Tuesday, February 25, 2014

Credit Cards: Stuck in HIRP

The following chart shows the spread between commercial banks' interest rates on credit card plans (for accounts assessed interest) and the effective Federal Funds rate.


Click to enlarge.

HIRP: High Interest Rate Policy

Source Data:
St. Louis Fed: Custom Chart

44 comments:

mab said...

Worker's paradise = Banker's paradise!

Feliz Cumpleaños Darwin!


Troy said...

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

real per-capita (age 25-54) revolving debt

Stagflationary Mark said...

mab,

Worker's pair-of-dice = Banker's paradise!

Can't win if you don't [borrow to] play!

Baby needs highly leveraged shoes!

Stagflationary Mark said...

Troy,

Somebody's covering my share (and my girlfriend's share, and my friends' share).

mab said...

Worker's pair-of-dice = Banker's paradise!

Clever!

Troy said...

http://research.stlouisfed.org/fred2/graph/?g=sw2

hmm, when thinking about the 1990s, this graph has something important to teach us.

Sustainable Gains said...

You, Sir E, are suffering from HIRPes!

Troy, thanks for the graphs - more evidence that the credit overdose is systemic. FedGov, corporations, banks, consumers, you name it. Too much debt = too many promises that cannot be repaid = too many future defaults.

BTW, does anyone expect boomers to stop overrunning their credit cards? I think they'll take those debts to their graves, begging all the while for more handouts.

Hmm, perhaps the high rates are to balance out the chargeoffs on all the loans being defaulted upon at death? (i.e., are the credit card issuers' profits-per-card at all time highs as well?) Or are the high interest rates to make up for all the unprofitable misers who now pay their bills on time? Or are they to pay for all the expenses of putting too many cards into everyone's wallets? Or to cover the costs from all the fraud such as the Target card data hacking?

Troy said...

credit overdose is systemic. FedGov, corporations, banks, consumers, you name it

http://www.forbes.com/sites/halahtouryalai/2014/02/21/1-trillion-student-loan-problem-keeps-getting-worse/

To put that in perspective, back in 2001 the national debt was $2.7T (not counting the Fed's $600B piece).

Can't raise taxes, can't cut spending.

But we certainly can cut taxes, and spending simply has to rise due to the boomers getting their Great Society goodies (that they've largely been paying into since the 1960s).

We were doing OK until 2000, then we lost our minds. "Deficits don't matter" indeed.

I suspect the 2024 situation will be a straight extrapolation of 2004-2013 from here, with assumedly a lot fewer war KIA since we got burned again by that stove recently enough.

Fed's going to have to print the $2.7T in the Social Security "trust fund". Center of mass of Gen Y is turning 20 and is starting to need its own housing.

System's gotta keep printing. 2008 Fed meeting notes have exposed the hawks there to be utter morons.

CP said...

Mark,

Hussman's R:
http://www.creditbubblestocks.com/2014/02/update-to-hussmans-ratio.html

CP

Stagflationary Mark said...

Sustainable Gains,

...suffering from HIRPes!

Nice, lol. Sigh.



Stagflationary Mark said...

Troy,

I suspect the 2024 situation will be a straight extrapolation of 2004-2013 from here...

Put me down for 1 to N recessions between now and 2024. I'd be more specific but I expect fireworks if/when we enter the next one while trapped in ZIRP.

Stagflationary Mark said...

CP,

Interesting ratio. With margin debt so high, what's the worst that could happen (again)?

Troy said...

Put me down for 1 to N recessions between now and 2024

The Fed's not going to monkey with the dials like they did 1970-2005.

Quite the opposite. This economy WILL respond to their further intervention.

And the current status quo is not dependent on $200B/mo of borrowed money like we were in 2005:

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

is total YOY borrowing ex-QE.

This is not to say something somewhere can't snap this decade, or the current semi-recovery can't just peter out again out of entropic destiny, but I do think the situation can remain insaner far longer than I can remain solvent.

Putting Yellen in charge is a signal that we're going to do something different this decade.

Yellen is no Greenspan, or Bernanke. Dunno how the rest of the Fed is going to "vote" but there's no technical reason they can't actually prevent the return of the recession bug.

ZIRP, QE -- the beatings will continue until moral improves.

Stagflationary Mark said...

Troy,

I do not believe for a moment that the Fed can postpone the next recession until 2024.

This weakened economy will take so little to push us into the next one.

The Fed's not going to monkey with the dials like they did 1970-2005.

