Wednesday, October 14, 2020

Don't Fight T-Fed

The Fed I: Birth of T-Fed. What a difference a pandemic makes. Prior to the Great Virus Crisis (GVC), Fed officials were either dismissive of Modern Monetary Theory (MMT) or remained silent on the subject since it crosses into the realm of fiscal policy. Fed officials have had a very long tradition of never crossing that line. They do monetary policy. Congress and the White House do fiscal policy. Period! Nothing to see here. Move on.

Since the GVC, Fed officials repeatedly and frantically have been exhorting the fiscal authorities to do much more to support the economy. They’ve made it very clear that they will continue to help finance the resulting federal deficits by purchasing most, if not all, of the Treasury debt issued to pay for more fiscal stimulus. They’ve certainly been doing so since March 23, when they implemented QE4ever, which has already mostly financed the $2.2 trillion CARES Act signed by President Donald Trump on March 27. Consider the following:

(1) Consolidating the Treasury & the Fed. Over the past 12 months through August, the federal budget deficit totaled a record $2.92 trillion (Fig. 1). Over the same period, the Fed’s holdings of Treasuries is up by a record $2.26 trillion. Now that the Treasury and the Fed have joined forces in the MMT crusade to drown the virus in liquidity, we might as well consolidate the two of them into “T-Fed.” The result is that the federal government needed to borrow just $663 billion from the public over the past 12 months through August (Fig. 2)!

(2) The Fed’s portfolio of Treasuries. The Fed held a record $4.45 trillion in US Treasuries at the end of September (Fig. 3). That amounts to 24.2% of the Treasury’s marketable debt outstanding (Fig. 4). The Fed owns 20.0% and 36.9% of US marketable Treasury notes and bonds, respectively (Fig. 5).

(3) Good ol’ Feddie. During the Great Financial Crisis, mortgage giants Fannie Mae and Freddie Mac were placed in conservatorship on September 7, 2008. The Fed rose to the occasion and was transformed by then-Fed Chair Ben Bernanke into “Feddie.” QE1 was introduced on November 25, 2008. In this first round of quantitative easing, the Fed committed to purchase $1.24 trillion in mortgage-backed securities and agency debt (Fig. 6). Since QE4ever, the Fed has purchased $618 billion in such securities, bringing their total to a record $1.98 trillion during September. The result has been record-low mortgage rates, which has contributed to the housing boom caused by de-urbanization in response to the pandemic and mounting urban crime (Fig. 7).

The Fed II: De Facto Yield-Curve Targeting. What if another big round of deficit-financed fiscal spending pushes up bond yields and mortgage rates? That would be a big setback for MMT crusaders. The 10-year Treasury bond yield has averaged 0.68% since MMT Day (March 23) through Friday’s close. It rose to 0.79% on Friday, up from the record low of 0.52% on August 4 (Fig. 8).

Have no fear; the Fed is here with YCT (yield-curve targeting), which it will use if necessary to supplement MMT by keeping a lid on bond yields. Actually, the remarkable stability of the bond yield near record lows since March 23 suggests that the Fed may be capping the bond yield below 1.00% without officially saying so.

Ever since March 23, Powell repeatedly has stated that the Fed intends to keep interest rates close to zero for a very long time. At his June 10 press conference, he famously said: “We’re not thinking about raising rates. We’re not even thinking about thinking about raising rates.” He reiterated that policy in his July 29 press conference, saying: “We have held our policy interest rate near zero since mid-March and have stated that we will keep it there until we are confident that the economy has weathered recent events and is on track to achieve our maximum employment and price stability goals.”

Remember that the Fed lowered the federal funds rate by 100bps to zero on March 15. No target was set for the bond yield at that time or has been since then—so far. At the June 10 presser, Nick Timiraos of the WSJ asked Powell about the possibility of “yield caps.” Powell revealed that at the latest meeting of the Federal Open Market Committee (FOMC), the participants received a briefing on the historical experience with YCT and said that they would evaluate it in upcoming meetings. Here is the excerpt on YCT from the June 10 FOMC meeting Minutes:

“The second staff briefing reviewed the yield caps or targets (YCT) policies that the Federal Reserve followed during and after World War II and that the Bank of Japan and the Reserve Bank of Australia are currently employing. … [T]hese three experiences suggested that credible YCT policies can control government bond yields, pass through to private rates, and, in the absence of exit considerations, may not require large central bank purchases of government debt. But the staff also highlighted the potential for YCT policies to require the central bank to purchase very sizable amounts of government debt under certain circumstances … and the possibility that, under YCT policies, monetary policy goals might come in conflict with public debt management goals, which could pose risks to the independence of the central bank.”

So how might the Fed be keeping a lid on the 10-year bond yield? Simple: The Fed has been buying all the bonds that the Treasury has been issuing in recent months and then some. From February through September, the Treasury issued $259 billion in bonds with maturities exceeding 10 years. Over that same period, the Fed purchased $338 billion of such bonds.

The Fed III: How To Print Money. Fed Chair Jerome Powell’s important interview on 60 Minutes with Scott Pelley was aired on May 17. Pelley asked where Powell got the trillions of dollars that the Fed spent on purchasing bonds since March 23: “Did you just print it?” Powell forthrightly responded: “We print it digitally. So as a central bank, we have the ability to create money digitally. And we do that by buying Treasury bills or bonds or other government guaranteed securities. And that actually increases the money supply. We also print actual currency, and we distribute that through the Federal Reserve banks.”

