While there are those who saw October and more so November spikes in real estate and housing estimates as the beginning of the something big, all the December 2017 statistics suggest nothing more than the easily anticipated hurricane anomalies. Housing construction was back in line with weaker earlier 2017 estimates (particularly starts), while resales were, too. Today we found that sales of newly constructed homes also pulled back last month after a run in November.
The prior month’s big jump was revised to a seasonally-adjusted annual rate of 689k, well above the 599k posted in October. The estimate for December was 625k, just above the 6-month average.
The November figure was widely hailed as some kind of meaningful milestone simply because it was the most sales since August 2017. The media loves to write stories that contain the phrase “highest in ten years.”
This is not to say that the housing market isn’t growing; it is. Nor is it exhibiting any warning signs that it is close or about to collapse; it isn’t. The issue here is the same as it is for the overall economy, which is what matters as to whether November’s increase was the start of something bigger, or an aberration leaving the real estate market in the same shape as before.
In other words, anything that has been written about home construction making it seem like a positive is totally overwhelmed by the chart above. In December 2017, the Census Bureau figures that 43k (unadjusted) newly built homes were sold across the United States. That’s fewer than were turned over in December 1995 (45k), or December 1985 for that matter (47k).
As noted yesterday, there is a big problem in housing as it relates to the economy given this shrunken state. It’s far too consistent with the non-full employment view of circumstances. If things are really improving as is always claimed and characterized, then home sales would be brisk, as would resales.
The latter are not because they are being held back by a serious and sustained reluctance of home owners to sell. What we find here in new home sales is that reticence is obviously shared among buyers, too, particularly at the lower end starter homes.
Like shrinking available-for-sale inventory, the permanently reduced market for new homes isn’t really a mystery. If you ignore, as Economists do, the millions upon millions (as many as 16 or more) of Americans who don’t count for the unemployment rate, none of this makes sense given the “exceptional” job market that one statistic might indicate. Factor them into your economic equation, however, and your interpretation, and therefore outlook, changes dramatically.
Given that, it wasn’t ever very likely that October and November represented the start of something meaningfully different. That would have been just too far of a leap, to get to rapid growth finally after a decade of truly stunning shrinking and stagnation, and for what legitimate reason? In truth, it would have been a miracle, a verdict that I think will be applied to a lot more than the housing statistics in the months to come.
Following the plunge in New- and Existing-Home Sales, expectations for a 0.5% acceleration in Pending Home Sales in December were met.
However, YoY, Pending Home Sales NSA dropped 1.8%.
The Northeast dominated the weakness (after a big jump in Nov):
Northeast fell 5.1%; Nov. rose 4.1%
Midwest fell 0.3%; Nov. fell 0.1%
South up 2.6%; Nov. rose 0.1%
West up 1.5%; Nov. fell 2%
Since the start of the year, Housing-related data has disappointed notably, after ramping remarkably since the storms…
Lawrence Yun, NAR chief economist, says pending sales edged up in December and reached their highest level since last March (111.3).
“Another month of modest increases in contract activity is evidence that the housing market has a small trace of momentum at the start of 2018,” he said. “Jobs are plentiful, wages are finally climbing and the prospect of higher mortgage rates are perhaps encouraging more aspiring buyers to begin their search now.”
“Sadly, these positive indicators may not lead to a stronger sales pace. Buyers throughout the country continue to be hamstrung by record low supply levels that are pushing up prices — especially at the lower end of the market.” oops “In the short term, the larger paychecks most households will see from the tax cuts may give prospective buyers the ability to save for a larger down payment this year, and the healthy labor economy and job market will continue to boost demand,” said Yun.
“However, there’s no doubt the nation’s most expensive markets with high property taxes are going to be adversely impacted by the tax law.”
However, Yun ended on an ominous note…
“Just how severe is still uncertain, but with homeownership now less incentivized in the tax code, sellers in the upper end of the market may have to adjust their price expectations if they want to trade down or move to less expensive areas. This could in turn lead to both a decrease in sales and home values.”
Elon Musk’s week just got worse as Tesla’s share tumble after CNBC reports the problems with battery production at the company’s Gigafactory in Sparks, Nevada, are worse than the company has acknowledged and could cause further delays and quality issues for the new Model 3, according to a number of current and former Tesla employees.
These problems include Tesla needing to make some of the batteries by hand and borrowing scores of employees from one of its suppliers to help with this manual assembly, said these people.
The reaction was instant and lower…
CNBC goes to report that more than a month after Musk’s initial warnings, in mid-December, Tesla was still making its Model 3 batteries partly by hand, according to current engineers and ex-Tesla employees who worked at the Gigafactory in recent months.
