A record 18.3% of the nation’s total personal income was a payment from the government for Social Security, Medicare, food stamps, unemployment benefits and other programs in 2010. Wages accounted for the lowest share of income — 51.0% — since the government began keeping track in 1929.
25 April 2011 by Cullen Roche
April 25, 2011 Monetary Policy in 3-D
John P. Hussman, Ph.D.
One of the most important factors likely to influence the financial markets over the coming year is the extreme stance of U.S. monetary policy and the instability that could result from either normalizing that stance, or failing to normalize it. It is not evident that quantitative easing, even at its present extremes, has altered real GDP by more than a fraction of 1% (keep in mind that commonly reported GDP growth rates are quarterly changes multiplied by 4 to annualize them). Moreover, it’s well established – on the basis of both U.S. and international data – that the “wealth effect” from stock market changes is on the order of 0.03-0.05% in GDP for every 1% change in stock market value, and the impact tends to be transitory at that.
Still, by replacing an enormous quantity of interest-bearing assets with non-interest bearing money, quantitative easing has created profound distortions in asset prices, where Treasury bills now yield less than 5 basis points annually, while “risk assets” such as stocks and commodities have been driven to prices high enough that their likely future returns now compete perfectly (on a time-horizon and risk-adjusted basis) with the zero expected returns on cash.
Taken together, despite the limited and transitory real effects of QE on output and employment, the Federal Reserve has created an unprecedented monetary position that creates an extremely unstable equilibrium for the financial markets. There are several ways that this might be resolved. Based on the very robust relationship between short-term interest rates and the monetary base, it is clear that a normalization of short-term interest rates, even to 0.25-0.50%, would require the Federal Reserve to fully reverse the $600 billion of asset purchases it conducted under QE2. Alternatively, with the monetary base now exceeding 16 cents for every dollar of nominal GDP, any external upward pressure on interest rates (that is, not produced by a Fed-initiated reduction in the monetary base) would quickly provoke inflationary pressures.
Time to Wake Up: Days of Abundant Resources and
Falling Prices Are Over Forever
Until about 1800, our species had no safety margin and lived, like other animals, up to the limit of the food supply, ebbing and fl owing in population.
From about 1800 on the use of hydrocarbons allowed for an explosion in energy use, in food supply, and, through
the creation of surpluses, a dramatic increase in wealth and scientifi c progress.
Since 1800, the population has surged from 800 million to 7 billion, on its way to an estimated 8 billion, at minimum.
The rise in population, the ten-fold increase in wealth in developed countries, and the current explosive growth in
developing countries have eaten rapidly into our fi nite resources of hydrocarbons and metals, fertilizer, available land, and water.
Now, despite a massive increase in fertilizer use, the growth in crop yields per acre has declined from 3.5% in
the 1960s to 1.2% today. There is little productive new land to bring on and, as people get richer, they eat more
grain-intensive meat. Because the population continues to grow at over 1%, there is little safety margin.
The problems of compounding growth in the face of fi nite resources are not easily understood by optimistic,
short-term-oriented, and relatively innumerate humans (especially the political variety).
The fact is that no compound growth is sustainable. If we maintain our desperate focus on growth, we will run
out of everything and crash. We must substitute qualitative growth for quantitative growth.
But Mrs. Market is helping, and right now she is sending us the Mother of all price signals. The prices of all
important commodities except oil declined for 100 years until 2002, by an average of 70%. From 2002 until now,
this entire decline was erased by a bigger price surge than occurred during World War II.
Brett Arends’ ROI
April 25, 2011, 8:57 a.m. EDT
The IMF in its analysis looks beyond exchange rates to the true, real terms picture of the economies using “purchasing power parities.” That compares what people earn and spend in real terms in their domestic economies.
Under PPP, the Chinese economy will expand from $11.2 trillion this year to $19 trillion in 2016. Meanwhile the size of the U.S. economy will rise from $15.2 trillion to $18.8 trillion. That would take America’s share of the world output down to 17.7%, the lowest in modern times. China’s would reach 18%, and rising.
Just 10 years ago, the U.S. economy was three times the size of China’s.
In 1990 the Heritage Foundation put out a report titled “How ‘Poor’ Are America’s Poor?” Not very, concluded author Robert Rector:
“Poor” Americans today are better housed, better fed, and own more property than did the average U.S. citizen throughout much of the 20th Century. In 1988, the per capita expenditures of the lowest income fifth of the U.S. population exceeded the per capita expenditures of the median American household in 1955, after adjusting for inflation.”
Among “the persons whom the Census Bureau identifies as ‘poor,’ ” 38% were homeowners. Among “poor” households, 62% owned a car, 14% two or more cars, nearly half had air-conditioning, and 31% had microwave ovens. “Nationwide, some 22,000 ‘poor’ households have heated swimming pools or Jacuzzis.”
e21 Staff Editorial | 04/20/2011
For these reasons, it should be no surprise that the reduction in tax rates has resulted in substantial increases in the amount of taxable income reported by the rich. This has increased the top 1%’s share of pretax income, which has, ironically, led some to argue for higher taxes on the rich. The graph below plots the top marginal tax rate against the share of pretax income reported by the top 1% (from CBO). The correlation is –0.55: as the tax rate applied to the highest income falls, the amount of income (and share of total income) reported by this group increases on a predictable basis.
The only real exception to this rule came in the 1990s, as top marginal rates increased even as the top 1%’s share of income grew. Yet, this too was likely tax-related, as the reduction in capital gains tax rates to 18% led to larger and more frequent realizations. Since income includes only realized capital gains, lower tax rates on this form of income can increase taxable income simply by increasing the number and frequency of realizations. While this can improve the economy’s efficiency if positions that would have been held purely for tax purposes are liquidated, again, increases in taxable income can result even when the economic gains are not present.
At the moment, the target federal funds rate is set at 0-0.25 per cent, but the Fed also has about $1,600bn in extra long-term assets on its balance sheet, with more to come before the end of QE2.
A Fed rule of thumb is that buying an extra $200bn of assets is the same as taking 25 basis points off the funds rate. That means current interest rates are, in effect, about minus 2 per cent.