A Crisis in the Debt Ceiling Limit Approval – Again!

I know this isn’t headline news, yet.  But in two weeks, it will be.

I knew if Hillary Clinton was elected, this crisis would happen.  With Clinton as President,  I knew the House Republicans would use this opportunity to threaten  to wreck the economy unless a “dirty” approval was signed into law.  A dirty approval contains additional riders outside of increasing the debt ceiling which the President and the Democrats oppose and would under normal circumstances never pass.   The threat of sovereign default is used as leverage.   This makes most economists cringe.

But I thought it would be completely different with Trump in the White House and Republicans in control of both the House and the Senate.  Boy was I wrong!

Obama and Treasury Secretary Jack Lew went through sheer hell in getting the debt ceiling approved in 2011.   There was another crisis in 2013.    Treasury Secretary Steven Mnuchin asked Congress to approve a simple and clean bill to increase the debt ceiling limit.  He is 100% right.

As this issue got politicized,  somehow what the debt ceiling really was got twisted out of shape.  It absolutely is not analogous to the limits on credit cards, which we all know stops someone from racking up huge debts. The debt ceiling is not a mechanism to control spending.   This is done through the budget and appropriation requests.   This is stated on numerous website including Wikipedia as follows:

Because expenditures are authorized by separate legislation, the debt ceiling does not directly limit government deficits. In effect, it can only restrain the Treasury from paying for expenditures and other financial obligations after the limit has been reached, but which have already been approved (in the budget) and appropriated.

The difficulty in approving this increase, is that it says to conservative Republicans, that they somehow approved huge government deficits.

If not approved by late September, the US will be  in default.   The US stock market crashed in 2011, when it looked like there would be no approval. According to Wikipedia:

The GAO estimated that the delay in raising the debt ceiling during the debt ceiling crisis of 2011 raised borrowing costs for the government by $1.3 billion in fiscal year 2011 and noted that the delay would also raise costs in later years.[39] The Bipartisan Policy Center extended the GAO’s estimates and found that the delay raised borrowing costs by $18.9 billion over ten years.

We are back in the same situation, and this time it could be far worse because of the White House in-fighting.    Mike Mulvaney of the Office of Budget and Management undercut the Treasury Secretary’s position by suggesting something truly frightening-  using the crisis to force changes to Medicaid.

I like the way the LA Times presented the crisis:

The debt ceiling fight: This time it’s different–and much more dangerous

It is a time bomb.  There are  ways to kick it down the road, but that’s a horrible idea, as it starts discussion of all sorts of ways to frustrate a simple approval.  Democrats and moderate Republicans should unite and pass what Mnuchin asked for, ASAP.  Mulvaney should just keep quiet if he can.

Most economists believe the debt ceiling shouldn’t exist.  I agree, as explained in the link.

Stay tuned,

Dave

Link:  Wikipedia Debt Ceiling

 

Coal Companies and Jobs

For those who watch Jim Cramer’s Mad Money show, one might thing the coal producers would be the perfect “Trump stock” as the EPA is set to reverse course on air pollution standard regulations, enacted during the Obama era.

But coal stocks are not doing well at least in the last 3 months.  Since the beginning of 2017, Arch Coal (ARCH) is down 16% and Cloud Peak Energy (CLD) is down 27%.

We have plenty of coal resources, but declining demand.  See prior post, “Coal Craziness” for more details with links.   The decline in employment over the last 70 years or so, is due to a high level of mechanization in the mines as well as less demand for coal.  The electric producers will use the lowest cost fuel, and natural gas is a very competitive alternative to coal.

I suggested in my last post, that coal miners might be able to retrain for the more lucrative area of the manufacturing of  solar energy photo-voltaic panels.  A recent university study suggests this is possible, and the benefits would be enormous:

Coal to solar transition

The coal industry is not disappearing (sorry Al Gore) but the solar energy industry is likely to be booming in the next 5 to 10 years.

Investing in solar energy has been a bumpy ride.   I would never think “green energy” and Trump policies go together.  But based on  year to date, investing in a solar power fund  (KWT)  would have made about 10%, better than the market average of 6%.    Pulling out the international agreements to reduce fossil fuel emissions, and subsidies for the solar industry are among the worst plans of the Trump administration.

Stay tuned,

Dave

 

 

 

Obama’s Legacy – Economics Part 2

I only listened to part of Obama’s farewell address, then Sean Hannity came on, and started attacking Obama on economic policy.   It was way over the top.  In Part 1,  three graphs,  showing the Dow Jones Industrial Average, housing starts and unemployment show a very solid economic recovery trend from mid 2009 to 2016.

But, the US economy has been changing.  Workers with  an assembly line  job for a car manufacturer,  could count on steady employment so long as the cars sold.  Now, the big two challenges are whether the company wants to continue to manufacture the  cars in the US and whether the job can be replaced by computer controlled robots.

new-jobs

The above graph is from http://www.fivethirtyeight.com.  Job growth in manufacturing has increased beginning in mid 2009, but there has been a down trend in manufacturing since about year 2000. So,  Obama should be praised not blamed for help change the direction of the trend.    The profits of manufacturers have not declined, except during the last year of the Bush term and manufacturing output has increased.  So we make more with less workers.   The culprit is automation.

