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Page added on April 2, 2015
Our Current Illusion Of Prosperity
Pile on More Debt
Unfortunately, this latest boom is artificial and has been built by adding debt on top of debt. Total household debt increased 2.5 percent in 2014 — the highest level since 2010. Mortgage loans increased 1.5 percent, student loans 6.6 percent while auto loans increased a hefty 9.6 percent. The improving auto sales are built mostly on a bubble of sub-prime borrowers. Auto sales have been brisk because of a surge in loans to individuals with credit scores below 620. Since 2010, such loans have increased over 100 percent and have gone from 20 percent of originations in 2009 to 27 percent in 2013. Yet, auto loans to individuals with strong credit scores, above 760, have barely budged over the last year.
Subprime consumer borrowing climbed $189 billion in the first eleven months of 2014. Excluding home mortgages, this accounted for 41 percent of total consumer lending. This is exactly the kind of lending that got us into trouble less than a decade ago, and for many consumers, this will only end in tears.
But we need to ask ourselves: is the current boom built on sound foundations? In other words, do we have sharp increases in productivity or real wage growth?
Productivity increased less than 1 percent on average in the last three years and real wages have flat lined or declined for decades. From mid-2007 to mid-2014, real wages declined 4.9 percent for workers with a high school degree, dropped 2.5 percent for workers with a college degree and rose just 0.2 percent for workers with an advanced degree.
Is the boom being built on broad base investment in plant and equipment? The current average age of working plants and equipment in the US is one of the oldest on record.
Meanwhile, it is now clear that the shale boom was an illusion of prosperity. Oil prices have dipped below $50 with some analysts calling for $20 oil by the end of the year. This is a drop from over $100 from last year. Many shale outfits need oil above $65 just to break even. Massive layoffs in the energy sector are now a certainty. Few realize that most of the gains in employment in the US since 2008 have been in shale states. Yet the carnage is not over. Induced by low interest, investment banks loaned over 1 trillion dollars to the energy industry. The impact on the financial sector is still to be felt.
There Has Not Been a True Home Price Correction
The same is true about current increases in housing prices and construction costs. Following the financial crisis of 2008, real estate prices should have dropped much more than they did relative to other prices. The new reality between supply and demand would have led to a price correction similar to the ones we see in oil prices today or to high-flying internet stocks after the dot-com bubble burst. Housing should then have remained in a slump possibly for a decade or more, until the overhang of empty residential and commercial real estate had been cleared off.
Today, housing is back, with price increases at bubble-era levels and construction activity is picking up. The improvement is being driven by professional investors stretching for yield in the buy-to-rent market and by historically low long-term mortgage rates of below 4 percent. Yet, the overhang of empty commercial properties from the previous boom has not disappeared. It has just been left in limbo, because of the “extend and pretend” strategy of banks made possible by the central bank’s massive printing over the last six years. The number of vacant units (table 7) in the US still stands at over 18 million units — a level reached back in 2008–2009. As of 2014, the number of units held off the market was still at a record level of over 7 million units.
Will Easy Money Fix Everything?
Current policy coming from the Fed seems to be geared to create a never-ending series of booms and busts, with the hope that the busts can be shortened with more debt and easy money.
Yet one major driver behind the financial crisis in 2008 was too much debt – much of which led to taxpayer-funded bailouts. In spite of this, the best the Fed can come up with now is to lower interest rates to boost demand to induce households and governments to borrow even more.
Interfering with interest rates, however, is by far the most damaging policy. The economy is not a car, and interest rates are not the gas pedal. Interest rates play a critical role in aligning output with society’s demand across time. Fiddling with them only creates an ever-growing misalignment between demand and supply across time requiring an ever larger and more painful adjustment.
paulo1 on Thu, 2nd Apr 2015 9:41 am
Nothing to disagree with any points made in this article. But we are already converted on this site, for the most part. It’s nuts out there and I no loner understand why a big big correction has yet to happen?
marmico on Thu, 2nd Apr 2015 10:19 am
That’s great. When the subprime vehicle buyers default on their loans or leases, it will increase the supply of used vehicles in the market driving down used vehicle prices for non subprime purchasers.