They say Tesla had to “borrow” scores of employees from Panasonic, which is a partner in the Gigafactory and supplies lithium-ion battery cells, to help with this manual assembly.
Hidden beneath the controversy stirred up last week by the publication of a book called “Fire and Fury,” a highly critical insider’s view of the Trump White House that the president has not only denounced on national television but also tried to prevent from being published and distributed, are the efforts of the Trump administration and congressional leadership to bypass the Fourth Amendment to the Constitution.
Here is the back story.
After the excesses of the Watergate era, during which the Nixon administration used the FBI and the CIA unlawfully to spy without warrants on the president’s real and imagined domestic political opponents, Congress passed the Foreign Intelligence Surveillance Act. FISA prohibited all domestic surveillance except that which is pursuant to warrants signed by federal judges.
The Fourth Amendment — which guarantees privacy in our persons, houses, papers and effects — permits the government to invade that privacy only when a judge has signed a warrant that authorizes surveillance, a search or a seizure. And judges may only issue warrants when they have found probable cause to believe that the government surveillance or invasion of the target’s privacy will produce evidence of criminal behavior. The Fourth Amendment further requires that the judicial warrant describe specifically the place to be searched or the person or thing to be seized.
All these requirements are in the amendment so as to prevent any court from issuing general warrants. Before the Constitution, general warrants were issued by British courts that met in secret in London. They were not issued based on probable cause of crime but issued based on the government’s wish to invade the privacy of all Americans living in the Colonies to find the more rebellious among them. This was the king and Parliament’s version of protecting national security.
General warrants did not describe the place to be searched or the person or thing to be seized. They authorized the bearer — usually a British soldier physically located in the Colonies — to search where he wished and seize whatever he found.
FISA did not interfere with the standard understanding or use of the Fourth Amendment by the government and the courts. But it did add another way for the government to invade privacy when its wish is to surveil people for national security purposes — a return to general warrants — as opposed to solely gathering evidence of crimes.
The FISA-created procedure, enacted in defiance of the Fourth Amendment — which makes no distinction between government evidence gathering and government intelligence-gathering — permits a secret court in Washington to issue general warrants based on the government’s need to gather intelligence about national security from foreigners among us. It pretends that the standard is probable cause of foreign agency, but this has now morphed into the issuance of general warrants whenever the government wants them.
Since 1977, the Foreign Intelligence Surveillance Court has issued well over 99 percent of the warrants that the government has requested. And these warrants do not specifically describe the place to be searched or the person or thing to be seized. A typical FISC-issued warrant authorizes government surveillance on all landlines, mobile devices and desktop computers in a given area or ZIP code. One infamous FISC-issued search warrant permitted the feds to surveil all Verizon customers in the U.S. — in excess of 115 million people — without any evidence of crime or even suspicion about any of them.
Now back to the Trump administration’s work below the radar. Even in the fresh aftermath of 9/11, when the government’s respect for constitutional norms was at a lamentably low point, the government interpreted the Fourth Amendment as requiring the government to separate its intelligence functions from its law enforcement work. The government recognized that its trigger for mass surveillance — namely, looking for a foreign agent among the populace — was a far lower standard than probable cause of crime, which is what the Fourth Amendment requires.
Today, the federal government’s computers are permanently connected to the mainframes of all telecoms and computer service providers in America, so the spying is in real time. Today, the federal government employs more than 60,000 domestic spies — one spy for every 5,500 Americans. Today, if any of them come across evidence of crimes while listening to your telephone calls or reading your texts or emails ostensibly for intelligence purposes, there is little they can do about it.
Now, hidden beneath the “Fire and Fury” controversy is the muffled sound of the Trump administration and Republican congressional leaders plotting the enactment of an addition to FISA that would permit the use of evidence of crimes in federal court even when it is discovered during mass surveillance authorized by general warrants.
If enacted, this radical, unconstitutional hole in the Fourth Amendment would bring the country full circle back to the government’s use of general warrants to harass and prosecute — general warrants so odious to our forebears that they took up arms against the king’s soldiers to be rid of them.
I am surprised that President Donald Trump supports this. He has himself been the target of unlawful foreign surveillance and unconstitutional FISC-authorized domestic surveillance. “Fire and Fury” even quotes former British Prime Minister Tony Blair warning a newly elected Trump about this. And now he wants to unleash upon us all the voracious appetite for surveillance that was unleashed upon him and prosecute us for what is found, the Constitution be damned.
