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View Full Version : The Fog of Economic Crisis - Part I: Will the real Real Economy please stand up - Eric Janszen



EJ
01-27-10, 01:28 PM
http://www.itulip.com/images2/realexonomystandup440.jpgThe Fog of Economic Crisis - Part I: Will the real Real Economy please stand up

It's the FIRE Economy, stupid.

• GDP mystery solved
• Retail's Armageddon-lite
• Productive Economy falters
• The great asset price collapse
• Why stocks are falling

In our analysis Asylum Markets of the post FIRE Economy – Part II: Breaking the Rules (http://www.itulip.com/forums/showthread.php?p=138349#post138349) we discovered that Personal Consumption Expenditures, the non-government expenditure portion of GDP, had by the end of 2009 recovered to pre-Great Recession levels. How can this be when the recession cost millions their jobs, consumer credit contracted for the first time on record and is still contracting, and depressing signs of consumer retrenchment line the main streets and blights the malls of every town and city in the U.S. with thousands of closed down and boarded up retail stores?

If not from cash income earned on the job or credit tapped from credit card and other revolving credit sources, where is the money coming from to finance the consumer economy recovery? What is “Personal Consumption Expenditures” anyway?

A seemingly simple and innocent question about personal expenditures once again leads us to unexpected places, in this case through the bowels of the U.S. National Income and Product Accounts (NIPA) and Fed Flow of Funds data. There we discovered that approximately half of the Personal Consumption Expenditures (PCE) measure appears to have little to do with consumers spending money on dinners and iPods in the Productive Economy and everything to do with paying interest on mortgages, bank fees, and other economic rents in the FIRE Economy. In the process, we discover just why the economy feels as bad as it does even though the PCE numbers present an economy on a rapid recovery path, and why the latest GDP report is utter nonsense.

We start our journey through the Great Recession fallout with the chart that first raised the question, PCE since 1969.

http://www.itulip.com/images2/GreatRecessionFalloutPCEyoy1969-2010.gif




On a year-over-year basis, PCE appears to be recovering powerfully from an economic crisis that took PCE down off the scale. Partly this miracle results from comparing Armageddon to a subsequent period of merely horrid economic performance, but even viewed as level of PCE rather than year over year change, the data present a picture of complete recovery.

http://www.itulip.com/images2/GreatRecessionFalloutPCE1969-2010.gif





PCE as of Dec. 2009 has not only recovered to pre-crisis levels but is at an all-time high of $10.2 trillion at an annualized rate. The decline on a percentage basis through the recession was a surprisingly modest 3.5% between June 2008 when the drop began and December 2008 when it ended and started to recover. Odd that an economic catastrophe that resulted in more than ten million newly unemployed registers as a small 3.5% dip in PCE. But no matter; the data say Recovery Has Arrived, right?



PCE Mystery

Despite what the term Personal Consumption Expenditures appears to describe, the measure has less to do with individuals consuming goods and services than with debt-related transactions by households in the FIRE Economy.

Three components comprise PCE: Durable Goods, Non-durable Goods, and Services. Durable Goods are things like autos and appliances that you don’t buy often because they last for years. Non-durable Goods are items like food and beer that you buy frequently because you need them but they don’t last long—especially beer. Services is by far the largest part of PCE, and as we shall see includes not only haircuts and auto repairs but interest on debt and other forms of “economic rent.”

“Services” represented $6.9 trillion of the $10.2 trillion PCE total in Dec. 2009 on an annualized basis, while Non-durable Goods represented $2.3 trillion and Durable Goods only $1.0 trillion. The remaining $4 trillion of our $14.2 trillion GDP is public sector spending.

On a percentage basis, the Services component of PCE has grown from 45% to 67% of since 1959 while Non-durable Goods fell from 41% to 22% and Durable Goods from 14% to 11%. We often hear that the U.S. economy has become a “services economy,” because so much of GDP is the Services component of PCE. But calling this gigantic financial area of our economy “Services” is misleading.

http://www.itulip.com/images2/PCE2000-2010.gif




The Durable Goods component of PCE peaked at $1.2 trillion and began to decline at the start of the recession in Q4 2007, and continues to decline. Non-durable Goods peaked in Q3 2008, dipped to $2.1 at the start of 2009, and has since then staged a near full recovery. But Services began The Great Recession at $6.7 trillion and never skipped a beat, rising all through the recession to $6.9 trillion today. How is that possible? What is in this mysterious “Services” component of PCE that makes it immune to the worst recession since The Great Depression? To get to the bottom of the mystery, we start by reviewing the impact of the recession and its residual effects.

Fallout from The Great Recession

The recession officially ended in Q3 2009, but leaves behind high and rising unemployment, persistent unemployment, falling personal income, and negative revolving credit growth. It is unintuitive that the services expenditure in the economy kept growing throughout this.

http://www.itulip.com/images2/GreatRecessionFalloutUnemployment1947-2010.gif




Unemployment grew from six to 16 million during The Great Recession, yet the Services component of PCE continued to grow.

http://www.itulip.com/images2/GreatRecessionMedDurationUnemp1967-2010.gif




Duration of unemployment, the number of weeks that millions of officially unemployed have been out of work, tripled from seven to 21 weeks during The Great Recession, yet Services kept growing.

http://www.itulip.com/images2/GreatRecessionFalloutRevolvingCredit1967-2010.gif




Revolving credit growth, primarily credit cards and auto loans, turned negative for the first time on record during The Great Recession, yet Services personal expenditure kept climbing.

http://www.itulip.com/images2/GreatRecessionFalloutPersonalIncomeChange1992-2010.gif




Personal Income fell during The Great Recession, recently rebounding from the Armageddon collapse from 2006 to mid 2009 while the Services component of PCE grew the whole time.

The data in the graphs above accord with the stories we hear and our own observations, of friends out of work or working for far less, of boarded up storefronts and reduced store inventories. Evidence that goods-producers suffered badly is no surprise.

http://www.itulip.com/images2/GreatRecessionFalloutFianlSalesyoy1952-2010.gif




Final sales turned negative for the first time on record.

All this yet PCE shows the economy is back to business as usual. This did not make sense to us, so we started digging.

First we focused on the Durable and Non-durable Goods components of PCE, separate from Services. We’d expect these to be comparable to sales by retailers to consumers. Maybe a comparison will help us understand the disconnect between the Great Recession fallout and the PCE data.

Retail Sales Recovery

Retail sales data, collected by the Census Bureau, measures the aggregate dollar price of merchandise sold for cash or credit by retailers to consumers. Durable goods, such as appliances and autos, make up 40% of Retail Sales. The balance consists of non-durables, such as gasoline, meals at restaurants, and general merchandise. The Retail Sales data report purchases of goods only, not services, and the data are not adjusted for inflation.

Sans the mysterious Services component of PCE, we expected Goods PCE and Retail Sales to be approximately the same, or at least proportionate. They are not.

http://www.itulip.com/images2/PCEvsRetailSales1959-2010.gif




The yellow area in the chart above is Retail Sales. The red area is Durable Goods plus Non-durable Goods PCE added together. The orange area shows the overlap of both the Goods PCE and Retail Sales series.

In 1959 the total amount spent by consumers on goods at retail stores was more than four times Durable Goods plus Non-durable Goods PCE. By the end of 2009 Goods PCE was 40% more than Retail Sales.

How can Goods PCE grow so much faster than the sales revenue of retailers? Retail Sales grows linearly while Goods PCE grows in a non-linear fashion, in the classic manner of compound interest. We put this oddity aside for the moment and focus instead on the sharp decline in Goods PCE and Retail Sales during the recession. The data on store closings reflects what we see in the Retail Sales graph.

