Tuesday, December 31, 2019

RECESSION OR DEPRESSION? CAN AMERICAN 'AFFORD' ANOTHER ECONOMIC MELTDOWN?

Can America ‘Afford’ Another Recession?



It’s now history: the federal deficit for fiscal 2019 was -$984 billion. That’s an increase from the previous year of $205B, or 26 percent. And this increase in the deficit happened, mind you, despite an increase in revenue of 4 percent.
Here’s more history: On the last day of the last economic expansion (Nov. 30, 2007), the Debt Held by the Public was $5.146T, and twelve years later the Debt Held by the Public was $17.105T. That’s 3.32 times higher, kids.
So, twelve years, twelve trillion dollars of additional debt. What Americans need to keep in mind is that deficits are a function of both revenue and spending. Although revenue went up by 4 percent in 2019, spending went up by 8 percent; hence the deficit. Many Americans seem to not know that federal spending is controlled by Congress. Budgets, appropriations, continuing resolutions, omnibus bills, and supplementals are legislation, the province of Congress. Therefore, if one worries about debt, one should look to Congress for relief, especially the House of Representatives, the chamber where spending bills originate.
Here’s a little context: the $3.46T in total federal revenue in 2019 would have been more than enough to fund the entire federal government for as recently as 2013, when total outlays were $3.45T (see Table 1.1 of the historical tables to verify). If we had had 2019’s revenue in 2013, we’d even have had a little change left over to pay down the federal debt a smidgeon.
Our twelve-year window extends from the first day of the Great Recession to about one month ago. Since the finale of the Great Recession (June 2009), the economy has been expanding. But where would the economy have been if Congress hadn’t spent that $12T of borrowed “stimulus”?
Economic expansions have always ended, and sometimes with a resounding thud. However, when the last expansion ended, the deficit had been getting better. In fact, for the fiscal year that had ended two months before the Great Recession began, the total deficit was down $252B from the (then) record high set in 2004. So, the last deficit before the Great Recession hit was -$160B.
The feds project that the deficit will be more than a trillion dollars in 2020 and in each year of the next decade. So if a recession were to hit now, Congress would be in a worsening fiscal situation rather than the improving situation back in December 2007 when the Great Recession hit. Rather than a -$160B deficit, Congress would be running more than a trillion-dollar deficit.
The Great Recession was the worst downturn since the Great Depression, it’s been said. But with the accumulation of so much debt since the last expansion ended, and with out-of-control spending and deficit, one wonders how Congress will grapple with the next recession.
One of the ways that Congress copes with recessions is -- deficit spending itself. It’s called “priming the pump,” i.e. stimulus. But for more than twelve years, through both recession and recovery, Congress has been priming the pump. It started in February 2008 with the Economic Stimulus Act of 2008. One of the main features of the Act was one-time rebate checks (i.e. stimulus) for income tax filers. The projected cost of the package was $168B, no doubt one of the reasons that the deficit for 2008 set the then all-time record of -$458B.
It should be noted here that at the time, the first weeks of 2008, Congress did not yet know that we were already in recession. That would not be determined until December, when the Business Cycle Dating Committee of the NBER would agree on the start of what is now called “the Great Recession.”
What Congress hasn’t done since 2009 when the Recession ended is trim its sails and cut spending, (as their hero Keynes would advise). Instead, Congress has used recessionary tactics and tools to prop up the economy even when not in recession. Congress hasn’t gotten close to getting the deficit back to the pre-recession level in FY 2007. The stimulus of yet more stimulus (deficit spending) might not be very stimulating when you’re already running a trillion-dollar deficit. The danger is that Congress will run out of anti-recession ammo.
The common factor in the history here is Nancy Pelosi. She was the Speaker of the House when we slid into recession in December of 2007, she was Speaker when the financial crisis hit in 2008, she was Speaker when the deficit first breached the trillion-dollar mark in 2009, and she is Speaker now, as we plow through the trillion-dollar mark yet again. Nancy Pelosi is a “high maintenance” old gal; she’s damnably expensive. Your grandchildren will pay for her fiscal recklessness.
America needs a new speaker and a new House of Representatives. We can no longer afford the Democrats. The most important votes Americans will make in November 2020 are the votes they cast for Congress. We need conservative congressional candidates who vow to cut spending, but in ways that don’t stall the expansion. What we need is another Newt Gingrich, the Speaker who ushered in the balanced budgets and surpluses of 1998-2001.
Every candidate for the U.S. House should be asked what they’re going to do about the deficit and spending. If they say they’re going to raise taxes on corporations and the “evil” One Percenters because they can’t make do on revenue of $3.46T, then they’re unfit to “control the purse strings.” You might even tell them that.
The easiest way to fund the government is by selling debt, (assuming the feds will always be able to find buyers for U.S. bonds, notes, bills, etc.). It’s also fairly easy to “print” new money. What’s hard is raising taxes. But what’s especially hard is cutting spending. No one wants their government benefits cut, no government employee wants their salary cut or job eliminated; no one wants their “ox gored.” Cutting government spending is politically dangerous.
It’s simple, we can borrow more, we can crank up the printing presses and create new money, we can hike taxes (but only on a tiny group at the top), or we can at long last start cutting spending. With Madame Pelosi at the helm, one supposes that we’ll do all of it -- except for the part about cutting spending.
Can we “afford” another recession? If we cannot afford another recession because the usual remedies will be less effective given our trillion-dollar deficit, then we need to keep the current economic expansion going. But how do we keep humming an already very mature expansion, the longest expansion in postwar history? The best hope we have of keeping the economy expanding is by re-electing President Trump, and by giving him a conservative House of Representatives he can work with. Vote Republican, Americans.
Jon N. Hall of ULTRACON OPINION is a programmer from Kansas City.