The Fed is not nearly as powerful as you seem to think it is. Sure, the Fed's got it's foot firmly on the accelerator. The car is not speeding up though. It's like entering a Yugo in the Indy 500 and expecting it to perform, lol.

1. 5+ years of ZIRP can't get the CPI in their target zone.
2. Real disposable personal income continues to weaken.
3. Real retail sales continue to weaken.

The Fed cannot create "real" prosperity.

Nathan said...

Mark,

If I understand Troy correctly, I think his concern is more that massive deficits (e.g. returning to ~$1T/year) will be accepted by Congress and monetized by the Fed.

As a (non-inflation protected) bondholder, future deficits are my main concern as well. Right now I think QE's main effect is psychological (people are uncomfortable holding cash, so they feel compelled to deploy it) since low-yielding TBonds and cash have nearly the same "moneyness". Large deficits that sent money directly to people (via SS) would change that.

To me the main counterpoint to this scenario is that bonds represent a large store of wealth and bond holders will demand entitlement / spending cuts.

Question: What is the basis of your long term "inflation mood" indicator?

Troy said...

that massive deficits (e.g. returning to ~$1T/year) will be accepted by Congress and monetized by the Fed

And that QE seems to be putting more money into the top of the economy that soaks up the new bond issues. QE money certainly seems special.

We're not Japan, but my appreciation of what the Fed can do is informed by what they have done to themselves.

Back in '96 they hit 100% debt-to-GDP, and they just kept going.

I do suspect the baby boomer retirement wave will give the system a politically acceptable way (monetize the $2.7T in the SSTF) to perform a mild but sustained QE money drop on the wider economy -- $10B/mo ramping towards $30B/mo 10 years from now.

The system can't raise taxes or cut spending.

And spending will rise again as the baby boom packs off into retirement this decade and next.

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

is real per-capita fed spending. This WILL go to $32k later this decade.

We're not going to cut entitlements, or defense. Not much left to cut.

200% debt to GDP gives the system another ~$20T to play with, doled out over 20 years that's ~$2T/yr.

Troy said...

^ $1T/yr

real per-capita (age 25-54) SS payouts:

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

this is pretty high-powered 'go juice' for the economy. Granted, it's replacing an active salary, but holistically, if the salary transfers to Gen Y then we've got more demand in the system.

Stagflationary Mark said...

Nathan,

Question: What is the basis of your long term "inflation mood" indicator?

It's just a gut feel that 2% inflation may be here to stay over the long-term. Just a mood, nothing more.

I am generally an inflation agnostic though. I own TIPS and I-Bonds because I have believed and continue to believe that real growth would slow over the long-term. Real yields are tied to real growth.

Stagflationary Mark said...

Troy,

And spending will rise again as the baby boom packs off into retirement this decade and next.

We have a greatly differing opinion on how stimulative retired baby boomers will be for this economy, and I think that is one basis of our differing opinion on expected recessions over the next 10 years.

Time will tell.

Troy said...

"We have a greatly differing opinion on how stimulative retired baby boomers will be for this economy"

http://www.offthechartsblog.org/wp-content/uploads/2013/2-19-13health.jpg

Medicare alone is going to rise from $500B/yr to $800B.

Gen Y is age 12-30 now, so in 10 years instead of a 60+yo boomer and a teen ager we're going to have a 70+yo and a 20+yo.

Boomers are in fact sitting on trillions in savings.

% pop over 65

shows they are transitioning from under 15% of the population to over 20% by 2030.

Health costs by age:

http://www.motherjones.com/files/blog_healthcare_costs_age.jpg

All this is tailwinds for the economy, not headwinds.

(My analysis is simply how much "rain" the paycheck economy is getting)

As for recessions, they can come from fatigue I guess but I think something unsustainable needs to fail, and I can't see what that is right now.

The housing bubble was unsustainable, due to the suicide lending blowing up when borrowers defaulted en masse. The 1990s were unsustainable due to consumer credit take-out and over-investment in tech. The 1980s were the initial transition from our previous era of (relative) fiscal and financial probity if not repression and the 1990 recession was a cyclical pullback driven by the oil patch crash, general over-investment, plus defense drawdowns in CA.

Previous recessions 1950s-1980s were Fed-pushed IMO, attempts to brake the economy as borrowing got overheated.

The Fed no longer has a brake pedal. We can agree that its accelerator is iffy.

But I think it's dangerous to not understand how much power the Fed as should they be willing to exercise it.

They totally have the power to Weimar or Zimbabwe this place, should they choose to exercise it and Congress go along.

The only way to get a weak dollar is to print, too.

Nathan said...

