MB360: FIRE sector is back, big time

MB360 gives us great stats to illustrate starkly the so-called financialization of the U.S. economy: 

In 1947, the FIRE side of the economy made up roughly 10 percent of GDP. Today it is 21 percent.  On the other hand manufacturing in 1947 made up 25 percent of GDP while today it is closer to 11 percent.

Near-zero interest rates by the Fed and TBTF bank bailouts are direct federal government aid to the FIRE sector.  It's called socializing risk and privatizing rewards.  

Meanwhile, bizzaro conservatives assure us that if only Americans would stop being so lazy and collecting food stamps, then our economy would turn around. [Facepalm].  Foks, this is government-sponsored upward redistribution of wealth.  

If only the Tea Parties would brandish their pitchforks over the real redistribution problem in America!

Long live the reemergence of the FIRE economy: Over the last decade GDP is up $5.2 trillion while the total credit market debt owed is up $24.5 trillion.

Posted by mybudget360 

August 27, 2013

The current economy is juiced on the rivers of easy debt.  An addiction that is only getting worse.  Want to go to college?  You’ll very likely go into deep student debt given the rise in college tuition.  Want a home?  Prices are soaring because of speculation but you’ll need a bigger mortgage to buy.  Want a modest car? A basic new car that has four wheels will likely cost $20,000 after taxes after fees are included.  Need gas for that car?  The price of a gallon has quadrupled since 2000.  Combine this with the reality that half of Americans are living paycheck to paycheck and you can understand why the debt markets continue to grow at an unrelenting pace.  Here is some food for thought; in the last 10 years, GDP has gone up $5.2 trillion however, the total credit market has gone up by $24.5 trillion.  An increasingly large part of our economic growth is coming from massive leverage.  This is why the market sits fixated on the Fed’s next move regarding interest rates even though in context, rates are already tantalizingly low.  The FIRE economy is driving a large portion of corporate profits yet most Americans are left in the cold winds of austerity.

GDP being driven by FIRE

More and more of our growth is coming from a massive expansion of debt:

The total credit market is now roughly 4 times the size of our annual GDP (inching closer to $60 trillion in the US).  While some think that this growth is natural and easy, in reality most of it is coming from growth in the financial services side of the economy.  The banking system is currently operating in a way that really does not benefit the typical Americans family.  Take a look at two employment sectors over the last few years:

In 1947, the FIRE side of the economy made up roughly 10 percent of GDP.  Today it is 21 percent.  On the other hand manufacturing in 1947 made up 25 percent of GDP while today it is closer to 11 percent.  It comes as no surprise especially as we now see big banks and hedge funds crowding out the real estate trade.  Prices in real estate continue to rise at levels last seen during the bubble yet the homeownership rate continues to fall.  We keep adding more and more Americans as “non-workers” and then wonder why we have 47 million on food stamps:

The number of Americans not in the labor force is booming because of demographics but also because people are dropping out of the workforce.  This certainly doesn’t coincide with some of the data being produced from other channels.

The reason why most Americans are not feeling the recovery trickle down to them is that the FIRE side of the economy is capturing a large share of the profits (more fuel for the growing income inequality trend).  Just take a look at how much of the recent growth has come courtesy of financial engineering:

Corporate profits as a percent of GDP are at generation high levels.  Yet GDP growth is weak (especially if you consider how much growth is coming from FIRE activity).  This is reflected in stagnant household income growth and the reality that wealth continues to shift into the hands of a very few Americans.

Redoing the last bubble

The problem with all of this is that we are simply redoing the last bubble.  This is a similar variation of our last bubble (i.e., financial sector deep into speculation, quickly rising real estate, no income growth, leveraging on debt, etc).  The finance and real estate side of the economy is driving profits and speculation, yet we see that for most Americans, the gains are simply not there.  This is just part of the financialization of our current system.  It is odd that big banks and firms are so interested in rental real estate yet they can extract money from Americans via this measure because the Fed is basically offering zero percent rates to member banks.  In other words, it is a riskless trade so why not grab all the real assets you can while the Fed continues to devalue the purchasing power of Americans?