Retail's Armageddon-lite

In 2008, 35 retailers closed 4,321 stores. Below we list the number of stores and the retailer name by order of the largest number of store closings.





384 Bombay (all stores)
378 Movie Gallery
371 Linens 'N Things (all stores)
356 KB Toys
184 Sharper Image
181 Rite Aid
173 Steve & Barry's (all stores)
160 Wilson Leather
154 Pacific Sunwear / PacSun
149 Mervyn's (all stores)
140 Dell
140 Footlocker
126 Office Depot
125 Sprint/Nextel
120 Friedmans
117 Ann Taylor
112 Office Depot
105 Zales
103 CompUSA (all stores)
100 Fashion Bug
98 Disney
85 GAP
78 Club Libby Lu Saks (all stores)
78 Talbots Kids/Mens
54 Sigrid Olsen
41 Sergio Rossi
40 Lane Bryant
31 Pep Boys
29 Eddie Bauer
26 Dillards
25 Pier 1
20 Cache
15 Home Depot
12 Ethan Allen
11 Macy's
Bad as 2008 was for retailers, 2009 produced almost four times as many store closings by more than six times as many retailers. A total of 255 retailers closed 16,232 stores, producing the common sight of “For Lease” and “Going Out of Business” signs in every mall and downtown across the US.
2,639 General Motors
960 Blockbuster
789 Chrysler
567 Circuit City
461 KB Toys
450 Movie Gallery (Game Crazy, Hollywood Video)
365 Ritz Camera
273 Starbucks
287 Goody's
265 Jones Apparel Group (2009 & 2010)
240 Waldenbooks
224 Foot Locker
191 Zale Corporation
175 Van Heusen
163 Ann Taylor (by 2010)
162 Charming Shoppes
161 InkStop
160 Family Dollar
150 Popeye's (AFC Enterprises)
135 S&K Famous Brands Inc.
130 Advance America
129 Boater's World
125 F.Y.E. (Trans World Entertainment)
121 Eddie Bauer
118 Office Depot
117 Rite Aid
104 Finlay Enterprises
102 Payless Shoes
100 Albertsons
100 Gap, Inc.
98 Club Libby Lu (Saks)
85 NextCen Brands (Great American Cookies, MagieMoo's, Marble Slab Creamery, Pretzelmaker)
84 Payless Shoes
84 Samsonite
81 Saab Dealerships
77 Game Stop
75 J. Jill
75 Signet Jewelers
70 Famous Footwear (Brown Shoe Co.)
60 Arby's
60 Collective Brands
60 Dominos
59 Advance Auto Parts
59 Ruby Tuesday
58 Gottschalks
56 Smith & Hawken
53 Rex Appliance & Electronics
50 B Dalton
50 Pacific Sunwear
50 Select Comfort
50 Supervalu
50 New York & Co. (over the next five years)
48 Home Depot (Expo, YardBIRDS, Design Center, HDBath)
48 Ultra
46 Anchor Blue
45 Cato
44 Check 'n Go
43 Destination Maternity
40 Justice
40 Kirkland's
40 Tween Brands (Limited Two, Justince)
38 Bruno's
34 Bachrach
32 Big 10 Tires
31 Pier One
30 Big Lots
30 Jo-Ann Stores
29 Basha's Supermarket
29 Ruehl (Abercrombie & Fitch)
28 Kmart
28 Yankee Candle
26 Cost Plus
25 Chico's FAS
25 Dress Barn
25 Finish Line
25 Fred's
25 Luby's
24 Blue Tulip Gift Shops
24 Cashland
24 Sears
23 Sportsman's Warehouse
22 AFC Enterprises
21 Papa John's
21 ZGallerie
20 Baja Fresh Mexican Grill
20 Man Alive (Finish Line)
20 Oneida Ltd.
20 Pumpkin Patch
20 Wendy's
20 Wet Seal
19 Snyder's Drug Stores, Inc.
18 Black Angus
18 O'Reilly Automotive
16 Filene's Basement
16 Iridesse (Tiffany & Co.)
16 Men's Wearhouse
16 Shoe Carnival
16 Talbot's
16 Williams-Sonoma
15 Tim Horton's
15 West Marine
14 Whataburger
13 OfficeMax
13 Stein Mart
12 Bealls
12 Kira Plastinina
11 99 Cent Only Stores
11 Better Bedding Shops, Inc.
11 Jimmy'Z (Aeropostale)
11 Macy's
11 Pamida
10 Casual Male
10 Holcomb's Education Resource
10 Bassett Home Furnishings
10 Dollar General
10 E&J's Shoes
10 P.F. Chang's Pei Wei Restaurants
10 U.S. Cellular
9 American Eagle
9 California Herbal Relief Center
9 Rally's
8 Active Ride Shop
8 Dillard's
7 Auto Nation
7 Damon's
7 Flying J's
8 MarineMax
7 Penn Traffic (P&C Foods, BiLO)
7 Plunkett Furniture
7 Sweetbay Supermarkets
6 Denny's
6 Destination Maternity
6 Music City Record Distributors
6 Pulix
6 Whole Foods
6 Winn Dixie
5 Borders
5 Krispy Kreme
5 Mark Shale
5 Stock Building Supply
5 Target
4 Albertson's
4 Applebees
4 Coach
4 Girl Scout Stores
4 Red Robin Gourmet Burgers
4 Harry W. Schwartz Bookshops
4 Jagmania
4 Jennifer Convertibles
4 Lucky Grocery Stores
4 Sacino & Sons
3 Blockbuster
3 Bulgari
3 Dollar Tree
3 Food World
3 Good's Furniture & Flooring
3 Guess
3 Hawaiian Telecom
3 High Point Coffee
3 Jamba Juice
3 Lane Bryant
3 P&C Food Markets
3 Virgin Records
2 A.C. Moore
2 Bailey Banks & Biddle
2 Belk
2 Bob Evans
2 Checker Auto Parts
2 Costco Home Stores
2 Dunkin Donuts
2 Hacketts
2 Homer's Music and Gifts
2 Hypnoses
2 Jewel-Osco
2 Kragen Auto Parts
2 L'Oreal Paris
2 MarBeck Appliance Parts
2 Morton's
2 Natuzzi Americas
2 Piggly Wiggly
2 Plan 9 Music
2 Pop Tunes
2 Rees Jewelers
2 Robinson Luggage
2 Rooms Express
2 Ruth's Chris
2 Salvation Army Thrift Stores
2 Sears Essentials
2 Shaw's
2 Sheetz
2 SK Restaurant Group
2 Spicy Pickle
2 Storables
2 Thomasville Home Furnishings
1 Ace Hardware
1 Andersons General Store
1 Atlanta Bread Company
1 AutoZone
1 Badcock Home Furniture & More
1 Beverly Hall
1 Bon-Ton
1 Bigham’s
1 Bulgari
1 Cici's
1 Congress
1 Crabtree & Evelyn
1 Cub Foods
1 D'Amica Cucina
1 Disney Store
1 E&J's Designer Shoe Outlet
1 El Paso Bar-B-Que
1 Fleeger's Hardware
1 Fresh City
1 Fresh Market
1 Giant Market
1 Goldberg's
1 Hershey's Gifts (online store)
1 IGA
1 KC Masterpiece
1 Lord & Taylor
1 Lowe's
1 Max Mara
1 McCormick & Schmick's
1 Mel's Diner
1 Midtown Foods
1 Monroe IGA
1 Nike
1 Powell's
1 Record Theatre
1 RJ Gator's
1 Roy's Hawaiian Fusion
1 Safeway
1 Sam's Wine & Spirits
1 Schneiderman's Furniture
1 Scrambler Marie's
1 Smith's Food & Drug
1 Sony PlayStation Store
1 Sony Style Store
1 Southern Family Markets
1 Spartan Stores
1 Staples
1 Stax Omega Restaurant
1 Trader Vic's
1 Ukrop's
1 Uno Chicago Grill
1 Urban Fresh (Supervalu)
1 Victoria's Secret
1 Vons
1 West Elm (Williams Sonoma)
1 White's Fresh Foods
1 Wilson Farms Store
1 Winchell's Donut House
1 World Market
1 Wal-Mart




