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Discounting the Present Value of Future Income

Last week, we discussed the ongoing fall of dividend, and especially earnings, yields. This Report is not a stock letter, and we make no stock market predictions. We talk about this phenomenon to make a different point. The discount rate has fallen to a very low level indeed.

We add this chart to provide a slightly different perspective to the discussion that follows below (and the question raised at the end of the article). This is a very simple ratio chart, which focuses on non-financial corporate debt in particular, as neither consumer debt nor government debt can be considered “productive” by their very nature – the latter types of debt are used for consumption, which they “pull forward” (as an aside, we don’t believe there is anything wrong with consumer debt per se, but it is not “productive”). As the recommendations of Keynesians on combating economic downturns indicate, they have a slight problem with the sequencing of production and consumption. They favor measures aimed at boosting demand, i.e., they want to encourage consumption, which is tantamount to putting the cart before the horse. The chart above shows the ratio of GDP to total non-financial corporate debt – and obviously, GDP is not really an ideal measure for this purpose, as Keith also mentions below (GDP has many flaws, and its greatest flaw is the underlying idea that “spending” is what drives economic growth; not to mention that it seems not to matter what the spending actually entails – even Keynesian ditch digging or pyramid building would “add to GDP”, but would it represent economic growth? That seems a rather audacious assumption – in fact, it should be obvious that such activities would diminish rather than enhance society-wide prosperity).

…click on the above link to read the rest of the article…

Why We’re Doomed: Stagnant Wages

September 1, 2017

Why We’re Doomed: Stagnant Wages

The point is the present system cannot endure.

Despite all the happy talk about “recovery” and higher growth, wages have gone nowhere since 2000–and for the bottom 20% of workers, they’ve gone nowhere since the 1970s.

Gross domestic product (GDP) has risen smartly since 2000, but the share of GDP going to wages and salaries has plummeted: this is simply an extension of a 47-year downtrend.

Last month I posted one reason Why We’re Doomed: Our Economy’s Toxic Inequality (August 16, 2017). The second half of why we’re doomed is stagnant wages. Why do stagnating wages for the bottom 95% doom our status quo? As I noted yesterday in Why Wages Have Lost Ground in the 21st Century, our system requires ever-higher household incomes to function–not just in the top 5%, but in the top 80%.

Our federal social programs–Social Security, Medicare and Medicaid–are pay-as-you-go: all the expenditures this year are paid by taxes collected this year. As I have detailed many times, the so-called “Trust Funds” are fictions; when Social Security runs a deficit, the difference between receipts and expenses are filled by selling Treasury bonds in the open market–the exact same mechanism ther government uses to fund any other deficit.

The demographics of the nation have changed in the past two generations. The Baby Boom is retiring en masse, expanding the number of beneficiaries of these programs, while the number of full-time workers to retirees is down from 10-to-1 in the good old days to 2-to-1: there are 60 million beneficiaries of Social Security and Medicare and about 120 million full-time workers in the U.S.

Meanwhile, medical expenses per person are soaring. Profiteering by healthcare cartels, new and ever-more costly treatments, the rise of chronic lifestyle illnesses–there are many drivers of this trend. There is absolutely no evidence to support the fantasy that this trend will magically reverse.

…click on the above link to read the rest of the article…

Saving and Money–What is the Relationship?

August 8, 2017

SAVING AND MONEY – WHAT IS THE RELATIONSHIP?

Conventional wisdom says that savings is the amount of money left after monetary income was used for consumer outlays, implying that saving is synonymous with money. Hence, for a given consumer outlays an increase in money income implies more saving and thus more funding for investment. This in turn sets the platform for higher economic growth.

Following this logic, one could also establish that increases in money supply are beneficial to the entire process of capital formation and economic growth. (Note increases in money supply result in increases in monetary income and this in turn for a given consumer outlays implies an increase in savings).

Relation between saving and money

Saving as such has nothing to do with money. It is the amount of final consumer goods produced in excess of present consumption.

