Click to enlarge.
Things that might provide a miserable economic environment, either now or at some point in the future:
1. A higher unemployment rate.
2. A household net worth well below its peak (adjusted for inflation).
3. An unsustainable growth in the national debt (adjusted for inflation).
4. An unsustainable trade deficit.
That pretty much covers the main points of my blog over the past 3 years. About all it is missing is income inequality, but I think that might be indirectly included in the drop in net worth. Subprime NINJA mortgages?
You know what? As seen in the chart, maybe 1980 wasn't so bad after all.
This post inspired by energyecon and the Alternate Misery Index found there.
Source Data:
St. Louis Fed: CPI-U
St. Louis Fed: Unemployment Rate
St. Louis Fed: Household Net Worth
St. Louis Fed: Government Debt
St. Louis Fed: Imports of Goods and Services
St. Louis Fed: Exports of Goods and Services
For those interested...
ReplyDeleteAs of June 2010:
Unemployment rate: 9.5%
Real net worth below peak: 22.3%
Real annual growth in national debt: 13.1%
Trade deficit: 6.4%
Total: 51.2%
The balance seems about right to me, but it is just a gut call.
As a side note...
ReplyDeleteA side effect of my index is that continually borrowing money from ourselves to boost our real net worth would not alter the index much. We'd simply be borrowing from Peter to pay Paul.
My index does not believe in free lunches.
One more thought on the trade deficit.
ReplyDeleteImports: $583.577 billion
Exports: $451.977 billion
583.577 / (583.577 + 451.977) = 56.4%
I'm using the 6.4% part to determine the trade deficit's contribution to the misery index. It's the amount above what a balanced trade would be (imports exactly match exports).
What cannot continue forever, won't. There will be pain someday if we continue on the path we are on. Maybe not now, but someday.
Stag,
ReplyDeleteLooks good to me. With 25% of home-owers under water, misery abounds, that's for sure.
You've inspired me to work on a sentiment indicator. It will be based on financial fraud and political incompetence/corruption. The financial fraud indicator will likely be the inverse of the yearly Wall Street bonus pool. I'm still pondering the political metric. Don't hold your breath waiting though. Due to low sentiment, I've been demotivated like many others.
mab,
ReplyDelete"I'm still pondering the political metric."
Congress approval rating?
72% in California disapprove.
Stag,
ReplyDelete72%? That seems low. I would have guessed 110%, but I'm usually too optimistic.
I recently listened to a podcast that said Asian central bank buying of treasuries and Fannie and Freddie bongs lowered US interest rates by 1%. Supposedly 25% of credit offered to US consumers was backed by foreign money (i.e. China et al.)
ReplyDeleteOK, so the funds from sterilizing trade surpluses can lower interest rates by 1% - creating demand for credit that otherwise would not have existed. This was funneled into housing. Now that housing is done...where is that money going, and what does it mean? US treasuries?
Oh, the good news is that while the foreigner were lending us money at low, low rates, our companies invested in FDI and equities in Asia, with higher returns. So, we actually made money - or at least the investor class did. Arguably, some outsourcing does increase US productivity as well.
So, what happens if the elections lead to LESS spending and thus less treasuries offered? But the demand from Asian central banks remains...plus flight to safety? Would China be willing to get negative interest on US bonds just to keep their exports afloat,and thus their one-party rule?
The US should come up with this kind of bond. You pay us 1% for the privilege of sterilizing your trade deficit and keeping the peasants busy.
bongs = bonds...
ReplyDeleteAbove was coba...drinking beer and jet lag = crazy.
Is there any way we could segregate central banks/foreign states buying US treasuries versus private purchases?
ReplyDeleteIf so, could tax those purchases by foreign states, or offer them the -1% bonds, rather than engaging in an actual trade war. I would think financial instruments are not covered by WTO rules and China could not complain about such a scheme.
If they switched to private bonds that would be more productive investments (possibly) and also give them a true risk of default.
Coba
mab,
ReplyDeleteI think the 110% to 72% can be explained using a "buy one vote, get the second at half off" mechanism.
72 + 72 / 2 = 108
That's close enough for government work, lol. Sigh.
Coba,
ReplyDelete-1% bonds? I'm trying to picture the price of oil. Yikes!
http://finance.yahoo.com/news/Caterpillar-to-raise-prices-apf-3418240444.html?x=0&sec=topStories&pos=8&asset=&ccode=
ReplyDeleteCaterpillar to raise prices up to 2 percent
--I will make a WAG and suggest the price increases will be in China, due to wages and steel cost there. I think we are going to get the RMB to market level via local inflation.
Coba
Coba,
ReplyDeleteI'm not convinced one way or another whether the RMB is undervalued or overvalued.
The U.S. economist propaganda machine is absolutely convinced that it is severely undervalued. Unfortunately, I tend to be very skeptical of the success rate of the U.S. economist propaganda machine. Hindsight has been extremely unkind to it over the past decade.
Meanwhile, as expected, China's economist propaganda machine states that it is overvalued. Fortunately, I also tend to be very skeptical of the success rate of it too.