More than 20,000 stores closed over the past two years, with the bulk of the losses in 2009. Is the worst behind us? Year over year change in Retail Sales shows a sharp recovery starting in early 2009.

http://www.itulip.com/images2/GreatRecessionFalloutRetailSalesyoy1992-2010.gif




The year over year data that compare Dec. 2009 to Dec. 2008 shows a sharp recovery.

http://www.itulip.com/images2/GreatRecessionFalloutRetailSales1992-2010.gif




You may wonder how a 5.3% monthly decline in Retail Sales, from $376 billion in Jun. 2008 to $356 billion in Dec. 2008, translated into 20,000 store closings. The answer is that there are approximately 1.2 million retail stores in the U.S. The 5.3% decline in Retail Sales coincided with the closing of approximately 2.4% of retail stores. That doesn't sound so bad. It's beyond the scope of this analysis, but it is the character of store closings—the average size of each store and changes in inventories and merchandise sold rather than the total number that puts the number of closings that tell the real story. The U.S. has survived the ordeal, but the so-called "new normal" is the poorer and more third-world version that we warned about a year ago in Fed cuts dollar, Fire sales vs FIRE sales, Duh-flation, and Bezzle shrinks again (http://www.itulip.com/forums/showthread.php?p=66592#post66592). The insidious erosion of purchasing power continues as the same dollars earned today buy lower quality goods and services than before.

Getting back to the PCE Services mystery, personal consumption expenditure includes not only goods and services as you'd expect but interest and fees on goods and assets that were purchased in the past.




Top level list of components of PCE



Purchases of new goods and services by individuals
Purchases of goods and services by nonprofit institutions
Used goods
Purchases of goods and services abroad by U.S. residents
Imputed transactions







Services PCE includes haircuts and car repairs, but mortgage payments, auto payments, and credit card payments inflate the total.

We return to the chart we created earlier that compares money spent by consumers at retailers and total PCE on Durable and Non-Durable Goods.

http://www.itulip.com/images2/PCEvsRetailSales1959-2010.gif




Retail Sales measures sales of goods by retailers to consumers. Goods PCE measures the purchase of goods by consumers, plus the imputed interest payments on the debt taken on by consumers when they use credit to purchase these goods.

What you are looking at above is a Productive versus FIRE Economy comparison, the impact of the rise in the use of credit by consumers to purchase goods, and also home price inflation, since 1959. Note that the inflection occurs, as other charts we have shown you over the years, around the time of the end of the international gold standard and birth of the FIRE Economy in the early 1970s.

Notice also the impact of compound interest on the shape of the Goods PCE curve compared to the linear growth shape of the Retail Sales curve. The chart shows a layer of FIRE Economy sitting on top of the Productive economy, approximately $1.5 trillion in PCE on top of $2 trillion of Retail Sales in Dec. 2009 on an annualized basis. It is, as far as we know, the first chart that depicts the additive impact of the FIRE Economy to the Productive Economy.

While the FIRE Economy has largely recovered, the “real economy” remains sick.




Productive economy falters

Behind the encouraging 5.7% Q4 2009 GDP number released today is the fact that much of the PCE component of GDP is FIRE, and the rest is government spending. The stock market doesn't appear to be buying the idea that an economic recovery based on public debt expansion is sustainable. Beyond the credit limit on the government credit card that is quickly becoming a political football for the midterm elections, maybe the stock market is looking at something else.

Measures of real output

Here we review a number of measures of real economic output that are distinct from FIRE Economy measures.

Total rail traffic in the U.S. in 2009 was below 2008 levels, and trended down into the 4th quarter of 2009 as during 2008, curiously in a quarter when GDP numbers were robust.

http://www.itulip.com/images2/totalrail2008-2010.gif





If the economy is truly recovering we'd expect to see a climb in rail traffic to 2007 levels in Q4 2009 not a collapse to Q4 2008 lows.

http://www.itulip.com/images2/railtraffic2008-2010.gif





Given the crash in rail traffic in 2008 and 2009, any negative year over year traffic numbers in the current period are surprising.

Shipments of autos, presumably to replenish inventories after the "Cash for Clunkers" draw-down, shows robust growth. Food, grain, chemicals, and metals showed double digit growth over 2009 levels but not 2008 levels.

Looking at the totals, only by the measure of the current week is total rail traffic up over the same period in 2009, and only by a thin 0.1% margin. On a four week rolling average basis, total rail traffic is off nearly 20% from the same period in 2008. Even more remarkable is the drop off in coal shipments, off 21% from 2008 and 18% from 2009 levels on a four week rolling average basis.

Energy demand is indicative of economic performance, at least on a relative same-country basis. If an economy is recovering compared to last year, then why has U.S. crude oil demand fallen compared to a year ago?

http://www.itulip.com/images2/crudeoil2009vs2010.gif





According to the latest DOE report, net crude oil imports are off 24%, and net imports of all energy materials, including natural gas, are off 48%. Isn’t energy demand supposed to rise when the economy is recovering?

Electrical energy demand is as close to a government statistics-independent proxy for real economic growth as you can get, at least in the medium term, that is, in periods of more than three months but under two years. Short-term factors such as weather can impact electricity demand for short periods, and increased efficiencies and substitutions can lower demand over extended periods.

According to the latest DOE report published Jan. 15, 2010 that covers the year ending Oct. 2009, “Year-to-date, total net generation was down 4.6 percent from 2008 levels. Net generation attributable to coal-fired plants was down 12.4 percent. Nuclear generation was down 0.4 percent. Generation from petroleum liquids was down 11.4 percent, while natural gas-fired generation was up by 3.9 percent year-to-date.”

A recent update extends this decline into Nov. 2009, stating, “Total electric power generation in the United States decreased 5.6 percent from November 2008. Over the same period, coal generation decreased 12.2 percent as a result of the increased cost of coal as a fuel used in electricity generation and the decrease in demand for electric power due to the economic downturn in the United States.”

That means that electrical energy demand during the “as good as it gets” fiscal spending recovery quarter of Q3 2009 that we forecast in April 2009 was actually below the Armageddon period of Q3 2008 before the fiscal stimulus programs started and when monetary stimulus was still effective.

The great asset collapse

If the economy still “feels” worse to you than the numbers suggest, the preceding data on the state of the real economy help to explain why. But even as the so-called PCE Services measure of the FIRE Economy send signals of recovery, the latest Flow of Funds data show that the foundation of the FIRE Economy, asset prices, continues to rot.

During the Great Recession private assets lost ground as government-issued and nationalized private assets gained.

http://www.itulip.com/images2/GreatRecessionFalloutAssetsUpPercent2007-2010.gif





On a percentage basis, Treasury bonds became very, very popular during The Great Recession, between Dec. 2007 when we issued our warning that the Debt Deflation Bear Market started and Dec. 10, 2009 when the latest Flow of Funds report came out that covers the Q3 2009 period.

http://www.itulip.com/images2/GreatRecessionFalloutAssetsIpDollars2007-2010.gif





In dollar terms, the top five fastest growing household assets are Treasury bonds, government securities (municipal bonds), and Corporate bonds. Bank savings and money market accounts grew by $250 billion in total.

