Economy

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Calculating Average Credit Card Debt per Household

Recently I was puzzled by a debt service chart included in a presentation by Abby Joseph Cohen. The data for her graph comes from the Household Debt Service report produced by the Federal Reserve. My problem is reconciling the data with my belief that the average family is under a greater debt burden than is represented by the data. Although credit card debt is a small portion of the consumer debt, it is the most attractive debt to pay off as soon as possible.

Credit card debt is described by the Federal Reserve as revolving debt. The latest number from the Federal Reserve Consumer Credit report is 815.4 billion dollars. The Census Bureau’s Quickfacts says the number of households in the US is 114.2 million. When we divide these two numbers together, we get the average credit card debt per household is $7,140.

If we take the average credit card debt and plug it into Bankrate.com’s minimum payment calculator we get a minimum payment of $178.50 or $2,140 per year. For those who are curious this plan results in $10,133.07 in interest payments and 308 months(25 years) to pay off the balance. If we divide the annual minimum payment amount by the BEA nominal disposable personal income per capita, $37,976, we get 5.6% debt burden. This debt burden is a little higher than the 4.95% debt service burden reported by the Federal Reserve. Hmm… if debt service payments is a good indicator of financial pain for the “average” household then I would have to agree with Abby that with debt service at 1990’s levels, the households are not suffering from making their payments. Here is where I have a problem with Ms. Cohen’s analysis. My numbers imply that the consumer is making minimum payments on high interest loans. This is typically the sign of either a financially “dumb” consumer or a consumer who is maxed out. Neither situation will lead to sustainable consumer spending. With low inflation and wage growth the smart consumer should pay down credit card debt.

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Romney May Be the End of the Line for the Republican Establishment – Rasmussen Reports™

This is a great piece by Rasmussen. Follow the link to read the rest. For both political parties this election is the end of the line for politics as usual.

The Republican base is looking for someone like a 21st century Ronald Reagan, who will display his faith in the American people. The Washington Republicans are more comfortable with politicians like George W. Bush, Bob Dole, John McCain and Mitt Romney. Though the establishment has dominated the party since Reagan left the White House, the 2012 election could well be the end of the line.

If Romney loses in November, the Republican base will no longer buy the electability argument for an establishment candidate. From the view of the base, the elites will have given away an eminently winnable election. Someone new, from outside of Washington, will be the party’s nominee in 2016.

If Romney wins and does nothing to change the status quo, the economy will falter. He will end up as the second straight one-term president, and the nation will desperately be searching for an authentic outsider in 2016.

If he wins the White House, the only way for Romney to succeed will be to side with the nation’s voters and throw out the club in Washington. That will be great news for the country but bad news for political insiders on both sides of the partisan aisle.

Romney May Be the End of the Line for the Republican Establishment – Rasmussen Reportsâ„¢

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My Favorite John Maynard Keynes Quote

I am reading Keynes Hayek: The Clash that Defined Modern Economics and I am once again amazed how similar the economic problems and solutions of 1920’s and 1930’s are to today’s problems and solutions. Last night I heard James Grant on Consuelo Mack’s Wealthtrack make the classical Hayek argument against government intervention in the market. Since I am convinced that we cannot “grow out of our mess” because the consumer has too much personal debt and the age of our population should result in reduced consumer spending compared to previous generations, the logical conclusion is for our government entitlement programs to migrate to “pay-as-you-go” financing. The process of weaning Social Security, Medicare, and Medicaid from deficit financed programs to sustainable programs will be difficult. Here is what John Maynard Keynes said about it.

There has never been in a modern or ancient history a community that has been prepared to accept without immense struggle a reduction in the general level of money income.

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The Problem with Reforming Big Government Decision Making

My favorite quote over the last two weeks comes from the Planet Money podcast Episode 394: Why Taxpayers Pay For Farmers’ Insurance. I immediately thought of Ms. Pelosi’s remark about the Affordable Care Act in which she states, “We have to pass the bill so that you can find out what is in it”. Here is the YouTube link, http://youtu.be/hV-05TLiiLU.

