Quantcast
Channel: ECONOMY – WEALTHY DEBATES

America’s Long-Term Erosion of the Middle Class


Toronto’s House Price Bubble Not Fun Anymore

Six Key Events That Could Shape Markets In H2 2018

Next recession not far off, economists predict

Mexican Peso Falls to Lowest in a Year as Nafta Seen Delayed

A California mayor is launching a universal basic income experiment that will pay some city residents $500 monthly

18 Times The Fed Has Gone Through A Rate Hiking Cycle, And 18 Times It Has Caused A Huge Stock Market Decline And/Or A Recession

0
0

Since 1913, the Federal Reserve has engaged in 18 distinct interest rate hiking campaigns, and in every single one of those instances the end result was a large stock market decline, a recession, or both.  Now we are in the 19th rate tightening cycle since 1913, but many of the experts are insisting that things will somehow be different this time.  They assure us that the U.S. economy will continue to grow and that stock prices will continue to soar.  Of course the truth is that if something happens 18 times in a row, there is a really, really good chance that it will happen on the 19th time too.  For years I have been trying to get people to understand that our country has been on an endless roller coaster ride ever since the Fed was created back in 1913.  Things can seem quite pleasant when the economy is on one of the upswings, but the downswings can be extremely painful.

It was economist Lance Roberts that pointed out this correlation between rate hiking cycles and economic troubles.  When I came across his most recent article, it really got my attention

A sustained interest rate hiking campaign, as undertaken by the Fed, has always resulted in negative stock market returns.

Always. Not usually, not might-be-correlated-to. Always. As in, 18 out of 18 times. Until now. When we’ve had the single highest percentage increase in history (93.33% peak to trough, so far).

To support his claims, he posted this chart

So far, however, there hasn’t been a huge stock market drop or a recession during this rate hiking cycle.

Has something changed?

Is the 19th time going to be fundamentally different?

Roberts believes that the unprecedented intervention by the Fed that we have seen in recent years that has fueled corporate buybacks has successfully “delayed the inevitable stock market correction”

So what gives? Of course, it’s the Fed. Having kept interest rates near zero for years on end and having filled corporate coffers with super cheap debt used to fuel market-bubble-sustaining corporate buybacks, the Fed has delayed the inevitable stock market correction.

I definitely agree with Roberts – a colossal stock market correction is inevitably coming.

And the warning signs are all around us.  As I have discussed so many times before, junk bonds are often an early warning sign for a major financial crisis, and it is extremely interesting to note that it looks like Deutsche Bank is planning a “fire sale” of their energy junk bonds.  The following analysis comes from Zero Hedge

Bloomberg reports that Deutsche is planning to sell the loan book as a whole and has marketed it to North American and European peers, said one of the people. The portfolio is expected to sell for par value, said the people, who asked not to be identified because they weren’t authorized to speak publicly; good luck with that!

The bank’s energy business is expected to wrap up on June 30, one of the people said. The bank has been an active lender in the energy space in the past year, participating in the financing of companies including Peabody Energy Corp. and Coronado Australian Holdings Pty., according to data compiled by Bloomberg.

So to summarize: Moody’s is warning that when the economy weakens we will see an avalanche of defaults like we haven’t seen before; Corporate debt-to-GDP and investor risk appetite is reminding a lot of veterans of previous credit peaks; and now the most desperate bank in the world is offering its whole junk energy debt book in a firesale… just as high yield issuance starts to slump.

Wow.

To me, that is one of the strongest indications yet that things are about to take a major turn for the worse for the global financial system.

And even former Federal Reserve chair Ben Bernanke is sounding quite pessimistic these days.  The following comes from a Bloomberg article entitled “Bernanke Says U.S. Economy Faces a ‘Wile E. Coyote’ Moment in 2020”

The stimulus “is going to hit the economy in a big way this year and next year, and then in 2020 Wile E. Coyote is going to go off the cliff,” Bernanke said, referring to the hapless character in the Road Runner cartoon series.