While they purchased these assets, what did U.S. households sell?

http://www.itulip.com/images2/GreatRecessionFalloutAssetsDownPercent2007-2010.gif





On a percentage basis, households dumped Commercial more than any other of the top five losers.

http://www.itulip.com/images2/GreatRecessionFalloutAssetsDownDollars2007-2010.gif





On a dollar basis, while the total is not cumulative, the order of the top five big losers by asset category lays out the order of precedence.

Total assets fell by over $11 trillion, financial assets by $6.3 trillion, real estate by $5.1 trillion, tangible assets by $5 trillion, and owner-occupied real estate by $4.4 trillion. Based on today’s news that U.S. home prices fell by 12% in 2009, the next Flow of Funds report is likely to show even more Real Estate carnage.

If you add up all of the losses in the value of assets held by households during the recession (holding gains on assets), the sum comes out to a stunning $13.6 trillion, of which $7.6 trillion is real estate asset price loss.

http://www.itulip.com/images2/greatrecessionnetworthloss.gif





The net worth of U.S. households has fallen by $11 trillion as of the end of Q3 2009, this despite a strong recovery in portfolios due to rising stock prices.

Remember that PCE, comprised of 40% interest and other economic rents on production, improved at a $10.3 trillion annual rate in Dec. 2009? That only slightly offsets a $13 trillion loss in asset values over the same period.

Conclusion

Our earlier report of the death of the FIRE Economy was wildly exaggerated. PCE increased even during The Great Recession because the so-called Services component—that makes up 67% of the measure—grew due to interest and fees on existing debt.

Unemployment remains high and has yet to decline, real personal income is falling, revolving credit continues to contract, the value of assets held by households has been devastated by a $13 trillion loss, and household net worth took a $11 trillion haircut.

More than ten million people lost their jobs and 20,000 retail stores closed. Rail traffic is anemic, and energy demand is falling.

The data we see frequently displayed as evidence of recovery instead reveal an underlying weakness in the structure of the U.S. economy, and both the ineffectiveness and unsustainability of fiscal stimulus and monetary policy, and the fallacious reporting of economic rents as economic output.

As we said in "FIRE Economy Fallout -- Part I: Recession ends, depression begins (http://www.itulip.com/forums/showthread.php?p=112056#post112056)” the fallout from The Great Recession will dog the U.S. economy until the underlying problem is addressed: the dependence of the U.S. economy on private market debt financed economic growth, and on government spending when the private credit markets are unable to meet demand.

The stimulus that has sustained the illusion has not come cheaply.

http://www.itulip.com/images2/netgovsaving1947-2010.gif





These bad facts take us full circle back to our argument that we made for three years before the government executed the re-inflation policies we predicted. Before Q4 2007, in order to grow the economy depended on low interest rates, a weak dollar, government spending, foreign borrowing, and asset price inflation. After the crisis and asset price deflation the economy has come to depend on near zero interest rates, a weak dollar, government spending, foreign borrowing, and asset price maintenance merely to avoid a new crisis.

Special lending programs expand government credit in a vain attempt to keep real estate asset prices from falling even farther than they have since 2006.

New spending programs borrow more at home and abroad to “create jobs,” a dubious proposition based on the misapprehension that increased taxation and borrowing, ultimately from businesses, produces a net long-term gain in total employment.

Economists Stiglitz and Krugman argue that even more spending is needed to get the economy on a self-sustained growth path, while both Democrat and Republican candidates in midterm elections jockey for position on a platform of fiscal restraint.

The argument over bigger or smaller deficits or will not go on forever. Judgment Day approaches, and we believe its arrival may be hastened by recent developments that we cover in Part II.

Everything is up for grabs.

http://www.itulip.com/images2/EconomicFog300.jpgThe Fog of Economic Crisis (http://www.itulip.com/forums/showthread.php?p=146075#post146075) - Part II: Where the hell are we? (http://www.itulip.com/forums/showthread.php?p=146075#post146075)

• First Bounce of the Debt Deflation Bear Market ended
• No more easy shorts
• Waiting for the end of the world

A few weeks ago I’m on the phone waiting my turn to be interviewed as part of an NPR panel discussion. The segment begins with a replay of Vice President Joe Biden bellowing “No more bubbles!” In the same speech he blasts the "cowboys on Wall Street" and blames the nation's financial center for "an economy built on a bubble."

The populist accusations, while roughly conforming to fact, neglect the inconvenient truth that the prior bubble in dot com and telecommunications company stocks, years before the housing bubble, inflated during the Clinton administration.

In any event, the drama is wasted. The Obama administration need not worry about another big bad bubble. We are not going to have one, not for a very long time.

I know, I know. The title of my now two year old Harper's Magazine article was titled "The Next Bubble." But don't forget the conclusion: "Given the current state of our economy, the only thing worse than a new bubble would be its absence."

That was my warning at the time that after the crash yet to come, our bubble-dependent economy sans new bubble will be a poorer place, one of living standards below those to which many had become accustomed, based as they were on borrowing and wealth from rising asset prices. That ended in 2007. more... (http://www.itulip.com/forums/showthread.php?p=146075#post146075)

iTulip Select (http://www.itulip.com/forums/showthread.php?t=1032): The Investment Thesis for the Next Cycle™
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doom&gloom
02-01-10, 03:40 AM
wow, I get first comment?

Great job as usual!

cjppjc
02-01-10, 08:28 AM
Lot's of good information. I enjoyed reading this very much. I wonder if this piece just shows how the cancer is too strong to kill.

we_are_toast
02-01-10, 08:35 AM
Ok, if PCE is rising due to services,


Getting back to the PCE Services mystery, personal consumption expenditure includes not only goods and services as you'd expect but interest and fees on goods and assets that were purchased in the past.

This implies PCE is rising due to interest and fees paid to the fire economy.

But, I'm a bit confused.

http://research.stlouisfed.org/fred2/graph/fredgraph.png?bgcolor=%23B3CDE7&chart_type=line&drp=0&graph_bgcolor=%23FFFFFF&height=378&mode=fred&preserve_ratio=checked&recession_bars=On&txtcolor=%23000000&ts=8&width=630&id=REVOLNS&scale=Left&range=10yrs&cosd=1999-11-30&coed=2009-11-30&line_color=%230000FF&link_values=false&line_style=Solid&mark_type=NONE&mw=4&lw=1&ost=-99999&oet=99999&mma=0&fml=a&transformation=lin&vintage_date=2010-02-01&revision_date=2010-02-01
Total revolving credit has dropped.

http://research.stlouisfed.org/fred2/graph/fredgraph.png?bgcolor=%23B3CDE7&chart_type=line&drp=0&graph_bgcolor=%23FFFFFF&height=378&mode=fred&preserve_ratio=checked&recession_bars=On&txtcolor=%23000000&ts=8&width=630&id=NONREVNS&scale=Left&range=10yrs&cosd=1999-11-30&coed=2009-11-30&line_color=%230000FF&link_values=false&line_style=Solid&mark_type=NONE&mw=4&lw=1&ost=-99999&oet=99999&mma=0&fml=a&transformation=lin&vintage_date=2010-02-01&revision_date=2010-02-01

Total nonrevolving credit has dropped a little.

http://research.stlouisfed.org/fred2/graph/fredgraph.png?bgcolor=%23B3CDE7&chart_type=line&drp=0&graph_bgcolor=%23FFFFFF&height=378&mode=fred&preserve_ratio=checked&recession_bars=On&txtcolor=%23000000&ts=8&width=630&id=TOTALNS&scale=Left&range=10yrs&cosd=1999-11-30&coed=2009-11-30&line_color=%230000FF&link_values=false&line_style=Solid&mark_type=NONE&mw=4&lw=1&ost=-99999&oet=99999&mma=0&fml=a&transformation=lin&vintage_date=2010-02-01&revision_date=2010-02-01

Total outstanding consumer credit continues to drop.