The truth is somewhere in the middle no doubt.
From June...
Yuan is overvalued, not undervalued: report
Xie's argument is unlikely to win many backers in Washington.
No doubt. The currency exchange issue is SO easy to do. Blaming China for being a manipulator is far better speech material than blaming us for having far higher wages than they do.
I have a real hard time blaming any seller of goods for pricing their products too low. I can't think of any single instance where I did this, China included.
Is it good for us to buy Chinese goods when all they want in exchange are our dollars? Long-term? I doubt it very much.
We do it though. They are desperate to sell and we are desperate to buy. Desperation for the win! Sigh.
Mark,
ReplyDeleteI will be expecting your question tomorrow!
If the Yuan is over-valued, then the Chinese should set it free...except they do not do that.
ReplyDeleteIf you look at foreign currency the last several years, you see EURUSD go up and down like a yo-yo with huge swings. Chinese currency moves glacially - maybe 2% over the same period, EXCEPT when the government allowed a revaluation and it went from 8.2 to 6.8 and held steady there even while every other currency goes yo-yoing around like crazy vs. the USD.
I have also seen the same thing in Taiwan - they opened their currency up and it went from 40+ to 25 in only a few months time. The Asians all do this - keep the currency low and export for growth.
Besides, the trade imbalance really is the key. Why are the Chinese buying endless amounts of US bonds if their currency is naturally weakening? Why is the trade balance always in surplus? Every person in China has $ 800 in US housing debt to their name...I am sure they would normally have made that investment.
If the Yuan declines, which it could, it will be due to the decades of mal-investment formed by not allowing free currency and capital flows. Personally I doubt that will happen.
We just have a threat of trade wars, and the currency actually strengthened again! I would think that would have been a signal for a weakening. Or maybe the Chinese decide they have to give a little again to avoid the trade war.
Spotted one for you Mark:
ReplyDelete"The first is that governments like inflation, at least at moderate levels. Unbelievably, but true, people initially believe in the illusion of prosperity that rising prices from inflation brings."
http://www.zerohedge.com/article/will-we-have-hyperinflation-america
Illusion of Prosperity strikes again! You may want to sell your domain for big bucks if this keeps up!
GYSC,
ReplyDeleteIllusion of Prosperity bubble!!!
Mr. Fusion here we come! Or not. Sigh.
Anonymous said:
ReplyDelete"If the Yuan is over-valued, then the Chinese should set it free...except they do not do that."
The Krugmans of the world want the Chinese to do something to raise the value of the yuan. But, they do not want the yuan to float freely because there is the possibility the currency markets will find the yuan overvalued.
The Brazilians are complaining because they feel their real is overvalued by 25%. The Japanese are playing King Canute and trying to stop the increase in the value of the yen. The dollar index has dropped below 80 and is looking like free fall.
I was listening to an interview with Ben Davies. He thinks this rush to devalue by every country could lead to war. Well, Krugman would like it since he believes WWII got us out of the depression.
http://kingworldnews.com/kingworldnews/Broadcast/Entries/2010/9/29_Ben_Davies.html
The possibility of course is there for the Yuan to weaken. However, I cannot see a country that has literally thousands of miles of factories all producing for export is going to have a larger chance of depreciation than appreciation.
ReplyDeleteIf you look at Taiwan or Japan, when they finally free their currencies they strengthen like crazy (probably overshooting in fact) before settling down somewhere. Of course, these countries still depend on exports so they meddle as well, because they are afraid of China's currency. LOL.
Not to mention the inflationary pressures these countries face due to having to mimic US monetary policy - Taiwan's house prices are shooting up due to low interest rate policy. Now they have to raise interest rates. China may have to stop inflation the same way. Higher interest rates become attractive for foreign investors...which means more pressure to appreciate. You get the picture.
The wildcards for me would be:
a) housing bust in China scares everyone as banks go down and the central government allows people to take losses. I doubt the communist party will allow that happen.
b) US depression means lack of demand for Chinese exports. Well, at that point it won't be fun to be invested in anything, really. And, of course, China no longer just sells to the USA. The products we help them develop are sold into the entire global market.
c) trade war from USA.
d) War with Taiwan.
p.s. The Brazilian currency is not overvalued - they are commodity exporter and booming, thus people want to hold their currency, including Buffet. But no one wants to be the "sucker" and they hope the USA will keep to that role - I personally think they are risking scenario B in the above by doing this. These growing nations should allow their currencies to float instead of relentlessly being mercantilist.
Coba
Rick & Coba,
ReplyDeleteIf history is any guide then war would seem a possibility. If things continue to deteriorate and competitive devaluation continues, I'd expect trade wars at the very least.
Stag,
ReplyDeleteAs shown by your index, there sure is a lot of misery out there. I's be worried if the Fed wasn't openly sponsoring a renewal:
http://www.youtube.com/watch?v=xSnLU9nyFSA
mab,
ReplyDeleteBank run: Actively withdraw funds from the bank.
Logan's bank run: Passively stop paying "30-year" mortgages to the bank.
The latter can be done while napping! Hello sandman! ;)