The producers of final consumer goods can trade saved goods with each other or for intermediate goods such as raw materials and services. Observe that the saved goods support all the stages of production, from the producers of final consumer goods down to the producers of raw materials, services and all other intermediate stages.

Support means that these savings enable all these producers to maintain their lives and wellbeing whilst they are busy producing things. Also, note that if the production of final consumer goods were to rise, all other things being equal, this would expand the pool of real savings and would increase the ability to further produce a greater variety of consumer goods i.e. wealth.

Note that people do not want various means as such but rather final consumer goods. This means that in order to maintain their life people require an access to consumer goods.

…click on the above link to read the rest of the article…

Hell To Pay

September 24, 2016

SkillUp/Shutterstock

Hell To Pay

The final condition for a market crash is falling into place

Sometimes I wonder if I’m ever going to run out of new things to say about the economy. Nothing interesting has happened in a long time.

Our liquidity-drunk “markets” remain over-priced due to the chronic intervention of the global central banking cartel, which has demonstrated over and over again that it won’t tolerate even the slightest drop in asset prices.

Those familiar with my writing know I put the word “markets” in quotes because we no longer have a financial system where legitimate price discovery is a regular — or even recognizable — feature.

It’s destined to fail. What more can be said about such a flawed system?

Well, a lot as it turns out.

And failure to pay attention at this stage of economic and ecological history will prove to be exceptionally painful.

The Beginning of the End

It’s been a long 7 years for those of us who believe fundamentals matter. For quite some time they have not.

So we reality-based fundamentalists have largely been reduced to pointing at the parade of policy failures and ham-fisted market manipulations and saying, essentially, That’s just dumb.

But ‘dumb’ mistakes have become ‘stupid’, and ‘stupid’ became ‘idiotic’, and now ‘idiotic’ mistakes are piling up, accumulating into a mountain of stored potential energy that will someday topple destructively across the global markets. We’ve all known, deep down, that money printing is not the same as capital formation, and that prosperity never truly results from redistributing wealth from one group to another. And yet, far too many have been willing to play along and place their trust in the central banks.

Well, we’ve finally reached the beginning of the end.

…click on the above link to read the rest of the article…

Guided By Nonsense

June 4, 2016

Guided By Nonsense

“Read the directions and directly you will be directed in the right direction.” — Lewis Carroll

U.S. consumers are at it again. After a seven year hiatus they’re once again doing what they do best. They’re buying stuff.

According to the Commerce Department, personal consumption expenditures (PCE), which is the primary measure of consumer spending on goods and services in the U.S. economy, increased $119.2 billion in April. That marks an increase of 1 percent, and is the biggest one month increase since August 2009…nearly seven years ago. Indeed, this is quite an achievement.

The consumer, you know, is the primary engine of U.S. economic growth. Without consumption GDP doesn’t go up; rather, it goes down. Moreover, in a debt based money system, when GDP goes down the whole financial debt structure breaks down.

We don’t condone it. Certainly we’d prefer an honest hard money system where savings and investment drives growth as opposed to borrowing and spending. But our preference has no bearing on reality in this matter.

Still, given the vast array of pretense inherent to a debt based money system, when we hear that PCEs increased by the largest margin in nearly seven years, we take a keen interest. Naturally, we want to know what’s going on. Namely, we ask, where’s the money coming from?

Where’s the Money Coming From?

Middle class incomes, the last we recall, scored a big fat rotten goose egg over the last decade. By this we mean incomes haven’t gone up. To the contrary, they’ve going down.

Our understanding of this unfortunate situation isn’t based on anecdotes we overheard at the corner donut shop. Nor is it based on experiences shared by the crusty fellows casting their lines off Belmont Veterans Memorial Pier. Instead, we have hard evidence and solid proof. Specifically, we point to the distilled findings of Pew Research released earlier this month.

…click on the above link to read the rest of the article…

No Wonder We’re Poorer: Wages’ Share of GDP Has Fallen for 46 Years

May 7, 2016

No Wonder We’re Poorer: Wages’ Share of GDP Has Fallen for 46 Years

The problem is that limiting financialization will implode the system.