Overall, consumers win, bankers lose.
http://research.stlouisfed.org/fred2/graph/fredgraph.png?g=16io
GregT on Thu, 2nd Apr 2015 10:37 am
When the consumers default on their loans or leases, the banks repossess the vehicles for the amount left owed on them, not the full resale value of the vehicle.
The consumer loses, and the banks win, overall.
ghung on Thu, 2nd Apr 2015 10:50 am
marm: “Overall, consumers win, bankers lose.”
…and there’s no entropic loss to the overall system? If there is, it’s not a problem in an infinite economy, eh marm?
Plantagenet on Thu, 2nd Apr 2015 11:18 am
The economy isn’t great but its doing a heck of a lot better then it could be doing. And now, thanks to the oil glut, we’ve got cheap gasoline!
I think we’ll see another year or two of 2.5-3.5% GDP increases in the USA.
forbin on Thu, 2nd Apr 2015 11:23 am
Gunhg , the overall system is “vitual”
There’s no reason not to build more stone heads …….
“entropic loss” is a Game of Thrones warlord as far as the public is concerned…
🙂
Forbin
steve on Thu, 2nd Apr 2015 12:23 pm
Plant you are wrong about the growth…it is all manipulated numbers…go to zero hedge you will see…oh and you will like it there because there is a lot of obama haters there….
jjhman on Thu, 2nd Apr 2015 12:42 pm
Greg:
I don’t think banks win on repos. Especially on subprime borrowers. They generally finance more than 100% on car loans so when the banks reposesses them the loan amount is often more than the retail value. If a glut of repo’d cars end up in the market the value of the vehicles will be even lower and it takes a cerain amount of paid labor to reposess the vehicle, process the paper and sell.
So the only winners will be vultures who mostly buy cars used when there is an easy bargain to be had.
GregT on Thu, 2nd Apr 2015 12:53 pm
A very small percentage of automobiles are financed with 0% down. A large inventory of repos drives the prices down for anyone else trying to sell a used car. Also a lose for the average consumer attempting to make an upgrade.
Plantagenet on Thu, 2nd Apr 2015 12:57 pm
@steve
If you are an Obama hater, you’ll have to hate on by yourself. —-I’m not interested.
Obama may be a nebbish and a total incompetent, but there is something likable about him personally.
Cheers!
Mike989 on Thu, 2nd Apr 2015 1:28 pm
The Mises Institute: Full of Shit.
“Current policy coming from the Fed seems to be geared to create a never-ending series of booms and busts, with the hope that the busts can be shortened with more debt and easy money.”
NO. This isn’t the policy of the Fed. We are in a RECESSION. The economy needs DEMAND to return to a Normal Level of Employment and Growth. That “easy” money is just a low interest rate to Not Choke Off the current Mild Recovery.
Only a FOOL would raise interest rates and choke off the current economic growth rate.
This is why Republicans Are DANGEROUS for the Economy. They 100 year old FAILED Model of the economy doesn’t work, and it actually hurts them.
This is about Rich Republicans living off INTEREST Payments vs. Rich Republicans wanting to see the Economy Grow and Companies Expand.
The rich martini sipping lazy brained country club Republican, listening to dumbass radio and Fox Hate News, only cares about his bond interest rates, and nothing else.
Notice the most incompetent business Republicans are the must gullible and suck this bullshit up.
If they ever got near a real economics text book America could grow 10X faster.
GregT on Thu, 2nd Apr 2015 1:35 pm
Mike,
Only a fool would believe that infinite exponential growth in a finite environment is even a possibility. Also, interest rates and monetary policy are dictated by the central banks. It makes no difference which politicians are in the limelight. The bankers control the political system, not the other way around.
