Enlightened Economics

Economics for an Enlightened Age

Posts Tagged ‘economy’

• Americans Say it’s Still a Recession—or Worse!

Posted by Ron Robins on June 21, 2011

By Ron Robins. First published June 1, 2011, in his weekly economics and finance column at alrroya.com

Why don’t Americans believe Mr. Ben Bernanke, the chairman of the US Federal Reserve, that the economy is growing and getting better? Americans are right not to believe him and the Obama administration that the economy is on the verge of significant and sustained growth. Past predictions by these parties have either been flat out wrong or overly optimistic. Hence, Americans are not fooled and their own experience tells them that the US economy is still in recession—or worse.

They see the reality every day of joblessness and increasing poverty, and hear about out of control government deficits and debt. They know that massive deficits and debt can only mean belt tightening and increasing taxation ahead—resulting in even higher joblessness.

In a Gallup poll published April 28, Gallup found that, “more than half of Americans (55%) describe the U.S. economy as being in a recession or depression… Nor does it seem likely that — given surging gas and food prices — most would agree with the Committee [the Federal Reserve’s Open Market Committee] that ‘longer-term inflation expectations have remained stable and measures of underlying inflation are subdued.’”

And Americans are not convinced that cutting the federal government’s deficit will create jobs. A New York Times/CBS News poll on April 21 reported that, “for all the talk from Congressional Republicans and Mr. Obama of cutting the deficit as a way to improve the economy, only 29 percent of respondents said it would create more jobs. Twenty-seven percent said it would have no effect on the employment outlook, and 29 percent said it would cost jobs…”

Most Americans are also beginning to understand that despite the huge growth of corporate profits and executive pay in recent decades, their pay has been left far, far behind. And this adds to their belief that the economy for most Americans is one of continuing and growing recession.

On March 16 Yahoo Finance noted that, “since 1973, the median take home pay of full-time workers is virtually unchanged on an inflation-adjusted basis. [That] the top 11,000 households in America have more income than the bottom 25 million. [And] since 1976, 58% of real income growth has gone to the top 1% of Americans… ” Jeffrey Sachs, professor of economics at Columbia University, says in the article that, “we’ve reached the greatest income [and] wealth inequality in history… the people at the top buy the politicians… All of them – all parties. Everyone is in the hands of the super wealthy.’”

However, the above inflation adjusted median take home pay situation of full-time workers is probably even far worse than depicted. Unfortunately, the take home pay data above is discounted by US government inflation statistics which have had numerous ‘modifications’ over the years that cumulatively, effectively, and dramatically, have lowered the inflation rate from what it would otherwise have been. With a higher inflation rate, the real take home pay in the above analysis becomes almost miniscule.

For many years now, the current US consumer price index (CPI) no longer measures the prices of a fixed basket of goods and services. To understand what the CPI really is, see my post, Unethical Statistics Lead us Astray. Shadowstats.com has created their SGS Alternate CPI which they say is a true “measure of the cost of living needed to maintain a constant standard of living,” and it is now running about 10 per cent higher than a year ago. That compares with nominal wages increasing only around 2 per cent over the same period, according to the US Bureau of Labor. No wonder that Americans feel they are still in a recession—or a depression.

Adding to Americans’ sense of economic distress is that the US job market is becoming one of lower paying jobs. In 1980, the US had a plethora of middle income jobs—about 75 per cent more than low income jobs. However, by 2010, the number of middle and low income jobs were almost even at just over 40 per cent each of America’s job market, as reported by Sherle R. Schwenninger and Samuel Sherraden in, “The American Middle Class Under Stress,” released by the New America Foundation on April 27.

Schwenninger and Sherraden also report that, “wages and salaries have fallen from 60% of personal income in 1980 to 51% in 2010. Government transfers have risen from 11.7% of personal income in 1980 to 18.4% in 2010, a post-War high… [and] America’s social wage has been eroded by the rising cost of health care and education. Health care spending increased from 9.5% of personal consumption in 1980 to 16.3% in 2010… The average cost of one year of college… after adjusting for inflation… has risen 72% since 1990… ”

They continue that, “household net worth declined from $65.7 trillion in the second quarter of 2007 to $56.8 trillion in the fourth quarter of 2010… At the end of 2010, 23.1% of all residential properties with a mortgage were underwater [home value being less than the principal left on the mortgage]… Over the past three decades, household debt as a share of disposable income increased from 68% to 116%.”

