Irving Fisher
"Stock prices have reached what looks like a permanently high plateau." 1929

1932 Booms and Depressions
1933 "The debt-deflation theory of great depressions"

Debt Deflation Theory of Depressions
Debt liquidation and distress selling.
Contraction of the money supply as bank loans are paid off. (unless outside forces at work)
A fall in the level of asset prices.
A still greater fall in the net worth of businesses, precipitating bankruptcies.
A fall in profits.
A reduction in output, in trade and in employment.
Pessimism and loss of confidence.
Hoarding of money.
A fall in nominal interest rates and a rise in deflation adjusted interest rates.

Government
$19.4Trn
Financial
$13.8Trn
Corporate
$12.7Trn
Consumer
$12.2Trn
Total:
$60.4 Trn
Data Source: Federal Reserve Flow of Funds Report, Treasury Direct, 2013
Total U.S. Debt Outstanding
1977-2012
Foreign
$2.3Trn

Household Debt as % of Disposable Income, 1952-2012
Data Source: Federal Reserve Z1 Report; Bureau of Economic Analysis, 2013

Consumer Credit
1980-2013
Data Source: Federal Reserve, G.19, 2012

Real Retail Spending
1992-2013
Data Source: St. Louis Federal Reserve, 2013

Data Source: Federal Reserve, 2013
% of Capacity
Capacity Utilization
1967 – 2013

Unemployment Rate
1948 – 2013
Data Source: US Census Bureau, 2013

Percent Job Losses in Post- WWII Recessions
Source: Calculated Risk Blog, 2013

U.S. Employment, Part-Time for Economic Reasons, 1960-2012
Source: Calculated Risk Blog, 2013

Unemployment Rate, 2000-2013
U3 and U6
Data Source: Bureau of Labor Statistics, 2013
Seasonally Adj. % Unemployment by Month

Data Source: US Census Bureau, 2013
Median Household Income
1975 – 2012

Real Median Household Income, Annual Change, 2000-2012
Inflation Adjusted YoY Percent Change
Data Source: U.S. Census Bureau, 2013 2012 Data estimated

Tough Road Ahead
for Jobs

Drop in Pay for Re-Employed
% of Re-Employed That Lost Pay
Amount of Pay Reduction
Data Source: “Out of Work and Losing Hope: The Misery and Bleak Expectations of American Workers,” Cliff Zukin, Carl Van Horn, Charley Stone. 9/2011

Drop in Pay for Re-Employed by Age
% of Re-Employed
Amount of Pay Reduction
Data Source: “Out of Work and Losing Hope: The Misery and Bleak Expectations of American Workers,” Cliff Zukin, Carl Van Horn, Charley Stone. 9/2011

Comparing Jobs Lost
to Jobs Gained
Use a matrix of three levels of pay to compare jobs lost to those gained (each a third of 2008 employment) -

Lower wage - $7.69/hr. to $13.83/hr
($16,049 to $28,863)

Median wage - $13.84/hr to $21.13/hr
($28,884 to $44,098)

Upper wage - $21.14/hr to $54.55/hr
($44,119 to $113,845)

Comparing Jobs Lost
to Jobs Gained
Lower-wage occupations were 21 percent of recession losses, but 58 percent of recovery growth.

Mid-wage occupations were 60 percent of recession losses, but only 22 percent of recovery growth.

Higher-wage occupations were 19 percent of recession job losses, and 20 percent of recovery growth.

Comparing Jobs Lost
to Jobs Gained

Comparing Jobs Lost
to Jobs Gained

Comparing Jobs Lost
to Jobs Gained

Comparing Jobs Lost
to Jobs Gained

Comparing Jobs Lost
to Jobs Gained
`
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The Face of the Recovery

Job Additions by Age
Change Since June 2009
In Thousands
Data Source: Bureau of Labor Statistics, 2013

Share of Job Gains and Losses Since June 2009
Data Source: Bureau of Labor Statistics, 2013
+3.4 Million
+768 Thousand
-566 Thousand
-890 Thousand

Percent of Part Time Workers
1968-2013
Data Source: Bureau of Labor Statistics, 2013

Percent of Part Time Workers
1968-2013
Data Source: Bureau of Labor Statistics, 2013

The Blunt Instruments of Government
US Government
deficit spending, targeted stimulus

Federal Reserve
interest rates, bond purchases, printing dollars

The Fed Is Here to Help!