Whatever happened to the public promise to preserve, protect and defend the Constitution as it is written? That’s in the oath all in government have taken. That is the oath that the president and his Republican allies reject.
According to a new bombshell report from the Environmental Working Group (EWG), tap water for more than 170 million Americans contains radioactive elements that may increase the risk of cancer. The group examined 50,000 public water systems throughout the United States and found from 2010 to 2015, more than 22,000 water utilities reported radium in treated water.
Radiation in tap water poses serious health threats, particularly for children, and women during pregnancy.
The most common radioactive element the EWG found was radium. Studies show that radium above the EPA legal limit may cause depression of the immune system, anemia, cataracts, fractured teeth, and of course cancer.
Radium is a naturally occurring radioactive element that resides on the earth’s crust. The EWG emphasizes that higher radium levels in tap water occur when uranium mining or oil and gas drilling exploration companies disturb the earth’s geology. The process triggers radiation called “ionizing because it can release electrons from atoms and molecules, and turn them into ions,” explained the EWG. The EPA warns that all ionizing radiation is carcinogenic, implying that radium above the EPA limit is all too prevalent in America and it could be causing lots of cancer.
In 158 public water systems serving some 276,000 Americans in 27 states, the EWG found that radium exceeded the federal legal ceiling for radium-226 and radium-228.
The EWG’s Tap Water Database covers six radioactive contaminants, including radium, radon, and uranium. The database shows radium-226 and radium-228 are the two most common forms of radiation in every state.
The EWG expresses frustration with the 41-year old federal drinking water standards that are not designed to protect human health. New public health goals were set in 2006 by the California Office of Environmental Hazard Assessment, but have been widely overlooked by the federal government.
Federal drinking water standards are based on the cost and feasibility of removing contaminants, not scientific determinations of what is necessary to fully protect human health. And like many EPA tap water standards, the radium limits are based on decades-old research rather than the latest science.
The EPA’s tap water limits on the combined level of the radium isotopes and the combined level of alpha and beta particles were set in 1976. They were retained in 2000, when the uranium standard was established.
To more accurately assess the current threat of radiation in U.S. tap water, we compared levels of the contaminants detected by local utilities not to the EPA’s 41-year-old legal limits, but to the public health goals set in 2006 by the respected and influential California Office of Environmental Hazard Assessment.
California public health goals are not legally enforceable limits, but guidelines for levels of contaminants that pose only a minimal risk – usually defined as no more than one expected case of cancer in every million people who drink the water for a lifetime.
California standards are hundreds of times more stringent than the current EPA limits for radium-226 and radium-228. If the federal government adopted the new tests, it would mean that no more than one case of cancer per million people per water supply. That would likely cause a public health emergency across the United States, but apparently, that is something the government has no intentions in doing in the intermediate time. So, for now, Americans will enjoy a higher risk of cancer one glass of water at a time, because, perhaps, cancer is very profitable for pharmaceutical companies, or the country is just flat broke and cannot afford new infrastructure.
“Most radioactive elements in tap water come from natural sources, but that doesn’t take away the need to protect people through stronger standards and better water treatment,” Olga Naidenko, senior science adviser at EWG, said in a statement.
“Millions of Americans are drinking water with potentially harmful levels of radioactive elements, but the outdated federal standards mean many people don’t know about the risk they face when they turn on the tap.”
Radium contamination in public water systems nationwide:
Radium concentrations in drinking water are drawn from EWG’s Tap Water database, and represent the average of all samples of treated drinking water collected from 2010 to 2015 for each water system. Samples reported as non-detections are entered as zero, which could underestimate the actual radium concentration in drinking water.
Federal drinking water regulations set a Maximum Contaminant Level, an enforceable legal standard, of 5 picocuries per liter (pCi/L) for the combined level of two isotopes of radium: radium-226 and radium-228. Some water utilities and states report individual levels of these isotopes, while others report a single combined radium value of a specific sample. When the combined level was not reported by the water utility, EWG added measurements of radium-226 and radium–228 to calculate it, as available.
This map displays radium data for 1,850 community water systems serving more than 10,000 customers, and 1,620 community water systems serving between 3,301 and 10,000 customers. The water system locations were mapped based on the Environmental Protection Agency’s Safe Drinking Water Information System, or SDWIS. Locations are approximate and are meant to visualize the general area served by a specific water system – not to give the specific address of the water treatment plant. The map does not include water systems that did not detect radium between 2010 and 2015. It also does not include those water systems for which EWG could not confirm geographic locations.