Powell also acknowledged that there was no precedent for the scale of QE4ever: “The asset purchases that we’re doing are a multiple of the programs that were done during the last crisis.” Let’s review how T-Fed’s actions since MMT Day have boosted the M2 monetary aggregate:

(1) US Treasury’s deposit account at the Fed. The Treasury has been borrowing at a record pace in the Treasury market to fund the various government support programs aimed at reducing the economic damage and pain resulting from the GVC. The federal budget deficit has totaled a record-shattering $1.9 trillion from March through September. As a result, the US Treasury General Account at the Fed has jumped from $439 billion at the end of February to $1.7 trillion during the October 7 week (Fig. 9).

(2) The Fed’s US Treasury purchases. Over that same period, the Fed facilitated the Treasury’s massive borrowing with massive purchases of US Treasuries, totaling $1.99 trillion. The Fed now owns a record $4.46 trillion in US Treasuries as of the October 7 week (Fig. 10).

(3) Commercial bank deposits and cash. The Fed also facilitated the mad dash for cash that started during February as the viral pandemic triggered a widespread pandemic of fear. The Fed’s purchases of Treasuries and agency securities from the public boosted commercial bank deposits by $2.28 trillion from the end of February through the September 30 week as the public sold securities to raise cash (Fig. 11).

The huge 20% y/y jump in this liability item on banks’ balance sheets was offset on the asset side by “cash” assets, which are basically the banks’ reserve balances at the Fed (Fig. 12). They really aren’t cash per se, since the banks can’t make loans with these deposits at the Fed. They can make more loans by lending out the increase in their deposits less reserve requirements, which were lowered to zero on March 15. When they do so, the banks also create more deposits. That’s the way a fractional-reserve banking system works. (By the way, the answer to the oft-asked question of why the banks don’t lend out all that cash on their balance sheets is that they can’t, because it is a balancing item determined totally by the Fed’s balance sheet!)

(4) Commercial bank loans. The Fed’s MMT maneuvers also facilitated the $781 billion jump in commercial bank loans from the end of February through the May 13 week (Fig. 13). Commercial and industrial loans soared $715 billion over this same period as businesses cashed in their lines of credit, fearing a cash crunch (Fig. 14). The surge in loan demand was easily funded by the increase in deposits. Indeed, the brief surge in borrowing by banks during the weeks of February 12 through March 25 has been more than reversed subsequently (Fig. 15).

(5) Companies issuing bonds and paying down lines of credit. Now many businesses that had rushed to draw their lines of credit during the mad dash for cash earlier this year are paying them down. Nonfinancial corporations raised a record $1.44 trillion over the past 12 months through August at record-low yields, thanks to the Fed’s backstopping the corporate bond market as part of QE4ever (Fig. 16). And what are the banks doing with the cash from the loan paydowns? They are buying Treasuries and agencies to the tune of $527 billion since the start of this year through the September 30 week (Fig. 17).

The Fed IV: MMT Junkies. T-Fed was born on March 23, the day that the Fed adopted QE4ever. Ever since then, Fed officials have been basically saying: “More, more, more!” They want another round of MMT. They don’t call it that, but that’s what they are asking for.

Fed Chair Jerome Powell was asked about MMT during congressional testimony on February 26, 2019. He hated it back then: “The idea that deficits don’t matter for countries that can borrow in their own currency I think is just wrong,” the Fed chair said. The “US debt is fairly high to the level of GDP—and much more importantly—it’s growing faster than GDP, really significantly faster. We are going to have to spend less or raise more revenue.”

Powell rejected the notion that the Fed should enable fiscal spending: “[T]o the extent that people are talking about using the Fed—our role is not to provide support for particular policies,” he said. “Decisions about spending, and controlling spending and paying for it, are really for you.” In effect, he told Congress: “Fiscal policy is your domain. Leave us out of it.”

Again: What a difference a pandemic makes! Consider the following:

(1) March. In his March 3 and March 15 unscheduled press conferences, Powell said it wasn’t the Fed’s “role to give advice to the fiscal policymakers” and that fiscal policy would need to be handled on a “discretionary” basis.

(2) April. Powell’s fiscal pivot occurred during his April 29 press conference Q&A, when he said: “I have longtime been an advocate for the need for the United States to return to a sustainable path from a fiscal perspective at the federal level. We have not been on such a path for some time, which means … that the debt is growing faster than the economy. This is not the time to act on those concerns. This is the time to use the great fiscal power of the United States to … do what we can to support the economy and try to get through this with as little damage to the longer-run productive capacity of the economy as possible.”

(3) June. During his June 10 press conference, in prepared remarks, Powell said: “I would stress that [the Fed has] lending powers, not spending powers. The Fed cannot grant money to particular beneficiaries. … Elected officials have the power to tax and spend and to make decisions about where we, as a society, should direct our collective resources. The CARES Act and other legislation provide direct help to people and businesses and communities. This direct support can make a critical difference not just in helping families and businesses in a time of need, but also in limiting long-lasting damage to our economy.”

(4) July. During his July 29 press conference Q&A, Powell stated: “Fiscal policy … can address things that we can’t address. If there are particular groups that need help, that need direct monetary help—not a loan, but an actual grant as the PPP program showed—you can save a lot of businesses and a lot of jobs with those in a case where lending a company money might not be the right answer. The company might not want to take a loan out in order to pay workers who can’t work because there’s no business.”

(5) September. In prepared remarks at his September 16 presser, Powell said: “The path forward will also depend on the policy actions taken across all parts of the government to provide relief and to support the recovery for as long as needed.” In the Q&A, he warned that “as the months pass … if there isn’t additional support and there isn’t a job for some of those people who are from industries where it’s going to be very hard to find new work, then that will start to show up in economic activity. It will also show up in things like evictions and foreclosures and, you know, things that will scar and damage the economy.”