Planet Money talked to agricultural economist Dan Sumner of the University of California at Davis, who has some theories about how the program persists. Sumner recalled the sage words of Norfleet Sugg, former executive secretary of the North Carolina Peanut Growers Association and later head of the Agricultural Council of America, who explained to him: “The peanut program is so complicated, there’s only three people in the world that actually understand how it works. It’s my job to keep it that way.”

Just when I thought that big government was the culprit Planet Money gave us another update on the problems with the decision making in a much smaller government with the podcast Inside America’s Most Indebted City. The problems with the decision making in Harrisburg may even result in criminal charges.

From these two podcasts we can see that a major distinction between large and small government decision making is that the residents in Harrisburg are definitely feeling the effects of bad decisions. People have had their pay cut and some residents have moved out of the city. The effects of bad decision making at the big government are more benign. Although the decision making at both the local and federal level may be equally bad from a moral or government effectiveness viewpoint, the effects at the federal level are more muted. The primary advantage of bad decision making at the federal level is that it does not result in cuts to government services. Of course, this can change quickly if the markets start to punish the government for bad stewardship. It may seem a strange argument that we want the markets to punish the government finances for bad decisions but not enough that we might actually feel the effects.

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The End of Thirty Years of Irrational Debt Spending

Recently I have been thinking about The 4% Solution: Unleashing the Economic Growth America Needs advocated by the Bush Institute, the CALPERS report that said that they had 1-year return of only 1%,  sequestration, and Mitchell’s Golden Rule. For those unfamiliar with Mitchell’s Golden Rule it states that “the private sector should grow faster than the government”. In this discussion I will use the stronger form which states the private sector should grow faster than the growth in government debt if we want to grow out of our mess.

The 4 percent solution is wonderful idea that appeals to both parties. It states that we should focus our economic planning on those plans that help us achieve a 4 percent growth in real GDP. The problem with this plan is that it is primarily aspirational and is not significantly different than the plans of our last four presidents. In fact it does not address the problem that has plagued our last two presidents, we spent money like we already had the 4 percent growth money in the bank. This has been readily apparent with the economies under the last two presidents. Two different plans were used, some political objectives were achieved but both plans failed to generate the job or GDP growth. We did achieve a fairly spectacular increase in public debt.

CALPERS is the poster child for pension problems in the United States. Like most pension plans they expect their portfolio to achieve a 7.25% return. This seems reasonable since they earned a 7.7% return over the last twenty years. The problem is that their 1-year return was 1%, their 10-year return is 5.7%, and they are spending about 6.4% of their portfolio on benefits. This doesn’t work. They look like they desperately need the government to be successful with their 4 percent growth plans or they might have to resort to Plan B.

Sequestration is not a plan but a veiled threat that becomes more unveiled as we get closer and closer to the spending cuts. The idea of sequestration is not to subtle hint that we would like to chain our legislators to the bargaining table until they made a budget deal that cuts spending. So far the threat has not worked. The Simpson-Bowles and Ryan Path to Prosperity plans are much better than sequestration. Both plans are much better at growing the economy while structurally reforming the spending than sequestration. In fact I think the end game is a budget deal will likely be some variation of one of those plans that partially satisfies both parties. I think it is interesting to speculate what the presidents over the last 100 years would do with the situation that President Obama has in front of him. I suspect all of them would see a budget deal as one of the most significant accomplishments of their administration. I can almost guarantee that the last four presidents would have done a deal before the end of the first term. In my life time all of the presidents except for the current president have been willing to reach across the aisle to get a deal done to pass major legislation.

The key to any successful budget plan will be how to grow the private sector faster than the government debt. This is really simple math. You get a better bang for your tax buck with an increased number of private sector employees. The less these employees are dependent on government spending, the greater the cash flow goes to the government. Adding private sector employees is more efficient at increasing tax revenues then via an equal number of number government employees. For at least the last twelve years growing the government debt does not appear to be helping the GDP or the private sector very much. Here is a graph I created to show that relationship. I am using the S&P 500 as a proxy for the wealth and health of the private sector. To paraphrase the old GM line, what is good for the private sector is good for the country and our pension plans, too. In this graph I deflated the S&P 500 and Total Public debt using the GDP Price deflator so that all three indicators reflect inflation adjusted values using the same deflator. In the graph it looks like the Total Public debt helped the S&P 500 in the 1980’s and 1990’s and significantly hurt it after 2000. I was somewhat surprised to see that an increased Total Public debt does not seem to have helped the GDP at any time on the graph. The GDP kept trucking along at the same pace with only a minor blip during the recessions. Here is an interesting question, “How did government spending let alone debt financed government spending became the preferred vehicle for growing the economy?”

