Thursday, December 29, 2016
Back on March 14, 2008, I wrote the article below for Gather.com, for whom I was a Money Correspondent. Given that the financial crisis began in September, 2008, just six months later, this proved to be somewhat prescient.
I highlighted the numerous problems plaguing the U.S. economy and how they were like spokes on a wheel, converging in a central hub. I could clearly see a crisis unfolding. Many of these problems have not gone away; in some cases they have worsened. Since many of these same concerns still exist today, I thought I would look back and republish this article, along with its longer companion piece, which was originally published just two days later.
Right now, it appears as if the U.S. is in the middle of an economic "perfect storm." The nation is grappling with an eroding dollar, high budget and trade deficits, a mortgage crunch that is resulting in a spreading credit crisis, record oil prices, a weak job market and the continued, massive costs of two simultaneous wars.
It appears that we may be in big trouble.
The U.S. currency is in a free fall and people who survey such things say there is no end in sight. Many believe it will take years for the greenback to recover its former value and prestige.
The dollar fell to a 12-year low against the Japanese yen on Thursday, dropping below 100 yen for the first time since November 1995. Meanwhile, the euro rose to all time high and is currently trading above $1.55.
The dollar has steadily eroded in value against the euro and other currencies since 2002 as U.S. budget and trade deficits have ballooned. But fears of an American recession and credit crisis have sent the dollar to stunning lows amid predictions that the slump will continue for quite some time.
While the dollar has fluctuated for many years, what's different this time is the existence of the Euro. While foreign funds and governments used to buy up U.S. Treasury notes, bonds, and other securities — which had the effect of propping up the dollar — the Euro and other currencies are now seen as safe alternatives and they are paying higher yields.
Simply put, this means better returns on investments can be found elsewhere.
"You have the U.S. still holding this trade deficit, but now you have the possibility of a U.S.-led recession, and you have a weakening currency. So it's a very dark outlook for the dollar," said Gareth Sylvester, senior currency strategist with the British firm HIFX Inc.
"People just don't want to be holding U.S. dollars and U.S.-based equities," he added. "If you are an investor with a million dollars to invest, you look for the highest yield — you're looking at South Africa, Australia, New Zealand."
Meanwhile, oil prices set a new record high on Thursday at $111 per barrel. In fact, crude has set records in 12 of the last 13 trading sessions. Analysts blame the spike on weakness in the dollar. Interest rate cuts further weaken the dollar and have helped fuel oil's rise. Another rate reduction is expected next Tuesday at the Federal Reserve's regularly scheduled monetary policy meeting.
"This cocktail's been whipped up by the Federal Reserve," said James Cordier, founder of OptionSellers.com, a Tampa, Fla., trading firm.
Analysts expect the price of oil to maintain its upward track. "There's really no end in sight to this," added Cordier.
Gas prices are following crude, reaching a record national average of $3.27 a gallon. And gas prices are expected to rise much higher this spring; estimates range from about $3.50 a gallon in the Energy Department's latest forecast to $3.75 or even $4.00 a gallon according to some analysts.
Higher pump prices result in higher costs for food and other consumer goods.
Despite the weak dollar, the U.S. trade deficit still increased 0.6 percent in January, reaching $58.2 billion. Though exports increased 1.6 percent to the highest level ever, the U.S. still buys more from other nations than it sells abroad.
So much for the supposed benefit of a weak dollar.
Perhaps the most troubling news is that the wars in Iraq and Afghanistan are now costing U.S. taxpayers $12 billion per month, according to the nonpartisan Congressional Research Service.
A Nobel Economist just issued a report indicating that the total cost of the war could exceed $2 trillion. That figure is more than four times what the war was expected to cost through 2006, according to congressional budget data. The White House predicted in 2002 that the war would cost between $100 billion and $200 billion.
Add all of these factors together and it's a frightening mix -- a witches brew of economic trouble that may haunt the U.S. for years to come. These imperfect realities are coalescing into what seems to be a "perfect storm."