When you read that quote, alarm bells should have been going off in your head.

If his forecast is accurate, that means that the U.S. economy’s Wile E. Coyote moment will come just in time for the 2020 election

The timing of Bernanke’s possible slowdown would line up badly for Trump, who has called the current economy the best ever and faces reelection in late-2020.

Wouldn’t that be convenient for the elite?

U.S. voters tend to be extremely influenced by the performance of the economy, and so a major economic downturn would not bode well for Trump’s chances.

Similarly, if a major crisis erupts during the second half of this year, it will probably mean big problems for Republicans in November.  Timing is everything in politics, and when the next crisis comes most voters won’t even consider the fact that it had been building for a very, very long time.  All they will care about is who is in office at the time.

But for the moment, most of the “experts” are assuring us that things will be rosy for the foreseeable future.  For example, a couple of prominent analysts over at Goldman Sachs are saying that tech stock prices are likely to continue to rise

“Unlike the technology mania of the 1990s, most of this success can be explained by strong fundamentals, revenues and earnings rather than speculation about the future,” strategists Peter Oppenheimer and Guillaume Jaisson wrote in a note. “Given that valuations in aggregate are not very stretched, we do not expect the dominant size and contribution of returns in stock markets to end any time soon.”

And the optimists will continue to be right up until the moment that the bubble finally bursts.

Whenever the Federal Reserve starts raising rates, it always results in a bad ending.

This time will be no different, and anyone that is trying to convince you otherwise is just being delusional.

Michael Snyder is a nationally syndicated writer, media personality and political activist. He is the author of four books including The Beginning Of The End and Living A Life That Really Matters.

The post 18 Times The Fed Has Gone Through A Rate Hiking Cycle, And 18 Times It Has Caused A Huge Stock Market Decline And/Or A Recession appeared first on WEALTHY DEBATES.

These US States Have Higher Incomes than Nearly Every European Country

0
0

Back in 2015, I wrote an article titled “If Sweden and Germany Became Us States, They Would Be Among the Poorest States.” It is one of the most widely shared — and also most widely disparaged — articles on mises.org. The article showed that contrary to many efforts to posit interventionist European states as being more prosperous than the United States, the record — at least if we measure things in terms of income data — doesn’t bear this out. While it’s true that income isn’t the only measure of prosperity, it is an important one.

The enthusiasm with which the information was promoted and defamed is not surprising since these sorts of international comparisons often provide fodder to both sides of the debate. The fact that some relatively interventionist economies have high incomes is proof that interventionist, so-called “mixed economies” are better than economies where things lean more in the direction of markets. On the other hand, if more market-oriented economies can be shown to have especially high incomes, then this is also allegedly proof that more purely market economies are best.

This conflict is then made worse by the perception that the United States is more or less a hard line, extreme free-market system, while most European economies are thought to be far more interventionist than the US.

In reality, the truth is far more muddled. In terms of government spending on welfare programs, the United States is comparable to a number of other states commonly regarded as “welfare states.” On the matter of health care specifically, US government spending outpaces nearly all other countries, both rich and poor. In other words, the US is not nearly the outlier many people think it is.

RELATED: “The Myth of America’s “Stingy” Welfare State” by Ryan McMaken

Nevertheless, in many respects the US is a relatively free economy in terms of tax burden, regulations on private property, and international trade.

So where exactly does the US rank in terms of income? If we update the data using 2015 numbers, we find similar results.1 The United States, when measured according to median disposable income (which includes cash benefits from welfare programs), remains among one of the highest-income places in the world:

median_incomes.png

Note that here I’m using median numbers so as to avoid averages. When dealing with wealth and incomes in the United States, averages are usually skewed up considerably by the presence of so many members of the super-rich in the United States. By using medians, we mitigate those effects.

Moreover, the data used here comes from the The Organisation for Economic Co-operation and Development (OECD), which is hardly a pro-market group. Specifically, the numbers are from the “median disposable income” metric which also takes into account income from social programs, and the costs of taxation.