If the rise in PCE is to be explained by increasing interest and fees to the FIRE economy, how can this be when consumer credit has dropped and seems to continue to drop? It would seem to require a huge increase in interest or fees on existing loans.

The only thing I can think of is ARMS are beginning to reset, but even this doesn't seem to be large enough to make up the gap.

we_are_toast
02-01-10, 09:03 AM
Excellent piece, one of the best.

Exposing PCE is a very nice piece of economic investigative journalism. That's the good news. The bad news is it was one of the indicators iTulip recommended to watch. We are running out of reliable measuring sticks to use to measure what's happening in the economy.

I sure don't like the term "Great Recession". This still feels like we are in the beginning of a long process that is going to get much worse and will only make us wish for the recessions of the past.

slippery
02-01-10, 09:37 AM
Great analysis of PCE components. Thanks.

porter
02-01-10, 09:43 AM
So does this mean the FIRE economy is here to stay?

oddlots
02-01-10, 09:50 AM
Outstanding. This is the kind of analysis that got me hooked here years back.

There's a ton of analysis that looks at arguments from a kind of a priori stance. Most of the arguments that tend to get me exercised fall into this category: ideological musings. (I would argue they have their place, and also that I don't know what that place is.)

There's a ton of analysis that looks at economic data but never get much below the surface. Much of the guff in the MSM falls into this category (what will the U3 numbers be, the revisions, etc.... blah, blah blah.)

Pulling apart the PCE figures is a brilliant idea and a demonstration of the maturity and depth of thinking that underpins the itulip project. Ditto the look at energy usage and rail traffic as a proxy for overall, "real" activity.

Thanks. Very helpful antidote to my own self-distracting political obsessions and the vacuous chatter of cheerleaders.

You'll make an adult of me yet.

jk
02-01-10, 11:01 AM
real insight, thank you, but unfortunately a depressing one: the only thing that continues to grow is the fire sector. the parasite/cancer lives on, while its host continues to weaken.

c1ue
02-01-10, 11:48 AM
real insight, thank you, but unfortunately a depressing one: the only thing that continues to grow is the fire sector. the parasite/cancer lives on, while its host continues to weaken.

http://www.itulip.com/forums/showpost.php?p=119180&postcount=10

Remember this post? And what Dr. Michael Hudson said?

jpatter666
02-01-10, 11:51 AM
Remember this post? And what Dr. Michael Hudson said? (http://0)

Hey c1ue, link doesn't seem to work?

Quincy K
02-01-10, 12:01 PM
What confuses me is that Non-durable Goods has fully recovered. Not even the greatest Bear can deny this as being significantly positive. If the economy were truly sick then this number should correlate with the continued 20 percent decline of Durable Goods.

Also, the components of Services does not seem to have changed and have always included "economic rent." Not discounting the government spending and stimulus(some have made a case that this has had a 50 percent effect on recent GDP numbers), I don't see a collapsing economy here.

WDCRob
02-01-10, 12:15 PM
Very focused and understandable - one of the tightest pieces you guys have produced IMO. Thank you.

c1ue
02-01-10, 12:37 PM
What confuses me is that Non-durable Goods has fully recovered. Not even the greatest Bear can deny this as being significantly positive. If the economy were truly sick then this number should correlate with the continued 20 percent decline of Durable Goods.

Also, the components of Services does not seem to have changed and have always included "economic rent." Not discounting the government spending and stimulus(some have made a case that this has had a 50 percent effect on recent GDP numbers), I don't see a collapsing economy here.

The point of the post to my understanding is that the Durable/Non-durable goods numbers no longer cover just the purchase of the goods themselves, but also covers the interest and other FIRE costs associated with the purchase of said goods. This would likely, for example, cover ongoing credit card balances associated with goods purchases.

A prime example of how this might work would be the auto loan: so long as the loan is outstanding, the 'purchase' is generating interest income (i.e. consumption). But in reality no actual economic activity going forward is being generated outside of perhaps a loan servicer. In fact economic activity will fall as the loan comes due and the underlying principal, the car, is 'unexpectedly' discovered to be worth far less than the outstanding loan amount.

Thus it is entirely possible that the amount of purchases have fallen, but the overall spending has recovered as banks, credit cards, etc reap higher fees, interest income, and penalties. These - rather than being a separate category - are lumped in with the physical/service goods.

Seems nice but the real economy cannot survive via higher FIRE bloodsucking, nor will jobs be created/sustained.

Mega
02-01-10, 12:45 PM
He always stops writing just as it starts to get inter..
Mike

jk
02-01-10, 12:46 PM
What confuses me is that Non-durable Goods has fully recovered. Not even the greatest Bear can deny this as being significantly positive. If the economy were truly sick then this number should correlate with the continued 20 percent decline of Durable Goods.

Also, the components of Services does not seem to have changed and have always included "economic rent." Not discounting the government spending and stimulus(some have made a case that this has had a 50 percent effect on recent GDP numbers), I don't see a collapsing economy here.
i wonder how much of non-durable goods is energy consumption? e.g. the price of gasoline is up substantially compared to a year ago.
http://charts3.barchart.com/chart.asp?vol=Y&jav=adv&grid=Y&divd=Y&org=stk&sym=RBG0&data=E&code=BSTK&evnt=adv
paying more for gas and oil isn't what i'd call recovery, but has to show up in the consumption numbers as "growth."

Chris Coles
02-01-10, 12:53 PM
The analysis of the PCE Goods versus Retail Sales graph is a Masterstroke. Pure Genius.

jk
02-01-10, 12:57 PM
http://www.itulip.com/forums/showpost.php?p=119180&postcount=10

Remember this post? And what Dr. Michael Hudson said?
i remember that nightmarish post quite well. i wasn't consciously referring to it, but obviously the image of the parasite and host was out there before i used it.

newnewthing
02-01-10, 01:47 PM
Just an awesome piece. This provides detail that explains a lot I've noticed but hadn't quantified. This is the sort of thing one hopes to see discussed in the broader body politic but that may be asking too much. Way too much. Once can only hope some influential folk are paying attention.

metalman
02-01-10, 01:54 PM
Just an awesome piece. This provides detail that explains a lot I've noticed but hadn't quantified. This is the sort of thing one hopes to see discussed in the broader body politic but that may be asking too much. Way too much. Once can only hope some influential folk are paying attention.

http://www.lookingglassreview.com/assets/images/H_is_for_home_run.jpg

thanks for this one... well done.

jneal3
02-01-10, 01:55 PM
Just to clarify, retail sales data does not include imputed interest from purchases made by credit, correct? It seems to me then that retails sales showing a 'sharp recovery' wouldn't fit well with the thesis that there really isn't a recovery going on and that any good news is just FIRE-related, no? Granted that the rail traffic and energy production/consumption numbers are consistent with sluggishness, to me the retail sales chart looks simply like a phase-lagged version of the PCE (total dollars) chart. What am I missing?

pianodoctor
02-01-10, 03:38 PM
EJ, Fred, or Others: I am a bit thick regarding economics. Can someone explain that when we are reading about this sharp upturn in "imputed interest" (Interest and fees paid to credit card accounts), is it to be understood that the increase is solely tied to such imputed interest paid on new purchases (as registered at the appropriate point on the timeline axis of the chart), or is it the total amount of interest and fees the companies are receiving including consumers paying off old debt?

