.

Today, I’ll look at a variation of the 200 day strategy called the “Golden Cross”, which I have mentioned in a few past blogs.  A Golden Cross buy signal occurs when the 50 day moving average crosses above the 200 day moving average.  A sell signal occurs when the 50 day average crosses below the 200 day average. A buy signal just occurred at the end of January. You can chart the S&P index for free at StockCharts.  I will compare this Golden Cross strategy to the buy and hold strategy. 

The Golden Cross strategy investor must overcome two major problems: tax attrition and the return on cash while out of the market.  The first problem is formidable. The IRS takes their pound of flesh out of profits that the trading strategy produces.  The downturn in prices when the strategy is out of the market may not be enough to compensate for the 20% (or more?) tax bite, which reduces the investor’s capital pool when he buys back into the market.  Thus the investor may buy fewer shares on the next buy date, and those fewer shares generate less profits as market prices climb.  The second problem is almost as formidable.  Over the 50 years that I will explore, the investor would be out of the market about a third of the time.  The interest rate one earns on one’s capital while out of the market is an important factor in total returns.

Here are the assumptions of the study:

20% Effective Tax Rate – capital gains taxes are “taken out” at the time of the sale.

3% Average Dividend Yield (see here for historic dividend yields)- dividends are recorded and taxes paid for those dividends for both strategies at buy and hold dates.  While not entirely accurate, it largely accounts for the value of dividends to a portfolio.

Interest – 4% on cash while out of the market.

Reinvest – For the conservative buy and hold strategy, the investor pays taxes on the dividends received and puts the money in some cash equivalent fund earning the stipulated interest.  The Golden Cross strategy accumulates and reinvests the dividends at the next stock purchase date. (Click to enlarge in separate tab)

The market downturn during the 70s was severe enough that the Golden Cross investor could book profits, pay taxes and buy back more shares than he had before.  In the early 80s, the downturns were not significant enough to overcome tax attrition.  Had we ended this exploration in the year 2000, this strategy would have done poorly when compared to a buy and hold strategy, even after accounting for the deferred taxes owed by the buy and hold investor.  During the two severe bear markets of the 2000s, the Golden Cross strategy shined, exceeding the returns of the buy and hold strategy.

The lesson is that the downturn must be strong enough that the Golden Cross strategy can overcome the tax attrition by buying shares back at greatly reduced prices.  Although the Golden Cross strategy produced only 5 losses out of 27 round trip (buy/sell) trades, a winning percentage of about 80%, the tax obstacle is a formidable barrier to increased profits over buy and hold.  The buy and hold strategy is about 25% invested in cash at the end of this study, a conservative approach consistent with a buy and hold investor.  If the buy and hold investor were to periodically reinvest dividends instead of holding cash, it would probably equal the after tax returns of the Golden Cross strategy.

The Golden Cross strategy is much more dependent on finding a good return on cash when the investor is out of the market.  In these times, that is not an easy task.  As a retirement strategy, it might be wise to choose a combination of the Golden Cross and buy and hold.  A buy and hold investor in or approaching retirement would assess their income needs for the next 3 – 5 years and sell just enough shares to fill the cash account when a Golden Cross sell signal arrives.  During their working years, a buy and hold investor would add shares when a Golden Cross buy signal arrived.

The Core Work Force

Leave a comment

The Bureau of Labor Statistics (BLS) released their monthly Employment Summary this past Friday and the market cheered, the Dow jumping up 100 or so at the open.  The Sunday talk shows have been abuzz about the report, which showed a January gain of 243,000 jobs.  After 5 months of increasing job gains, how improved are Obama’s chances of re-election?  Does the improving job picture cause the Republican Presidential contenders to change course a bit?  Wanting not to appear as though they are rooting against the American economy, do the contenders aim at specific policies of Obama in the coming months?  With the S&P500 index at 1344, some market pundits are whispering the 1500 mark that the S&P could take a run at this year.  Holy moly, macanoli, what a buzz about one labor report!

The labor report is only part of the picture puzzle that shows an improving economy.  The ISM manufacturing report was slightly below expectations but still growing.  Two key components of the index, new orders and backlogs, showed a robust increase, hinting at continuing improvement in the coming months.  The recent durable goods report shows that businesses are building inventories, a sign that expectations are improving.   Retail sales tapered off in December, but Personal Income was slightly above expectations, growing .5% over November.  Caterpillar, the large equipment maker, is looking forward to revenue and profit increases in 2012, reducing earlier concerns of a global recession.  A recent report indicates that the ongoing contraction in China’s manufacturing has slowed and is close to the neutral mark between contraction and growth. 

So, what’s not to like?

Looking past the monthly headline numbers of job growth, let’s look at this country’s core work force, men and women aged 25-54.  The BLS just made several census adjustments which resulted in upward revisions to seasonally adjusted job growth from April to December.  Instead of looking at seasonally adjusted numbers, I’ll take a look at the raw numbers from the BLS employment report for January and compare them to BLS January data for the past ten years.