The majority of American households feel poorer because they are poorer. Real (i.e. adjusted for inflation) median household income has declined for decades, and income gains are concentrated in the top 5%:

Even more devastating, wages’ share of GDP has been declining (with brief interruptions during asset bubbles) for 46 years. That means that as gross domestic product (GDP) has expanded, the gains have flowed to corporate and owners’ profits and to the state, which is delighted to collect higher taxes at every level of government, from property taxes to income taxes.

Here’s a look at GDP per capita (per person) and median household income.Typically, if GDP per capita is rising, some of that flows to household incomes. In the 1990s boom, both GDP per capita and household income rose together.

Since then, GDP per capita has marched higher while household income has declined. Household income saw a slight rise in the housing bubble, but has since collapsed in the “recovery” since 2009.

These are non-trivial trends. What these charts show is the share of the GDP going to wages/salaries is in a long-term decline: gains in GDP are flowing not to wage-earners but to shareholders and owners, and through their higher taxes, to the government.

The top 5% of wage earners has garnered virtually all the gains in income.

The sums are non-trivial as well. America’s GDP in 2015 was about $18 trillion. Wages’ share–about 42.5%–is $7.65 trillion.

If wage’s share was 50%, as it was in the early 1970s, its share would be $9 trillion.That’s $1.35 trillion more that would be flowing to wage earners.

That works out to $13,500 per household for 100 million households.

…click on the above link to read the rest of the article…

The Root of Rising Inequality: Our “Lawnmower” Economy (hint: we’re the lawn)

April 12, 2016

The Root of Rising Inequality: Our “Lawnmower” Economy (hint: we’re the lawn)

This predatory exploitation is only possible if the central bank and state have partnered with financial Elites.

After decades of denial, the mainstream has finally conceded that rising income and wealth inequality is a problem–not just economically, but politically, for as we all know wealth buys political influence/favors, and as we’ll see below, the federal government enables and enforces most of the skims and scams that have made the rich richer and everyone else poorer.

Here’s the problem in graphic form: from 1947 to 1979, the family income of the top 1% actually expanded less that the bottom 99%. Since 1980, the income of the 1% rose 224% while the bottom 80% barely gained any income at all.

Globalization, i.e. offshoring of jobs, is often blamed for this disparity, but as I explained in “Free” Trade, Jobs and Income Inequality, the income of the top 10% broke away from the bottom 90% in the early 1980s, long before China’s emergence as an exporting power.

Indeed, by the time China entered the WTO, the top 10% in the U.S. had already left the bottom 90% in the dust.

The only possible explanation of this is the rise of financialization: financiers and financial corporations (broadly speaking, Wall Street, benefited enormously from neoliberal deregulation of the financial industry, and the conquest of once-low-risk sectors of the economy (such as mortgages) by the storm troopers of finance.

Financiers skim the profits and gains in wealth, and Main Street and the middle / working classes stagnate. Gordon Long and I discuss the ways financialization strip-mines the many to benefit the few in our latest conversation (with charts): Our “Lawnmower” Economy.

…click on the above link to read the rest of the article…

The Fed’s 2% Inflation Fairytale—–Who Made It Up And What Does It Mean?

November 5, 2015

The Fed’s 2% Inflation Fairytale—–Who Made It Up And What Does It Mean?

Once upon a time, not too long ago, central bank wizards began telling a fairytale that economies need inflation. But not just any inflation. In their Goldilocks make-believe world, the not too hot, not too cold, just right dose of two percent is needed to keep an economy healthy.

While there is absolutely no quantifiable data or economic model that proves or supports this oft-cited fairytale, the business media keep repeating it, selling the fiction that a two-percent inflation rate will somehow create jobs and spur economic growth.

“Worry Over Low Inflation Kept Fed at Bay,” screeched the Wall Street Journal, 9 October headline, following the release of Federal Reserve minutes in which they decided not to raise interest rates.

