I love graphs, charts and PowerPoint slides. They are the most effective way to convey complicated data and numbers. A picture is really worth 10,000 words. Or rows of numbers or columns of statistics.
Here are five I came across this week that are a little sobering. Compliments to the team at JP Morgan Asset Management's Outlook 2012 Report for getting me started on some of these charts.
The first is a chart which shows the percent of federal revenue that is available after taken account of all mandatory spending (Social Security, Medicare, Welfare, Federal Government pensions etc). In the mid-1960's, almost 2/3 of federal revenues was available after paying for mandatory programs. The last few years mandatory programs have absorbed almost all ( and sometimes more than all) of available federal revenues. That means all of the money being spent on everything else has to be borrowed. It doesn't look any better going forward either. Something has to give, and it will eventually.
The second chart shows gross US federal debt as a percent of GDP. US debt is now over 100% of GDP although the chart below just shows data through 3Q, 2011. Four years ago it was barely over 60% of GDP. The level of debt we have taken on is both stunning and sobering. Of course, this is Bush's fault if you listen to Democrats.
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| US Debt as a % of GDP FRED database-Federal Reserve Bank of St. Louis Oregon Office of Economic Analysis |
This connection was broken in the Fall of 2008 when the Federal Reserve started intervening. At that time the Federal Reserve started paying banks interest on reserve balances for the first time. That rate is currently .25%, which is higher than 3-month Treasury bills. They also increased the money supply substantially. This is a chart of the excess reserves at banks produced by Donald Coffin, an Economics professor at Indiana University Northwest. It shows that the amount of excess reserves pretty closely matches the disconnect between deposits and loans
Where did the deposits come from? Most of that money is a result of increases in the monetary base that came from the Federal Reserve's quantitative easing program. More simply put, the money printing the Fed has done the last few years. You can see from the chart below from Monetary Choice that the base of money has increased by about $1.8 trillion in the last 3 years. This also is about the same amount of the the increase in deposits and the amount of the excess reserves.
I don't know where it all ends but these charts are not pretty. They are scary in addition to sobering.
There is a lot of well-founded concern about Iran getting a nuclear weapon. However, when you look at these charts you have to wonder what type of ticking debt bomb we are sitting on right here in what used to be the good old United States of America. I hope someone knows what they are doing. Looking at the evidence, I have serious doubts.
I tend to take the point of David Rosenberg and Richard Koo and Cullen Roche. That is, we are in a "balance sheet recession". It does not matter how much base money is provided. If banks simply keep it at the FED, it does not enter the real economy at all. In a balance sheet recession, both firms and individuals are interested in deleveraging and bringing their debt ratios down, not in taking on more debt.
ReplyDeleteYou are absolutely correct right now. We simply have no money velocity currently which is a big reason we are where we are.
ReplyDeleteHowever, there is $1.6 trillion of money sitting in excess reserves that will be unleashed into the world at some point. What happens when that occurs is the big question. It is difficult to see how that genie gets back into the bottle.
That may turn out to be good news for farmland investment but it is unlikely to be good news for many others. If you are retired and expect to live off your safe bond portfolio it will be a lot more challenging than it already is.
I know this. Given a choice between inflation and deflation, government and the Federal Reserve are going to choose inflation. They are really trying. They will succeed at some point. It is their only way out from under the debt bomb that has been created.