The data is irrefutable that Americans are suffering financially in ways they never before imagined. While the rich get richer, they get relatively poorer and ever more dependent on debt and government handouts. No press conferences like the one on April 27 by Mr. Bernanke, or government propaganda, will convince suffering Americans that the ‘system’ has not been rigged against them, or that there is the possibility for any substantive improvement ahead. It is no wonder that most Americans believe that the US is still in recession—or worse!

Copyright alrroya.com

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• U.S. Personal Savings Rate To See Big Gains

Posted by Ron Robins on September 4, 2008

There is good news coming. Americans are about to save more, much more. A new consciousness is dawning. It is one that brings enhanced balance to Americans material and inner personal lives as they re-evaluate their futures due to changed circumstances. Boomers approaching retirement are seeing their homes decline in value, their stock market investments in difficulty, and concerned about government support—are realizing the importance of savings as never before.

Recently, U.S. tax-payers received up to $600 in cash from their government. It seems that Americans are choosing to save it. In May 2008 the savings rate as a percentage of personal disposable income shot-up to 4.9% and in June to 2.5%. This occurred after the rate was near zero for about three years and the lowest since 1933. These higher savings rates are just the beginning of a trend that I believe will crest with savings rates in excess of 10% in the next few years.

Higher savings rates will eventually create a new economic equilibrium and allow for vigorous economic expansion. However, until this new economic equilibrium emerges, the increased savings rates have some downsides. It begins with a significant reduction in consumer expenditure. The U.S. is the world’s leader among developed countries in having the highest consumption relative to its gross domestic product (GDP). Stephen Roach of Morgan Stanley shows that U.S. consumption is about 71% of GDP, compared to 56-57% in most other developed countries. The U.S. average for the years 1975–2000 was 67% of GDP, and for 1950-1975 around 64%. Now the U.S. is likely to head back to the latter figure.

Why Americans will save more
Another consequence of lower consumption will be further downward pressure on Americans most important asset – their homes. Until recently, Americans saw their homes as the safe place to invest in and build equity for retirement. But they now understand this strategy may not work well in the future. Purchasing a home for investment purposes will be de-emphasized. Home prices are likely to fall even further, scaring particularly those boomers to save in other ways.

In addition, declining consumption could mean even lower stock market returns than even the abysmal ones seen in recent years. Adrian Ash in his article, The Decade of No Returns, says, “… the total return [capital gains and dividends] on the S&P500 [the pre-eminent U.S. large companies stock index] was actually negative for the decade ending on 30th June 2008.” The numbers were adjusted for inflation as well. By far the largest proportion of Americans’ stock investments are held in companies that make-up the S&P 500 Index.

Incidentally, if you account for the declining value of the dollar internationally, then performance of the S&P 500 delivered a negative real return of about -20 to -40% over the past 10 years! And Americans investing in S&P 500 companies did also participate significantly in the growth of foreign market as well. Such revenues grew rapidly to around 40% of total S&P 500 sales during this period.

Therefore Americans planning to retire in the next few years cannot rely on the stock market to replicate its gains seen between 1980 and 2000, to fund their retirement. They simply have to save more and place some of those savings away from the stock market. (Note: I do not anticipate Americans abandoning stocks. And there will be some market sectors that will do very well even if the broad market struggles.)

Boomers also have to question the ability of the U.S. government to fund their medical needs and pensions in retirement, as the U.S. government is in one heck of a hole – a hole of around $70 TRILLION! The enormity of this funding gap cannot be easily grasped. But let us try. In an article, U.S. ‘fiscal gap’ paving the road to meltdown, by Derek DeCloet in the Canadian Globe & Mail he states, “To earn $70-trillion in profit, you’d need 1,723 companies the size of ExxonMobil; $70-trillion would be equal to the annual sales at 1.35 million Wal-Mart stores. [Now that’s]… not the size of the U.S. government’s debt, though. It’s the shortfall between its projected future revenues and what it plans to spend (in today’s dollars).”

It is evident from the U.S. government’s financial position that its promised benefits to its citizens could be cut significantly – while substantially raising taxes as well. In such an environment boomers have no other option but to urgently save a heck of lot more now.

A new consciousness arising bringing balance to spending and saving
Americans, whether they be boomers or from generations X, Y and Z, are at the cusp of a new consciousness. They will bring a new balance to their material life and inner desires. The rapidly changing financial picture together with a fundamental shift in their consciousness concerning what is important in life, will place a renewed emphasis on savings. In years to come, this will be seen as a great turning point for the American economy, a turn towards a more balanced Enlightened Economics.

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© Ron Robins, 2008.

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