On the map, dots indicating water system locations are color-coded according to the combined radium levels. Dot size reflects the water system’s size of above or below 100,000 customers. Any changes in water sources and treatment, and water quality after 2015, are not reflected in EWG’s analysis. For more detail on data reporting methods for EWG’s Tap Water Database, read our Methodology.
It’s official: the reason behind the recent rebound in the economy can be explained with two words: “charge it.”
Readers may recall that one month ago, we reported that with Republicans in Washington on the verge of passing their first major piece of legislation in the form of comprehensive tax cuts that will allow Americans across the income spectrum to keep a little more of their hard earned cash in 2018, it appeared that U.S. consumers already “pre-spent” their savings using their credit cards.
And now we have confirmation that this is precisely what happened, because in the month of November, between revolving, or credit card, and non-revolving debt, largely student and auto loans, according to the latest Fed data, total consumer debt rose by $28 billion, or the most since November 2001, to $3.827 trillion, an annualized increase of 8.8%, or roughly 4 times faster than the pace of overall GDP growth.
Broken down, consumer credit rose by $11.2 billion in revolving credit, or credit card debt, which pushed it a record $1.023 trillion, the highest credit card amount outstanding on record. This was also the second highest monthly increase in credit card debt on record.
Meanwhile, non-revolving credit – or auto and student loans – rose by $16.8 trillion to $2.805 trillion. Nonrevolving lending to consumers by the Federal government, which is mainly student loans, rose to $1.142t, on a non-seasonally adjusted basis.
This was to be expected: as we showed last month, US consumers appear to be tapping out, and as a result, the Personal savings rate dropped to 2.9%, the lowest since November 2007.
So, in addition to all the usual holiday trinkets that US consumers buy year after year, what hot new Christmas gadget has Americans suddenly willing to max out their credit cards? Well, if Google search trends are any clue, it might not be a gadget, or anything tangible for that matter, at all.
The United States spends almost twice as much on health care, as a percentage of its economy, as other advanced industrialized countries — totaling $3.3 trillion, or 17.9 percent of gross domestic product in 2016.
But a few decades ago American health care spending was much closer to that of peer nations.
A large part of the answer can be found in the title of a 2003 paper in Health Affairs by the Princeton University health economist Uwe Reinhardt: “It’s the prices, stupid.”
The study, also written by Gerard Anderson, Peter Hussey and Varduhi Petrosyan, found that people in the United States typically use about the same amount of health care as people in other wealthy countries do, but pay a lot more for it.
Ashish Jha, a physician with the Harvard T.H. Chan School of Public Health and the director of the Harvard Global Health Institute, studies how health systems from various countries compare in terms of prices and health care use. “What was true in 2003 remains so today,” he said. “The U.S. just isn’t that different from other developed countries in how much health care we use. It is very different in how much we pay for it.”
A recent study in JAMA by scholars from the Institute for Health Metrics and Evaluation in Seattle and the U.C.L.A. David Geffen School of Medicine also points to prices as a likely culprit. Their study spanned 1996 to 2013 and analyzed U.S. personal health spending by the size of the population; its age; and the amount of disease present in it.
They also examined how much health care we use in terms of such things as doctor visits, days in the hospital and prescriptions. They looked at what happens during those visits and hospital stays (called care intensity), combined with the price of that care.
The researchers looked at the breakdown for 155 different health conditions separately. Since their data included only personal health care spending, it did not account for spending in the health sector not directly attributed to care of patients, like hospital construction and administrative costs connected to running Medicaid and Medicaid.
Over all, the researchers found that American personal health spending grew by about $930 billion between 1996 and 2013, from $1.2 trillion to $2.1 trillion (amounts adjusted for inflation). This was a huge increase, far outpacing overall economic growth. The health sector grew at a 4 percent annual rate, while the overall economy grew at a 2.4 percent rate.
You’d expect some growth in health care spending over this span from the increase in population size and the aging of the population. But that explains less than half of the spending growth. After accounting for those kinds of demographic factors, which we can do very little about, health spending still grew by about $574 billion from 1996 to 2013.
Did the increasing sickness in the American population explain much of the rest of the growth in spending? Nope. Measured by how much we spend, we’ve actually gotten a bit healthier. Change in health status was associated with a decrease in health spending — 2.4 percent — not an increase. A great deal of this decrease can be attributed to factors related to cardiovascular diseases, which were associated with about a 20 percent reduction in spending.
This could be a result of greater use of statins for cholesterol or reduced smoking rates, though the study didn’t point to specific causes. On the other hand, increases in diabetes and low back and neck pain were associated with spending growth, but not enough to offset the decrease from cardiovascular and other diseases.