Troy,

Couldn't health care spending be characterized as a bubble? It's a classic case of spending decoupling from the value of the underlying goods/services. Same goes for higher education. It's simply not important/sustainable for more GDP to flow into those sectors, no matter what demographic trends would suggest. If you can't print more doctors something real is going to give.

I think another counterpoint to the inflationary view is that many of the US government's obligations are real, not nominal, so if they can't be sustained they will be defaulted on in some (non-inflationary) capacity. For example, maybe Medicare spending maxes out and the per-capita benefits start dropping.

There are certainly policies that would be inflationary. For example, wiping the balance of federal student loans would effectively create $1T in new money. I just don't see how anything like that furthers the interests of TPTB, and the US just isn't that populist.

Anyway, I actually share many of your concerns, so don't take this as some out of hand dismissal :)

Stagflationary Mark said...

Troy,

All this is tailwinds for the economy, not headwinds.

How do your tailwinds help Sears? Or any of the other brick and mortars where many of this country's working population finds work?

Stagflationary Mark said...

Nathan,

If you can't print more doctors something real is going to give.

Indeed.

Stagflationary Mark said...

Troy,

But I think it's dangerous to not understand how much power the Fed as should they be willing to exercise it.

In nominal terms, yes.
In real terms, no.

Real Median Household Income in the United States

If the Fed is trying to get "real" household income to rise, then it is failing miserably, and in my opinion it will continue to do so.

The longer ZIRP lasts, the more people will be converted into being as frugal as I am.

Once savers (and there are plenty in this country contrary to popular opinion) fully understand that real interest rates are not rising (and this isn't just some sort of short-term cyclical problem soon to be undone), then like me, they will be forced to spend less in order to compensate.

You do not want this country to be filled with people as frugal as I am. Recession would be a very mild term for what we'd be experiencing.

For example, nobody forces me to eat at restaurants or drive my car more than is minimally necessary.

Stagflationary Mark said...

Put another way, I base my spending to a great degree on future income streams.

If I really thought I'd be earning a 3% real return on my nest egg over the long-term, then I'd be eating at restaurants and shopping like I once did.

As of 2004, I no longer believe that I will be earning a 3% real return on my nest egg. Not even close. Fortunately, I locked in rates before they fell even further. Many like me, have not.

If you think I'm frugal, just think what they are thinking. The real yield on the 5-year TIPS is -0.73% today.

That's saver's hell.

Troy said...

yeah, I think 2024 is going to be a projection of 2014 from 2004.

Not that it's going to be great.

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

jobs, 2000-now

is an interesting graph. 2014-2016 is going to be status quo as the parties jockey for the Big Election. Debt limit has been removed as a game element now.

As for brick & mortar, it is true that the 2000s boom is history. (My thesis says a large part of the 1990s and 2000s boom was the rise of big-box retail + cheaper Chinese stuff in great supply)

http://research.stlouisfed.org/fred2/series/JTS4400HIL

retail hires, not sure what it's telling us.

The baby boomers are not all broke, they're going to double in count and convert from net savers to net spenders.

What's going to happen to Medicare this decade and next is not visible in my crystal ball, but I do know that both parties have to cater if not pander to the boomers so I don't see spending or service cuts there.

Funny thing is the boomers have been paying into Medicare for 40+ years now, and it's time they get their money back!

My thesis is that the 2008 crash came from the loss of the $1T inflow. I don't see where the next dislocation is coming, and if the Fed is willing to continue to do what Congress can't, the game can go along as it is for some time.

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

(dollar index) is another part of the puzzle. The yuan is back to its pre-1995 strength, and will be getting stronger. Euro is still 30% weaker than its early parity.

My thesis is that the economy just needs more 'circulation' of money, and big gov is going to stir the pot this decade, that's for sure.

http://research.stlouisfed.org/fred2/series/W068RCQ027SBEA

shows gov't spending rose from $3T to $5T, 1999-2007. Getting about time for another breakout.

Stagflationary Mark said...

Troy,

The baby boomers are not all broke, they're going to double in count and convert from net savers to net spenders.

Our economy got a tremendous boost when they entered the workforce. You seem to expect that same boost as they exit. Just sayin'.

Stagflationary Mark said...

I would also point out that the wealthy baby boomers intend to take it with them past the grave.

Very few intend to die broke.

Sustainable Gains said...

