Recession Statistics: August 2011

Using the St Louis FED Data we present with some commentary the Recession Stats as we have for the past three years.

First the GDP. It is lagging behind almost all other Recessions as we have seen. This will clearly be a serious problem for the current administration.

Now for its components:

Personal Consumption had been growing but as a driver of GDP it has dropped the last period.

Private Investment also dropped. This is a very bad sign going forward.

Government Consumption has also lagged as we have seen pressure on the over expansion and total ineffectiveness of the Stimulus. There clearly is no credibility in the collection of economists who has said one thing and another happens.

Exports have increased relatively showing the potential weakness of the dollar.

Imports are on norm.

Incomes are below the minimum. That is a major concern. Both as a source of tax revenue and in terms of the pressure downward. Perhaps the only good news is the low pressure on any inflationary trend.

Industrial production is slowly increasing but with low incomes there is little hope of that continuing.

Finally Retail Sales seems to be on par.

Net, this Recession is far from over and signs of a second dip are evident.

This Really Sounds Like Throwing Grandma Over The Cliff

The report from the Hill states:

Failure of Congress to pass the future deficit-reduction package would automatically trigger cuts to defense spending and Medicare. An aide familiar with the deal said the Medicare cut would not affect beneficiaries. Instead, healthcare providers and insurance companies would see lower payments. 

Now one must remember that you must take Medicare at 65, or forfeit it forever, and if perchance you do then your providers must accept what they get paid. Now if Congress slashes payments you lose your providers because you are not allowed by law to pay them any more than what Medicare states.

Now if they reduced the payments but allowed you to make up the difference that is one thing. But these characters have let loose the hounds of hell! Everyone over 65, almost everyone, is caught in this debacle.

Just pay what you will but make it legal for us to make up the difference!

Interest Rates Would Increase: The Other Side

The more I hear that people will have to pay higher interest rates, greater than 3% or so, the more I am amazed. You see there are two sides to this issue. For every dollar loaned there is someone getting interest because they are loaning the dollar. Thus if I have all cash and you still want to borrow money, because you cannot get your business to generate cash, then I would be more than willing to loan it at much higher rates.

You see there are two sides to this argument. One is easily solved, stop borrowing! Yes, you really don't need those new whatever. That of course means lower GDP but how much lower will it get. But if you want it then it will cost more, and in fact it will cost what it should without the FED artificially lowering the interest rates. Perhaps this action will result in an economic balance. Interesting thought!

The Nonsense in Universal Service

There is an article in The Hill regarding the "reform" of Universal Service. Fourteen year ago I wrote a piece on Universal Service. Simply Universal Service is an $8-10 Billion give away by the FCC to rural telcos. It makes small operators quite rich in the process. It allows them to provide local telephone services at rates almost equal to the local CATV provider but in turn it makes them confiscatory profit.

Change the system? One would think so. Get rid of it! Yet the Hill states:

The plan comes one day after a bipartisan group of lawmakers called for reforming the $8 billion fund, which subsidizes phone service for low-income and rural residents. The FCC proposed reforming the $4.5 billion high-cost portion to focus on broadband deployment in the National Broadband Plan.

 Namely they want to move it from the left pocket to the right and may very well increase the costs to the telco users in urban areas. It continues:

The plan unveiled a day later by the telecom firms, including AT&T, Verizon and CenturyLink, attempts to achieve those ends by re-directing the high-cost USF funds to deploy broadband access where there is currently no business case for carriers to provide service. 

 If there is no business case then why do it! This is another "tax" we could cut and we should cut now. Also it would eliminate almost half the FCC as well. That of course is another issue. The FCC was set up originally to do two things: (regulate spectrum, and (ii) manage the monopoly. Well the monopoly is gone and they have turned spectrum management into a fund raising mechanism. But if we managed and taxed spectrum on a real time basis then this would be no problem. I suggested how to do that a few years ago as well. That would totally eliminate the need for the FCC, from a pragmatic sense as well. It would eliminate a lot of plum jobs however and that is something Washington cannot do.

In a sense the USF is the Deficit/Debt crisis in miniature. Namely we could save money and make things more efficient except for the politicians.

The GDP and the Economy

The GDP has a very sluggish growth despite the words from our wonderful macroeconomists who predicted a turn about with the Stimulus. I always come back to Romer's report on January 11, 2009 on how things would turn out. Not a recommendation for the new Delphi oracle to say the least. The above shows the change in GDP since early 2008.

The above shows the components.

A look above at Government expenditures shows that State and Local are slowly building after a drop from their explosive growth but that the Defense spending is still moving forward at an unlimited rate. It is clear that we need to cease that and in fact re-trench substantially. A Defense cut of $50B pa is not unrealistic now. In fact a cut of $60B is achievable by returning forces and acting with a pure Special Forces mindset.

Also the non Defense spending has risen almost $100B and this too can be cut back.

These do NOT include Medicare and SSI. Needless to say we can do a great deal there. Thus it is possible to achieve a $500B cut from the Federal budge and then add easily a 10%-15% reduction on entitlements and we are on a good standing.

The above depicts the change by Quarter. Note the drop in the early part of the Recession but the growth has continued.

Finally we re-emphasize the Govt changes. Defense still remains an issue. This is especially disconcerting since we are allegedly winding down. There is also the issue as to where such expenditures as Homeland Security and CIA/NSA/NRO etc are hidden.

Another View of Interest Rates

There is a fear of increasing interest rates. We all know that the FED has pressured them down by its printing of money. Let us first look at M2 and the Monetary Base.

Clearly we have a growing M2 and an exploding Monetary Base. Trillions are pressed into the banks and the MB now is approaching $3 Trillion.

Now consider a simple retiree. Say they had $1 million in the bank and wanted to live off the interest. Independent of any real inflation, they would have to inflate their earnings at a rate which we will show so as to keep the same annualized payout. Thus if they had $1 million and the annual rate was 5% they got $50,000 pa. But if they want $50,000 pa and the interest is 3%, they must have well over $1.5 million. The rate at which the base must increase is an imputed inflation. We show this below assuming a 10 year Treasury.

 The above shows the 10 year rate as well as the calculated inflation due to the decreasing rate. This imputed inflation is in addition to the actual cost inflation. Thus we see  that for someone on a fixed payout from a seemingly risk free investment they will see an added inflation rate of from 5-10% pa due to the FEDs manipulation of the MB.

Now if the Treasury defaults, and if the money was in cash, then they can buy in at a higher rate and reduce the FEDs inflation. Thus it is to the advantage of those with cash assets to see a default!