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Jim Bacon publishes the "Bacon's Rebellion" and "Boomergeddon" blogs. His book "Boomergeddon" was published in August.
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  • The Recession May Be Over, but It Doesn't Feel Like It Yet
    Technically speaking, the United States is no longer in a recession; the economy hit bottom in June 2009 and has been expanding ever since. But it’s been a slow recovery, and Americans are still worse off than before the meltdown began.  Now a study by two Rand Corporation scholars, ”Effect of the Financial Crisis and Great Recession on American Households,” suggests that two American out of five (39%) have experienced financial stress in at least one of three ways since the recession began: a member of the family lost a job, the family fell behind on mortgage payments, or the value of the house is underwater.

    The recession wreaked greater hardship than most previous downturns by virtue of three factors: unemployment was more widespread, housing prices fell further, and more people were dependent upon their 401(k)s for retirement saving when the stock market took a dive. Today, unemployment has barely budged, house values are still falling and the stock market has recovered only some of the ground it lost. Write authors Michael D. Hurd and Susann Rohwdeder:

    On average expectations about stock market prices and housing prices are pessimistic, particularly long-run expectations. Among workers, expectations about becoming unemployed have recovered somewhat from their low point in May 2009 but still remain high. Overall the data suggest that households are not optimistic about their economic futures.

    The study was based upon monthly surveys of the American Life Panel, a group of 2,500 Americans, maintained by the University of Michigan. Rand began asking questions about the respondants’ family finances shortly after the financial crisis broke.

    There is a good reason why Americans are reluctant to resume spending like the good ol’ days (even if they could get the credit): They are feeling extremely insecure. In April 2010 (the most recent month covered by the paper), 16.8% still were experiencing financial stress, about the same as a year previously. Nearly 40% had experienced distress at some point during the year-and-a-half survey.

    Nearly one in five Americans live in fear of losing their job in the next 12 months. Only half expect their houses to gain value within the next five years. Only 16% expect to increase spending in the next six months, compared to 12% who expect to decrease it.

    To get by, 39.2% of those who lost jobs took unemployment insurance, another 35.6% drew down savings, and 18.% increased indebtedness.

    One glimmer of hope: The percentage of people feeling dissatisfied or very dissatisfied with their economic situation has improved from 45% at the beginning of the survey to only 34% in April.

    The Boomergeddon bottom line: Americans are in no mood to crank up consumer spending. Americans need to repair their household balance sheets, and they know it. Any economic policy based upon the idea of restoring consumer spending to its once-lofty level of 70% of GDP is flawed at the inception — and is doing a dis-service to American households who need to spend less and save more.

    Disclosure: No positions
    Nov 19 11:10 AM | Link | Comment!
  • Concord Takes a Whack at the 10-Year Forecast

    Creating 10-year forecasts for the U.S. budget is unavoidably an arbitrary process. The final output in terms of deficits and accumulated debt depend upon the assumptions built into the budget models. The Office of Management and Budget (OMB) makes the baseline assumptions. The Congressional Budget Office (CBO) refines some of those assumptions, usually by fine-tuning spending projections, but accepts other assumptions, such as the rate of economic growth and prevailing interest rates. Accordingly, CBO’s projections differ from the administration’s only by degree.

    Then there are not-for-profit advocacy groups like the Concord Coalition, which have the leeway to make different policy assumptions, mainly on the tax and spending side. The differences can be startling. In a recent exercise, Concord looked at the budget projections for the decade of 2011 to 2020. Where the CBO had projected accumulated deficits of $6.2 trillion, Concord came up with a cumulative deficit of $15.2 trillion.

    Who’s projection do you believe? It all depends upon whose assumptions you find more plausible. CBO is required to assume that current law will continue to govern over the next decade, thus the Bush-era tax cuts will expire on schedule next year and tax collections will surge. CBO also is forced to assume that Congressional appropriations increase no faster than the rate of inflation (har! har!) By contrast, Concord expects (1) spending to increase at the same rate as the nominal GDP (inflation + economic growth), (2) that the Obama administration slowly draws down the troops in foreign wars, and (3) that Medicare physician cuts are postponed indefinitely. Concord also assumes that the Bush-era tax cuts are extended, and that Congress continues applying patches to the Alternative Minimum Tax. Here is the result:

    At the moment, Concord’s assumptions appear to be more realistic. But, who knows what will happen a few years from now? If the Republicans make the electoral gains this fall that many political pundits are projecting, and if Obama loses in 2012, budget forecasters will have to take into account a very different tax and spending environment.

    While Concord’s assumptions may be more realistic than CBO’s, Concord has voluntarily placed itself in a strait jacket of its own. Concord appears to accept the economic assumptions as provided by OMB and CBO. However, as I demonstrated in “Boomergeddon,” economic assumptions are just as critical for a 10-year forecast as are the tax and spending assumptions. If you assume a weaker economy recovery and a modest recession by 2017, annual deficits could run $700 billion a year higher than the OMB forecasts. Assume 10% interest rates on 10-year Treasuries by 2020, and annual deficits could run $1 trillion a year higher.

    If we make the same tax and spending assumptions as Concord, layer in a slower growth rate (as seems to be occurring), rising interest rates in the second half of the decade (as some analysts are projecting) plus a recession (we’re going to have another one eventually), all bets are off. Deficits and the national debt will run so high that confidence in the system will collapse well before 2020. I’m betting that we muddle through the 2020s by making policy changes, which neither CBO nor Concord currently foresee, in a weak stab at fiscal discipline. But as Boomers continue retiring en mass, putting more pressure on Medicaid and Medicare especially, and as interest rates climb in the next decade, there will be no muddling through the 2020s. Sooner or later, the federal government will go into default. It’s only a question of when.

    Disclosure: No positions
    Sep 08 10:21 AM | Link | Comment!
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