IOW, it seems there is a current trend to pay off old debt and become more frugal. (See TV shows like Dave Ramsey, Suze Orman, Till Debt Do Us Part, etc) Is the upturn in the interest & fees component of the PCE reflective of consumers paying down their credit accounts- or is it only computed as it relates to more recent purchases?

cindykimlisa
02-01-10, 03:41 PM
This is a fine piece of analysis.

However it serves to point out what many know about government numbers; Sometimes pieces and parts get left out of the analysis and other dashes of salt and pepper get put in just to make the product look better.

This has been going on with the CPI for years - all doctored up.

Cindy

metalman
02-01-10, 04:04 PM
EJ, Fred, or Others: I am a bit thick regarding economics. Can someone explain that when we are reading about this sharp upturn in "imputed interest" (Interest and fees paid to credit card accounts), is it to be understood that the increase is solely tied to such imputed interest paid on new purchases (as registered at the appropriate point on the timeline axis of the chart), or is it the total amount of interest and fees the companies are receiving including consumers paying off old debt?

IOW, it seems there is a current trend to pay off old debt and become more frugal. (See TV shows like Dave Ramsey, Suze Orman, Till Debt Do Us Part, etc) Is the upturn in the interest & fees component of the PCE reflective of consumers paying down their credit accounts- or is it only computed as it relates to more recent purchases?

bottom line... economy crashes & services pce never falls? wtf?

answer... gov't money mainlined into the veins of the fire econ.

don
02-01-10, 05:03 PM
In the aftermath of Easy Bubble Making the death of FIRE was predicted. Turns out it's beaten and battered Production's final daze....:eek:

pianodoctor
02-01-10, 08:04 PM
bottom line... economy crashes & services pce never falls? wtf?

answer... gov't money mainlined into the veins of the fire econ.

Either I'm not grasping you or my question is so badly worded that you are not grasping me. I'm talking about the Imputed Interest component of the Goods PCE. EJ states: "Goods PCE measures the purchase of goods by consumers, plus the imputed interest payments on the debt taken on by consumers when they use credit to purchase these goods."

I'm trying trying to understand if this component of the PCE statistic which supposedly accounts for most of the recent rise in PCE can be a result of consumers knuckling down to pay down consumer debt, or if it rises only as it applies to new purchases- which might imply that people are using credit cards more now for basics like groceries. Which is to say they aren't buying more stuff, but they are putting a lot more of what they must buy on credit.

Or can it be, as you say, that somehow the bailout/stimulus money is directly responsible for the rise in this component of PCE? But if so, how? (based on EJ's definition as given above)?

Glenn Black
02-01-10, 09:47 PM
If I understand this correctly, Joe Consumer uses his credit card as an convenience, one card does it all. He pays off his credit card every month in full, and therefore gets free line of credit from the banks.

Then, all of a sudden, the economy takes a shit. Joe cuts back some on his purchases, but still needs gasoline, food, car payments, etc. His overtime disappears, then he is on a short work week, then laid off. Bank balance tanks, so even more is purchased on credit card. Thank God he had received all those credit cards with $10k credit limits, and the banks $250k line of credit that pretends to be a mortgage. Just write the cheque says the bank, and we'll add it to the principal on your mortgage. If times get better, then Joe has nothing to worry about. If things don't get better soon, again, Joe can't do much else about it, so why worry about it; it's only money, and a guy has to eat.

All of this will show as a dramatic rise in sales & income to the banks and the credit card companies.

So, let's take a vote. Does this scenario explain the above graphs adequately?

Question: Eric, can we back out these imputed interest charges from the Gross Expenditures to see what the true retail sales are without the interest surcharges? That should indicate just how lively the consumers truly are.

flintlock
02-02-10, 12:01 AM
i wonder how much of non-durable goods is energy consumption? e.g. the price of gasoline is up substantially compared to a year ago.
http://charts3.barchart.com/chart.asp?vol=Y&jav=adv&grid=Y&divd=Y&org=stk&sym=RBG0&data=E&code=BSTK&evnt=adv
paying more for gas and oil isn't what i'd call recovery, but has to show up in the consumption numbers as "growth."

I think that is probably a big part of it.

Statistics can be so misleading. :(

Chris Coles
02-02-10, 06:38 AM
By pure chance, yesterday, as I waited in line at a bank branch here in the UK I chanced to overhear an agitated customer, (standing right in front of me), asking why his account was suddenly £450 overdrawn when he thought he had covered the last balance only to be told, (we could all hear this), that the last payment came in after the bank had computed an additional £5 per day on overdraft charges, which left the overdraft in place and adding daily. The customer was clearly disabled and totally confused by the actions the bank had taken against him.

Banks make a fortune from their most vulnerable clients.

thriftyandboringinohio
02-02-10, 09:33 AM
A prime example of how this might work would be the auto loan: so long as the loan is outstanding, the 'purchase' is generating interest income (i.e. consumption). But in reality no actual economic activity going forward is being generated outside of perhaps a loan servicer. In fact economic activity will fall as the loan comes due and the underlying principal, the car, is 'unexpectedly' discovered to be worth far less than the outstanding loan amount.




There may be a counter argument for this. My car takes me back and forth to work every day. My little one-man business has one customer and the business generates revenue reported on a W-2. My auto is a vital piece of capital equipment taking me to the work site every day. That's economic activity. Of course mine is old and long paid off (thrifty and boring), but if it had a loan I would consider the interest a fair cost for a contributing asset.

Surely some portion of our national interest payments has utility in this way.

jneal3
02-02-10, 10:14 AM
Surely some portion of our national interest payments has utility in this way.

I would think that if it were a significant portion, it would have stayed relatively constant over time, instead of having increased exponentially.

btw if thrifty is boring, I think we're finding out as a nation that we and our children/grandchildren can't afford 'excitement' :rolleyes:

thriftyandboringinohio
02-02-10, 11:14 AM
If I understand this correctly, Joe Consumer uses his credit card as an convenience, one card does it all. He pays off his credit card every month in full, and therefore gets free line of credit from the banks.

Then, all of a sudden, the economy takes a shit. Joe cuts back some on his purchases, but still needs gasoline, food, car payments, etc. His overtime disappears, then he is on a short work week, then laid off. Bank balance tanks, so even more is purchased on credit card. Thank God he had received all those credit cards with $10k credit limits, and the banks $250k line of credit that pretends to be a mortgage. Just write the cheque says the bank, and we'll add it to the principal on your mortgage. If times get better, then Joe has nothing to worry about. If things don't get better soon, again, Joe can't do much else about it, so why worry about it; it's only money, and a guy has to eat.

All of this will show as a dramatic rise in sales & income to the banks and the credit card companies.

So, let's take a vote. Does this scenario explain the above graphs adequately?

Question: Eric, can we back out these imputed interest charges from the Gross Expenditures to see what the true retail sales are without the interest surcharges? That should indicate just how lively the consumers truly are.

It's a great scenario, but doesn't seem right. The lower 90th percentile of people have been famously over-leveraged and underemployed for quite a while. I wouldn't think there would be enough credit left available to that cohort to pay the interest streams shown; not that much money for that long a time, and increasing sharply. Joe consumer entered this mess with his credit card, auto and home equity lines maxxed out and now he's out of work.

Could it all be coming from the upper income folks, the top 10 percentile, paying down debt?

I don't question the data but remain confused about who could be paying all this interest, more all the time.

jneal3
02-02-10, 11:27 AM
Question: Eric, can we back out these imputed interest charges from the Gross Expenditures to see what the true retail sales are without the interest surcharges? That should indicate just how lively the consumers truly are.