The median income numbers are then converted from local currencies to international dollars by using the PPP conversation factor found at the World Bank’s site.2 There’s nothing novel about this approach. It’s exactly what the World Health Organization tells us to do when comparing values across jurisdictions. The international median-income comparisons at Wikipedia also employ a similar method. Moreover, our results in the graph above, look quite similar to final results expressed in dollars and published by the OECD itself in its 2014’s “Society at a Glance” report.

Usually when comparisons like this are made in the media, they’re based on GDP per capita or other measures that ignore social benefits, taxes, and the effects of a small number of ultra-large incomes at the top. The median disposable income measure takes all this into account. And we still end up with a measure that shows that the United States is still outpacing most of the countries we’re so often told have been made into paradise by an interventionist state.

Comparing Incomes with Social-Benefits Spending

Moreover, when we compare these results to welfare spending by country, we don’t find a solid connection here between the amount of spending on social benefits and median incomes — one way or another. It’s true, for instance, that Denmark’s median income is essentially the same as that of the US, at right around $32,000. Meanwhile, Denmark spends far more as a percentage of GDP on social benefits. Is this evidence that the US could spend more on social benefits and still maintain the same median income level? No.

Skepticism in this regard is warranted since Canada and Australia, both of which spend less on social benefits than the US, have higher median incomes than the US. Isn’t this evidence that the US should cut social spending if it wants to increase its median incomes? That conclusion doesn’t necessarily follow from this information either. Spending in the US is about equal to that in Switzerland and New Zealand, and only two percentage points behind the UK:

spending1_1_0.png

Source: The OECD Social Benefits database: http://stats.oecd.org/Index.aspx?datasetcode=SOCX_AGG

What About Inequality?

When faced with higher median numbers, the interventionist will then say “but what about poverty levels?” Sure, median numbers are high, but there are more poor in the US.”

Even that, though, depends on how poverty is measured.

International measures of poverty are usually expressed in terms of the number of people who have incomes at 50 percent of the median income in each country. As I explained in an article titled “The Poor in the US Are richer than the Middle Class in Much of Europe” the poverty-level income in the US, by this 50-percent-of-median measure is nearly as high as the median income in Spain and Italy. Thus, even if poverty rates in the US are higher than they are for the poverty-tier households in most other countries,  the actual incomes of these poor households is higher than in countries with lower median incomes. For instance, 50 percent of the median US disposable income — the poverty level — is approximately $16,000. That’s only $7,000 below the median income level in Italy. The poverty income in Italy meanwhile, is $12,000.

The Pew research center has also recently provided another way of looking at this. In a 2017 report, Pew looked at median incomes across numerous countries, breaking out income groups into three tiers: middle-class, lower tier, and upper tier.

26 percent of Americans are in the lower tier. That’s not much higher than what we find in southern Europe, but well above what’s seen in much of northern Europe:

pew2.JPG

But also note that the income level for the lowest tier is higher than what we find in most of Europe. Yes, the lower tier is larger, but its also comparable in income (again, this is including government assistance) to that found in Denmark and the Netherlands. It’s higher than in Germany:

lowerincome.JPG

So yes, there are more people in the lower tier in the US, but the people in the lower tier have higher incomes than their peers in much of Europe.

Note also that the middle tier in southern Europe (i.e., Italy and Spain) is barely more than half of the middle-tier income in the US. The lower-tier incomes there are only one quarter of the middle-tier income in the US.

Clearly, the mere presence of a welfare state in these countries does not exactly guarantee abundance.

Breaking Out by States

One final factor to consider is that whenever we make comparisons like these, we have to remember that the US if far more geographically and demographically diverse than any single European country. The US population is much larger than any other country mentioned here, and income differences can vary significantly from state to state. Speaking of a single nationwide income number is troublesome everywhere, but it makes even less sense for a country as large and varied as the United States.

According to the Census Bureau, for instance, the median income in the US was $55,775 in 2015.