(6) October. At the National Association for Business Economics virtual annual meeting on October 6, Powell reiterated his call for more MMT: “By contrast, the risks of overdoing it seem, for now, to be smaller. Even if policy actions ultimately prove to be greater than needed, they will not go to waste. The recovery will be stronger and move faster if monetary policy and fiscal policy continue to work side by side to provide support to the economy until it is clearly out of the woods.”

An October 7 WSJ editorial commented: “It’s important to understand how unusual this is. The Fed’s job is monetary policy and financial regulation. Yet here is a Fed chief lobbying Congress, and the public, on behalf of one side of a fiscal debate.”

(7) Other talking Fed heads. And the beat goes on … On Thursday, Dallas Fed President Robert Kaplan said in a Bloomberg Television interview: “I think the Fed can do more, and I’m sure we’ll look at all our options, but those aren’t substitutes for fiscal policy.”

The same day, Boston Fed President Eric Rosengren emphasized in an interview with Bloomberg News: “There’s a limit to how far we can push the 10-year Treasury rate or the mortgage-backed rate down.” He added: “That’s not to say we shouldn’t do it. It just says the magnitude of the impact, when rates are already so low, is probably much less than what we want, which is why I think you’re hearing Federal Reserve speakers call out for more fiscal policy.”

The Fed V: MMT’s Best Friends Forever. The Fed isn’t the only central bank that has embraced MMT. Arguably, the Bank of Japan (BOJ) led the way with its zero-interest-rate policy, which has been in place since the late 1990s. The People’s Bank of China certainly has enabled China’s commercial banks to finance lots of government spending since 2008.

In her September 4, 2019 speech as the new president of the European Central Bank (ECB), Christine Lagarde called on “the other economic policy makers” to do “what they had to do” to stimulate economic growth. And that was before the pandemic. Since the World Health Organization declared the pandemic on March 11, the ECB’s assets have soared by €2.0 trillion to a record €6.7 trillion (Fig. 18). This past July, the European Union approved a €750 billion economic recovery fund, which will be financed by issuing common debt, providing more bonds for the ECB to buy.

On Thursday, September 17, BOJ Governor Haruhiko Kuroda pledged to work closely with the country's new Prime Minister Yoshihide Suga to support the economy. So far, Suga has indicated that he is not focused on the inflation target. Instead, a top priority of his administration is protecting jobs, reported Reuters. Suga’s emphasis on jobs may influence Kuroda to deemphasize the importance of the inflation target, as Powell’s Fed has recently done. Since the last week of February through the September 25 week, the BOJ’s balance sheet has soared 18% in yen (Fig. 19).

The three major central banks are all MMT’s BFFs (best friends forever).Their combined balance sheet has jumped $6.8 trillion to a record $21.2 trillion since the February 21 week through the September 25 week (Fig. 20). Here in dollars are each of their increases over this period and their most current record highs: Fed ($3.0 trillion $7.0 trillion), ECB ($2.5 trillion, $7.6 trillion), and BOJ ($1.3 trillion, $6.6 trillion).

It’s good to have friends.

Friday, October 9, 2020

Tale of Two Economies: Housing-Related Boom vs Pandemic-Challenged-Services Bust

“E pluribus unum” certainly doesn’t apply to our highly partisan political discourse these days. The phrase is Latin for “Out of many, one.” It is a traditional motto of the US, appearing on the Great Seal. Its inclusion on the seal was approved by an Act of Congress in 1782. Another motto is “Novus ordo seclorum,” which is Latin for "New order of the ages.” That doesn’t seem to apply these days either given our political and social disorder.

Then again, we all seem to be united when it comes to shopping. While the country remains bitterly divided politically, we are united in our drive to thrive. That certainly helps to explain the remarkable economic recovery in recent months from the two-month lockdown recession during March and April.

American consumers almost never disappoint us. I often have observed that when Americans are happy, they spend money and when they are depressed, they spend even more money—because shopping releases dopamine in our brains, which makes us feel good. Obviously, the Great Virus Crisis (GVC) is writing a new chapter in the history of consumer behavior. I’m not a virologist, but one widespread side effect of the virus is evident: Most consumers have been suffering from cabin fever, which can be depressing, and weren’t able to seek relief through shopping during the lockdown recession.

In our May 21 Morning Briefing, we predicted that “US consumers will open their wallets and spend once some semblance of normalcy returns.” So far, so good. As the lockdown restrictions were gradually lifted during May, consumers rushed to spend lots of the cash they had saved up during the lockdown.

Housing-related spending has been especially strong, as consumers have decided it’s time to remodel their cabins if they are going to spend more time working, learning, and entertaining at home. They’ve also rushed to buy more new and existing cabins in suburban and rural areas in a broad-based wave of de-urbanization triggered by the pandemic. In addition, the pandemic may have convinced many Millennials (who are currently 24 to 39 years old) that now is the time to buy a house rather than to rent an apartment. The Fed is contributing to the resulting housing-related boom by keeping mortgage rates at record-low levels.

All these developments were confirmed on October 1, when the Bureau of Economic Analysis (BEA) released the August personal income report. The next day, the employment report for September released by the Bureau of Labor Statistics (BLS) suggested that consumers continued to gain purchasing power from their participation in the labor market—i.e., working—which should more than offset the decline in purchasing power provided by the government with pandemic-support benefits.

If Washington provides another round of such support anytime soon, that will unleash even more dopamine, adding to the economic “V is for Victory” victory over the pandemic’s economic impact. Consider the following:

(1) Consumer-led V-shaped recovery. The October 2 update of the Atlanta Fed’s GDPNow model showed that Q3’s real GDP is tracking at a record jump of 34.6% (at a seasonally adjusted annual rate, or saar) following the record 31.4% drop during Q2. That’s certainly a V-shaped recovery so far.