BC on Thu, 2nd Apr 2015 1:36 pm
@Plant:
https://www.frbatlanta.org/cqer/researchcq/gdpnow.cfm
http://research.stlouisfed.org/fred2/graph/fredgraph.png?g=16kq
http://research.stlouisfed.org/fred2/graph/fredgraph.png?g=16km
http://research.stlouisfed.org/fred2/graph/fredgraph.png?g=16ko
http://research.stlouisfed.org/fred2/graph/fredgraph.png?g=16kn
The US economy has decelerated to stall speed since Q3-Q4 ’14.
Profits are contracting.
Bank loans and lines of credit to the shale bubble are about to be pulled, which will drag down orders, IP mfg., and goods-producing employment hereafter.
The yield curve won’t invert ahead of a recession this time around, as similarly has been the case in Japan since 1992 and the most recent recessionary episodes in the EZ.
During debt-deflationary regimes (no debt deflation yet, or not much), recessions don’t occur because of capacity constrains, banks restricting credit, and the central bank tightening reserves; rather, there is insufficient growth of income after taxes and debt service to sustain growth, and the economy stalls and contracts.
Were it not for the debt overhang, peak Boomer demographic drag effects bearing down, extreme wealth and income inequality resulting in the economy being overly dependent upon the spending of the top 1-10%, and a record low for labor’s share of GDP causing real productivity to decelerate below 1%, the reported growth of payrolls and wages would imply 3.5-4% real GDP growth.
Mike989 on Thu, 2nd Apr 2015 1:36 pm
The Mises Institute worried about Wage Growth?
Why CEOs are getting Tremendous Wage Growth, what could be the problem?
Why doesn’t the Mises Institute start demanding that CEOs stop raping their companies of profits and send some of that wage growth to the actual workers? Then you’ll see the economy grow from the bottom up, because as we’ve seen since Reagan, nothing grows from the trickle down rape the worker and taxpayers with current Republican economic and tax policies.
Why doesn’t the Mises institute start DEMANDING companies bring back their offshore profits and Invest in America?
Mike989 on Thu, 2nd Apr 2015 1:37 pm
Why isn’t there a SHAREHOLDER REVOLT over CEO compensation? CEO pay policy is literally destroying companies as it bleeds profits out of the system, to the CEO, from the working and shareholder.
Because you’ve got Fox Hate News as a propaganda source for the gullible 1%.
Mike989 on Thu, 2nd Apr 2015 1:40 pm
Wait What?
US Economy grew 5% in Third Quarter?
http://www.forbes.com/sites/samanthasharf/2014/12/23/u-s-economy-grew-5-in-third-quarter-up-sharply-from-earlier-estimates/
Mike989 on Thu, 2nd Apr 2015 1:45 pm
In a Zero Bound, Demand constrained economy even low interest rates don’t help much. Only consumer confidence about being able to hold a job, and pay off a loan is the point where the consumer will return to the economy to make large long term purchases.
What’s helping now is banks have started loosening up their qualification criteria. Where you used to have to offer 5 different forms to prove your employment history and income, now you only need two.
You could say this recession was a bank, tight credit, recession, as the banks tried to save themselves from the Bloat of Awful mortgages and loans they had written 2000-2007. Yes, it took 8 years of only approving the highest quality loans to fix the banking system, even with ultra low rates.
Plantagenet on Thu, 2nd Apr 2015 2:30 pm
@BC
If it were just up to me, I’d be inclined to agree with you. However, check out Mike989’s link just above. The Obama administration now estimates in a 3rd revision that 3rd qtr 2014 GDP grew by 5% (FIVE PERCENT!!!!). And thats on top of the 3rd revision of the 2nd Quarter to 4.9%. Thats a 10% growth rate for six months of last year.
Unless the Obama people are totally cooking the numbers—which is certainly possible—- thats pretty darn good GDP growth by anyone’s measure.
GregT on Thu, 2nd Apr 2015 2:50 pm
10% growth rate for six months of the last year?
Hurray, we’ve been saved!
So if we can keep growing at that rate, the economy will double in a mere 3.5 years. Twice as much resource exploitation, twice as much consumption, and twice as much waste!
It is little wonder why we’re in such big trouble, with so many fools among us.
“The greatest shortcoming of the human race is our inability to understand the exponential function.”