Isn't that chart already shown in EJ's piece as:







The year over year data that compare Dec. 2009 to Dec. 2008 shows a sharp recovery.

http://www.itulip.com/images2/GreatRecessionFalloutRetailSales1992-2010.gif




You may wonder how a 5.3% monthly decline in Retail Sales, from $376 billion in Jun. 2008 to $356 billion in Dec. 2008, translated into 20,000 store closings.


This is why I asked a question above (post #21) - to me, this chart shows that the consumer is getting 'lively', independent of the thesis that it's all FIRE-driven. It looks like the PCE chart EJ showed, a small dip then recovery, and at a slight phase lag. If it follows the PCE chart, we would see a full recovery to pre-crash levels sometime fairly soon. Unless of course I'm just being thick.

c1ue
02-02-10, 02:36 PM
There may be a counter argument for this. My car takes me back and forth to work every day. My little one-man business has one customer and the business generates revenue reported on a W-2. My auto is a vital piece of capital equipment taking me to the work site every day. That's economic activity. Of course mine is old and long paid off (thrifty and boring), but if it had a loan I would consider the interest a fair cost for a contributing asset.

Surely some portion of our national interest payments has utility in this way.

Certainly correct, but I'd note that there is a difference between capital cost and interest cost.

In your own personal example, you have paid off your car. There is no interest expense, but there is still capital expense (depreciation).

The business would generate revenue regardless of the existence of the interest expense; it might be worthwhile nonetheless but it should not be a requirement.

The vast majority of auto loans, however, are effectively leases.

Many, if not most, people do not keep their cars for the full 5 or 7 year loan terms; as they sell or trade-in the old car and buy a new one every 2 or 3 years - the difference between a loan an a depreciating asset becomes apparent to the tune of several thousand dollars.

In this case, the economic value generated by having the loan is net negative - especially so if compared to an outright lease.

Me
02-03-10, 02:19 AM
So does this mean the FIRE economy is here to stay?

From what I can figure out the answer is yes. My question is rather. Does this put us in a deflationary outcome?

thriftyandboringinohio
02-03-10, 09:07 AM
bottom line... economy crashes & services pce never falls? wtf?

answer... gov't money mainlined into the veins of the fire econ.

<O:p</O:p
I’m not doubting your conclusion MM, I'm just genuinely thick sometimes. By what mechanism(s) did the Fed/treasury mainline all this interest into PCE?<O:p</O:p

porter
02-06-10, 10:49 AM
Our earlier report of the death of the FIRE Economy was wildly exaggerated. PCE increased even during The Great Recession because the so-called Services component—that makes up 67% of the measure—grew due to interest and fees on existing debt.How does this jive with the massive decline in revolving credit? How can you justify this conclusion without comparing the magnitude of the increase in fees and interest versus the decline in revolving credit? Where would we even get this data?

As someone who works at a commercial bank I can speak to what we are seeing. We don't do any consumer loans (no autos, credit cards, etc.), but only business lines of credit, equipment loans, construction loans, mini-perms, acquisition & development, etc. So, this may be different that what consumers are experiencing. However, we are generally freezing lines of credit for Borrowers who don't have sufficient cash flow or collateral value. Additionally we have implemented rate floors on virtually everything at 6%, with the exception of problem loans (in which case we actually are lowering rates to help with debt service). Even with these rate floors, we are pretty much holding steady on rates (no dramatic change over the past few years), but we are reducing our commitments and doing very few new loans. Given this experience, it doesn't seem to jive with the above analysis.

But, like I said, we don't really do consumer loans, so I realize this might be a different experience. However, from personal experience my credit card rates are still low and I haven't been charged any new fees. Also, residential mortgages still have very low rates and most folks I talk to are actually negotiating lower rates on their home loans (some have even told me they are short-selling their homes to their wives and locking in lower rates at the same time). In general people are spending less, borrowing less, paying off existing debt and negotiating better rates/deals on existing loans.

Again, I realize this is anectodal, so I will restate my questions above: How does this jive with the massive decline in revolving credit? How can you justify this conclusion without comparing the magnitude of the increase in fees and interest versus the decline in revolving credit? Where would we even get this data?

bart
02-06-10, 11:24 AM
This is why I asked a question above (post #21) - to me, this chart shows that the consumer is getting 'lively', independent of the thesis that it's all FIRE-driven. It looks like the PCE chart EJ showed, a small dip then recovery, and at a slight phase lag. If it follows the PCE chart, we would see a full recovery to pre-crash levels sometime fairly soon. Unless of course I'm just being thick.

Keep in mind that the retail sales stats aren't inflation adjusted. Here's a chart with both CPI and CPI w/o lies adjustments.

http://www.nowandfutures.com/images/retail_sales_cpi_lies1992on.png



And the same chart, except log based.

http://www.nowandfutures.com/images/retail_sales_cpi_lies1992-current_log.png

c1ue
02-06-10, 01:59 PM
How does this jive with the massive decline in revolving credit? How can you justify this conclusion without comparing the magnitude of the increase in fees and interest versus the decline in revolving credit? Where would we even get this data?

Can't provide you with proof, but I can provide a possibly illuminating anecdote:

Last year I interviewed a lady as a caregiver - very nice person. What was interesting was that I was interviewing her for a $10/hour job, but in the interview process somehow her credit cards came up.

Turns out she was really desperate for work because her $25000 credit line was recently cut. She's been a professional caregiver for at least 5 years, so her income clearly did not match her credit limit. But it turns out the credit line originally arose because she did a stint for a while (15 years ago) as a purchaser for a small company.

I think what is happening is that the banks are cutting down on all the unwarranted credit lines to those borrowers which previously the bank hadn't cared about because before the economy was growing, other credit card companies would dangle refi deals, or whatever.

Those with good incomes won't see any effect, but almost by definition the majority of people don't have good incomes - at least commensurate with the amount of credit available.

Or in other words, the FIRE parasites are now performing triage on potential hosts.

we_are_toast
02-08-10, 09:52 AM
Again, I realize this is anectodal, so I will restate my questions above: How does this jive with the massive decline in revolving credit? How can you justify this conclusion without comparing the magnitude of the increase in fees and interest versus the decline in revolving credit? Where would we even get this data?


Consumer credit falls in November for record 11th month, as Americans pay down credit cards

...By contrast, November's revised $21.8 billion drop in total credit was the biggest amount in dollars terms since records began in 1943.

The Fed's credit report excludes home loans and home equity mortgages, only covering borrowing that is not secured by real estate.

The drop in overall credit for 11 straight months was a record in terms of consecutive declines, surpassing the old mark of seven straight declines set in 1943 and again in 1991.

Borrowing in the category that includes credit cards has fallen for 15 straight months, also a record.

With the string of declines, overall consumer borrowing by the Fed measure has fallen to $2.46 trillion.

With all the defaults on Mortgages, the total interest and fees on mortgages has to have fallen greatly.

Something is not adding up with attributing the increase in PCE to interest and fees from the FIRE economy.:confused:

http://research.stlouisfed.org/fred2/graph/fredgraph.png?bgcolor=%23B3CDE7&chart_type=line&drp=0&graph_bgcolor=%23FFFFFF&height=378&mode=fred&preserve_ratio=checked&recession_bars=On&txtcolor=%23000000&ts=8&width=630&id=REVOLNS&scale=Left&range=10yrs&cosd=1999-11-30&coed=2009-11-30&line_color=%230000FF&link_values=false&line_style=Solid&mark_type=NONE&mw=4&lw=1&ost=-99999&oet=99999&mma=0&fml=a&transformation=lin&vintage_date=2010-02-01&revision_date=2010-02-01

c1ue
02-08-10, 11:22 AM
With all the defaults on Mortgages, the total interest and fees on mortgages has to have fallen greatly.