Leading the way up during Q3 is a 36.8% projected rebound in real consumer spending, following the 33.2% drop during Q2. Consumers contributed 24.0 percentage points to the freefall in real GDP during Q2, when lockdown restrictions held them back (Fig. 1). They are likely to contribute more to the Q3 upswing. By the way, spending on consumer services was hit hardest by the lockdown during Q2, as evidenced by the -22.0ppt contribution of this component to the drop in real GDP!

In current dollars, personal consumption expenditures has rebounded 18.6% from April through August (Fig. 2). It is only 3.4% below its record high during January. Interestingly, consumer spending on goods is up 24.0% over this period to a new record high. Spending on services is up 16.1% since April but still 7.4% below its record high during February. During August, consumer spending totaled $14.4 trillion (saar) with services at $9.5 trillion and goods at $4.8 trillion.

(2) A pile of savings to spend. How can it be that consumer spending has rebounded so strongly when millions of workers remain unemployed? During the lockdown recession, personal saving soared from $1.4 trillion (saar) during February to an all-time record of $6.4 trillion in April (Fig. 3) . It was back down to $2.4 trillion during August.

Consumer spending clearly was boosted by the jump in the government social benefits component of personal income from $3.2 trillion (saar) during February to a record $6.6 trillion during April (Fig. 4).

However, government social benefits was down to $4.1 trillion during August. That’s still well above the $3.2 trillion during February. The same pattern is evident in personal saving. So there is still enough “potential” fiscal stimulus left over to provide “kinetic” energy to consumer spending over the next few months, in our opinion.

(3) Earned income rebounding. But don’t we need another round of fiscal stimulus to keep the consumer recovery going until a vaccine is available? Not if wages and salaries continue to rebound along with employment. The former is up 7.6% since April through August, while the latter is up 6.5% from April through September (Fig. 5).

Our Earned Income Proxy (EIP) is highly correlated with wages and salaries in the private sector (as reported in the BEA personal income release). The EIP is up 10% from April through September (Fig. 6). The EIP is based on the monthly BLS payroll data. It is simply aggregate hours worked by all workers—which is up 12.1% from April through September—multiplied by average hourly earnings. Aggregate hours worked reflects payroll employment—which is up 8.8% from April through September—multiplied by the average length of the workweek. This augurs well for the ongoing V-shaped recovery in both consumers’ purchasing power and their spending.

(4) Housing-related spending leading the way. The latest personal income release confirms my view that a housing-related spending boom is underway as a result of de-urbanization and record-low mortgage rates. Spending on furniture & furnishings and household appliances soared 38.9% from April through August to new record highs since June of this year (Fig. 7).

Construction spending on new homes and on home improvements is included in the residential investment component of GDP rather than in personal consumption. The recent jumps in new and existing home sales suggest that both categories of residential construction should be rising to new cyclical highs soon and could be on their way to record highs in coming months (Fig. 8). Together, they totaled $589.4 billion (saar) during August, 13.1% below the record high during February 2006.

Altogether, housing-related consumer and construction spending totaled a record-high $906.4 billion (saar) during August, surpassing the previous record high during February 2006 by 1.3% (Fig. 9).

(5) Spending on autos also strong. Undoubtedly, the pandemic also has boosted the demand for autos along with the demand for houses by people moving out of cities to the suburbs and rural areas. Sure enough, current-dollar spending on new motor vehicles jumped 50.6% from April through August to the highest pace since July 2005 (Fig. 10). Spending on used cars is up 94.5% since April.

(6) Services are on the mend too. As noted above, the services economy also has been recovering, but has a ways to go to regain all that was lost during the lockdown recession. That’s because several important services-providing industries remain challenged by various voluntary and enforced social distancing restrictions.

Initially, the pandemic caused spending on health care services to plunge 34.7% from February through April (Fig. 11). Hospitals suspended elective procedures in anticipation of a huge influx of Covid patients. Since April through August, this category is up 43.5%, which is only 6.4% from its record high during February.

Also taking a big hit from the lockdowns was spending on food services, including restaurants. This category plunged 47.5% from February through April but rebounded 69.4% through August (Fig. 12). It is still 11.2% below its record high during January. It is likely to struggle to climb higher in coming months as winter weather forces restaurants to halt outdoor dining and do the best they can with significant capacity limits on indoor dining.

Among the services-providing industries, the most challenged have been the following (showing the percentage changes from February through April and from April through August, as well as the percentage below the February pace): Air Transportation (-93%, 888%, -36%), Hotels & Motels (-83, 176, -54), Gambling (-80, 320, -18), Amusement Parks, Campgrounds, & Related Recreation (-90, 240, -67), and Admissions to Specified Spectator Amusements (-97, 423, -82) (Fig. 13 and Fig. 14).

(7) Bottom line. Although the recovery from May through September has been V-shaped, there are plenty of challenges ahead. The pace of the recovery is bound to slow in 2021, and there could be setbacks. However, so far, the recovery has been impressive.

Thursday, September 24, 2020

The Glass Is More Than Half Full

We didn’t know how good we had it in 2019. Then the pandemic hit in 2020, and we all concluded that it will take many years before life will be as good as it was in 2019. Perhaps we’re too pessimistic. After all, 2019 was better than we realized at the time; perhaps we’ll return to the good life sooner than we realize now. Let’s examine that notion, starting with how good it was in 2019, then considering how we might rebound to the good old days sooner than widely anticipated:

(1) Household income rose to record high in 2019. My attitude toward any data series that doesn’t support my story is that either it is flawed or it will be revised to support my story. That’s been my strongly held attitude toward median real household income, the annual series compiled by the Census Bureau and used to measure poverty in America. It’s been a big favorite with economic pessimists and political progressives in recent years because it confirmed their view that, for most Americans, the standard of living has stagnated for years.