But state median incomes varied from approximately $40,500 in Mississippi to $75,800 in Maryland.

Expressed as a percentage of the nationwide median income the states break out like this:

states_income.png

So, if we look at some of the wealthier American states, we find that some of them are well above where the US ranked as a whole in international comparisons. For example, New Hampshire’s median income is 126 percent of the US median income.  If we consider this information in light of the fact that the US median disposable income (according to the OECD) is $32,075, then we might conclude that New Hampshire comes in at an internationally comparable income of $40,400. That’s comparable to Norway and Switzerland. In other words, taken on their own, states like New Hampshire, Massachusetts, Washington, and Colorado, are among the richest places in the world, by far.

Extending this same analysis to all states, it looks like this:

compared_3.png

Acknowledging that some US states are wealthier than others, we now start to get a picture of where some European countries might fit into the mix. Not surprisingly, Norway, Luxembourg, and Switzerland are still near the top. Canada and Australia come in between Rhode Island and Illinois. And Sweden comes in between Kansas and South Dakota.

Some European countries often regarded as wealthy don’t fare especially well by this measure, however. France, for example, lands between South Carolina and Louisiana, while Germany ranks below Florida. Southern Europe fares even more poorly with Italy ranking below Arkansas, and Spain below Mississippi. By this measure, if Italy were a US state, it would rank behind every state except Mississippi. The United Kingdom would rank behind every state except Mississippi, Arkansas, and West Virginia.

Much of this should be unsurprising, though. Incomes in places like Minnesota, Connecticut, Massachusetts, Utah, and Colorado have long been evidently high income places with high measures of quality of life such as life expectancy, poverty, and crime. The fact that these states might rank with places like Switzerland, Canada, Denmark, and Austria shouldn’t exactly boggle the mind.

One final refinement we might include would be to take into account the differences in cost of living from state to state. We’ve already adjusted for the cost of living by making the PPP adjustment, but that only includes differences across international boundaries. We could also adjust median incomes in each state by the “regional price parity” in each state.3 This would move low-cost places like Mississippi up the rankings, while moving high-cost places like New Jersey down. If we make this adjustment, the result is this:

parities.png

The overall effect here is not significantly different from the previous graph, however. Our point has already been made: for those Americans who think it’s important to live in a place with very high incomes, the answer may not lie in moving across international boundaries. It may only require moving to another state.

Although some interventionists would like to portray the US as an economic basket case where only the super-wealthy prosper. The numbers simply don’t bear this out. This doesn’t prove the US and other wealthy relatively libertarian countries (such as Switzerland) as flawless. But the data hardly supports crude theories that a little more government spending will pave the way to economic prosperity.

Of course, the fact that this data on its own tells us so little illustrates the need for sound economic theory to help us understand why West Germany was rich, but East Germany was poor, why Venezuela is starving, but Chile is not.

  • 1. When I made these calculations earlier, the calculations were based on data from 2011 through 2014. I’ve updated this to 2015 numbers, although in some cases, 2014 is the most recent data available. Median dispasable income data comes from oecd.stat: http://stats.oecd.org/Index.aspx?DataSetCode=IDD. The disposable income measure includes: “the sum of wages and salaries, mixed income, net property income, net current transfers and social benefits other than social transfers in kind, less taxes on income and wealth and social security contributions paid by employees, the self-employed and the unemployed.” (https://data.oecd.org/hha/household-disposable-income.htm) It should also be noted that the absence of in-kind transfers is unlikely to significantly impact rankings here because the US is similar to other OECD countries in terms of in-kind transfers. The OECD average is 8.3 percent of GDP, while the total in the US is 9.4 percent of GDP. See: http://stats.oecd.org/Index.aspx?datasetcode=SOCX_AGG. See also “Why In-Kind Benefits?” by Janet Currie, Firouz Gahvari 17 December 2007. (https://voxeu.org/article/why-kind-benefits) showing that US in-kind spending is comparable to other European welfare states in terms of education, health, and child care. None of this is included in calculating US (or other) income levels.
  • 2. See: https://data.worldbank.org/indicator/PA.NUS.PPP
    “PPP conversion factor, GDP (LCU per international $)”
  • 3. Price parities and income use 2015 measurements.