Déjà Vu? Auto-Loan Delinquency Hits New Record High For, Um … Some Reason



https://hotair.com/archives/2019/02/13/deja-vu-auto-loan-delinquency-hits-new-record-high-um-reason/

 

 

Is this a failure of the labor market? Or is it a rerun on a smaller scale of the financial crash that created the Great Recession? According to the Federal Reserve of New York, a record number of Americans are three months or more behind on their car payments — even worse than during the crash in the previous decade:
A record 7 million Americans are 90 days or more behind on their auto loan payments, the Federal Reserve Bank of New York reported Tuesday, even more than during the wake of the financial crisis.
Economists warn that this is a red flag. Despite the strong economy and low unemployment rate, many Americans are struggling to pay their bills.
That seems incongruous in an economy where growth has spread out across the spectrum. Job creation has picked up, wages have increased in real terms at the best rate since before the Great Recession, and the overhang of discouraged workers finally appears to be evaporating. Still, the New York Fed blames this on a lack of widespread impact from the economy:
 “The substantial and growing number of distressed borrowers suggests that not all Americans have benefited from the strong labor market,” economists at the New York Fed wrote in a blog post.
Maaaayyyyybeee, but there’s something else going on here too. In the same blog post, the NY Fed also notes that the delinquencies are mainly coming from subprime loans:
The flow into serious delinquency (that is, the share of balances that were current or in early delinquency that became 90+ days delinquent) in the fourth quarter of 2018 crept up to 2.4 percent, substantially above the low of 1.5 percent seen in 2012.
In the chart below, we disaggregate the delinquency rate by the borrower’s credit score at origination. The relative performance between each credit score group stands out immediately; but the increase in delinquency is most obvious among the loans of the two groups of lower-score borrowers, shown by the blue and red lines in the chart below. Borrowers with credit scores less than 620 saw their transitions into delinquency exceed 8 percent in the fourth quarter (annualized as a moving sum), a development that is surprising during a strong economy and labor market. Meanwhile, the delinquency transitions among those with the highest credit scores have remained stable and very low. In aggregate, the increasing share of prime loans has partially offset the deteriorating performance of the subprime sector.
That increase in the percentage of prime lending as a hedge against subprime risk has only happened recently. Over the last several years, subprime lending increased significantly, including in the auto-loan market. By 2013, subprime auto lending had increased 18.8%, while subprime auto-loan securities had grown 63.5%. Many of those loans carried high interest rates, sometimes as high as revolving credit-card rates. Did people expect to marry credit risks to high interest rates and not get defaults?
The Washington Post buries the scope of that risk towards the end of their article:
He noted that non-prime and subprime auto loans increased from 28 percent of the market in 2009 to 39 percent in 2015, a reminder of how aggressively lenders went after borrowers who were on the margin of being able to pay. More lenders are giving people six or seven years to repay now vs. four of five years in the past, according to Experian, another tactic to try to make loans look affordable that might not otherwise be.
That’s a more accurate look at the aggressive nature of subprime lenders, which also has echoes of the housing bubble and its 2008 collapse. The NY Fed blames this mainly on “auto finance reporters,” but this chart shows a more nuanced picture:
Half of all auto-finance reporter loans are subprime, which accounts for $75 billion in outstanding debt. However, 25% of all auto loans written by large institutions are also subprime — and that accounts for over $97 billion in outstanding debt. Those “too big to fail” institutions apparently didn’t learn any lessons, and neither did the investors who are buying securities based on subprime debt. And how much backstop are the auto finance reporters getting from the large banks?
The only potential good news is that auto-loan debt isn’t large enough to knock out financial institutions — on its own, anyway. Does anyone want to bet that subprime lending in the housing markets hasn’t followed along in the same manner, though?