 

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RE: CalPERS Reports Preliminary 2011-12 Fiscal Year Performance

Yesterday CalPERS released a press report yesterday titled, CalPERS Reports Preliminary 2011-12 Fiscal Year Performance of 1 Percent. Since I recently read their financial documents and made a comment about them, I was surprised that they compared the investment return to their 20-year investment return rather than their five or ten year investment return. When you compare the latest investment return to a ten year return of 5.7% there is a greater call for action by the board. Since they are spending the equivalent of 6.4% of their fund on pension benefits each year($15 billion), they are between a rock and a hard place. The time for action was several years ago. Now they are just being stubborn.

 

“It’s important to remember that CalPERS is a long-term investor and one year of performance should not be interpreted as a signal about our ability to achieve our investment goals over the long-term,” said Henry Jones, Chair of CalPERS Investment Committee.

CalPERS 1 percent return is below the fund’s discount rate of 7.5 percent, a long-term hurdle lowered recently in response to a steady decline in inflation and as part of CalPERS routine evaluation of economic assumptions. CalPERS 20-year investment return is 7.7 percent.

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California’s Bad Bet Makes JPMorgan’s Look Minor – Bloomberg

I was casually catching up on some blogs and found this gem at Bloomberg. This led me to the article, SB400 pension boost: uncanny forecast unheeded, on calpensions.com. Wow! For a long time I have been wondering how we got into this mess with defined benefit pension plans and there is probably no better example of the problem than the largest pension fund in the United States, Calpers. From the SB400 article we can see in retrospect the legislators were overly optimistic about investment returns versus expenses. The legislators were expecting an annual average of 8.25 percent and they got a 3.1 percent return according to according to a Wilshire consultants report in March 2010. In the latest Calpers Fact at a Glance the latest ten year total return is listed at 5.7%. According to Calpers the assets went from $172.2 billion in 2000 to $237.5 billion in 2011. Although this looks good at first glance, the compounded rate is only 2.97%. It is pretty obvious that if you are spending like you are getting a 8.25% return and you are getting somewhere between 3.1% and 5.7% returns you are going to be in trouble. Then I tried to compare Calpers to the savings in my 401K. If my calculations are correct the average wealth saved per participant(237.5 billion/1.6 million participants) in Calpers is $148,000.  This doesn’t look too good but it is about the same number reported about Calpers in the pension plans article in Wikipedia. If we look at only the current retirees(536,234) this number goes up to $448,000. This is an ugly number for those people expecting something close to 50% of their salary over a 20 year retirement . Regardless of how you want to slice and dice these numbers to come up with the more precise actuarial values, there is too little money in the fund for the retirees’ benefits. Something has to give. The interesting part of examining the problems facing Calpers is that it reminds me of another bubble, residential real estate. Both bubbles received bipartisan support for overly optimistic outlooks about the future. In one case it is residential real estate appreciation and the other it is stock market performance. The irony is that the warning symptoms in both bubbles were apparent early on. That is where it takes the contributions from a lot of very smart people to turn a bad decision into a really big, bad decision. Finally the solution to these bubbles require very difficult political choices. So even though it is relatively easy to identify the cause of the bubbles, finding legislators willing to try and fix the consequences from bad decision making in the past is particularly difficult. It appears we have a decision making system in which bad decisions are too easy to make considering that it takes decades to undo their consequences. I can’t wait to see how the health care decisions turn out!

 Winking smile

I will leave you with what David Crane wrote in the Bloomberg article, California’s Bad Bet Makes JPMorgan’s Look Minor.

The pension deal was a stunning example of nondisclosure. The legislators didn’t inform the taxpayers that:

1. The state was on the hook for deficiencies if actual investment returns fall short of assumed investment returns.

2. The assumed investment returns implicitly forecast that the Dow Jones Industrial Average would reach about 25,000 by 2009 (it barely made it over 10,500 that year) and 28,000,000 by 2099.