A unseasonably warm winter throughout much of the U.S. gave a boost to construction jobs in the office building and multi-family residential construction.  Although the construction industry is still far below 2007 levels, that boost shows up in a comparison of employed men aged 25 – 54 from last January to this January. (Click to enlarge in separate tab)

The ongoing attrition in government jobs, which disproportionately employs women, has slowed but is still evident in comparisons with past Januaries.

This rather tepid growth, or lack of it, in our core work force is troubling.  This age demographic forms the backbone of a healthy economy, raising children, buying furniture and homes, saving for retirement and their kid’s college. Any job growth is good, but when I see a better improvement in the employment numbers for this group, I will know that we are building a resilient economy, one that can withstand some shocks.  We know of some possible shocks – the probable default of Greece, the ongoing recession in Europe and the possibility of some armed conflict with Iran, to name but three.  The shocks we don’t forsee are what can push our economy off balance.  Last year was a reminder of the impact of unforeseen shocks.  The tsunami  in Japan and the flooding in Thailand not only devastated those countries and their people but impacted supply chains in Asia and consequently sent after shocks throughout the world.

Recently fashionable has been talk of a decoupling of the U.S. and emerging countries’ economies from the sovereign debt and financial troubles in Europe.  If recent history has taught us nothing, it is that much of the world is joined together by interdependent webs of financial conglomerates and the monetary policies of nation states, by the tension between global consumer demand and multi-national supply chains to meet that demand.

200 Day Nudges Higher

1 Comment

The market is a reflection of hope and fear, of world events that affect each of us, our jobs, our families, our schools, churches and neighborhoods.  The 200 day moving average moves through the minute gyrations of the daily market like a great leviathan, changing its course only gradually.  If you are a Star Wars fan, think of the 200 day as The Force.

For the long term investor, it is wise to buy or sell as this average changes direction.  When we compare a month’s (21 trading days) average of the 200 day to the previous month’s average, we can see these changes in direction.  At the onset of the recession in 1990, the S&P 500 index dropped about 17%.  The recession was fairly short but it was a jobless recovery.  From the October 1990 trough to the end of 1993, the index climbed 60%, then paused and stumbled.

Almost 3 years after the recession had officially ended in March 1991, the unemployment rate was still a lofty 6.5%.

Due in part to the jobless recovery, the federal debt had risen 50% in the four years of 1990 through the end of 1993 and would continue it’s relentless march upwards for several more years.

 

In 1994, the 200 day average waggled in indecision, barely moving during that summer before nudging upwards in August, then falling again in November, before making its decisive move upwards in 1995.  In six years, the index would more than double.  When the 200 day began to roll over in the fall of 2000, the wise long term investor listened to that slow heartbeat and headed for the exits.  In the middle of May 2003, the 200 day began another 4-1/2 year climb up before rolling over in Jan. 2008.  18 months later, the 200 day began yet another climb after the steep descent of the financial crisis of 2008.  Just this past September, the 200 day signaled exit after a tumultuous summer and before continuing unrest in the fall.

A person investing in the S&P500 index who turned when the 200 day average turned would have made 460%, including dividends, on their money since 1994, 81% in the past ten years and that doesn’t include money that could be made in interest while their money sat safely outside of the market mayhem. 

In the last quarter of 2011, the 200 day moving average had been slightly declining but largely flatlining – unchanged – since the beginning of August. A week ago, it nudged higher.  Will this be like the nudge higher in August 1994 that may reverse in a month or two?  Could be. Although the signals of the 200 day average are relatively few, a prudent investor would monitor the situation every week in case this is a “waggle” and not the beginning of a move up.

Corporate Taxes

Leave a comment

Both conservative and “mainstream” media pundits, as well as candidates In the Republican primary debates, assert that U.S. corporations pay a 35% federal income tax rate, “one of the highest in the world.”  After the corporation pays this tax, it distributes dividends to its shareholders, who then pay tax on the dividend.  Capital gains and dividends are taxed at a lower 15% rate, resulting in a net tax of 50% federal tax on corporate profits.  In arguing for lower corporate tax rates and rationalizing the lower rate on dividends, conservatives ask should the federal government get half of corporate profits?

The federal government may get too much of profits but it is not 50%.  The international accounting firm PricewaterhouseCoopers calculated an effective tax rate of 27% in the years 2006 – 2009.  Sixty years of data from the Bureau of Economic Analysis show that the corporate tax rate has declined markedly since World War 2. (Click to enlarge in separate tab)

Using a three moving average highlights the downward trend.  For those in the Ronald Reagan cult, it may come as some surprise to see the “hump” in rates during the Reagan years.

Zooming in on the past ten years, we see an effective tax rate of 30% or less.  Some might explain that the lower average rate is due to smaller corporations who pay less than the 35% tax but IRS data shows that smaller companies who qualify for these lower rates make up less than 10% of corporate profits.

If companies had paid a 35% rate on their profits this past decade, what would they have paid?  Almost a trillion dollars extra in taxes.

