If we follow the logic of portfolio managers the situation gets worse. To take advantage of the attractive interest rate to risk differential, portfolio managers will re-balance their portfolio quickly by selling Treasury bonds. This will put pressure on both Treasury interest rates and the Euro to dollar conversion rate. The United States could get hit with a double whammy in an election year. Here is a chart of the real interest rates from the Treasury Department.

Gary identifies 9 causes of slow global growth in the years ahead:

1. U.S. consumers will shift from a 25-year borrowing-and-spending binge to a saving spree. This will spread abroad as American consumers curtail the imports of the goods and services many foreign nations depend on for economic growth.

2. Financial deleveraging will reverse the trend that financed much global growth in recent years.

3. Increased government regulation and involvement in major economies will stifle innovation and reduce efficiency.

4. Low commodity prices will limit spending by commodity-producing lands.

5. Developed countries are moving toward fiscal restraint.

6. Rising protectionism will slow—even eliminate—global growth.

7. The housing market will be weak due to excess inventories and loss of investment appeal.

8. Deflation will curtail spending as buyers anticipate lower prices.

9. State and local governments will contract.

My first concern is that we may be embarking on a downward spiral in international trade. Although several people I have spoken to are in favor of protectionism for a variety of reasons, the economic impact on certain industries in the United States could be higher costs and lower sales volumes. So we may even greater economic dysfunctionality in 2012 than in 2011. What I mean is that some sectors of the economy might find themselves facing rampant inflation while other sectors are facing stagnant growth or even rampant deflation. Hmmm… maybe I should start working on the other implications of the summary.

A few days ago I was surprised when Henry Blodget wrote an article advocating more government spending in the article, Well, It Sure Seems Like Keynes Was Right, and based it partly on Reinhart and Rogoff’s analysis of prior financial crises. I was surprised since the authors did not comment directly about stimulus spending in the chapters I read but here is what Henry wrote:

And I’ve also looked back at history–namely, Reinhart and Rogoff’s analysis of prior financial crises, the Great Depression, Japan, Germany after Weimar, and so forth.

So I skipped to the end of the book and read the last two chapters. The closest I came to a comment on Keynesian stimulus spending is:

Debt sustainability exercises must be based on plausible scenarios for economic performance, because the evidence offers little support for the view that countries simply “grow out” of their debts. This observation may limit the options for governments that have inherited high levels of debt. Simply put, they must factor in the possibility of “sudden stops” in capital flow, for these are a recurrent phenomenon for all but the very largest economies in the world.

and

Our extensive coverage of banking crises, however, says little about the much debated issue of the efficacy of stimulus packages as a way of shortening the duration of the crisis and cushioning the downside of the economy as a banking crisis unfolds.

So although the authors are concerned about plausible debt sustainability scenarios since it may lead to “sudden stops” in capital inflow in smaller economies, their data has shown that large economies like the United States have been immune from these “sudden stops”. This leaves open the question of what would happen to capital inflows if the United States undertook another stimulus like Henry Blodgett is recommending.   At what level of debt does the rest of the world decide that the United States debt is not sustainable and they should invest their capital elsewhere. If that scenario occurs we can safely say this time is different.

As a back-handed complement I would like to thank Henry for making the “This Time is Different” book much more interesting than it would be otherwise.

Now this is an interesting graph. We can see that the S&P 500 and the per capita revolving credit have a close relationship up until the internet boom of 2000. Then things go haywire. We can also see that the per capita rate of revolving debt started to accelerate after 1983. It continued to increase at a rate greater than the inflation rate until 2007 when it started a decline despite a much larger number of wage earners and inflation. This leads me to conclude that the wage earner’s debt was maxed out in 2007.

The next question I had was where does the per capita revolving debt go from here? One way we can make an intelligent guess at the answer is to go from the premise that per capita revolving debt should have grown at the rate of inflation. Using a regressed line of the CPI to provide us with the slope of the line, we would expect that per capita revolving debt still needs to drop another 10% to reach the point that inflation rate would have predicted. Since the wage earner was probably maxed out in 2007 I think the wage earner is unlikely to add more debt any time soon. They are still close to their max debt load. If we assume that wage earner’s tolerance for debt and inflation rates does not change dramatically then it make take another year or two for the wage earner to pay down enough debt and establish enough distance from their max debt level. On the negative side if the wage earner gets panicky about the future of their job and the economy,  there might be some debt repayment overshoot. The logical conclusion is that this new normal for revolving debt will be bad news for the companies whose sales are dependent on revolving debt and make if very difficult for this economy to expand for the next two years.