My view has been that lots of other, more reliable indicators of income confirm that the standard of living has been improving for most Americans for many years. Now even the Census series confirms my story. So it’s back on the right track after misleadingly showing stagnation from 2000 through 2016 (Fig. 1). The median household series, which is adjusted for inflation using the CPI, is up 9.2% from 2016 through 2019 and hit new highs during each of the last three years (2017-19) after remaining flat from 2000 to 2016.

Also up over the past three years to new record highs are the Census series for median family (up 11.0%), mean household (10.7%), and mean family (12.5%) incomes. Almost everyone was doing better than ever before last year.

(2) Personal income data refute stagnation myth. While the Census data make more sense to me now, they still have lots of issues. Most importantly, the Census data are based on surveys asking a sample of respondents for the amount of their money income before taxes. So Medicare, Medicaid, food stamps, and other noncash government benefits—which are included in the personal income series compiled by the Bureau of Economic Analysis (BEA)—are excluded from the Census series. In addition, the BEA data are based on “hard” data like monthly payroll employment statistics and tax returns. BEA also compiles an after-tax personal income series reflecting government tax benefits such as the Earned Income Tax Credit.

The BEA series for personal income, disposable personal income, and personal consumption expenditures—on a per-household basis and adjusted for inflation using the personal consumption expenditures deflator (PCED) rather than the CPI—all strongly refute the stagnation claims of pessimists and progressives (Fig. 2). All three measures have been on solid uptrends for many years, including from 2000 through 2016, rising 25.1%, 27.9%, and 25.9%, respectively, over this period. They often rose to new record highs during this period. There was no stagnation whatsoever according to these data series. Instead, there was lots of growth!

The standard critique of using the BEA data series on a per-household basis is that they are means, not medians. So those at the very top of the income scale, the so-called “1- Percent,” in theory could be skewing both the aggregate and per-household data. That’s possible for personal income but unlikely for average personal consumption per household. The rich can only eat so much more than the rest of us, and there aren’t enough of them to substantially skew aggregate and per-household consumption considering that they literally represent only 1% of taxpayers, but almost 40% of the federal government’s revenue from income taxes, as discussed below.

(3) Real hourly wages belie stagnation myth too. Another data series that refutes the stagnation claim of pessimists and progressives is average hourly earnings (AHE), reported in the monthly employment report and reflected in the BEA income data. Adjusting it for inflation using the PCED shows that it soared during the second half of the 1960s through the early 1970s (Fig. 3). It then stagnated during the rest of the 1970s through mid-1995 as a result of what was then called “de-industrialization.” Since December 1994, it has been rising along a 1.2%-per-year growth path. That’s a significant growth rate in the purchasing power of consumers, as real AHE compounded to an increase of 37.2% from December 1994 through July of this year. That coincides with the High-Tech Revolution, which I’ve been writing about since 1993!

By the way, the hourly wage series I am using here is for production and nonsupervisory workers, which obviously doesn’t include the rich. Furthermore, these workers have accounted for between 80.4% and 83.5% of total payroll employment since 1964 (Fig. 4). So the real AHE series includes lots of working stiffs and isn’t distorted by the 1-Percent, let alone the top 20%-or-so of earners.

(4) The CPI is very misleading. It is well known that the CPI is upwardly biased, especially compared to the PCED (Fig. 5). Since January 1964 through July of this year, the CPI is up 838.5%, while the PCED is up 646.3%. As a result, while the PCED-adjusted AHE has been rising in record high territory since January 1999, the CPI-adjusted version didn’t recover to its previous record high during January 1973 until April 2020, which makes absolutely no sense (Fig. 6)! (An extremely flawed August 2018 study by the Pew Research Center concluded that Americans’ purchasing power based on the CPI-adjusted AHE has barely budged in 40 years!)

The Fed long has based its monetary policy decision-making on the PCED rather than the CPI. A footnote in the FOMC’s February 2000 Monetary Policy Report to Congress explained why the committee had decided to switch to the inflation rate based on the PCED.

(5) Adjusting for household and family sizes makes a difference. The fun of making fun of the funny-looking Census income data series continues when I adjust them for the average size of households and families in the US (Fig. 7 and Fig. 8). Both series have been on downward trends since the 1940s, especially the average size of households. Households have always been smaller than families, and earned less, since the former include single-person households, which have increased significantly in recent years because young adults have been postponing marriage and older folks have been living longer, resulting in more divorced and widowed persons.

Furthermore, data available since 1982 through 2019 show that the percentage of nonfamily households has increased from 25.1% to 35.7% over that period (Fig. 9 and Fig. 10). So there are more of these households that tend to earn less than family households. No wonder that the Census data adjusted for household size and for inflation using the PCED shows less stagnation and steeper uptrends since the start of the data (Fig. 11 and Fig. 12).

(6) The rich aren’t like you and me. What about the 1-Percent, who earn too much money, have too much wealth, and don’t pay their fair share of taxes? The total number of all the tycoons on Wall Street, in Silicon Valley, and in the C-suites of corporate America—including everyone with adjusted gross income (AGI) exceeding $500,000 a year—was 1.5 million taxpayers in 2017, exactly 1% of all taxpayers who filed returns that year, according to the latest available data from the Internal Revenue Service (IRS) (Fig. 13).