Okay, so I was disappointed that no one commented on "You, Sir E" = usury = HIRPes :)

With regard to the boomers and the recycling of their colossal accumulated asset hoard, I think of it in three slices: first, the vast majority of boomers haven't got any net worth to speak of, and they're going to be living hand-to-mouth while pleading for taxes or debts (either way, debits from the rest of the economy) to subsidize their profligate lifestyles until they die. The next slice actually has some net worth, but it's only a small fraction of the total and it's maybe barely enough to retire upon. They're going to pay it all out in health care costs (or other expenses) until they end up poor. It's only the relatively small third slice that really has ownership of the vast majority of the assets, and they're wealthy enough to pass it on as they wish (and they have the legal code structured to minimize estate taxes etc.), without recycling it into the mainstream economy.

Stagflationary Mark said...

Sustainable,

Okay, so I was disappointed that no one commented on "You, Sir E" = usury = HIRPes :)

Hey, I did comment that HIPPes made me laugh. What more do you want? ;)

As for your take on the slices that make up the boomers, that's pretty much my take on it. Wealth inequality is not going to provide the boost that would seem obvious on face value.

We'll see.

And Troy, I've been giving some more thought to something you said.

But I think it's dangerous to not understand how much power the Fed as should they be willing to exercise it.

Which is more dangerous?

1. Bracing for a recession that comes about once every 5 years since the Fed's creation.

2. Assuming there won't be a recession for 10+ years because the Fed has finally figured out how to put a stop to them. All it took was perma-ZIRP.

Unfortunately, I don't believe:

1. The business cycle is dead.
2. The Fed is in full control of the business cycle.
3. ZIRP will work over the long-term any better than it worked for Japan.
4. China's growth model has a hope in hell.

Stagflationary Mark said...

Nominal Annual GDP Growth in Japan

ZIRP worked?

Troy said...

ZIRP was a palliative to keep the economy from seizing after the 1980s-era idiocies.

If Kuroda can print $500B/yr (current rate) he can print $1T. The printing will continue until morale improves.

The only thing that limits Kuroda's power is where the PTB want the yen to be. I think they'd be perfectly happy with it at ¥150 again.

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

The best trade barrier is a weak currency.

Troy said...

Our economy got a tremendous boost when they entered the workforce. You seem to expect that same boost as they exit. Just sayin'

that the wealthy baby boomers intend to take it with them past the grave.

these two have the same response: Gen Y inherits the job now, then the wealth this decade or next.

Population age 20-64 is going to rise from 185M in 2010 to 195M in 2020, 204M in 2030, 220M in 2040, 240M in 2050.

https://www.census.gov/prod/2010pubs/p25-1138.pdf

So demographically we have no decline coming.

Not sure this added population is a boon, either. Just more mouths to feed and demand on already lacking housing supply in an increasingly automated and alienated economy.

Troy said...

Bracing for a recession that comes about once every 5 years since the Fed's creation.

My thesis is the Fed had a hand in many of these recessions, by taking away the punchbowl.

http://research.stlouisfed.org/fred2/series/A01028USA558NNBR

is a FRED graph starting from the 1800s, showing how often recessions appeared in the 19th century.

The Fed is NOT going to raise rates in the foreseeable future. This takes away the inducements of all postwar recessions:

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

note the pattern of gray bar vs. blue ramp.

Now, I'm not welded to this thesis, clearly the 1990, 2001 and 2007 recessions had other causes.

But I do think the 1970-83 recessions were mostly the Fed's doing, fighting inflation of a tightening labor market by cutting credit.

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

blue is fed rate, red is inverted continued claims, higher is tighter labor market.

The business cycle is dead

I think it is, since the business cycle is IMV mostly the credit cycle. Inventory management has gotten a lot better now compared to the 1950s.

You dump money into the paycheck economy, we'll get back to the Clinton and Bush good times again.

The system has the capacity to meet demand, the problem is the demand is unfunded.

This is just a money problem, and in a fiat regime money is an self-imposed set of handcuffs.

I do agree that much of government spending is not inflation hedgable. If food or health care goes up a lot, 'gov's liability goes up too.

But the feds tax 20-30% of every dollar made in the economy, so in the end, they win with inflation, too.

ZIRP will work over the long-term any better than it worked for Japan.

The point is to get to retirement and the grave w/o another Great Depression / riots / mass wealth destruction event, not policy 'working' per se.

What will actually 'work' -- raise taxes on everyone, nationalize health care, redirect military spending into social spending, etc etc is politically impossible.

As for China, they've got a billion more people than we do and I can't pretend to understand WTH is going on with them, other than their expectations of quality of life are only vaguely overlapping with the US's.

Stagflationary Mark said...

Troy,

The Fed is NOT going to raise rates in the foreseeable future. This takes away the inducements of all postwar recessions:

The Fed is NOT going to lower rates either. Zero is the bottom. If you are wrong and we do enter a recession at any point in the next decade, then things will get very ugly.