According to a recent study from The National Foundation for Credit Counseling (NFCC), 33 percent of Americans do not have a savings account of at least $1,000 or more to cover emergency expenses.

The NFCC study surveyed 1,010 Americans to determine how much money they had set aside in the event of a financial emergency that could cost around $1,000.

Of the respondents surveyed, 64 percent claimed to possess emergency funds.

Those individuals without savings said that they would have to turn to an outside source to ask for money if they were faced by an unexpected expense.

In the words of Technorati:

Although the study might have been a bit biased in selecting its sample pool, the fact that such a high number of participants are lacking a relatively modest $1,000 in savings is still alarming. And is clearly something that should be addressed—for example, through better financial education.

This seems to be part of a wider picture of poor financial provision by households in the US. An earlier study by the NFCC found that 30 percent of Americans have zero dollars in non-retirement savings. A separate study by the National Bureau of Economic Research found that 50 percent of Americans would struggle to come up with $2,000 in a pinch.

And these are just a few of the alarming discoveries made in the NFCC’s annual report. Here are some others:

Today, more than 1 in 5 U.S. adults (22 percent) do not have a good idea of how much they spend on housing, food and entertainment. Although just over 2 in 5 Americans (43 percent) say they have a budget and track their expenses, more than half (56 percent) do not.

More than half do not budget? Well, that certainly explains what is going on in D.C.

Furthermore, more than 1 in 3 adults (36 percent) say they are now saving less than last year. And, in fact, 1 in 3 (33 percent) do not have any non-retirement savings. Although there had been a steady increase in the proportion of adults who have savings between 2008 (63 percent) and 2010 (67 percent), that proportion has now declined somewhat (to 64 percent in 2011).

One of the conclusions that can be drawn from the report is that there seems to be a prevalent attitude in American culture where not enough emphasis is put on self-reliance and personal financial freedom but instead too much has been put on the “gimme-gimme” mentality. That would certainly account for the multitudinous amounts of Americans in debt and the coinciding lack of personal financial responsibility.

View the full report here.

This post originally appeared at The Blaze.

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See Also:

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• Inside Mayor Bloomberg’s Extravagant New York And London Townhouses

Guess How Many Americans Don’t Have Enough Saved To Cover A $1000 Emergency
Becket Adams
Tue, 20 Sep 2011 21:00:00 GMT

1. How do you scale back the future benefits in an equitable manner?
2. How do you convince current contributors to contribute more money at the same time you are scaling back benefits?
3. In the case of defined benefit programs that are partially advance-funded, who is responsible for investment risk?

This is not a new problem. For many years companies had difficulties managing the funding and benefits of their pension plans. An additional problem was what to do with defined benefit plans for companies that no longer existed. This problem became very apparent when the steel companies disappeared in the 1970’s. In 1974 the government created the The Pension Benefit Guaranty Corporation(PBGC) to take over the defined benefits for pensions for bankrupt companies. The funding for the PBGC came from fees charged on the remaining existing corporate defined benefit plans. This policy seems to have worked. In the following years most private companies converted their pension plans into defined contribution plans and problems with the remaining defined benefit plans diminished considerably. On the other hand public sector fully embraced the defined benefit plans. Part of the allure was that the promise of future benefits was a major issue in collective bargaining agreements. Instead of pay raises they were promised future health and pension benefits.  The long history of problems that the private sector had with funding and managing defined benefit pension plans seems to have been ignored by the public sector. Since the management of defined benefit plans were not being managed differently than the way the private sector managed their plans it is inevitable that they would duplicate the same mistakes. Considering the size and extent of the public sector unfunded pension and health care liabilities, most of these agreements were done in bad faith and led to deliberate mismanagement of pension funding and benefits. It will probably take some form of the PBGC for state and local governments that is funded by the public sector pension funds and has strict funding and benefit rules to clean up the public sector pension mess.