When someone mentions the “35% corporate tax rate”, that is the statuatory rate, not the actual rate companies pay.   In 2009, the three year moving average rate had dropped to 21%.  That is a far cry from 35%.  We can have a discussion – or disagreement – about what a fair tax rate is for U.S. companies.  We should at least start that discussion from some realistic data.

Obama Care and Republican Debates

Leave a comment

In all the Republican debates, the Presidential candidates vow to repeal the Patient Protection and Affordable Care Act, or Obama Care, pointing specifically to the provision of the bill which mandates that people have health insurance or pay a fine.  Not once can I remember any candidate advocating the repeal of the 1986 Emergency Medical Treatment and Active Labor Act (EMTALA) which mandated that hospitals provide emergency care to anyone regardless of citizenship, their legal status or their ability to pay.  Twenty-five years ago, this law was passed by a Democratic House, a Republican Senate and signed by a Republican President, Ronald Reagan.  The law dictates but provides no funding for its mandate.  Obama Care finally provides a mechanism to fund the 1986 law – a “put up or shut up” provision that a lot of people don’t like.  If Republicans are truly against federal mandates, are truly for more state autonomy, why are they not calling for EMTALA’s repeal?  Although I have not heard Ron Paul recommend repeal of the 1986 law specifically, he has consistently voiced his opinion that the federal government should get out of the medical care business. 

The health care debate is part of a larger issue.  Are we as a people prepared to put up or shut up?  Should hospitals be forced to treat patients?  If so, how to pay for it?  Should Congress be allowed to pass these unfunded mandates?

“Repeal and replace” is an argument I have heard frequently.  Replace with what?  Last March, Bloomberg analyzed various Republican proposals to replace Obama Care and found that it was mostly hot air, saving far less money than the lofty claims.  Again, I ask – are we going to put up or shut up?  Is Ron Paul the only Republican candidate who shows a consistent adherence to principle?  Have we become a nation of people who elect only those politicians who tell us that it really is possible to have our cake and eat it too?  

Recession and the Presidency

Leave a comment

On Tuesday, President Obama will give his annual State of the Union address to Congress and the nation.  This past Saturday, South Carolina chose Newt Gingrich, the former Speaker of the House, as the front runner in their Republican primary.  In three grassroots states, Iowa, New Hampshire and South Carolina, primary voters have chosen three different Republican contenders who are vying for the Chief Executive Office.

For the past 150 years, every President except Lyndon Johnson, Jack Kennedy and Bill Clinton has had to contend with recession during their tenure. (NBER Source)  Every Presidential contender promises that they are going to stop the vicious business cycle that inevitably leads to recession.  With the advent of “JIT” – Just In Time Inventory – increasingly adopted by businesses and their suppliers in the mid to late 90s, recessions were pronounced a thing of the past.  No more would there be an excess build of supply by the nation’s businesses, leading to a sagging economy when product demand inevitably fell.  Advances and investments in technology enabled businesses to respond quickly to fluctuations in demand.  As the milennium approached, it was truly the dawning of a new age.

What was dawning was the advent of a secular bear market, a long period of time when the market falls for a few years, struggles up again, then falls, then rises again as fear and hope compete against one another.

A few weeks ago, I noted that in the middle of 2011, we had finally come out of an almost four year  recession.  This was not the official National Bureau of Economic Research end of the recession.  That happened in the middle of 2009.  This mid-2011 recession end was the “How It Feels” variety as real GDP finally gets back and surpasses the level it was at before GDP started its decline.

Below is a graph comparing the official lengths of recession and the “how it feels” recession length and a comparison of the two during each President’s tenure in the past sixty years.  This comparison helps explain the mood of the country when Presidents Ford, Carter and HW Bush lost re-election bids (Ford was actually not up for re-election since he had taken over the Presidency when Nixon resigned in August 1974).  The chart also gives an insight into the success of re-election bids by Eisenhower, Nixon, Reagan, and GW Bush. The economic pain was either less than or about equal to the official figures of economic distress during their presidencies.

As he prepares for his third State of the Union address, the lesson for President Obama is stark.  History unfortunately repeats itself.  It is also a lesson for any Republican Presidential hopeful; the odds are that he will have to contend with a recession during his tenure if he wins election.  On the campaign trail, how many Presidential hopefuls of either party ever broach the subject of what their administration will do during the eventual recession while they are in office?  Better to promise that it won’t happen on their watch.  It will.

Savings Crisis

Leave a comment

Last week the Commerce Dept reported that consumer credit had grown in November at an annualized rate of 10%. 

The growth consisted mostly of car and truck sales, which shows increasing confidence and pent up demand.

Below is a chart of revolving credit outstanding which excludes auto sales.  As we can see, the American consumer is still struggling.

Taking a longer perspective, let’s look at the personal savings rate for the past 50 years.  The savings rate is calculated by subtracting all personal consumption expenses, including interest, from disposable personal income (gross income less taxes).

The savings rate shows the underlying resilience – or lack of it – of the average American household.  Savings helps fuel investment in companies, investment in local, state and federal government bonds.  As our savings fall, we become ever more reliant on foreign money to fuel this country’s debt and growth.