Collectively, during 2017 the 1-Percent paid $625 billion in income taxes, or 26.7% of their AGI. That amount represented 38.9% of all federal income tax paid by all taxpayers who paid any taxes at all (Fig. 14, Fig. 15, and Fig. 16). The rest of us working stiffs, the “99-Percent,” shelled out $980 billion, or 61.1% of the total tax bill. What should be the fair share for the 1-Percent? Instead of almost 40% of the federal government’s tax revenue, should they be kicking in 50%? Why not 75%? They would be less rich, but everyone else would be richer—unless the 1-Percent decided to work less hard or to leave the country, having lost their incentive to keep creating new businesses, jobs, and wealth.

(7) Can you Trump this? Love him or hate him, the standard of living did increase significantly during Trump’s first term (until the pandemic hit), as it has done under many previous presidents, especially those who have championed pro-growth and pro-business policies, including tax cuts and deregulation.

(8) Time for progressives to declare “mission accomplished?” Progressives continue to claim that government policies need to be more progressively focused on raising taxes and redistributing income. Until recently, they’ve relied on the Census income series to prove their point, though these measures clearly leave out the positive impact that past progressive policies have already had through Medicare, Medicaid, food stamps, tax credits, and other noncash government social benefits.

Progressives long have promised that their policies will create Heaven on Earth. Arguably, they have succeeded in doing so for many Americans with their New Deal, Great Society, and Obamacare programs. These programs have reduced income inequality by redistributing income, which has been growing faster than progressives concede thanks to America’s entrepreneurial spirit and capitalist system. Progressives, who never seem satisfied with the progress they have made, run the risk of killing the goose that lays the golden eggs to pay for their programs. Incomes can always be made equal by making everyone equally poor.

As confirmed by the latest available IRS data, there is no denying that the rich got richer during 2017 and earned more taxable income than ever before. They undoubtedly continued to do so during 2018 and 2019. But now even the Census data show that real median household income rose to a record high last year. Most Americans were more prosperous last year than ever before, though some more so than others. Why does anyone have a problem with that?

The bottom line is that just before the pandemic, American households enjoyed record standards of living. Income stagnation was a myth. Income inequality isn’t a myth but an inherent characteristic of free-market capitalism, an economic system that awards the biggest prizes to those capitalists who benefit the most consumers with their goods and services. Perversely, inequality tends to be greatest during periods of widespread prosperity. Rather than bemoaning that development, we should celebrate that so many households are prospering, even if a few are doing so more than the rest of us.

(9) Housing-led recovery. So how do we bring back the good times once the pandemic is over so that we can enjoy widespread prosperity again? We may not have to wait that long. The pandemic has triggered a housing boom that could offset many of the ongoing woes in industries still plagued by the pandemic. De-urbanization is certainly weighing on urban economies, but suburban ones are booming because more and more city apartment dwellers are moving to homes in the burbs. There’s increasing anecdotal evidence that Millennials who’ve been renting apartments in urban areas are responding to the pandemic by buying houses in the burbs. Housing-related retail sales of furniture, furnishings, and appliances have rebounded to record highs as both existing and new home sales are surging.

Among the industries that are most likely to face a challenging recovery are the ones covered by the following categories of personal consumption expenditures: air transportation, hotels & motels, food services, amusement parks & related recreation, admission to special spectator amusements, and gambling. Altogether, these categories added up to $996 billion (saar) during July, while housing-related construction and consumption totaled $862 billion. While the recent recovery in the former could stall until a vaccine is available, the latter is likely to boom in coming months (Fig. 17).

Furthermore, Americans have $10.6 trillion in home mortgages. Thanks to the Fed’s ultra-easy monetary policies, many are refinancing their loans at record-low mortgage rates, providing a significant boost to monthly household incomes. Those record-low mortgage rates are also helping to keep home buying affordable even as home prices continue to rise. In addition, Americans have a record $20.2 trillion in home equity. If they need it, they can use it to raise some cash through home equity loans or by selling their homes at record-high prices. The glass is at least half full.

Monday, September 21, 2020

What In the World Is Going On? A Recovery from the Global Lockdown Recession Is Underway.

There has never been a recession like the one that hit the global economy earlier this year. It was truly global because every country in the world experienced an economic downturn as almost all governments around the world responded to the pandemic by imposing lockdown restrictions to slow the spread of the virus. China (in late January) and Italy (in early March) did so before the World Health Organization (WHO) officially declared the pandemic on March 11. Almost everyone else followed suit immediately after the WHO declaration. While the pandemic continues to plague the world with new outbreaks and waves of infection, the global economy has recovered in recent months. Let’s take a world tour to assess the strength and sustainability of the recovery:

(1) Global PMIs and leading indicators. It’s been a V-shaped recovery according to the global PMIs (purchasing managers indexes) for both advanced and emerging economies as well as for both manufacturing and non-manufacturing around the world (Fig. 1 andFig. 2). The global composite PMI—which combines the global manufacturing indexes (M-PMIs) and non-manufacturing indexes (NM-PMIs)—rebounded from a record low of 26.2 during April to 52.4 during August, the best reading since March 2019. That’s certainly a V-shaped recovery.

Not surprisingly, leading on the way down and on the way up was the NM-PMI for advanced economies. As a result of social distancing, this has been the first-ever global recession led by services-producing industries. It hit the global economy hard during March and April. The gradual easing in lockdown restrictions led to a solid rebound in both non-manufacturing and manufacturing industries since the April bottom.