The housing ownership percentage was the highest around 2004 to 2006, during the housing bubble that finally burst in 2008.   Does anybody still remember how people the ninjas (no income, no jobs) could get high interest loans and then these toxic assets were bundled with other debts to somehow qualify as safe investments?

homeownership

Finally, and least important is the labor participation graph.  This shows over 24 year period, the percentage of the population working was increasing 5%, until it reach a maximum in 1997, and started to decline.

laborpat

This was a surprise to me.   It certainly does not correlate with recessions or other common measures of the economy, as shown below:

labpat-1

The shaded bars represent recessions. During recessions, generally unemployment goes up, so why is labor participation going up during all recessions except the two?    This downward trend is due in large part to the baby boomers retiring.   Overall employment during Obama’s term increased steadily.

The chart Obama-haters love most—and the truth behind it

I’ve seen a lot of booms and busts.    You can see a bust in the shopping centers.  New  car lots are going out of business. Foreclosures everywhere.  It didn’t happen on Obama’s watch.

I’ve shown three common measures of the economy:  stock market, unemployment and housing starts – all solid trends.

I’ve shown manufacturing employment is down from levels 25 years ago.  Profits are not.   The last two statistic, home ownership and labor participation have to do with demographics which I don’t think Trump will change.  Well, unless he wants to get the over 65 year old’s back on the assembly lines.

More later.

Stay tuned,

Dave

Obama Legacy – Economics, Part 1

Worst economic conditions since 1973.  Labor participation has never been this low.  Percent of home ownership now at a 10 year low.  Deficits are sky rocketing.  Thank God we got rid of Obama and his screwed up economic plan.

Ok- this is from Fox news,  Sean Hannity, right after Obama’s farewell address.  I’ve embellished on a bit.  This kind of bashing of the economy used to come from financial advisors with doomsday prediction, and then either “Buy my book … ” or “Call me now at 800- ….”  so you will be protected.   Now, it’s all about ratings.

When things are bleak for large companies, the stock market crashes.  The stock market crashed in 2008 at the end of Bush’s term as the banking/financial crisis got red hot.

djia

Now, the first big infusion of government money came during Bush’s term.  Conservative Republicans hated this, and stated it was like throwing gasoline on a fire.  But no recovery goes straight up. I count 9 dips in the Dow.

As the economy recovered,  unemployment dropped from 10% to 4.6%.

unemployment

 

And the housing market recovered as well beginning in late 2009.

housing

Unemployment and housing starts are two of the most closely watched barometers of the US economy.

Average home prices have also increased, and bank requirements for new loans are more difficult than in the period of 2000 to 2008.   This is why, the percentage of home ownership  declined  during Obama’s administration.    Also labor participation declined as baby boomers retired.  Increase enrollment in colleges may also be a factor.

Has the election of Trump made a difference in the economy?  Certainly, the stock market has rallied since November, but it is far too early to tell.

I haven’t mentions the US debt and other important aspects of the economy. To be continued.

Stay tuned,

Dave

 

 

 

 

US Unemployment

Donald Trump says we shouldn’t believe US unemployment rates  is 5%.  He says the unemployment rate is really  around 20%.  The average investor knows 20%  is very evident with massive foreclosures and businesses closing up. The stock market is destroyed by even 10% unemployment.

The highest level of unemployment in the last 67 years has been 10.8% during Reagan’s administration. Many economic events occurring during Nixon and Carter’s administrations, likely contributed to this high rate.  Oil prices tend to go down with unemployment.  In the last 4 months, oil prices have been slowly moving up even with an oversupply situation.

Trump is quoted as saying:

The official jobless figure is “statistically devised to make politicians — and in particular presidents — look good.”

Unemployment rates are determined by the Bureau of Labor Statistics. They have been estimating unemployment on a monthly basis since 1948.  Now, with the internet, you can get all the BLS   monthly estimates from 1948:

Unemployment Rates

The unemployment estimates are done by career government employees with the objective of obtaining the best estimate of unemployment in the country.  A 5% unemployment rate sounds good, unless you live in a neighborhood where most of your neighbors are unemployed.  The 5% unemployment is a nationwide value,  and there are large variations depending on age and trade or educational skills.

There are other measures of  unemployment statistics calculated by the BLS.  The BLS has a budget of 618 million dollars and has 2,500 employees.

The BLS data are used by economists and financial analysts around the world. In  addition to the unemployment rate, they provide estimates of the Payroll Employment,  Consumer Price Index (CPI), Producer Price Index (PPI),   Productivity,  US Import Index  and US Export Index.

Stay tuned,

Dave

 

Graham Ledger on the debt ceiling

Graham Ledger of OANN (One American News Network)  said that congressmen should look up the word “ceiling”  because if they keep raising it, it isn’t a ceiling.   And I agree that it is a misnomer.   I will call it “Economic self destruct time bomb.”

There’s nothing constructive about the debt ceiling.   It doesn’t limit spending.  It doesn’t limit our debt.  It  empowers the government to pay its bills.  It doesn’t exist in other countries.  It is an anachronism.  It really  should be eliminated because it is being used by minority groups to try to extort from government what they couldn’t do by the democratic process in Congress- like defund Obamacare.

The day after Congress refuses to increase the debt ceiling,  the US debt will be just the same and  be over the debt ceiling limit.  Debt increases when spending exceeds revenue.  The cure to debt is to cut spending or increase revenue, not plunge the country into economic chaos.

If the President continues to pay bills after Nov 3,  he  and the Secretary of the Treasury are in defiance of Congress and subject to impeachment.  If he does not pay the bills, the US is in sovereign default.

What have other President’s done in similar situations?   Nothing, because Congress has always raised the debt ceiling. It used to be automatically attached to spending bills.

“Economic self destruct time bomb” is more appropriate.   It has been at the door of congress since March  together with the instructions to defuse this bomb – pass the clean debt ceiling increase.

Stay tuned,

David Lord