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Jon Talton

Analysis and commentary on economic news, trends and issues, with an emphasis on Seattle and the Northwest.

Category: Debt
June 11, 2013 at 10:22 AM

Household wealth still far from recovery

Four years after the official end of the recession, the average American household has recovered only 62.8 percent of the wealth it lost in the crash. The findings come from a new report by William Emmons and Bryan Noeth at the Federal Reserve Bank of St. Louis. That’s in real dollars. All household net wealth has rebounded 114.3 percent from the trough to a record high, but it doesn’t account for inflation or increased population. Adjusted for these factors, the number is well below where it stood in 2006. And the recovery is highly uneven, mostly benefiting the better off with the stock-market boom and saving the big banks.

According to the Fed’s Survey of Consumer Finances, household finances were “severely” affected by the downturn. Median household wealth dropped 39 percent. Among those worst hurt were the young, those with less than a college education, minorities and those carrying heavy debt. With wages largely stagnant, wealth was increasingly dependent on housing, which was in a bubble. In a separate essay by Emmons and Ray Boshara, the importance of household balance sheets to the larger economy is explained. This element was largely discounted by many macroeconomists before the collapse.

It has come as somewhat of a surprise, therefore, that many economists now are calling the Great Recession of 2007-09 a “balance-sheet recession” and that balance-sheet failures of the type described above are seen as important contributors to the downturn and weak recovery.

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Comments | More in Consumer spending, Debt, Demographics, Great Recession, Housing, Inequality, Jobs/Unemployment

March 4, 2013 at 10:23 AM

The next bubble is here: Student loans

Friday’s report from Donghoon Lee of the Federal Reserve Bank of New York makes clear that the American bubble economy learned nothing from the Great Recession. With no meaningful reform in the financial sector, it’s cooked up a new one, this time in student loans. And it’s about to blow.

It’s not just that student debt is approaching $1 trillion compared with about $350 billion in 2004. “Student debt is the only kind of household debt that continued to rise through the Great Recession and has now the second largest balance after mortgage debt.” That means the burden is larger than credit cards, auto loans and others. While households have done some deleveraging after the big bust, people losing their jobs went back to school. With most Americans’ net worth about where it stood in 1992, they borrowed. The loans have been packaged into securities by outfits such as SLM Corp. and sold to investors. These derivatives are highly profitable and demand is rising. Now, as the new report makes clear, delinquency rates are rising.

Does this sound familiar?

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Comments | More in Banking, Business scandals, Debt, Student loans

February 25, 2013 at 10:36 AM

Making peace with the sequester

It looks as if the sequester will happen. The public doesn’t actually want to cut any government programs. There’s no economic reason to do so: Borrowing costs remain at historic lows, we borrow in our own currency, and cutting government spending in the midst of a slow recovery marked by continued high joblessness will only make things worse. The deficit is almost entirely a product of the collapsed economy, along with the Bush tax cuts and two long wars; it’s coming down. Nevertheless, the D.C. elites, from President Obama to Republicans controlling the House have bought into the idea that the deficit is our most pressing challenge.

So we’re going to embark on an experiment not seen in this country since 1937, when FDR throttled back spending on the New Deal and promptly sent the economy, which had been recovering smartly, into a new recession. Austerity in Europe has proven to be a disaster, too. Still, some good might emerge. Ever since Ronald Reagan, politicians have gotten ahead by claiming that “government is the problem.” Nevermind that the federal government grew under every president, including Reagan, who also added government jobs to help come out of the 1981-82 recession (unlike Obama, who has been cutting jobs).

The initial American austerity is relatively small, amounting to about 2 percent of the federal budget. That’s just for starters. So let’s find out if we really need the federal government.

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Comments | More in Debt, Deficit, Federal debt/deficit

February 22, 2013 at 10:07 AM

Sequester and the economy

Where to begin on the sequester? The $85 billion in automatic, across-the-board federal budget cuts set to kick in on March 1 are an entirely artificial crisis manufactured by the Congress, specifically the Tea Party-dominated House of Representatives. The deficit and debt are not the biggest economic problem facing the country. Not by a long shot: There’s persistent high unemployment, slow growth, lack of investment in 21st century infrastructure, bad trade deals, inadequate tax revenues and the hollowing out of the middle-class by an oligarchy that has gamed the system to its advantage. Inflation remains tame. Interest rates are at historic lows. So there’s no evidence — none — that the deficit and debt (which are coming down, by the way) are hurting the economy.

The sequester, on the other hand, has the potential to shock a slow economy back into recession. The slow recovery is already partly the result of federal austerity. These cuts will do even more damage. Austerity is not working in Europe. It won’t work here. To be sure, we need to make the transition from Military Keynesianism to a peacetime economy and invest in America rather than in blowing things up and making more enemies overseas. We need to get control of health costs, which are the long-term threat to the budget. But the House, whose red-state members are in districts that are almost entirely net takers from the taxpayer, seems disinclined to back away from the brink. What do you think? You can make multiple answers.

Read on for the best links of the week and the haiku:

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Comments | More in Debt, Defense, Deficit, Federal debt/deficit

August 30, 2012 at 10:00 AM

Five things to watch for this fall

Europe is back from vacation, American economic growth remains weak and the presidential campaign will suck all the oxygen from the room. Here are five things to watch for in the economy in the weeks ahead:

1. The European recession and political crisis will get worse. It begins with the need for the Greek parliament to approve another 11.5 billion euros in spending cuts or risk losing its lifeline from the European Central Bank and International Monetary Fund. As I’ve written before, the only real answer is an “orderly” exit mechanism for the euro or a complete write-down of the debt.