Keep in mind that the Fed has been lowering rates to save us each time the economy has shown weakness for 30+ years. I see plenty of scenarios for added weakness in the years to come, much like Japan faced after their housing bubble popped in the early 1990s.

Scatter: Fed Funds (x-axis) vs. CPI growth (y-axis)

Which is the chicken and which is the egg? I strongly suspect both can be depending on the situation.

Stagflationary Mark said...

Perhaps I should put this another way.

It is possible that the bond market has been lowering rates over the past 30+ years and the Fed is simply along for the ride.

So what happens if/when rates cannot continue to fall when they need to fall? Bad things.

Stagflationary Mark said...

Troy,

I think it is, since the business cycle is IMV mostly the credit cycle. Inventory management has gotten a lot better now compared to the 1950s.

From where I stand, the business cycle is all about pent-up demand and pent-down demand. Inventory management is nothing compared to the whims of the consumers.

There is nothing in the following chart that tells me that the business cycle is even remotely dead.

When Will the Next Auto Industry Bailout Occur?

Few were buying cars within the Great Recession (pent-up demand) and now everyone seems to be (pent-down demand).

This is a very unstable situation and very unlike what we were seeing from 1993 to 2006.

Troy said...

Zero is the bottom

. . . nominally . . .

As for Japan, they had an interlinked megascale S&L crisis to go with their housing bubble (which was more of a sideshow, more a side-effect than a driver of the 80s goodtimes).

The only thing to be learned from Japan is that when both a central bank and legislature get into the can kick mode, the can will go pretty far.

Exogenous shocks can arrive -- a stupid war breaking out somewhere, our agriculture sector failing due to drought or something.

But as long as the Fed has the power to print it can keep the economy rubber side down.

The main feedback on printing is FX not inflation, though weaker FX drives Brent higher . . .

Federal Budget Deficit Falls to Smallest Level Since 2008

If and when outlays rise again, we'll get feel good times here again, too.

The GOP has exiled the TP clowns, and the dog that didn't bark was the ease of Yellen's succession, tho the vote wasn't the 99-1 that B got.

Dunno how much clout the Chair has to drive actual Fed votes, but I don't see why things can't continue as the are.

Things could even get better, like if we can move off of imported oil more and more . . .

Troy said...

"Inventory management is nothing compared to the whims of the consumers."

Gen Y is coming on-scene and they need new stuff . . .

Stagflationary Mark said...

Troy,

Gen Y is coming on-scene and they need new stuff . . .

They say people in hell want ice water.

That first home?
Furniture to fill it?
Student loan debt?
High paying jobs?
Cheap oil?

Troy said...

Yup, Gen Y is screwed. . .

Japan has this same problem, the boomers ran up the national debt to 200%+ of GDP and they think it's their savings now.

NOT going to work that way, when the follow-on generation is 30% smaller than their boomers.

There were 34M Japanese born 1947-65, 24M 1982-2000. D'oh!

For the US, this is 72M vs 70M, but we got a lot of immigration in the 1990s to fuzz the actual pop numbers a bit.

Still demand is demand, and other than the $30,000 student loan debt ('aside from that Mrs Lincoln . . .'), Gen Y is starting with a clean slate.

The $16T national debt is just numbers on the board. Japan has also taught us that ZIRP kills the bond vigilantes.

Well, ZIRP + QE 1,2,3, . . ., n, n+1

Interest expense is $220B in 2014, $2B less than it was in 2000.

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

real interest expense to individuals / businesses

Stagflationary Mark said...

Troy,

('aside from that Mrs Lincoln . . .')

The best stuff is almost always found within the parentheses, lol. Sigh.

Troy said...

http://research.stlouisfed.org/fred2/graph/?g=sB5

above interest graph divided per-worker

$200/mo, what it was in the 1970s.

Japan has also taught us that you can enter the ZIRP regime but cannot leave.

The bond buyers may indeed go on strike, but if the Fed has Congress' back, the bond buyers will feel more pain as the ZIRP regime turns into a NIRP regime.

(The O in ROI can be 'on' or 'of' . . .)

The Fed could monetize $1T/yr should it chose to do so.

http://research.stlouisfed.org/fred2/graph/?g=sB7

ah, I see it already is.

Stagflationary Mark said...

Troy,

Japan has also taught us that you can enter the ZIRP regime but cannot leave.

We were trapped in ZIRP after the Great Depression but Japan helped get us out of it (eventually). Go figure.