Did we spend more time in the hospital? No, though we did have more doctor visits and used more prescription drugs. These tend to be less costly than hospital stays, so, on balance, changes in health care use were associated with a minor reduction (2.5 percent) in health care spending.
That leaves what happens during health care visits and hospital stays (care intensity) and the price of those services and procedures.
Did we do more for patients in each health visit or inpatient stay? Did we charge more? The JAMA study found that, together, these accounted for 63 percent of the increase in spending from 1996 to 2013. In other words, most of the explanation for American health spending growth — and why it has pulled away from health spending in other countries — is that more is done for patients during hospital stays and doctor visits, they’re charged more per service or both.
Though the JAMA study could not separate care intensity and price, other research blames prices more. For example, one study found that the spending growth for treating patients between 2003 and 2007 is almost entirely because of a growth in prices, with little contribution from growth in the quantity of treatment services provided. Another study found that U.S. hospital prices are 60 percent higher than those in Europe. Other studies also point to prices as a major factor in American health care spending growth.
There are ways to combat high health care prices. One is an all-payer system, like that seen in Maryland. This regulates prices so that all insurers and public programs pay the same amount. A single-payer system could also regulate prices. If attempted nationally, or even in a state, either of these would be met with resistance from all those who directly benefit from high prices, including physicians, hospitals, pharmaceutical companies — and pretty much every other provider of health care in the United States.
Higher prices aren’t all bad for consumers. They probably lead to some increased innovation, which confers benefits to patients globally. Though it’s reasonable to push back on high health care prices, there may be a limit to how far we should.
Austin Frakt is director of the Partnered Evidence-Based Policy Resource Center at the V.A. Boston Healthcare System; associate professor with Boston University’s School of Public Health; and adjunct associate professor with the Harvard T.H. Chan School of Public Health. He blogs at The Incidental Economist, and you can follow him on Twitter. @afrakt
The Financial Repression Authority interviewed Lacy Hunt, Chief Economist at Hoisington Management on Fed policies.
The interview below first appeared on the FRA website along with a video.
The emphasis in italics is mine.
FRA: Hi, welcome to FRA’s Roundtable Insight. Today, we have Dr. Lacy Hunt. He’s an internationally recognized economist and the Executive V.P. and Chief Economist of Hoisington Investment Management Company, a firm that manages over $4.5 billion USD and specializing in the management of fixed income accounts for large institutional clients. He also served in the past as Senior Economist for the Federal Reserve Bank of Dallas, where he was a member of the Federal Reserve System Committee on Financial Analysis. Welcome. Dr. Hunt.
Dr. Lacy Hunt: Nice to be with you, Richard.
FRA: Great. I thought we’d have a discussion on a variety of topics relating to the economy and the financial markets. You recently mentioned that you thought this was the worst economic expansion recovery in U.S. history since 1790. Wow. Can you elaborate?
Dr. Lacy Hunt: If you calculate the average growth rate in the expansions since 1790, this is a long-running expansion, but it’s the slowest and in the last 10 years the household sector lagged very, very badly. The rate of growth in real disposable household income per capita is only 0.9 percent per year. And in the last 12 months, we’re up only 0.6 percent per year. So it’s a long-running expansion, but it’s been a poor expansion. There are certainly problems with some of the earlier data, but this appears to be the slowest expansion since the turn of the 18th Century and our households are the main problem for the growth rate lag.
FRA: And do you point a finger for this cause as primarily on the Federal Reserve or do you see structural changes happening to the economy?
Dr. Lacy Hunt: I think that the main element suppressing growth is the heavily leveraged U.S. economy. We have too much public and private debt, and this debt does not generate an income stream for the aggregate economy. As a result of the prolonged indebtedness, which is on the verge of going much higher because of problems in the governmental sector, the economy is now experiencing very poor demographics. We have a baby bust, a household formation bust, and the lowest birth rate since 1937. These demographics are exacerbating the problems because we have too much of the wrong type of debt and thus the velocity of money has been falling since 1997. Velocity this year is only 1.43 percent, which is the lowest since 1949. Furthermore, the debt creates a situation where monetary policy capabilities are asymmetric. In other words, a lot of action is needed to provoke even a muted impact on the economy, whereas the slightest monetary tightening goes a long way in depressing economic activity. So the root cause of this underperformance is extreme indebtedness.
FRA: And what about the Federal Reserve? How has it undermined the economy’s ability to grow?
