Wednesday, August 29, 2012 - Today's Debt and GDP

Today's Debt and GDP 

By Sinclair Noe

DOW + 4 = 13, 107
SPX + 1 = 1410
NAS + 4 = 3081
10 Yr Yld +.02 = 1.65%

OIL – 1.02 = 96.80
GOLD – 10.50 = 1657.10
SILV - .17 = 30.83
PLAT – 3.00 = 1521.00

The month of August has been basically flat, looking at the major market indices, just a couple of points movement. You may recall that last March I was warning you about the worst six months in the market, the old idea of “sell in May and stay away”. On May 1^st, the S&P 500 closed at 1405. So, if you did get out in May, you’re doing O.K. Of course, the theory looks at the worst and best six months of the market, and based upon that you would avoid the market volatility in September and October. September is historically the worst month for stocks. The Dow Industrial Average has declined 1.4 percent on average in September since 1929. Taking a broader look at the market, September is by far the worst month for the S&P 500. It has posted an average decline of 1.3 percent since 1929. Over that period, it's the only month to drop more than 50 percent of the time. Of course, there are no guarantees in the stock market; might go up, might go down; but I think it’s a safe bet that the lazy, hazy days of summer will give way to more volume and more volatility and it could start with Fed Chairman Bernanke’s address from Jackson Hole Wyoming this Friday.

Household debt and delinquency dropped in the second quarter.

Aggregate consumer debt fell by $53 billion, or 0.5%, to $11.38 trillion, the New York Fed said in its quarterly look at household debt. From the peak in the third quarter of 2008, household debt has tumbled by $1.3 trillion.

Most of that was driven by a decline in real estate loans, which also fell 0.5%, to $8.15 trillion. The delinquency rate also fell, slipping to 9% from 9.3%.Approximately 256,000 consumers had a foreclosure notation added to their credit reports in the quarter, the lowest since mid-2007.

The one area of growing debt and delinquency came in student loans. Student loan debt climbed $10 billion to $914 billion, a surge of $303 billion since the third quarter of 2008.  Student loan delinquency rates increased for the second consecutive quarter, with the percent of student loan balances 90 or more days delinquent up to 8.9% from 8.7%.

The economy expanded somewhat faster in the second quarter than originally reported because of higher consumer spending and slower growth in imports.  The revised gross domestic product increased at a 1.7% rate in the April-to-June period, up from a first read of 1.5%. GDP, the value of all goods and services produced in the country, is considered the broadest measure of an economy’s health.

The economy’s current level of growth, however, still falls well short of what’s needed to dramatically lower the nation’s high unemployment rate and eliminate the lingering threat of another recession.

GDP is projected to grow 2.0% in the third quarter and 1.9% in the final three months of the year.

I’m not sure what GDP truly tells us. It might not be the best way to gauge progress and prosperity. As an example, consider that GDP gives approximately the same weighting to any economic activity. So, in the health care sector, if you break your leg the ambulance ride, the costs of doctors, nurses, hospitals, medicines and such are all added to the GDP. Although you wouldn’t consider it to be an economic benefit to break your leg, that is how it is counted. Marriages and divorces are both counted toward GDP without distinction. In short, GDP is a measure of quantity without regard to quality.

Some people have tried to come up with new gauges which include measurements of health, life expectancy, education, public infrastructure, fuel efficiency, community, leisure, pollution, and income equity. One appeal of GDP is that it presents a simple message; up is good; down is bad. To a certain extent we are what we concentrate on; you tend to get what you measure, so we’d better measure what we want.

Another possible explanation for slower growth is that education in the US is in decline. There are certainly other reasons that we might explore some other day, but according to some calculations we hit a plateau in educational attainment more than 20 years ago. The US is steadily slipping down the international rankings in the percentage of its population of a given age which has completed higher education.  Of course one big problem is the cost of higher education and the debt required to finance the cost. Once upon a time, California had a Plan for higher education which established a three-tier system of free public higher education; that’s right, free, as in no tuition, even for the high achievers who gained admission into the prestigious state universities. There was a pledge that the state would pay instructional costs for all residents. The Arizona constitution says that university instruction shall be furnished “as nearly free as possible” to Arizona residents.  Stupid is as stupid does.

And that brings us round to another topic that will be getting attention this week – entitlement reform.

"Rightly understood, health-care entitlement reform is not, as conservatives suggest, a matter of lessening the dependency of big chunks of the population on government largesse. It’s about weaning the members of our medical-industrial complex from their entitlement to far higher payments, despite shabby results, than their counterparts abroad get. This license for inefficiency, issued by both parties to doctors, hospitals, health plans, drugmakers and device firms, is diverting precious resources in an aging America from urgent non-health care, non-elderly needs." - Matt Miller, WaPo

So, how do we improve efficiency and lower costs? Let’s go back to the basic idea of supply and demand. More doctors, nurses, researchers, scientists, lab techs, and such – in other words if we increased the supply of trained workers and the demand stayed fairly constant, we should see a decline in prices. Of course, to increase the supply of skilled workers, you have to educate them and if you chain them down with debt for that education, you won’t lower costs.

It gets back to the idea of quality versus quantity in the GDP. A cigarette adds more to GDP than a crown of broccoli. . Higher health care costs add to GDP, whether it is the cost to treat diabetes or the cost of preventive care.  Student loans and debt adds to the GDP but ultimately student debt does not improve quality of life, or at least it improves it far less than a society that is willing to make the investment in free education or nearly free education for those willing to study. The money goes somewhere, and right now it goes to servicing debt rather than going to education and ultimately an educated and efficient and employed population.

RFK once said (in a 1968 speech): GDP "counts air pollution and cigarette advertising, and ambulances to clear our highways of carnage.  It counts special locks for our doors and the jails for the people who break them.  It counts the destruction of the redwood and the loss of our natural wonder in chaotic sprawl. It counts napalm and counts nuclear warheads and armored cars for the police to fight the riots in our cities.  It counts Whitman's rifle and Speck's knife, and the television programs which glorify violence in order to sell toys to our children.  Yet the gross national product does not allow for the health of our children, the quality of their education or the joy of their play.  It does not include the beauty of our poetry or the strength of our marriages, the intelligence of our public debate or the integrity of our public officials.  It measures neither our wit nor our courage, neither our wisdom nor our learning, neither our compassion nor our devotion to our country, it measures everything in short, except that which makes life worthwhile.  And it can tell us everything about America except why we are proud that we are Americans."