Who made this up? How is inflation – paying more for goods and services – the perfect financial tonic for working people to swallow?

In the United States, for example, with wages trending between decline and stagnation, more inflation means paying more to get less. With median household income below 1999 levels, how can higher inflation stimulate more spending? How can higher inflation be beneficial when, according to new Social Security data, 63 percent of Americans make less than $40,000 per year?

As dismal as those numbers are, in countries around the world where unemployment is much higher and real income and wages have fallen more dramatically, central bank charlatans persist with their “we need inflation” refrain.

A headline in the Financial Times read: “Eurozone’s small rise in prices misses ECB inflation target.” And the article reported: “Prices ticked up across the eurozone this month, although they remain well short of the European Central Bank’s 2 percent inflation target needed to bolster the region’s economic recovery(FT, 31 October 2015).”

…click on the above link to read the rest of the article…

Six Ways You Can Make More Money To Buy More Preps (Or Just Pay Off Your Bills)

October 14, 2015

Six Ways You Can Make More Money To Buy More Preps (Or Just Pay Off Your Bills)

I get thousands of emails each month (usually over 3,000 to be exact) and the one problem that I see mentioned over and over is a lack of money to prep, and while I try to keep the advice given on the blog to low-budget preps, it still takes some money to do it, after all it takes money to live, and by prepping you’re insuring that you live through and after a major disaster or social upheaval.

So to prep, even on the most basic level is going to cost some money for gear and food supplies, even if you just put together the most basic bug out bag you’ll need a few extra dollars. But let’s face it, if all you have is a bug out bag, then you’re not really very prepared, and as I’ve said before bugging out to the woods is one of the worst survival strategies under most circumstances.

So to get extra money for preps you either have to spend less on everything else or make more. We’ve covered many ways to save money on the blog already so today we are going to look at ways to help you make more money.

Wood working – if you’re handy with tools (you need to learn if you’re not) this can be a great money-maker. Pick a several products and learn to make them well and then start selling those products. Depending on the products you sell, you might only need to put a small ad in your local paper to have customers come to you, or your could set up a local swap meets / flea markets or even sell through local or regional retail outlets.

…click on the above link to read the rest of the article…

That 70s Show – Episode 2

August 15, 2015

That 70s Show – Episode 2

In Episode 1 we showed how the US labour market changed dramatically from the 1970s on back of excess money printing which allowed Americans to buy tradable goods on the international market, hollowing out its own manufacturing base, and essentially creating an unsustainable consumer driven economy where the broad masses get their employment within service sector.

We will now take that a step further and look at what this has meant for the US worker. As our first chart shows, non-supervisory real wages stagnated in the early 1970s and has essentially remained flat ever since.

Measured labour productivity on the other hand continued upward, but its rate of growth shifted down. More on this in our next blog post.

Source: Bureau of Labor Statistics (BLS), Bawerk.net

The American middle class, i.e. the non-supervisory workers, managed to grow their consumption in the midst of stagnating wages through

moving to two income households (women constitute almost 50 per cent of the labour force today)

Source: Bureau of Labor Statistics (BLS), Bawerk.net

by increasing debt

Source: Federal Reserve – Flow of funds Z.1, Bawerk.net

It should be clear that when the share of women in the labour force has reached 50 per cent and further leverage of a shrinking household income has become counterproductive the end-game has started. The only way to increase living standards from here will be the old fashioned way; consume less than you produce and productively invest the surplus.

…click on the above link to read the rest of the article…

The Economy is in Liquidation Mode

August 12, 2015

The Economy is in Liquidation Mode

Capital Consumption

If you’re an American over a certain age, you remember roller skating rinks (I have no idea if it caught on in other countries). This industry boomed in the 1970’s disco era. However, by the mid 1980’s, the fad was fading. Imagine running a rink company at the end of the craze. You know it is not going to survive for long. How do you operate your business?