The index of OECD leading indicators confirms the V-shaped recession and recovery for the advanced economies. It plunged from 99.4 during January to a record low of 93.2 during April, and rebounded to 98.3 during August (Fig. 3). Here are the three readings for January, April, and August for the US (99.3, 92.6, 97.6), Europe (99.5, 90.7, 98.3), and Japan (99.5, 98.3, 98.9). The OECD also compiles leading indicators for the BRIC countries. Here are their three readings for January, April, and August: Brazil (103.1, 93.3, 100.4), China (98.1, 94.9, 98.8), India (100.1, 87.1, 97.1), and Russia (99.7, 91.0, 98.7) (Fig. 4).

(2) Global production and exports. So far, we have data only through June for global industrial production and world exports (Fig. 5). They both show steep declines from December through April of 13.0% and 18.2%, respectively, and have rebounded 5.7% and 8.0% since then, through June.

The most current, and among the most relevant, export series for gauging the global economy is the one reported by China. The data we track are seasonally adjusted and available through August. Chinese exports (in yuan) plunged 42.1% from January through February, then rebounded through July to a record high; it dipped slightly in August, though still exceeded January’s reading by 9.1% (Fig. 6). That’s impressive.

(3) Commodity prices. Also impressive is the rebound in the CRB raw industrials spot price index, led by the price of copper (>Fig. 7). Since March 23—when the Fed announced its policy response to the pandemic, which we call “QE4ever”—through Friday, September 11, the former is up 10%, while the latter is up 43%. The price of copper has rebounded from a low of $2.12 per pound on March 23 to $3.03 on Friday, September 11, holding near September 4’s $3.05, which was the best reading since June 20, 2018, i.e., when Trump started to escalate his administration’s trade wars.

My colleagues and I created a Global Growth Barometer (GGB), which simply averages the CRB index of industrial commodity prices with the price of a barrel of Brent crude oil (Fig. 8). It is very similar to the S&P Goldman Sachs Commodity Index (GSCI), which gives energy commodities a combined weight of 61.71%; that compares with the 50.00% weight that our GGB gives to oil. Recently, the price of oil dropped a bit on concerns about a slowdown in the global economic recovery, which hasn’t been confirmed by either the CRB index or the price of copper. Our GGB and the GSCI are up 19% and 29%, respectively, since March 23.

(4) Currencies. By the way, there continues to be a strong inverse correlation between commodity price indexes (using either our GGB or the GSCI) and the trade-weighted dollar (TWD) (Fig. 9). The relationship between the dollar and commodity prices is quite a bit easier to see on a chart than the relationship between the dollar and US fiscal and monetary policies relative to those of other major economies.

The TWD has dropped 7.5% through September 11 since peaking this year on March 23. That coincided with the rebound in our GGB. It also nearly reverses the 9.4% surge in the TWD since the start of this year through its recent peak, which coincided with the pandemic-related plunge in commodity prices.

I’ve often observed that the dollar tends to weaken when overseas economies are showing strength relative to the US economy. Rising commodity prices suggest that’s the case relative to countries that are commodity producers. The inverse correlation between the dollar and commodity prices is partly attributable to the strong correlation between commodity prices and the currencies of commodity-producing countries such as Australia and Canada (Fig. 10).

China’s economy fell into the pandemic-related recession earlier this year before the US did the same, and China’s recovery started a couple of months sooner than the recovery in the US. China also seems to have made more progress in ending the spread of the virus than elsewhere in the world. That helps to explain why the Chinese yuan is up 4.7% since May 28 through Friday, September 11 (Fig. 11).

For a few weeks during the summer, it seemed that Europeans were also making more progress in dealing with the pandemic than have Americans. That explains some of the 9.8% bounce in the euro since May 7 through Friday, September 11 (Fig. 12). But now that Europeans are returning from their long summer vacations, another wave of infection is hitting Europe.

However, the euro may continue to benefit from the perception that the pandemic has reduced, rather than increased, the likelihood of the disintegration of the European Union (EU) and the Eurozone. On July 20, the 27 EU governments reached a breakthrough agreement authorizing the European Commission, the executive branch of the EU, to raise €750 billion to provide grants and loans to help member countries cover the costs of dealing with the pandemic.

This deal marks a precedent for common debt borrowing at the EU level, something that many countries, including Germany, opposed for a long time. But this oppositional stance had softened in the wake of the COVID-19 crisis.

Wednesday, September 2, 2020

The Future Is Coming: The Technology Revolution of the Roaring 2020s

In my August 12 newsletter, I discussed the technological innovations that drove the prosperity of the 1920s. Then I discussed the ones that are likely to do the same during the current decade:

“The awesome range of futuristic ‘BRAIN’ technological innovations includes biotechnology, robotics and automation, artificial intelligence, and nanotechnology. There are also significant innovations underway in 3-D manufacturing, electric vehicles [EVs], battery storage, blockchain, and quantum computing.”

In my 2018 book, Predicting the Markets, I observed:

“In the past, technology disrupted animal and manual labor. It sped up activities that were too slow when done by horses, such as pulling a plow or a stagecoach. It automated activities that required lots of workers. Assembly lines required fewer workers and increased their productivity. It allowed for a greater division of labor, but the focus was on brawn. Today’s ‘Great Disruption,’ as I like to call it, is increasingly about technology doing what the brain can do, but faster and with greater focus.”

The future is always coming, of course. However, the future is already here to a large extent. Consider the following awesome technologies that are just starting to proliferate in ways that should boost productivity and prosperity:

(1) Home-based work, education, and entertainment. The pandemic has transformed the way many people work, pursue an education, and get entertained. They can do all these activities from home because of technologies that allow them to carry on their lives over the Internet. When the pandemic is finally over, many people may go back to their old normal routines. Employers, however, may tell their employees to continue to work from home or closer to home in the suburbs. Reducing or eliminating commutes to work certainly increases productivity. It also cuts the costs of urban office space.