― Albert A. Bartlett
beammeup on Thu, 2nd Apr 2015 4:40 pm
Plant – The quarterly numbers are annualized, so they’re not additive. Still, 5% growth is a very large value. Given that government spending is included in GPD (more than once, as the money flows through the economy), and a large chunk of government spending is based on issuance of new debt, I’m dubious that the reported growth is truly reflective of an expanding economy.
Plantagenet on Thu, 2nd Apr 2015 5:50 pm
hi Beammeup
Shimata—you are right.
Cheers!
Makati1 on Thu, 2nd Apr 2015 9:58 pm
A ‘healthy’ country does NOT have 47,000,000 people on food stamps.
A ‘healthy’ country does NOT have 110% of it’s GDP as debt.
A ‘healthy’ country does NOT have a constantly declining net income.
And on and on…
BTW: The old pictures of soup lines have nothing on today’s. The ones today are plastic debit cards instead of lines, but if those 47 million were in line, it would stretch 18,000 miles or 2/3 around the earth or 7 times from L.A. to Boston.
Apneaman on Thu, 2nd Apr 2015 10:14 pm
Rough seas ahead for container shipping industry
The world’s shipping lines risk bankruptcy and will have to shed assets in order to stay afloat, an industry expert warns in a new report.
http://www.hellenicshippingnews.com/rough-seas-ahead-for-container-shipping-industry/
Apneaman on Thu, 2nd Apr 2015 10:22 pm
Goldman Confirms Global Economy Enters 4th Month Of Contraction
http://www.zerohedge.com/news/2015-04-02/goldman-confirms-global-economy-enters-4th-month-contraction
HARM on Thu, 2nd Apr 2015 11:21 pm
“Goldman Confirms Global Economy Enters 4th Month Of Contraction”
Yes, but the stock market and .1%ers balance sheets are going “to infinity and beyond!”, so it’s totes ma goats, bra. http://www.bloomberg.com/bw/articles/2014-04-03/top-tenth-of-1-percenters-reaps-all-the-riches
Apneaman on Thu, 2nd Apr 2015 11:36 pm
The U.S. Economy Slows to Stall Speed
http://charleshughsmith.blogspot.ca/2015/04/the-us-economy-slows-to-stall-speed.html
Apneaman on Fri, 3rd Apr 2015 12:05 am
Let’s bust a few myths about the supposed superiority of modern life.
“Primitive” Ancients
http://hipcrime.blogspot.ca/2015/04/primitive-ancients.html
Pre-industrial workers had a shorter workweek than today’s
http://groups.csail.mit.edu/mac/users/rauch/worktime/hours_workweek.html
Apneaman on Fri, 3rd Apr 2015 12:45 am
Economic Inequality: It’s Far Worse Than You Think
The great divide between our beliefs, our ideals, and reality
http://www.scientificamerican.com/article/economic-inequality-it-s-far-worse-than-you-think/
Speculawyer on Fri, 3rd Apr 2015 1:01 am
Ah yes . . . the Mises Institute and the Austrian economists. An economics school that rejects empiricism, the very fundamentals of science. The witch-doctors of economics.
Tim on Fri, 3rd Apr 2015 9:39 am
I never understand all these fluffy theories when there is a perfect tool for measuring the real ecomomy: the trade balance. If your economy is great you have a surplus: things are created wich you consume yourself (thus less import) or you can export and get money in the country. The US has a huge deficit of about 50 billion a month. That means nothing is created to consume or export and you have to import and so you money flows abroad and you get poorer. Then you can loan your dollars back from china at interest
Apneaman on Fri, 3rd Apr 2015 11:07 am
Desperate measures? Must consume
…………………………….
New scoring system aims to help people with poor credit
“…a pilot program to help millions of Americans get easier access to credit, based on their record of paying utility bills, instead of their history of loan repayments.”
http://hosted.ap.org/dynamic/stories/U/US_NEW_CREDIT_SCORES?SITE=AP&SECTION=HOME&TEMPLATE=DEFAULT