The birthplace of roller disco turned out to be edible, sort of
Photo via realskatestories.com

You milk it. You spend nothing on capital improvements, slash maintenance, and reduce operating expenses. There’s no return on investment, so you cut to the bone and wring out as much cash as possible. When a business has no future, you operate in liquidation mode.

Your rink generates cash flow, but this is no profit. It’s simply the conversion of accumulated capital into present income. You are consuming capital, almost literally eating the business.

roto A fad that went away… roller skating rink in the 70s
Photo credit: Picnicface

I have used a family farm as an example to paint a clear picture of capital consumption. Imagine using your farm, not to grow food, but to swap for it. You tear down the barn to sell the oak beams for flooring, auction off the back 40 (acres), put the tractor on Craigslist, then finally sell the farm and house. All to buy the produce you can no longer harvest.

Let this sink in. The farm’s falling crop yield can’t feed you any longer, but you still need to eat. You’re liquidating the farm merely to buy groceries.

The conventional view encourages you to be grateful that the purchasing power of the farm is high, that it trades for a big stash of food. While it may be true that you can eat for years on the proceeds, it’s small consolation for the loss of what had been an evergreen income.

…click on the above link to read the rest of the article…

Stop Financializing the Human Experience

August 11, 2015

Stop Financializing the Human Experience

In this financialized hall of mirrors, narcissism replaces identity and the authentic self is rendered incoherent.

Correspondent Dani A.M. (of Removing the Shackles) was kind enough to identify three bits of advice from my recent conversation with Max Keiser onSummer Solutions (25:45): (9:20 min: “We’ve been brainwashed into financializing the human experience.”)

1. Stop financializing the human experience

2. Acquire skills, not credentials

3. Vote with your Feet

These are the themes I’ll be addressing this week.

What does financializing the human experience mean? It means turning everything into a financial transaction that profits an enterprise and the state.Since the state needs profitable enterprises to generate its tax revenues (and to pay wages that generate payroll/income taxes), the state is an implicit partner in everyfinancializing the human experience transaction.

In an increasingly cashless, debt-dependent culture, every financial transaction generates income for banks: credit card and debit card fees, interest on credit cards, etc.

Here are some common examples:

— Mom and Dad work long hours to afford childcare. Maybe they like working for the state or Corporate America more than caring for their kids (or sharing the care of several kids with other parents), but the system incentivizes maximizing income and paying for childcare as a profitable transaction.

In other words, childcare for many has been distilled down to a financial decision.

— Dinner with friends is purchased, generating income for an enterprise, a bank and taxes for the state. If people no longer learn how to cook, then sharing a meal with friends necessarily becomes a financial transaction.

— A sense of self must be purchased via signifiers of identity and self-worth.

The obsession with brands and other signifiers of belonging reflects one thing, and only one thing: a pervasive fragility of self. Unsurprisingly, our selfhood is incredibly fragile in a culture that glorifies the impossible (thin, fit, super-smart, witty, personable, creative, wealthy oh and of course humble) and sows insecurity as a means of selling you something.

…click on the above link to read the rest of the article…

2-income families nearly doubled from 1976 to 2014

June 25, 2015

2-income families nearly doubled from 1976 to 2014

As Canadian families change, number of stay-at-home parents plunges, but more of them are dads

Families with both parents working are a substantial majority in Canada, with 69 per cent of couples with a child under 16 years of age having two incomes, according to Statistics Canada.

That contrasts sharply with 36 per cent of couples with a child under 16 having two working parents in 1976 and represents a 92 per cent increase.

In Quebec, the proportion of families with a stay-at-home parent declined faster than anywhere in the country, from 59 per cent of families in 1976 to 13 per cent in 2014.

The Statistics Canada study based on data from the Labour Force Survey shows the changes undergone by Canadian families in the past 38 years.

The survey gathered data on 2.8 million families in both 2014 and 1976, as the number of Canadian families with children remained constant.

Living on 1 income

The influx of women into the workforce in the 1970s and 1980s is credited with boosting the prosperity of middle-class households.

However, it is also true that few Canadian families can afford to live on one income as many did in 1976.