Originally published by Gather.com on March 16, 2008
By Sean Kennedy
Earlier this week, in an article titled "The Perfect Storm," I noted how a confluence of factors could portend serious consequences for the American Economy. I focused primarily on the tumbling U.S. dollar and the spiking cost of oil and gasoline.
In this installment, I'll try to outline, in further detail, the numerous other red flags that are threatening our economic well being and way of life.
The harsh reality is that our economy has been a sort of house of cards for quite some time; it has been built on a bad foundation and a lot of delusion.
Incredibly, 72 percent of the U.S. economy is based on consumer spending. This has numerous associated problems.
The kind of spending that Americans have been engaging in for decades has come to its inevitable conclusion. That's because most of us were spending money we didn't have and burdening ourselves with ever-greater debt. Americans don't save money anymore; instead we spend it all. In fact, our national savings rate has been negative for the past couple of years.
The spending frenzy of this decade was based largely on the premise that home values would continue to increase indefinitely. Many Americans seemed to believe that double-digit annual appreciation was a norm that would go on forever. False.
By now, we all know the resulting story; people bought homes they couldn't afford based on this mistaken notion, with the belief they could then flip these homes for a handsome profit or use the appreciation and resulting equity to refinance. Millions were using their homes like ATMs to fuel their obsessive spending. Then it all fell apart.
Now millions of people have lost, or are about to lose, their homes, while banks and other mortgage lenders have been caught holding the bag. This has led to a credit crisis in which banks are hesitant to lend, or in some cases don't even have the means to lend.
Bear Stearns, the nation's fifth largest investment bank, just collapsed under the weight of bad mortgages — or mortgage securities — and was bought out in a fire sale by rival JP Morgan Chase. The venerable financial institution was acquired for less than 7 percent of what its market value had been just two days earlier.
Bear is not alone in its troubles. Other financial institutions – Lehman Brothers, Citigroup, Merrill Lynch, Morgan Stanley – have had to write off billions in losses and seek billions more from foreign investors.
The fear is that the implosion of this financial giant could create a domino effect and set off a tidal wave of defaults in the banking industry. The Fed would be significantly challenged in any effort to avert this, though it would surely try. Who wants to jump on a sinking ship?
Quite naturally, all of this has made businesses very leery and they have recently stopped hiring. Though the unemployment rate of 4.8 percent is still historically low, there is plenty of reason for concern. The economy unexpectedly lost 63,000 jobs in February — the most in five years — after declining by 22,000 in January. These job losses could further weaken consumer spending.
Moreover, the number of jobs being created is not keeping up with population growth. Economists say the U.S. needs to add about 250,000 jobs per month to keep pace. That's not even close to happening right now. Another concern is that, according to the Department of Labor, the jobs that have been created in recent years pay, on average, $9,000 less per year than the jobs that have been lost.
One of the fundamental problems with our runaway spending habits is that we buy almost everything from overseas. Relatively speaking, we don't make much here in America anymore. This creates a significant challenge for exports and makes our massive $705 billion annual trade deficit essentially inevitable. If we don't sell much abroad, where will we continue to get the money to buy all this stuff? In fact, U.S. exporters account for only 12 percent of the economy and the Business Roundtable reports that just 10% of all U.S. jobs currently depend on exports.
Despite Asia's red-hot growth, consumers in China and India accounted for only $1.6 billion of the world's spending in 2007, a tiny fraction of the $9.5 trillion spent by Americans.
Just 7 percent of the world's oil is produced in the U.S., yet crude is traded in U.S. dollars. Other oil producing nations are paid in dollars, which are now worth less and less each week. As a result, these nations make less per barrel as the dollar drops — unless they raise prices. Though the market — not individual countries — sets the price of oil, controlling production does affect price. That's the sort of power that OPEC wields.
Since oil prices affect the truckers who transport our goods, the heating that warms factories, businesses and homes, as well as product packaging, even those who don't own or drive a car are indirectly affected.