2. Europe’s recession will spread. The EU accounts for 20 percent of U.S. trade and is a huge trading partner with Asia. The slowdown there is already affecting global commerce. The big unknown: The danger to “counterparty” U.S. banks (Mr. Dimon, call your office).

2. The danger of a new bubble popping. Will it be student loans or food futures?

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Comments | More in China economy and business, Debt, Debt ceiling debate, Deficit, Eurozone, Income/living standards, International Monetary Fund, Jobs/Unemployment, Trade

August 6, 2012 at 10:00 AM

Racing toward the fiscal cliff

I haven’t written about the so-called fiscal cliff because, against increasing evidence, I hold to Abba Eban’s quote, “When all else fails, men turn to reason.” But maybe not in today’s America.

The fiscal cliff is the set of budget cuts and tax increases that would automatically kick in next year. That is, unless Republicans and Democrats, the Congress and the White House, can agree to new tax and budget provisions, especially the shape of extending the Bush tax cuts. If we fall off the cliff, according to the Congressional Budget Office, the total effect could mean a 3.9 percent contraction in the growth rate of gross domestic product next year.

The fiscal cliff is replacing the eurozone crisis as the big deal facing the U.S. economy. As the New York Times reports, businesses are reducing their investments for fear that reason won’t prevail. “Executives at companies making everything from electrical components and power systems to automotive parts say the fiscal stalemate is prompting them to pull back now, rather than wait for a possible resolution to the deadlock on Capitol Hill.”

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Comments | More in Debt, Debt ceiling debate, Deficit, Lindsay Lohan, Politics and the economy

June 8, 2012 at 10:00 AM

Vote: Fix the economy now

The economy is near stall speed, no matter what Ben Bernanke says. The Obama stimulus was too small to fill the demand hole left by the Great Recession. It was poorly aimed and now is running out, and the reality is that Obama has presided over one of the lowest-spending terms over the past 60 years. Government cutbacks are a further headwind to recovery (something Reagan didn’t face in 1982).

Unemployment remains high and growth is slowing. Most people think we’re still in a recession. Europe is in a recession and threatening to bring the world into a deep downturn. The GOP House and minority in the Senate will resist any measures to move the economy forward — at least until President Romney is sworn in. So welcome to the next few months.

What would you do to fix it?

The most important need now:

Read on for the best links of the week and the haiku:

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Comments | More in Campaign 2012, Debt, Deficit, Eurozone, Federal Reserve, Great Recession, Great reset, Income/living standards, Infrastructure, Jobs/Unemployment

June 1, 2012 at 10:00 AM

The economy on the edge

I read an economist comment that today’s report of only 69,000 net new jobs created in May is “what a jobless recovery looks like.” No, this is what an economy tipped on the edge of a new recession looks like.

China and India are slowing. Much of the eurozone is already in a recession and on the verge of a breakup and breakdown that will make Lehman Brothers look like a community bank failure. And the U.S. economy is rapidly decelerating. The job growth was half what’s needed just to keep up with the natural growth of the labor force, much less find new work for 12.7 million unemployed. Worse, all the new jobs came from part-time positions. With the decline in labor-force participation, the unemployment rate badly underestimates joblessness. Average hours and weekly wages fell. The share of people unemployed for longer than six months grew. (Here’s a quick briefing in charts).

In Europe, leadership is lacking; the big banks are in control and seem happy to take the continent down. The Federal Reserve has consigned itself to the sidelines. Unlike the Reagan administration, which expanded federal jobs amid the 1981 recession and after, the Obama White House has been cutting them. The demand hole mostly behind the jobs crisis was never adequately addressed. Yet no new stimulus will be forthcoming from a gridlocked, election-year D.C. Unless things get really scary. And they just might.

Read on for the best links of the week and the haiku:

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Comments | More in Debt, Deflation, Eurozone, Federal Reserve, Global economy, Great Recession, Jobs/Unemployment, Outlook

March 29, 2012 at 10:00 AM

Our growth problem

It is definitely more profound after the Great Recession, but it’s not new. Real growth of gross domestic product was 51 percent in the 1950s, 53 percent in the 1960s, 38 percent in the ’70s, 35 percent in the ’80s, 39 percent in the 1990s — and just 16 percent in the 2000s (and thanks to Steve Randy Waldman for the research via the St. Louis Fed).

The reasons behind much of the the deceleration aren’t difficult to pinpoint: The economies of Japan and Germany were rebuilt and became world competitors; much of American manufacturing was complacent to threats and didn’t invest enough to meet them, and America hit its national oil peak in the early 1970s and was much more vulnerable to OPEC. The Morning in America decade actually performed worse than the decade of malaise, and the trend was somewhat reversed in the 1990s.

As for the 2000s, my suspects are the rise of China and our unwillingness to protect American jobs and industries; two recessions brought on by corporate wrongdoing; inequality that left more Americans unable to improve their economic conditions and hence productivity; unproductive finance, and the opportunity costs of two wars.

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Comments | More in Debt, Deficit, Federal debt/deficit, Great Recession, Income/living standards, Inequality

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