That makes the cost of daycare a perennial issue for many families and means legislation such as the income-splitting tax break pushed through earlier this year may be tailored for the kind of Canadian family that is no longer in the majority.

The share of couple families with children who had only a single earner declined from 59 per cent in 1976 to 27 per cent in 2014. That means about 736,000 couples across Canada, according to Statistics Canada.

But in 2014, it was far more likely that a stay-at-home parent was the father than in 1976. About 11 per cent of families with a stay-at-home parent said it was dad who was home with kids, compared to two per cent in 1976.

…click on the above link to read the rest of the article…

Younger workers more likely to see less income in retirement, CIBC says Average person born in ’80s and after may see only 70% of pre-retirement income, economist Benjamin Tal says

June 3, 2015

Younger workers more likely to see less income in retirement, CIBC says

Average person born in ’80s and after may see only 70% of pre-retirement income, economist Benjamin Tal says

Urgent attention needs to be given to what Canadians can expect to get in retirement income — something that’s become a real divide along generational lines, a prominent Canadian economist says.

In a note to clients this week, Benjamin Tal at CIBC waded into the ongoing debate over Canada’s looming pension and retirement crisis.

While falling well short of endorsing any of the myriad proposals out there to fix the problem, including beefing up the Canada Pension Plan, encouraging more individual savings by expanding RRSPs and TFSAs or something else, Tal is unequivocal in his view that declining retirement income is a problem needing a solution — and soon.

DON PITTIS: Expanding CPP won’t fix Canada’s pension problem

After running a simulation of pension income across a wide variety of age ranges, Tal found a clear deliniation between those in retirement now or approaching it, and those who won’t get there for several years or decades.

In today’s economy, few people rely on any one source of retirement income, with most people drawing on a combination of their own investments such as RRSPs, TFSAs and real estate, government programs such as CPP and things like pension plans that they may have accrued from employers over a lifetime of work.

In general, Tal says, “the typical 70-year-old today has enough income to maintain his or her pre-retirement standard of living, taking into account the typical drop in expenses in one’s post-working years.”

Generational gap

But while millions of Canadians 65 and up are on a path to the retirement of their dreams, the data show that millions of others are headed for a steep decline in living standards in the decades ahead, particularly people who are younger and are in middle-income brackets.

…click on the above link to read the rest of the article…

U.S. Households Under Pressure: Stagnant Incomes, Rising Basic Expenses

May 29, 2015

U.S. Households Under Pressure: Stagnant Incomes, Rising Basic Expenses

How do you support a consumer economy with stagnant incomes for the bottom 90%, rising basic expenses and crashing employment for males ages 25-54? Answer: you don’t.

Frequent contributor B.C. passed along a sobering set of charts that provide context for How The Average U.S. Consumer Spends Their Paycheck. The basic story is well-known to the bottom 90%: most of the household income goes to taxes, housing, food and transportation, with healthcare and insurance, pensions and retirement contributions rounding out the big-ticket items. (Higher education is, as we all know, paid with student loans by all but the top-tier of families.)

Here’s the question this raises: is the sliver that’s left enough to support a $17 trillion consumer economy? The answer is obvious: no.

Stagnant household income has a number of systemic causes, including the generational decline of full-time employment (A Rising Share of Young Adults Live in Their Parents’ Home) and the concentration of wage gains in the top 10%. These dynamics are not easily addressed, for the simple yet profound reason that the amount of human labor that generates a meaningful profit in a stagnant, over-indebted, financialized economy is declining.

The only way most enterprises can sustainably earn a profit is to offload costly human labor (with its immense burdens of healthcare, pensions, workers compensation, disability insurance, etc., and the heavy regulatory burdens of workplace rules) and replace it with networked software and smart machines.

The types of human labor that generate hefty profits are increasingly scarce, and as a result entry-level pay and employment are both capped by the high costs of human labor (even at minimum wage) and the relatively meager profits generated by conventional labor.

…click on the above link to read the rest of the article…

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