Ryan McMaken (@ryanmcmaken) is the editor of Mises Wire and The Austrian. Send him your article submissions, but read article guidelines first. Ryan has degrees in economics and political science from the University of Colorado, and was the economist for the Colorado Division of Housing from 2009 to 2014. He is the author of Commie Cowboys: The Bourgeoisie and the Nation-State in the Western Genre.

The post These US States Have Higher Incomes than Nearly Every European Country appeared first on WEALTHY DEBATES.


It’s official: Medicare trust fund will run out of money in 8 years

0
0

Two days ago the respective Boards of Trustees for Medicare and Social Security released their annual reports for 2018.

As usual, the numbers are pretty gruesome… and the reports plainly stated what we’ve been talking about for years: the trust funds for both Social Security and Medicare are going to run out of money.

Soon.

In the case of Medicare, the Trustees project that its largest trust fund will be fully depleted in 2026, just eight years away. In the context of retirement, that’s right around the corner.

Did you know? You can receive all our actionable articles straight to your email inbox… Click here to signup for our Notes from the Field newsletter.

For Social Security, the Trustee report stated that the program will spend more money on benefits in 2018 than it will generate in income and tax revenue.

So this year will be the first time Social Security has run a deficit since 1982.

But it gets worse. Because according to the Trustees’ projections, the program will continue running larger and larger deficits until it too becomes fully depleted in 2034.

After that, recipients can expect at least a 25% cut in the benefits that they were promised and worked their entire lives to receive.

Again, these numbers come directly from the Trustees of Social Security and Medicare (which includes the US Treasury Secretary).

The reports were so dire that mainstream publications picked them up almost immediately.

Curiously, though, a number of newspapers tried to play down the bad news, dismissively telling their readers that Social Security and Medicare are just fine, and that those sobering projections don’t matter.

These are common refrains. They’ll state, for example, that there’s nothing to worry about because the government will step in and bail out the programs.

Is that so? Well, who is going to bail out the government?

According to the Treasury Department’s annual financial report, Uncle Sam is already insolvent to the tune of $20.4 trillion.

And those numbers are only getting worse too. Treasury’s own projections show annual budget deficits in excess of $1 trillion starting in 2020.

Simply put, a short-term fix of Social Security and Medicare would cost trillions of dollars. And that would just be a down payment on the long-term costs of fixing the programs.

The federal government simply doesn’t have that kind of money. Not even close.

So the expectation that some politician is going to come riding in on a white horse with checkbook in hand is ludicrous.

A second commonly held myth is that these Social Security and Medicare projections are irrelevant because they “have a history of being wrong.”

That’s completely untrue.

35 years ago, the Social Security annual report from 1983 projected that the program’s cost would exceed its income and tax revenue in… 2020.

The current report states that this is going to happen in 2018.

That’s only a two year difference from what they projected over three decades ago. So they pretty much nailed it.

More importantly, though, we’re not even talking about long-range projections, which typically look 50-75 years into the future. We’re talking about EIGHT years from now.

But even if you take a longer-term view, the data is still grim.

Social Security and Medicare provide benefits to people based primarily on tax revenue generated by those who are currently in the work force.

Essentially the programs require a certain number of workers paying into the system for every single retiree drawing benefits. They call this the worker-to-retiree ratio.

In order for this delicate balance to work, population growth has to remain fairly stable. Major swings in population growth throw everything out of whack.

The critical problem is that both fertility rates and population growth (which takes into consideration immigration and mortality) have been declining.

The US fertility rate has been on a general downward trend since 1990, and in steep decline since 2007.

And overall population growth rates for the past several years have been the lowest in more than five decades.

This contrasts with the years immediately following World War II, in which there was an explosion in population growth.