Dr. Lacy Hunt: The Fed’s most serious mistake was made in the 1990s up until 2006 during which they allowed the private sector to become extremely over-indebted with the wrong type of debt. And, in essence, I think that quantitative easing, through the push for higher stock prices, created more problems than it has solved for the economy. QE caused the corporate executives to switch funds from real capital investments into financial investments through the paying of higher dividends, buying shares of their own companies, and buying back their shares from others. While this type of action does produce a higher stock market; it doesn’t generate a higher standard of living. And so, Federal Reserve policy has not improved the economy, although it certainly has well served components of the economy.
FRA: And due to that do you think that there’s been too much financial investment versus real economy investment in terms of diverting the economic financial resources away from the real economy?
Dr. Lacy Hunt: I think that’s the principal problem. Business debt last year reached a record high relative to GDP. As I said earlier, Fed policies have created a higher stock market but have not generated an improved standard of living. When the Reserve undertook quantitative easing, it was a signal to the corporate executives that the Fed preferred and would protect financial investments. But that meant financial assets were preferred over real side investments. And so QT is intermingling with the growth-depressing effects of too much debt. And the debt levels are getting ready to move substantially higher in our governmental sector. Government debt is already approaching 106 percent of GDP, a record high with the exception of a brief period during World War II. And by 2030, federal debt will be approximately 125 percent of GDP. For a long time, we’ve known about the issues that would inflate the entitlements — such as the prior-mentioned demographic problems — but there is an increasing likelihood that new federal programs with expenditure increases will further accelerate the growth in federal debt. I think there is clear evidence that increases in federal debt at these high levels relative to GDP over any measurable length of time, reduces economic activity. Thus, the multiplier is not a positive but negative figure, or otherwise exactly what economist David Ricardo hypothesized in his 1821 work. I have looked at the relationship between per capita changes in real GDP and government debt per capita and the relationship is negative, not positive. And so, we’re trying to solve an indebtedness problem by taking on more debt. You can get intermittent spurts of economic activity and inflation, but ultimately the debt is a millstone around the economy’s neck.
FRA: So would you say that we have migrated to a sort of financial economy?
Dr. Lacy Hunt: Let me give you a couple of examples. There’s so much liquidity in the financial markets, particularly the stock market, that a lot of the economic news is constructively interpreted even when it’s unconstructive. Virtually the world believes that the United States is experiencing large job gains and the idea that such productivity may be incorrect is hardly considered. But the rate of growth in payroll employment on a 12-month basis peaked at 2.4 percent in early 2015 and for the last 12 months, has sunk to 1.4 percent. What is even more critical — if you look at just the expansions and don’t include the recessions since 1968 – is that the average growth in employment in an expansion year was 1.9 percent. And in the last 12 months, we are half a percentage point under that figure. Yet, given these numbers, there is an erroneous perception that the employment gains are strong. And this view undermines the improvement in the standard of living. And because of the liquidity and the need of some investors to fully participate in the rising stock market, investors tend to overlook other important developments. If we go back to the 12 months ending November of 2015, real average hourly earnings were up about 2.5 percent. And in the latest 12 months, real average hourly earnings gained a miniscule 0.2 percent. The liquidity tends to push the focus away from the more realistic interpretation of the economy for certain types of assets.
However, the weak performance overall and the deceleration in some of the indicators that I just referred to is not unnoticed by the bond market. So, we have a dichotomy in which the stock market is strongly up but the long-term bond yields are down. Now, the short-term yields are up because they are under the control or heavy influence of the Federal Reserve. The Federal Reserve is in the process of raising the short-term rates and winding down their portfolio. They sold 20 billion dollars of government agency securities in October and November, pushing up the short-term rates. Erstwhile, the long-term rates — which look at some of the more important economic fundamentals — are actually declining.
Another element not in the public understanding, since the Federal Reserve no longer produces this sort of monetary analysis, is a very sharp slowdown in the money supply’s rate of growth, bank loans, and within important credit aggregates. Last year, the M2 money supply was up 7 percent. In the latest 12 months, it decelerated to less than 4.5 percent. The rate of growth in bank loans and commercial paper, which topped out on a 12- month basis about 9 percent, is now under 4 percent. So the Fed is raising the short-term rates, reducing the monetary base, and causing a tightening in the financial side of the economy. Some investors understand what is happening and yet it’s not in the general psyche because such monetary analysis is increasingly rare.