A recent study by the National Bureau of Economic Research compared employee behavior over two eight-week periods before and after shelter-in-place mandates were implemented. Looking at email and meeting metadata, the group calculated that the workday lasted 48.5 minutes longer, the number of meetings increased about 13%, and people sent an average of 1.4 more emails per day to their colleagues.

(2) Telemedicine. Telemedicine allows patients to visit with clinicians remotely using virtual technology. Innovative uses of telemedicine are increasing with advances in telehealth platforms and remote patient-monitoring technology. New mobile health apps and wearable monitoring devices help track a patient’s vitals, provide alerts about needed care, and help patients access their physician. Over the last few months, millions of people have relied on video or telephone calls to talk to their doctors.

During the coronavirus pandemic, the Centers for Medicare and Medicaid Services (CMS) has taken unprecedented action to expand telehealth for Medicare beneficiaries. On March 13, 2020, President Trump made an emergency declaration under the Stafford Act and the National Emergencies Act empowering CMS to issue waivers to Medicare program requirements to support healthcare providers and patients during the pandemic. One of the first actions CMS took under that authority was to expand Medicare telehealth on March 17, 2020, allowing all beneficiaries to receive telehealth in any location, including their homes.

Before the public health emergency, approximately 13,000 beneficiaries in fee-for-service Medicare received telemedicine in a week. In the last week of April, nearly 1.7 million did so. In total, over 9 million beneficiaries have received a telehealth service during the public health emergency, mid-March through mid-June, according to a July 15 HealthAffairs blog post.

(3) 6G. An August 21 article in SingularityHub, titled “6G Will Be 100 Times Faster Than 5G—and Now There’s a Chip for It,” reports the following:

“Though 5G—a next-generation speed upgrade to wireless networks—is scarcely up and running (and still nonexistent in many places) researchers are already working on what comes next. It lacks an official name, but they’re calling it 6G for the sake of simplicity (and hey, it’s tradition). 6G promises to be up to 100 times faster than 5G—fast enough to download 142 hours of Netflix in a second—but researchers are still trying to figure out exactly how to make such ultra-speedy connections happen.”

However, this technology probably won’t be available for prime time until 2030. For now, we’ll have to settle for 5G. The pandemic has slowed the rollout of 5G at the same time as it has increased the demand for the technology to facilitate working remotely by boosting data transmission speeds. Nevertheless, the rollout should continue during the second half of this year into 2021. When it becomes truly accessible, it promises to be more than 30 times faster than the average 4G download speed and to revolutionize self-driving cars, augmented reality, and the Internet of Things.

(4) Robotics, automation, and 3D manufacturing. The August 18 issue of National Geographic featured an article titled “The robot revolution has arrived.” The COVID-19 pandemic has significantly boosted the interest in having robots do more of what humans did before the health crisis. In many instances, it is simply the medically wise alternative to using infection-prone humans. The article reports:

“Already, in 2020, robots take inventory and clean floors in Walmart. They shelve goods and fetch them for mailing in warehouses. They cut lettuce and pick apples and even raspberries. They help autistic children socialize and stroke victims regain the use of their limbs. They patrol borders and, in the case of Israel’s Harop drone, attack targets they deem hostile.”

The pandemic disrupted global supply chains. One likely outcome is that manufacturers will increasingly explore ways to work with suppliers closer to home. Instead of just-in-time inventories, companies will be looking for ways to have just-in-case inventories available in the event of future supply disruptions. They are increasingly using 3D printers to produce parts on demand to the exact specification and in the exact numbers required—reducing wait time and safeguarding against external disruptions.

Robots, automation, and 3D printers are revolutionizing manufacturing. An August 21 article in reports:

“Mighty Buildings claims to increase the efficiency and reduce the waste in building modern homes. Drawing from foundations in robotics, manufacturing and sustainability, Mighty Buildings’ goal is no less than the reimagination of the construction sector. The company uses a combination of 3D printing and prefab techniques to automate up to 80 percent of the building process for greater productivity. … According to the Oakland, Calif.-based startup, they can build a 350-square-foot studio unit in under 24 hours while using 95 percent fewer labor hours at twice the speed of traditional manufacturing methods.”

If one of the consequences of the pandemic is de-urbanization, there will be more suburbanites who will need to buy one or more cars to get around their small towns. The August 7 Forbes reports:

“A mass shift to single-occupancy vehicles is occurring nationwide according to new research from Cornell University, which poses a major traffic and pollution problem in many cities. The solution, according to today’s most influential automakers, is to accelerate the development of electric, driverless cars programmed by artificial intelligence.”

Volkswagen AG pledged more than a fifth of its vehicles will be electric by 2025, while investing 44 billion euros ($52 billion) on autonomous driving and “mobility services” by 2023.

By the end of the 2020s, autonomous drones carrying passengers and cargo could be as ubiquitous as in the old television cartoon The Jetsons. EHang, a Chinese company, reportedly is ahead of the pack with its autonomous aerial vehicle, or AAV. A user can summon an EHang drone using an app. The drone lands at a predetermined spot near the requested pick-up location. It can carry up to two passengers with a combined weight of under 440 pounds and travel up to 32 kilometers (22 miles) on a single charge.

(5) Batteries. The outlook for EVs and drones depends largely on progress made in increasing the capacity and service lives of large batteries while reducing their weight, as Jackie and I have often discussed in the past. The future may belong to solid-state batteries, which reportedly could be available by 2025. That’s the same year that the world’s biggest automakers plan to launch an array of new electric models.