3. Potential costs to the state were uncapped.

4. Members of the Calpers board had received campaign contributions from beneficiaries of the legislation.

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Comments on the Current Consumer Credit Report

Both James Pethokoukis and Cullen Roche made misleading comments about the growth in consumer credit after the G.19 report was released. Here is a quote from A weak recovery with a weak foundation built on credit card debt that highlights the problem.

A big leap in credit card debt in May. It surged by $8.0 billion, the biggest one month gain since November 2007.

Here is an updated graph from the Fed that shows both revolving and non-revolving credit from 2000 to the present. In the graph we can see that revolving credit(i.e. credit cards) is still depressed and growing slowly compared to non-revolving credit(i.e. auto loans). It is still down from its peak in 2008 while the non-revolving credit has already passed its 2008 peak. Using a one month change to describe a trend is misleading. Since last month’s G.19 report showed a decline in revolving credit and this month it shows a gain, I think it is a little early to make predictions on credit card debt growth.

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Contemplations on the Origin and Future of Socialism

One of the ideas I have been toying with is that socialism cannot survive without the creation of “new” wealth. To be differentiated from other wealth distributions such as “to the victors belong the spoils”, socialism has a moral purpose. At its core socialism is a method of distributing the wealth fairly. The problems is how to get yours hands on the wealth and how to distribute the wealth fairly. During the Industrial Revolution the economic gains flowed to everyone but in particular to a disproportionately small group of people. The moral argument for socialism is that the wealth should be distributed across a broader section of the population. Socialism wants wealth distribution to be fair.

For the last 200 years the Western world has been very successful at creating new products that directly resulted in greater economic efficiencies and more “new” wealth. In this positive atmosphere the wealth creators have been receptive to distributing some of wealth created even though they questioned the fairness of the allocation. Ultimately they agreed and their philosophy was best epitomized by JFK when he said, “A rising tide lifts all boats”.  This continual growth in “new” wealth has allowed socialism to thrive and grow to a proportionately larger size of the economy. Recently I was surprised to see that the real return for the last decade was ”“3.4%. When you combine this with slow or no economic growth predictions for the next few years, can socialism survive without “new” wealth creation? Redistributing existing wealth is a completely different problem than redistributing “new” wealth. If the socialism based on redistributing “new” wealth is asleep or possibly dead, what will the new socialism look like? Jay Cost wrote an excellent article, The Politics of Loss in National Affairs that goes much farther on the politics of wealth redistribution.

When political scientist Harold Lasswell, writing in the mid-1930s, defined politics as the decisions society makes about "who gets what, when, and how," he might as well have been describing the debate over taxes and spending in the United States today. Butwhat happens when the focus of the political debate changes from who gets what to who loses what? This concept is unfamiliar to Americans, who have enjoyed more than 100 years of (mostly) uninterrupted economic growth.

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The Problem with Debt and Taxes

The problem with debt and taxes is that they are maximized when the people are thinking about something else. The real estate and financial bubbles were the recent distractions that allowed the debt and taxes to continue their inexorable climb. Now that we have run out of other people’s money to spend, our news media is compelled to cover the story until the financial conditions change.  Although the people cannot get away from discussions on the perils of debt and taxes, they have figured out “solutions” to shield themselves from these problems. Their “solutions” opens the can of unintended consequences. The unsustainable political trade-offs of the past will be discarded in an effort to match up government spending with revenue. The rigors of balanced budgeting already imposed on personal, city, and state finances will gradually be imposed at the federal level. Political parties who spent the last 70 years supporting and encouraging unsustainable spending habits for political gains will spend the next ten years trying to restore public confidence at the same time they are trying to put the worms back into the can.

 

“What we’re seeing is the real end game,” says Mauldin.  “We’re coming to the end of government’s ability to borrow money to fund current spending that’s beyond the growth of their economy.

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That’s where Western governments are.  They’ve run out of the ability to borrow money to finance their current consumption.  This is a good thing that it’s coming to an end.  I don’t see this as negative in the longer-term.  It’s still going to be a bumpy ride for the markets.  It’s certainly going to be (an interesting) ride for the business as usual crowd.”

Read more at KingWorldNews.com.

MAULDIN: WE’RE APPROACHING THE END OF THE END GAME
Sam Ro
Tue, 19 Jun 2012 08:53:00 GMT