Since raising interest rates makes borrowing money more difficult for businesses and individuals, it therefore slows inflation. That's how the Fed controls the economy. But raising interest rates also serves to push the dollar down even further because the return on the dollar declines. Why invest in dollars if you can get a better return elsewhere? If you still think the dollar is worth investing in simply for patriotic reasons, try telling that to foreign governments and investment funds.
In the previous installment, I noted the absolutely massive costs of two simultaneous wars; $12 billion per month, according to the nonpartisan Congressional Research Service.
And the total cost of these wars is now expected to exceed $2 trillion, according to Joseph Stiglitz, a professor of economics at Columbia and his associate, Linda Bilmes, a Harvard professor. If credentials are important here, Stiglitz is a Nobel Prize winner and the former chief economist of the World Bank, while Bilmes has a PhD in economics. In short, these people know what they're talking about and we ought to listen and be concerned.
According to the pair, the costs of our engagements in Iraq and Afghanistan will exceed the costs of both World War II and the Vietnam conflict. That's rather stunning. What this means for the U.S. economy in the long-term is quite sobering, if not downright frightening.
As it stands, the U.S. already has a staggering $9.4 trillion debt, which amounts to $31,000 for every single man, woman and child in this country. Since Americans no longer save money, or have any significant means to invest, our government is reliant on foreign governments – such as China, Japan, and Saudi Arabia – to buy Treasuries in order to finance our massive and out-of-control spending. These are simply IOUs that eventually need to be repaid.
Before these wars even started, our government didn't have the means to pay for its future obligations, according to David Walker, the nation's top accountant. Walker, who just resigned his position as the Comptroller General of the United States, says the Medicare program is on course to possibly bankrupt the U.S. treasury.
The problem is that people keep living longer, and medical costs keep rising at twice the rate of inflation. The U.S. spends 50 percent more of its economy on health care than any nation on earth, says Walker.
As he sees it, the survival of the republic is at stake.
"I would argue that the most serious threat to the United States is not someone hiding in a cave in Afghanistan or Pakistan but our own fiscal irresponsibility," he told 60 Minutes.
Walker isn't just some hysterical, partisan government bureaucrat. The Government Accountability Office website says he "has earned a reputation for professional, objective, fact-based, and nonpartisan reviews of government issues and operations."
And this expert says the US. cannot afford the massive entitlement programs promised to 78 million Baby Boomers who, over the next 20 years, will become dependents of U.S. taxpayers.
At present, the government is already borrowing money to pay for the healthcare of its senior citizens. According to Walker, the system is unsustainable. The only way out, he says, is through additional taxes, restructuring the entitlement programs or by cutting other spending.
That last suggestion would be rather difficult. Right now, 80 percent of the federal budget is allocated to just five areas; Social Security, Medicare, Medicaid, the military and interest on the national debt.
What gives credibility to Walker's projections and analysis is that virtually everyone on the left and the right agrees with him. Federal Reserve Chairman Ben Bernanke and ranking Republicans and Democrats on the Senate Budget Committee back his assessments. Everyone knows he's right; they're just afraid to admit it publicly.
But even with Walker's testimony and warnings, and a fiscal problem that everyone in Washington acknowledges, Congress still behaves like a drunken sailor on shore leave. It just keeps raising the federal debt limit so that it can continue spending money it doesn't have, which only serves to drive us continually further into debt. Each year since 1969, Congress has spent more money than it has taken in.
These costs are already being repaid to the governments who've lent us many billions and the interest payments on that debt account for the fifth biggest piece of the federal budget. Call it money for nothing.
In Fiscal-Year 2007, the U. S. Government spent $430 Billion of our tax dollars on interest payments to the holders of the National Debt. Again, most of them are foreign governments. Compare that to the budgets of NASA – $15 Billion; the Department of Transportation – $56 Billion; and the Department of Education- $61 Billion.
So what does this all mean? Well, I hate to sound alarmist, but it doesn't look good. This is a very ugly picture and we have a government that has ignored these manifold problems for many years.