Social Security is different from the public pension plans but it shares many of the same mismanagement of funding and benefits problems and a more puzzling style of investing. Considering the size of unfunded liability for Social Security, the funding and benefits have been negotiated in bad faith, too. So although comparing Social Security to a Ponzi scheme may seem too severe, it shares the same bad faith negotiations and plan mismanagement as public sector pension plans. A pension plan relying solely on "pay-as-you-go" financing and funky investing may have been a viable option for my father’s generation but not my son’s generation. The pact between one generation and the next is about to be broken. The future of defined benefit plans in general is in doubt. Defined contribution plans are the preferred option in the private sector but suffer from inadequate savings rate. This problem can be fixed by a relatively simple solution, policies to encourage a higher savings rate. It remains to be seen whether defined benefit plans can overcome their predisposition to bad faith negotiations and mismanagement and create a better pension outcome than those offered by defined contribution plans.

Effectively, the rule aims to maintain a structural budget balance every year. The rule allows deficits to be run in a recession, but requires surpluses in better economic times so that over the cycle the budget is in balance.

Putting the Brakes on U.S. Debt | Committee for a Responsible Federal Budget

This sure looks like a working example of the proverbial “Keynesian stimulus”. In the United States our policy makers have embraced  “Keynesian stimulus”  plans since the Great Depression but we have much different results. Here is a post from Mercatus that demonstrates that temporary increased federal spending always seems to lead to higher permanent federal spending.

The chart shows how expenditures as a share of GDP spiked during World War II but were reduced rapidly and significantly. However, spending never returned to the pre-war level and has followed a general upward trend ever since.

Today federal, state, and local expenditures as a share of GDP are back at the highs reached during World War II. This time, however, we are unlikely to see a swift decrease. Wartime expenditures on items like weaponry and salaries for conscripted soldiers were relatively easy to wind down. The bulk of current and future government spending is on entitlement programs like Social Security and Medicare. This variety of spending is nearly impossible to reduce in the near term.

The tendency for spending to ratchet up during a crisis is important because it suggests why fiscal stimulus is unlikely to be economically helpful. In an oft-repeated quote, economist and stimulus advocate Lawrence Summers has argued that stimulus ought to be “timely, targeted, and temporary.” Otherwise, it is unlikely to be economically helpful. The fact that spending rarely returns to pre-crisis levels suggests that governments may find it impossible to implement stimulus in the way Keynesians such as Summers would like to see.

Federal, State, and Local Expenditures as a Share of GDP at WWII Levels | Mercatus

Finally here is an analysis why the United States stimulus efforts are not working.

ONE REASON WHY THOSE KEYNESIAN STIMULI AREN’T WORKING: They’re Not Keynesian. “Whalen isn’t simply dumping on Keynesianism, he’s bent on pointing out that even its latter-day adherents are straying far from their master’s theory. And in this, he’s surely correct. As Allen Meltzer has argued, Keynes was against the very sort of large structural deficits that characterize contemporary federal budgets and policy, believing instead that deficits should be ‘temporary and self-liquidating.’ And Keynes believed that any sort of counter-cyclical spending by government should be directed toward increasing private investment, not simply spending current and future tax dollars on public works projects. Or, to put it another way: If the federal government had a strong track record of responsible spending, it would mean one thing if it went into hock for a short period of time to goose the economy (again, whether this would work is open to question). It means something totally different when a government that spent all of the 21st century piling on debt and new, long-term entitlement programs responds to an economic downturn first by creating yet another gargantuan entitlement (Obamacare) and taking on even more debt in the here-and-now.”

 

ONE REASON WHY THOSE KEYNESIAN STIMULI AREN’T WORKING: They’re Not Keynesian. “Whalen isn’t simply…

The “death cross” confirmed at the end of last week’s dramatic action, and this significant event points to the growing possibility of a new bear market.

Death Cross Now In Play

This is what it looks like courtesy of Yahoo Finance. Here is the link, http://finance.yahoo.com/echarts?s=%5EGSPC+Interactive#chart2:symbol=^gspc;range=1y;indicator=sma(50,200)+volume;charttype=line;crosshair=on;ohlcvalues=0;logscale=on;source=undefined.

Daily Treasury Real Yield Curve Rates