Monday, October 28, 2013

Exponential Illusions vs. Linear Reality


Click to enlarge.

The low points are following a linear trend, implying that growth is slowing over time. If it took 30 years for real net worth per capita to roughly double from 1982 to 2012, then it will take 60 years for it to roughly double again. That's assuming we even should extrapolate past history into the distant future of course. I for one am skeptical, especially now that we've entered a "QE Trap".

"I sensed the Fed’s full attention is now devoted to the question of whether and when to 'taper' its purchases of longer-term Treasury securities, leaving officials little time to think about long-term costs and scenarios," he writes. "The same could be said for the market participants I met with in New York and Boston, where the typical response was 'we haven’t thought that far ahead' or 'it’s tomorrow’s problem.'"

The high points are following an exponential trend, implying that the bubbles are growing exponentially over time (relative to the linear base line). I expect an epic failure that even mainstream economists can see coming if we get anywhere near that blue trend line again. Note that the data only goes through June of 2013. The stock market's up another 7% since then. To the moon, Alice!

This chart is more disturbing if one factors in that the federal, state, and local debts are not included in the household net worth as calculated by our government. That's not quite true. We get credit for owning them as households, just not as owing them. Win win. Perhaps we'll someday find an alien species that we can bill instead of American households. That must be the thinking.

If my net worth is $10,000 and I loan it all to the government then the government would claim my net worth is still $10,000. If the government then spends the $10,000 to keep the government running then my net worth is still $10,000. I'd only be in big trouble if the government actually taxed me $10,000 to pay me off. But why do that? Stick with what works! Deficit spending for the win!

The chart is even more disturbing if one factors in rising wealth inequality. I doubt that real median net worth would make such an optimistic looking chart. That's just my way of saying that there are parts of this economy that were financially subprime heading into the Great Recession and they remain financially subprime. In fact, there were 34% more households on SNAP in July 2013 than were on SNAP in October 2009. How's that for a recovery!

And lastly, who would have thought that the Fed could make the average household so much richer simply by helping us earn even less interest on our savings. Genius! And sustainable? Well, who can really say for sure?

Sarcasm abounds. To the moon! Alien species! Government running! Optimistic! Sustainable! Beware, it's a bungle out there. Seriously.

Source Data:
St. Louis Fed: Custom Chart

6 comments:

Troy said...

who would have thought that the Fed could make the average household so much richer simply by helping us earn even less interest on our savings.

the bulk of "savings" for the middle 3 quintiles is not capital per se but in their residence's site value (and the replacement value of their housing improvements, which /is/ capital to some extent).

Lower interest rates go, the more people can borrow to bid up the cost of housing.

http://research.stlouisfed.org/fred2/series/MORTG

10 years ago I had the beginnings of understanding of this treadmill dynamic of real estate, how it impoverishes as it enriches.

Now, this understanding consumes me. I preferred my ignorance.

(But the events of 2005-2008 were certainly confirmatory, just as seeing the aftermath of the Japan bubble firsthand in the 1990s opened my eyes a bit)

50% of houses being sold today are going to buyers paying cash. This is going to end very, very badly unless the renting bloc starts voting in their interests.

http://www.businessinsider.com/institutions-all-cash-buyers-are-driving-the-housing-market-2013-10

Something really weird is going on now.

http://taojonesing.blogspot.com/2010/10/neoclassical-economics-are-to-henry.html

Stagflationary Mark said...

Troy,

This is going to end very, very badly unless...

What's the worst that could happen again? Sigh.

Something really weird is going on now.

For what it's worth, I think the economy's spewing out a plethora of illusionary malinvestment signals.

A permanent end to recessions, stuck in ZIRP, and fear long bonds, so risk assets good at any price.

I think only 25% of that is actually true right now (the stuck in ZIRP part). I'm not exactly bracing for the 2014 acceleration of this economy. Let's just put it that way.

Troy said...

yeah, there's a distinct 'running on fumes' vibe again.

I don't think repeated DC dysfunction early next year will be the dislocation, but it's still possible.

Energy is being well-behaved now though:

http://research.stlouisfed.org/fred2/graph/?g=nOo

Pump prices with a $2 handle would be nicer, but at least current prices are not headwinds.

http://research.stlouisfed.org/fred2/series/TWEXM

shows the USD is precisely between 'too-strong' and 'too-weak' though of course http://research.stlouisfed.org/fred2/series/NETEXP indicates the former.

Demographics are interesting this decade:

http://research.stlouisfed.org/fred2/graph/?g=nOs

as the leading edge of the baby boom is hitting 65 now.

We're not going to get a 1990s-scale expansion in jobs this decade, we don't have the bodies for that.

Very strange times. I suspect things will continue to get more weird, not less.

Stagflationary Mark said...

Troy,

Pump prices with a $2 handle would be nicer, but at least current prices are not headwinds.

Oil might even be temporarily in the sweet spot. Even someone scared about our economic future and living mostly paycheck to paycheck might decide that buying a new fuel efficient car might be a good plan. I wouldn't exactly point to it as a reason to turn optimistic about holiday shopping though.

Very strange times. I suspect things will continue to get more weird, not less.

Me too.

Fritz_O said...

This,

"Lower interest rates go, the more people can borrow to bid up the cost of housing."

, does not agree with this,

"...there were 34% more households on SNAP in July 2013 than were on SNAP in October 2009.".

It's the word "people" that bothers me. I don't consider institutions people. People aren't bidding up house prices.

I have a family member who was earning $45K in 2009 and was laid off. Now she drives a school bus. She isn't rare, and she isn't bidding up house prices.

She recently re-financed to lower rates so she could save some interest expense. The bank didn't think she could pay off her debts long term. Who could blame them.

Eventually she got terms to reduce her payment size, at the expense of five additional years of payments.

That's not good for the long-term trends of house prices.

Stagflationary Mark said...

Fritz_O,

That's not good for the long-term trends of house prices.

Speaking of things not good for the long-term trends, my 90-year-old mother is a net seller of homes from here on out. Her's is on the market. It won't be staying in the family. All her children already have homes of their own. Go figure.