Politicians are afraid of giving voters bad news for fear of getting voted out of office. Who's ever won an election by telling people he or she plans to raise taxes or cut entitlement benefits?
Our reliance on foreign oil is a very old problem that has been ignored for decades. We have an insane energy policy that was essentially written by Big Oil and Big Energy. This doesn't serve the public good. How about a focus on clean, renewable energy and energy independence?
The massive size of our national debt and our continuous federal deficits have been ignored for decades. This is a form of national suicide. And our massive trade deficit has also been ignored for many years.
Meanwhile our leaders have asked us to soothe ourselves by buying as much as we possibly can, amassing ever-greater personal debt along the way.
This mortgage meltdown, which has turned into a full-fledged institutional crisis, was entirely avoidable. No-money-down loans? Stated-income loans? Interest-only loans? How was this stuff ever allowed?
It's because some in government think that any regulation is a bad thing and that we're all better off without it. But capitalism without regulation just leads some to some sort of Darwinian nightmare, in which only the strongest – or the richest, or the most cunning – survive.
What can we do about our do-nothing Congress?
Well, Democracy is participatory sport, not a spectator sport. It's time for everyone on the sidelines to get in the game.
Call your Senators and Representatives. Write them letters and let them know that you are aware of our bewildering array of economic problems and that you expect them to take action. If you don't know who your representatives are, find out!
Write a letter to the editor of your local paper.
Join a citizens group that is dedicated to progress and to making our politicians accountable to the people. It's time we hold their feet to the fire. In order to be considered leaders, our elected representatives must actually lead.
Get out and vote. Hold your government accountable! Ultimately, we end up with the government we deserve.
Let's just hope, for the sake of all Americans, that it's not too late to right the ship. We've taken our greatness, and our place in the world, for granted for far too long. It's not a right or a guarantee. It has to be earned and maintained.
None of the fixes will be easy, but we can't hide our heads in the sand any longer. Our government must know that we are aware and that they can't try to hide these problems from us, or ignore them, any longer. Then we have to be ready for some rather bitter medicine.
The taste will be harsh, but it will save us in the end.
Monday, December 19, 2016
Donald Trump has pledged to grow the American economy by 4 percent annually. That’s a lot easier said than done. The average growth rate in the U.S. has been below 2 percent for the last decade. In fact, since 2001, annual GDP growth has averaged just 1.85 percent.
Since 2001, GDP has reached at least 3 percent in just two years: 2004 (3.8 percent) and 2005 (3.4 percent). In every other year, through 2015, GDP failed to crack 3 percent, a number that was once considered customary.
Historically, from 1947 through 2016, the annual GDP growth rate in the US has averaged 3.23 percent.
Aging economies simply do not grow as fast as younger, emerging economies. All of the low-hanging fruit has already been picked in the U.S. and all the available juice has been extracted.
This failure to grow the economy at its historical average is not because presidents Bush and Obama didn’t want more growth, or because the two parties in Congress thought the status quo was good enough. They are simply confronting forces largely beyond their control.
If it were as easy as simply "deciding" to grow the economy by 4 percent or more each year, then all presidents would do it. However, it doesn't work that way.
The Baby Boomers were once the economic engine that drove the U.S. economy. However, those days are now over.
Defined as the generation born between 1946 and 1964, the Boomers comprise nearly a quarter of the US population — or more than 75 million people. They were the largest generation in American history, which made them an unprecedented economic force. However, they are now largely retirees… and dying.
Demographic research shows that people overwhelmingly begin to spend more in their 30s through their 40s. They are typically well established in their careers by that point and are in the midst of buying homes and furnishing them. They are also creating families, which also incurs deeper spending. As people progress in their careers, their pay typically rises, which increases spending power.
According to the work of demographic trend expert and economic researcher Harry Dent, individuals typically hit their peak spending between the ages of 46 to 50. However, once a person reaches the age of 50, spending begins to fall. After the age of 60, the decline in spending is significant, falling below that of even young people in the 18-22 demographic.