Those are the folks who are currently receiving Social Security and Medicare benefits.

But due to the declines in population growth, there are no longer enough workers paying into the system (even with unemployment at multi-decade lows) to support the programs’ current recipients.

The end result is what we’re talking about today: Social Security and Medicare can’t generate enough revenue to support their costs and will thus soon deplete their cash reserves.

The government is trying to put a brave face on this, telling us that the alarming drop in the national fertility rate is only temporary, even though it’s been falling steadily for three decades.

But they insist it will reverse soon.

Frankly, it doesn’t seem sensible to plan one’s retirement based the ability of these bureaucrats to accurately predict how much sex people are going to be having in the coming years.

Instead, let’s look at the big picture: Social Security and Medicare are both perennially mismanaged with a history of gridlock and inaction.

And the people who are responsible for overseeing these trust funds have clearly stated that the programs will run out of money and be unable to pay the benefits that have been promised.

What sane person would possibly put all of his/her retirement eggs in that basket?

There are clearly better ways.

One approach is to establish more robust retirement plans (like a solo 401(k) or self-directed IRA) and start maximizing your contributions.

These types of structures allow you to direct your capital to potentially more lucrative investments that go beyond mainstream stocks and bonds. Plus, in many respects, they can be cheaper to maintain.

This is important, because if you can squeeze out an extra 1% per year between cost savings and better investment returns, it can add up to hundreds of thousands of dollars in additional retirement savings when compounded over several decades.

Regardless of what happens (or doesn’t happen) with Social Security in the future, it’s hard to imagine you’ll be worse off for doing this.

The post It’s official: Medicare trust fund will run out of money in 8 years appeared first on WEALTHY DEBATES.

Will America’s Low Birth Rates Cause The Economy To Crash?

0
0

Birth rates in the U.S are at their lowest levels in three decades. As a result of fewer babies being born, diaper sales are down 6% and the impact on the economy is evident. With retail sales down, Kimberly-Clark, the manufacturers of Huggies diapers and pull ups, has already revealed plans to lay off 13% of its workers and close 10 of its manufacturing centers in a bid to cut costs. So, as more and more American retailers cease trading, could America’s low birth rates really be to blame?

Why birth rates have slumped

In 2017, it was estimated that the average U.S woman’s ‘total fertility rate’ dipped to 1.76, down from 2.12 in 2007. One reason birth rates have dropped is due to fewer teens having babies. Two decades ago, teens in Arizona were giving birth to 12,000 babies a year, but that number has now more than halved. A common reason why so many teens were having babies was due to contraception not being readily available or female contraceptives not working as expected. However, the state and the rest of America intervened by ensuring youngsters received effective sex education. The recession is also to blame as an increasing number of individuals are put off from starting families due to finances being tight


The impact on the economy

The long term effect on the economy if birth rates remain as they are or reduce further is that there will be a shortage of people to fill vital job roles in areas such as health and social care. It’s predicted that by 2050, 22.1% of the population will be aged over 65, according to Statista. Many of these individuals will require care in some form, but the number of individuals to take on the role of carer will be limited, meaning resources will be stretched and standards of care will be lower. 

A positive move

It’s not all bad news for the economy, though. Fewer babies mean people are choosing to have children when they are financially ready and when they can be sure that they can provide a stable home for their child. Elizabeth Wildsmith from Child Trends explains that this is more beneficial to children, stating “The evidence suggests that kids tend to do better when they’re born into situations where they’re a little bit more stable and that is more likely to be the case when parents are able to finish school and be in jobs that have higher wages.”

Declining birth rates in America has led to several well-known baby brands fighting plunging sales and cutbacks. While fewer births can and have impacted the economy negatively, there are benefits to be had too. Therefore, it’s important that the government don’t push to increase birth rates too substantially as this could impact the well-being of a whole generation.

The post Will America’s Low Birth Rates Cause The Economy To Crash? appeared first on WEALTHY DEBATES.





Latest Images