 Huge Disparity in Corporate Profits Hints at Something Amiss

Some worry that gap between weak profits in official government data and record earnings of S&P 500 repeats warning signs of late 1990s


U.S. domestic profit margins have fallen since 2012, even as S&P 500 margins rose to new highs.After-tax profit margin*Sources: Federal Reserve Bank of St. Louis; S&P Dow Jones Indices*12-month average; national accounts profits with inventory valuation and capital-consumption adjustments
%RECESSIONNational accounts, domesticcorporatesS&P 5001970’80’902000’10051015
Are U.S. companies making more money than ever before, or are they mired in one of their longest profit slumps since World War II? Widely used measures have diverged in recent years, leaving many investors worrying that something is amiss.
Look at pretax domestic profits as measured by the Bureau of Economic Analysis, and it is easy to be bearish. Profits are down 13% in five years, the biggest drop outside a recession since World War II. President Trump’s tax cut has cushioned the blow to earnings, with after-tax corporate profits falling only a little. Profit margins also are down sharply, with the pretax margin for domestic business lower than the postwar average and below where it stood from World War II until 1970.
Falling domestic profits suggest companies are in deep trouble, avoiding an even deeper slump only thanks to tax cuts.
Earnings by S&P 500 companies tell the opposite story. Reported earnings per share were at a record in the 12 months to June, up 31% in five years and forecast to keep rising. The after-tax profit margin is slightly down from a record last year, but still higher than any time before that.
Some investors are worrying that the gap between the weak profits and the record per-share earnings of the S&P 500 is a repeat of the warning signs of the late 1990s, when listed companies exaggerated their figures. There is probably some of this. Some such excesses usually build up during long periods of economic growth.
Another factor: High S&P profits have led many to conclude that U.S. businesses are raking in money in a way more consistent with oligopoly than a free market.
A deep dive into the numbers suggests most or all of the gap is explained by other elements. Much of the gap between S&P earnings and the national figures appears to be due to tax dodging by multinationals, the troubles of smaller businesses and that the big-company index includes more successful companies than the wider economy.
Taxing DataBefore taxes, S&P 500 profit margins aren't atnew highs, but are holding up far better thaneconomy-wide profitability.Pretax profit margin*Sources: Federal Reserve Bank of St. Louis; S&P DowJones Indices*12-month average; national accounts profits withinventory valuation and capital-consumptionadjustments
%RECESSIONNational accountsS&P 5001970’80’902000’1005101520
Stripping out tax narrows the gap. That is because big companies benefited more from the tax cuts than small businesses. Goldman Sachs analysts point out that the tax rate on the S&P dropped by 8 percentage points, from 26% to 18%. The economywide corporate tax take dropped by a smaller 5 points from 16% of profits to 11%, partly because the economywide data includes nonprofits and corporate structures where the tax is paid by the shareholders, not the company.
The rising use of tax havens to shift offshore patents and other intellectual property rights—and their fat profits—probably makes up much of the remainder. Figures here are sketchy. Researchers at the Minneapolis Federal Reserve last year estimated that roughly $280 billion of profits had been shifted by U.S. companies offshore in 2012. That would equate to tax revenues of as much as $100 billion. Add that back in, and after-tax profits are at a record, as with the S&P.
S&P profit margins before tax fit this pattern, too. They peaked in 2014, and have come down a little since then, though by less than the fall in margins. This suggests in part that a pickup in wages has started to eat into margins in the past few years, rather than being about the internet giants creating new monopolies.
However, Jonathan Tepper, author of “The Myth of Capitalism” and founder of research house Variant Perception, says the drop in pretax margins is a result of being late in the economic cycle, and is compatible with reduced competition leading to a multidecade trend higher in profitability.

Internet giants, like other successful tech stocks, have distorted profitability numbers. PHOTO: DENIS CHARLET/AGENCE FRANCE-PRESSE/GETTY IMAGES
Internet giants such as Alphabet and Facebook have skewed the numbers, though, along with other successful technology stocks. S&P 500 companies are far more profitable than small and midsize listed companies, in part because of the much heavier weighting of the tech sector in the blue-chip index.
Accounting shenanigans might play a part. As independent economist and author Andrew Smithers points out, CEOs were given incentives by bonus structures to overstate public-company write-downs in 2008 and 2009. That likely boosted stated profits, and bonuses, in later years.
The next bust will probably reveal accounting misdeeds from the long stock market boom, if history is any guide. The profits disparity can mostly be explained with tax, size and sector differences. But we will only know for sure when the market next crashes.


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