Something is not adding up with attributing the increase in PCE to interest and fees from the FIRE economy.:confused:

Not necessarily.

With Mark to Fantasy, all of the defaults can still be officially earning income for the banks - mortgage, credit card, or otherwise.

Perhaps being accelerated by the addition of late fees and penalties.

jackboogie
02-08-10, 09:22 PM
By pure chance, yesterday, as I waited in line at a bank branch here in the UK I chanced to overhear an agitated customer, (standing right in front of me), asking why his account was suddenly £450 overdrawn when he thought he had covered the last balance only to be told, (we could all hear this), that the last payment came in after the bank had computed an additional £5 per day on overdraft charges, which left the overdraft in place and adding daily. The customer was clearly disabled and totally confused by the actions the bank had taken against him.

Banks make a fortune from their most vulnerable clients.

Frontline just had a documentary that centered on this very theme. There is no money to be made from the financially prudent when it comes to credit cards. There is a nice little piece in there on the techniques that are used to increase the likelihood of overdrafts.

http://www.pbs.org/wgbh/pages/frontline/creditcards/view/?utm_campaign=homepage&utm_medium=proglist&utm_source=proglist

flintlock
02-09-10, 08:42 PM
Not necessarily.

With Mark to Fantasy, all of the defaults can still be officially earning income for the banks - mortgage, credit card, or otherwise.

Perhaps being accelerated by the addition of late fees and penalties.

You beat me to it. I was going to say, its not on a cash basis that they count it.

Bruno T
02-10-10, 12:24 PM
If I'm not mistaken that PCE number includes loan PAYMENTS, so maybe it's a function of people stopping borrowing and paying down debt. Basically, even if you can't keep spending with your credit card, you still have to make the payments on it. Also, many have raised their rates dramatically, so even minium payment folks would be paying more.


Ok, if PCE is rising due to services,



This implies PCE is rising due to interest and fees paid to the fire economy.

But, I'm a bit confused.

http://research.stlouisfed.org/fred2/graph/fredgraph.png?bgcolor=%23B3CDE7&chart_type=line&drp=0&graph_bgcolor=%23FFFFFF&height=378&mode=fred&preserve_ratio=checked&recession_bars=On&txtcolor=%23000000&ts=8&width=630&id=REVOLNS&scale=Left&range=10yrs&cosd=1999-11-30&coed=2009-11-30&line_color=%230000FF&link_values=false&line_style=Solid&mark_type=NONE&mw=4&lw=1&ost=-99999&oet=99999&mma=0&fml=a&transformation=lin&vintage_date=2010-02-01&revision_date=2010-02-01
Total revolving credit has dropped.

http://research.stlouisfed.org/fred2/graph/fredgraph.png?bgcolor=%23B3CDE7&chart_type=line&drp=0&graph_bgcolor=%23FFFFFF&height=378&mode=fred&preserve_ratio=checked&recession_bars=On&txtcolor=%23000000&ts=8&width=630&id=NONREVNS&scale=Left&range=10yrs&cosd=1999-11-30&coed=2009-11-30&line_color=%230000FF&link_values=false&line_style=Solid&mark_type=NONE&mw=4&lw=1&ost=-99999&oet=99999&mma=0&fml=a&transformation=lin&vintage_date=2010-02-01&revision_date=2010-02-01

Total nonrevolving credit has dropped a little.

http://research.stlouisfed.org/fred2/graph/fredgraph.png?bgcolor=%23B3CDE7&chart_type=line&drp=0&graph_bgcolor=%23FFFFFF&height=378&mode=fred&preserve_ratio=checked&recession_bars=On&txtcolor=%23000000&ts=8&width=630&id=TOTALNS&scale=Left&range=10yrs&cosd=1999-11-30&coed=2009-11-30&line_color=%230000FF&link_values=false&line_style=Solid&mark_type=NONE&mw=4&lw=1&ost=-99999&oet=99999&mma=0&fml=a&transformation=lin&vintage_date=2010-02-01&revision_date=2010-02-01

Total outstanding consumer credit continues to drop.

If the rise in PCE is to be explained by increasing interest and fees to the FIRE economy, how can this be when consumer credit has dropped and seems to continue to drop? It would seem to require a huge increase in interest or fees on existing loans.

The only thing I can think of is ARMS are beginning to reset, but even this doesn't seem to be large enough to make up the gap.

tsetsefly
02-25-10, 07:26 PM
anyone have a link of the NPR interview he was talking about?

bill
02-25-10, 07:50 PM
Brown confronts Ben about FIRE and how it has dominated our economy leaving a broken manufacturing sector. Bens answer “financial regulation needed”.
Start 1:06:45

http://www.c-span.org/Watch/Media/2010/02/25/HP/R/30001/Congressional+Hearings+On+Capitol+Hill.aspx

cobben
03-01-10, 02:06 PM
Bart,

I linked to this thread in a GDP discussion on the Safehaven longwaves group, and Bud Conrad (economist with Casey) noted:

" I researched and found the data.
I said:
"His Retail sales is presented as a Real (inflation adjusted) time series and the PCE Goods is not."

When you compare inflation adjusted data to non inflation adjusted data you have garbage.


Bud"

He does have a point if this is true, now I can't see whether the PCE is adjusted in some way or not, Eric doesn't seem to mention that detail.

FRED
03-01-10, 04:08 PM
Bart,

I linked to this thread in a GDP discussion on the Safehaven longwaves group, and Bud Conrad (economist with Casey) noted:

" I researched and found the data.
I said:
"His Retail sales is presented as a Real (inflation adjusted) time series and the PCE Goods is not."

When you compare inflation adjusted data to non inflation adjusted data you have garbage.


Bud"

He does have a point if this is true, now I can't see whether the PCE is adjusted in some way or not, Eric doesn't seem to mention that detail.

Bud's criticism of our graph is valid. The difficulty is that there are no independent Goods PCE and Retail data. The BLS told us they use the Census Bureau data, that is, the Retail Sales and nominal Durable + Non-Durable PCE data look the same because they are the same.


http://www.itulip.com/images2/nominalretailVSgoodsPCE1959-201


The data we want that show the monthly growth of debt service as a portion of PCE does not exist. We did pull together an annual comparison of nominal mortgage interest as a percent of nominal goods and services PCE and got this:


http://www.itulip.com/images2/mortggevsPCEannual1980-2009.gif


This leaves out revolvoing credit, student loans, and so on. Eventually we'll collect all of the data to build a picture that we have high confidence in.

bart
03-24-10, 05:01 PM
Bart,

I linked to this thread in a GDP discussion on the Safehaven longwaves group, and Bud Conrad (economist with Casey) noted:

" I researched and found the data.
I said:
"His Retail sales is presented as a Real (inflation adjusted) time series and the PCE Goods is not."

When you compare inflation adjusted data to non inflation adjusted data you have garbage.


Bud"

He does have a point if this is true, now I can't see whether the PCE is adjusted in some way or not, Eric doesn't seem to mention that detail.



Yep... as Fred notes, it's a b*tch to accurately track a number of the critical stats.

My best "solution" so far is just to take the non inflation adjusted stats as possible and adjust them with CPI and my own corrected (based on shadowstats work) CPI data... and punt from there. Considering all the uncertainties in data collection and accuracy, even before any manipulation, it seem workable from here.

I've never invested the quantity of time and effort required to get a "correct" PCE.