The FIRE economy is back in a big way.  Of course you shouldn’t be surprised that this isn’t helping most Americans prosper.

'Inconclusive' link between public debt, interest rates

Empirical data refutes the conservative mantra that higher government debt always leads to higher interest rates, thereby "crowding out" private investment:  

In a paper published by the National Bureau of Economic Research in April 2005, Columbia University economist R. Glenn Hubbard and Federal Reserve economist Eric Engen declared as “inconclusive” the link between government debt and interest rates. Hubbard headed George W. Bush’s White House Council of Economic Advisers from 2001 to 2003.

“While analysis of the effects of government debt on interest rates has been ongoing for more than two decades, there is little empirical consensus about the magnitude of the effect, and the difference in views held on this issue can be quite stark,” they wrote.

In fact just the opposite can happen:

“Deficits as a share of the U.S. economy have risen sharply at times with little to no discernible impact on the level of U.S. interest rates. In fact, just a cursory look at periods when the U.S. ran large deficits as a share of (the total economy) – 1983, 1991-92, 2008-2012 – we actually saw declines in nominal long-term (lending) rates,” said [Scott] Anderson [chief economist for Bank of the West in San Francisco].

He noted that the yield, or return on investment for bondholders, has not and did not rise sharply. “So the link between high levels of government spending and borrowing does not appear to raise the cost of money during these periods and therefore would not crowd out private consumption and investment,” Anderson said.

Just to show how fair & balanced I am, here's a recent WSJ op-ed that warns against a "fiscal dominance" scenario in the U.S., where debt-to-GDP consistently exceeds 80 percent, interest rates shoot up, debt increases even more, interest rates shoot up even higher, and a "fiscal death spiral" ensues.  Theoretically this is possible, but since this scenario depends a lot on "investor confidence," that means everything is relative.  Take Japan for example. Its debt-to-GDP ratio has been over 150 percent for years. It's now 225 percent. Yet Japan's borrowing costs remain low because of real deflation and the relative strength of the Japanese yen.  

Is government spending ‘crowding out’ private sector? No

By Kevin G. Hall

March 20, 2013 | McClatchy Newspapers

URL: http://www.mcclatchydc.com/2013/03/20/186450/is-government-spending-crowding.html

Reagan's 1981 recession v. W's Great Recession

Let's compare the 1981-82 recession to the Great Recession:

• Duration:  16 months vs. 18 months
• GDP:  -2.7 % vs. -4.1% *
• Consumption:  +0.1 % vs. -2.3 %
• Investment:  -9.3 % vs. -23.4 %

* The biggest drop in GDP since WWII.

Here are some more measures in 1981-82 vs. the Great Recession:

• Personal income: +7 % vs. -1 %
• Industrial production:  -8.6 % vs. -12 %
• Dow Jones Avg.:  +9 % vs. -22 %
• Housing prices:  +2.2 % vs. - 5.7%
• Rate of foreclosures:  0.67% (max) vs. 4.3 % (2009)

Regarding interest rates, you can thank the Fed, which intentionally targeted a high interest rate to kill inflation.  With 11% inflation the 19% interest rate in 1980 was not so high in fact.

Regarding unemployment, it grew more during the Great Recession (5.1 percent) than during the 1981 recession (3.6 percent).  Unemployment rose for 22 straight months during the Great Recession, the longest period since WWII.  It was also the first recession when all 50 states reported increased unemployment, meaning you couldn't simply move to find work in another state.  Long-term unemployment was also worse during the Great Recession: 5.6 million vs. 2.6 million; and in October 2009, the average length of unemployment was 26.9 months -- the longest on record.

Finally, the Great Recession was also (and still is, in some countries) a global recession.  

So I don't want to hear any more about how all it would take is a President Reagan to pull us out of the Great Recession.