Actions of the Fed
Fall 2008 – Qualitative Easing
March 2009 – Quantitative Easing (QE1)
August 2010 – Announced QE2
Summer 2011 – Announced Operation Twist
Repeated pledge to keep balance sheet level
Repeated pledge to watch for signs of stress in economy
Gave series of lectures extolling successes of the Fed’s actions over the last 3 years

Actions of the Fed
September 2012 – QE3 Announced
Fed will purchase $40 Billion of Mortgage-Backed Securities per month, indefinitely
Bernanke claims this action will boost employment as well as help reduce the Federal deficit

Outcomes – Desired vs.. Actual
Wanted –
inflation expectations, increased borrowing and spending, falling unemployment, higher wages, asset inflation (re-inflation)

Got –
split prices – deflation in services and real estate, inflation in commodities – local vs.. global

Who Gets Helped, Who Gets Hurt?
QE favors real assets, hurts dollars, so the question becomes, what is more important to your household, real dollars (dividends, interest, paycheck) or assets such as stocks, metals, commodities?


Assets
Income

Who Gets Helped, Who Gets Hurt?
Wealthy households tend to hold assets, poor households tend to rely on income. While higher food/energy costs might annoy rich households, the increase in their assets more than offsets the price difference. Not so for the poor.
Affluent households own more hard assets
Modest households rely on earned income

Percent of After-Tax Income
Spent on Food and Energy by Income
Source: U.S. Bureau of Labor Statistics, CEX, 2009

Inflation since 2000
Through February 2013
Data Source: Bureau of Labor Statistics, HS Dent, 2013
CPI
Core CPI Categories

Dollars Spent on Essential and Non-Essentials vs. Inflation (2000- Feb. 2013) on Those Items
Data Source: Bureau of Labor Statistics, HS Dent, Bloomberg; 2013
Young Families
Peak Spending
Retirees

The Term for Where We Are:
Financial Repression

When interest rates are held artificially low given the rate of inflation, resulting in savers being taxed/punished in order to provide borrowers greater incentives/benefits

Normal Yield Curve
CPI 2.8%
Real Rate of Return

Yield Curve Manipulated

Inflation vs. 10-year Treasury
1935 - 1951
inflation
10-year Treas Rate

The Brain Teaser

What happens to all dollars printed by the Fed?

All Printed Dollars Find Their Way to the US Government
Fed owns trillions of bonds, now what?

All Printed Dollars Find Their Way to the US Government

All Printed Dollars Find Their Way to the US Government
All profits earned by Fed, through interest received, principal payments, and activities, are given to US Treasury every week (used to be year end)

In 2009 Fed gave US Treasury $47 billion, in 2010 $79 billion, and $77 billion in 2011. So far in 2012 the Fed has given the US Treasury $70 billion.

What if $1 trillion of US bonds mature on the books of the Fed?

Over the last 99 years, the Fed has given the US Treasury $953 billion.

In the last three years the Fed has increased its holding by $1.8 trillion, which will eventually be given to the US Treasury.

Now the Fed is going to print $40 billion per month until “things improve.”

Quick Reduction of US Debt
Because all US debt held by Fed eventually forgiven, simply cancel it today.

The Fed holds $1.8 trillion in US Treasuries, which is already effectively cancelled debt.

This, Too, Shall Pass
Our demographic-driven downturn will last until the next generation pushes up its own spending in earnest – 7 to 10 years
We have large cohorts of 20 year olds and younger
Much more favorable position than other developed countries

The problem is that we are relying on the young to push the economy higher, but they are entering the workforce already in debt.

Student Loans, Wages
and Income

% Change in College Costs,
Inflation Adjusted

Cost of 4-Year Degree

Beyond inflation, a 4-year non-profit private university degree has increased in cost by 23.8%

A 4-year public university degree has increased in cost by 43.6%

% Change, Mean Family Income by Quintile

Real Mean Male Income
by Education, ages 25-34
Data Source: Census Bureau Historical Income Tables, 2013

Growth of Consumer Credit
2006-2012
Data Source: NY Federal Reserve Quarterly Consumer Credit Report, 2013
Index 100= 2006

Student Loan Defaults by
Year of Issuance

Response of Dept. of Ed.

Not a single solution offered was directed at lowering the cost of tuition as charged by universities.

Hurdles For the Next 4 Years
Taxes and Spending, Both Local and Federal

Workforce that remains because they need to, freezing the employment situation

Young graduates that enter the economy with debt they cannot pay at current income

Rising number of retirees with little savings to pay their own way

All of these are wealth transfer problems that do not add growth to the economy

Conclusion of Demographic School