However, another more public indicator is the very dramatic flattening of the yield curve. And when the yield curve flattens in such a way, first of all, it’s a symptom that monetary restraint is beginning to bite. Now, the slowdown in money supply growth and the bank credit flattening of the yield curve will occur well before there is any noticeable impact on a broad array of economic indicators or long lags in monetary policy. But when the yield curve starts flattening, that intensifies the effect of the monetary tightening because it takes away or, at the very least, greatly reduces the profitability of the banks and all those that act like banks. Banks make a profit by borrowing short and lending long. When those spreads recede, bank profitability is hurt, particularly for the higher, riskier types of bank loans since not enough spread exists to cover the risk premium. So the banks begin to pull back, further intensifying the restraint pressing on economic growth. To the vast majority of investors, we have an economy that is apparently doing well, but in fact there are elements right beneath the surface that strongly suggest to me that the outlook for 2018 is considerably more guarded than conventional wisdom implies.
FRA: And do you see the potential for an inverted yield curve in the near future?
Dr. Lacy Hunt: I’m not sure that we will have to invert because the economy is so heavily indebted and the velocity of money is its lowest since 1949. Now, a number of people have pointed out that we typically invert before a recession and historically such inversions have been the case most of the time — but not always if you go back far enough in time — and you should since this is not a normal economy. For example, money supply growth since 1900 has averaged about 7 percent per annum, whereas, currently, the rate of growth in M2 is about 36 percent below the long-term average, indicating a very weak growth rate. And the velocity of money is lower than all of the years since 1942 — with the exception of 7 years — and the economy has never been this heavily indebted. And so the yield curve could possibly approach inversion, but it may or may not occur or stay there very long because at that stage of the game, the flattening of the yield curve will greatly intensify all the other effects — the reduction in the reserve, monetary, and credit aggregates, as well as the weakness in velocity. And when this reduction becomes apparent, the Federal Reserve will not be able to reverse gears quickly enough to ameliorate the impact produced upon future economic growth.
FRA: So do you still see a secular low in bond yields on the long into the yield curve remaining in the future sometime?
Dr. Lacy Hunt: The lows have not been seen. The path there will remain extremely volatile. We will have episodes in which the long yields rise. My attitude is that the long yields can go up over the short run for any number of causes. While many elements work out of the system in the long end, yields cannot stay up. When yields go up — especially now that the yield curve is flattening — this intensifies monetary restraint, which puts downward pressure on commodities. This puts upward pressure on the value of the dollar and cuts back on the lending operations. Something I think has been somewhat overlooked in general euphoria over the strength of economic indicators, is the that commercial and industrial loans for all of the banks in the United States are now only up one-tenth of one percent in the last 12 months. There are forward-looking elements that have historically been very important for signaling that change is ahead. They don’t tell us the timing — timing is always difficult — but they are flashing signals that should be observed.
FRA: And as this plays out, do you see monetary policy and fiscal policy is changing, like will we get fiscal policy stimulus? Will there be a change in monetary policy and how will that look like?
Dr. Lacy Hunt: Here’s my attitude: the new federal initiatives, whether tax cuts or infrastructure or otherwise will not provide a boost to the economy if they are funded with increases in debt — that’s where we’re at. And by the way, it’s been that way for some time. If you go back to 2009, we had a one-trillion-dollar stimulus package that was said to be inflationary and was going to boost economic growth, but yet we still had this very poor expansion and little inflation except for intermittent bouts here and there, largely from highly-priced inelastic goods. All the while, the inflation rate has trended lower.
For example, when President Reagan cut taxes, government debt was 31 percent of GDP and now that’s 106 percent on its way to 120-125 percent. And so if you go back and if you read Ricardo’s great article in 1821, he was asked whether it made a difference as to whether the Napoleonic wars were financed by taxes or by borrowing. Ricardo said that, theoretically, either way private sector activity was going to be suppressed. Now we have a lot of evidence, including some that I produced, that the government multiplier is negative, not positive, over a three-year period. Thus, the tax cuts may work for a very short while, but not on balance. And if the tax cuts were revenue-neutral and financed by reductions in government expenditures that would be a positive since the evidence shows tax multipliers are more favorable than expenditure multipliers. Such a theoretical proposal would provide greater efficiency for private sector spending and government spending. There’s also evidence that you would lower the cost of capital, but that’s not what we’re talking about is it? We’re talking about a debt-financed tax cut and we’re not talking about a revenue-neutral infrastructure plan, just as we were not talking about a revenue-neutral stimulus package in 2009. We’re talking about the debt-financed variety of tax cuts and at this stage of the game, this will make us more vulnerable, except for a few fleeting instances.