Since the last of the Boomers were born in 1960, the final wave of them won’t retire until 2027 — a decade from now. Yet, their absence from the workforce is already being widely felt across the economy.
The labor force participation rate, which indicates the share of the working-age people in the labor force, stood at 62.7 percent in November, according to the Bureau of Labor Statistics (BLS). The figure has been stuck below 63 percent since the start of 2014. When the Great Recession officially began in December 2007, the proportion of adults who either had a job or were looking for one stood at 66 percent.
What all of this means is that a whopping 95 million Americans were not in the labor force as of November, which is a new record. The number of people in the labor force (which the BLS classifies as employed or unemployed, but actively looking for a job) was roughly 159 million.
To put this in simple terms, there are 159 million U.S. workers and 95 million non-working adults. In essence, there are just 1.67 workers for every non-worker.
The number of Americans in the labor force has continued to fall partly because of retiring Baby Boomers and also because fewer workers are entering the workforce.
The Congressional Budget Office says about half the decline is due to the aging population. Roughly 10,000 Baby Boomers turn 65 every day, and many of them retire.
Millennials surpassed Baby Boomers this year as the nation’s largest living generation, according to population estimates released by the U.S. Census Bureau. This makes sense; given their age, the Baby Boomers are a shrinking generation.
Millennials, defined as those born between 1981 and 2002, now number 75.4 million, surpassing the 75 million Baby Boomers (Generation X, those born from 1965 to 1980, totals just 65 million).
However, the Millennials are not the same economic force as their parents and grandparents. They are hindered by large student debts and low-paying jobs, even among those with college degrees. Think about how many young college grads are working as baristas, bartenders, servers or nannies, for example. These are the types of jobs that don’t set them up for a successful career, financially at least.
Low earnings at the start of a career typically hamper earnings throughout one’s career. Salary is often dictated by history, as well as experience. In many cases, Millennials don’t have much of either.
The U.S. has experienced an explosion of college loan debt, with more than 43 million Americans holding roughly $1.2 trillion in student debt obligations, which has more than doubled in just the last eight years.
Given their high debts and low-paying jobs, these young people cannot come up with the downpayment for a home, and many don’t feel they have enough income to get married and start a family. The delay in starting families will likely lead to smaller families, which will slow population growth and, ultimately, economic growth.
Consequently, just 36 percent of Americans under the age of 35 own a home, according to the Census Bureau. That's down from 42 percent in 2007 and it's the lowest level since 1982, when the agency began tracking homeownership by age.
So, demand is falling due to the aging Boomers and the Millennials are not in a position to pick up the slack. Additionally, older people aren’t more productive; they’re less productive.
Bureau of Labor Statistics data indicates that U.S. productivity growth from 2010-15 averaged just 0.4 percent per year, down from 1.9 percent during the 1990-2010 period and way down from 2.6 percent during the 1950-1970 period. Historically, productivity gains have been an important engine for wage increases as well as GDP growth.
Economists argue about why exactly productivity has declined, but many assert that game-changing new technologies — such as electricity, cars or personal computers — have run their course. The IT boom of the late ‘90s and early 2000s has also lost some steam as that technology has been widely adopted. Another problem is the lack of education and training for the jobs of the 21st Century.
This slump in productivity, which measures hourly output per worker, is a big deal for the economy and for workers. As Fed Chair Janet Yellen has said, “Productivity growth is the key determinant of improvements in living standards.”
With all of the above in mind, there's not a snowball’s chance in hell that the U.S. economy will grow at 4 percent per year under Trump, much less the 5-6 percent growth he assured voters during the October presidential debate.
The decline in demand and spending by the Baby Boomers should not be under-appreciated or under-stated. That, in combination with the financial struggles of the Millennials, are at the heart of our slow economic growth and there are no indications that will change in the coming years.
Then there’s the matter of our enormous debt, which is also hindering economic growth. But I’ve covered that many times in the past (such as here, here, here and here) and it will have to be a topic for a future story.
Suffice to say, debt growth is exceeding GDP growth, and that is highly problematic.