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

[c1ue]

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

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.

[jneal3]

Re: One Explanation for Eric's Graphs

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.

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.

[thriftyandboringinohio]

Re: One Explanation for Eric's Graphs

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]

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

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]

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

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.

[Chris Coles]

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

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.

[flintlock]

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

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.as...=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.

[Glenn Black]

One Explanation for Eric's Graphs

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.

[pianodoctor]

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

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)?

[don]

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

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:

[metalman]

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

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.

[cindykimlisa]

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

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

[pianodoctor]

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

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?

[jneal3]

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

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?

[metalman]

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

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.

thanks for this one... well done.