I will say this: when you have a debt-financed infrastructure program or tax cut, there will be pockets within the economy that will benefit, but the aggregate economic performance will not benefit and so fiscal policy, as I see it, is not really going to be helpful. The risk is that the debt buildup will add to the problems. There is extensive academic research indicating that when government debt rises above 90 percent of GDP for more than five years, this trend will reduce the economy’s growth rate by a third. Remember, we’re at 106 percent debt to GDP and there’s evidence these higher levels of debt have a non-linear effect. In other words, we use up growth at a faster pace. And there’s a lot of evidence from the available data that we’re even losing a half of our growth rate from the trend. For example, GDP has risen at 2.1 percent per capita since 1790. The latest 10 years produced a reduction to 1.0 percent. And so we should have lost only seven-tenths or come down at 1.3 over 1 but we didn’t and this is a consequence that we have to deal with. We’re not in a position to ignore the debt levels. Fiscal policy can be talked about, we can debate about it, and we can proclaim its benefits, but I don’t see them in the current environment just as I didn’t see them in 2009. I would change my tune if they were revenue-neutral, but that’s not the issue here.
To me, inflation is a money-price-wage spiral not a wage-price spiral as with the Phillips curve. The way inflations begin is by money supply growth acceleration not being offset by weakness in velocity, which shifts the aggregate demand curve inward. Remember, the aggregate demand curve is equal to money times the velocity by algebraic substitution as evidenced in all the leading textbooks on macroeconomics. So you have declines in the money supply and velocity, which will make the aggregate demand curve shift inward over time. This shift gives you a lower price level and a lower level of real GDP. It doesn’t happen every quarter or even every year, but it’s the basic trend. Thus, monetary policy is in the process not of decelerating money supply growth and by a significant amount. If the Fed adheres to their schedule of quantitative tightening, I calculate M2 will grow by the end of the first quarter – it’s currently running around four and a half percent – and the year over year growth rate will be down to less than 3 percent. And so monetary policy is taking steps to lower the reserve monetary and credit aggregates, and these actions will further flatten the curve because they can press the short rates upward. But I think the long-term investors will understand that the inflationary prospects on a fundamental basis are weakening not strengthening.
FRA: And do you see these trends as being exacerbated on the emerging government pension fund crisis? Could there be more debt used to solve that like for bailouts? Do you see that potentially happening?
Dr. Lacy Hunt: Well the main problem with government debt is that we’re going to have approximately one million folks a year reach age 70 in the next 14 to 15 years and we’ve known that this was coming, but we didn’t prepare for it. We’ve made a lot of promises under Social Security Medicare and the Affordable Care Act and government debt will have to be used to fund the entitlement benefits — I don’t see any other way around it. Another overlooked problem is that the actual federal fiscal situation is much worse than these surface numbers. For example, in the last three years, the budget deficit worsened each year. If you sum the budget deficits for 2015, 2016 and 2017, the sum is 1.2 trillion, but a lot of what was previously called “outlays” have been moved off budget — we call them investments (such as student loans) and there are other examples. The actual increase in federal debt in the last three years is 3.2 trillion. So the budget deficit is actually greatly understating what is happening to the level of federal debt which wasn’t always the case. Furthermore, the deficit was made worse by a 2015 bipartisan deal between Congress and the White House. And while neither party is blameless — they both agreed on the deal — yet it doesn’t change the fact that the federal situation is deteriorating and at a much worse rate than the deficit numbers themselves indicate.
FRA: And what about for state and local jurisdiction locales, in terms of their government pension funds? Could there be federal level bailouts at that level?
Dr. Lacy Hunt: Again, what are they going to bail them out with? You’re going to have to sell Federal Securities. And one of the multipliers on new sales of Federal debt is negative, not positive. Forget what was taught you in your macroeconomic class 30, 20, or even 15 years ago. When I was in graduate school, I was taught that the government multiplier was somewhere between four and five percent. Now, it looks like the multiplier is at best zero and even possibly slightly negative.
FRA: Great insight as always. How can our listeners learn more about your work, Dr. Hunt?
Dr. Lacy Hunt: We put out a quarterly letter as a public service. Write to us at hoisingtonmgt.com and we’ll put your name on the subscription list. We don’t spam you with marketing so please go ahead and subscribe.
FRA: Okay, great. Thank you very much for being on the Program, Dr. Hunt. Thank you.
Dr. Lacy Hunt: My pleasure Richard. Nice to be with you
Economics as Taught
Note Lacy’s comments on what he learned in graduate school. Lacy once told me that he had to “unlearn” nearly everything he was taught in school about economic.
Multiple generations of economists have been trained to believe inflation is a good thing, saving is bad, that there are no consequences for piling up debt.