Wednesday, April 24, 2013 - God Bless the Child

God Bless the Child

by Sinclair Noe

DOW – 43 – 14,676
SPX +.01 = 1578
NAS +0.32 = 3269
10 YR YLD un = 1.70%
OIL + 2.43 = 91.61
GOLD + 17.90 = 1432.50
SILV + .22 = 23.26

Them that's got shall get; them that's not shall lose; so the Bible said, and it still is news. The Pew Research Center has analyzed the most recent date from the Census Bureau, and it turns out the rich got richer and the poor got poorer. During the first two years of the nation’s economic recovery, the mean net worth of households in the upper 7% of the wealth distribution rose by an estimated 28%, while the mean net worth of households in the lower 93% dropped by 4%. From the end of the recession in 2009 through 2011 (the last year for which Census Bureau wealth data are available), the 8 million households in the US with a net worth above $836,033 saw their aggregate wealth rise by an estimated $5.6 trillion, while the 111 million households with a net worth at or below that level saw their aggregate wealth decline by an estimated $0.6 trillion.

Because of these differences, wealth inequality increased during the first two years of the recovery. The upper 7% of households saw their aggregate share of the nation’s overall household wealth pie rise to 63% in 2011, up from 56% in 2009. On an individual household basis, the mean wealth of households in this more affluent group was almost 24 times that of those in the less affluent group in 2011. At the start of the recovery in 2009, that ratio had been less than 18-to-1.

God Bless the child that's got his own.

But it's getting tougher. A new Frontline documentary aired last night and if you didn't see it, it's available online; it's called “The Retirement Gamble”. The basic premise is that even if you try to save for the future, Wall Street is stripping your retirement funds clean with fees and bad performance. The documentary spends a lot of time on a 2012 research paper by Robert Hiltonsmith of the think tank Demos, which found that a median-income, two-earner family will pay a staggering $155,000, all told, in 401(k) fees. That cash represents about 30 percent of the total retirement savings this hypothetical family would have had, if it had paid no fees.

Once upon a time, American workers were far more likely to work for a company that offered a defined-benefit pension plan, the cost of which was covered by the employer. Today, we are instead encouraged to invest in a 401(k) or similar retirement plan, which offer limited investment choices. Most of those choices are "actively managed" funds that try to beat the stock market, but charge higher fees for the privilege. It is often difficult to see what sort of investments these funds have made and the kinds of fees they are charging.

The first draft of first-quarter 2013 GDP is due on Friday, but it should be clearly noted that Friday's number is only an estimate; an initial guess; there will be revisions; the revisions might be substantial. Over the past week or so, there has been a big brouhaha over the revelation that economists Ken Rogoff and Carment Reinhart's research was wrong. They had determined that when a country's debt to GDP level reaches 90%, the result is that economic growth slows – it goes negative. Their research had a Microsoft Excel coding error, and a few problems with assumptions. And so the argument for austerity now has more holes than Swiss cheese. Unfortunately, the austerity theory was enforced and it has backfired, and there are consequences.

But if the idea of debt causing slow or no growth has been discredited, where does that leave us? Is it possible that slow economic growth causes more debt? And is economic growth really a good measure of economic performance? Can an economy be growing and still be lousy? Maybe.

Economic growth measures the increase in the gross domestic product. Economic growth only shows how much more wealth the country has as a whole. We've seen growth in GDP for about 4 years but we've also seen the gap between rich and poor growing wider and wider. Growth is not creating an equitable society; it is creating inequality. If you've ever played the board game Monopoly, you know that when one player gets all the properties and all the hotels and all the money, the game is over.

We've had growth but we haven't seen jobs; well, we've seen some jobs, just not enough. And the jobs that have been created are often in low paying fields. We're not seeing good solid job growth.

So, on Friday, we'll watch the report on GDP, but we'll watch with a skeptical eye.

Remember the sequester? When seven weeks ago the deadline to find a federal budget compromise came and went, there was much handwringing in Washington. In the event that no agreement was found there were to be cuts to public spending so severe and painful that no one would dare fail to agree. To deter Republicans from holding out, half the immediate spending savings of $85.4 billion was to be found from the defense budget, and, to ensure Democrats would work to find a deal, half from annually funded federal programs. Despite these encouragements to fiscal discipline, the March 1 deadline came and went.

We all grew sick of hearing about the sequester. This week the sequester broke surface when it began affecting air travel, causing long delays at airports, which is to be expected when you send 1,500 air traffic controllers home without pay. One in 10 controllers will stay at home on unpaid leave every day until October. With the vacation season looming, crowded airports full of frustrated passengers will become commonplace.

You may not see it but there are other problems with the sequester. Air traffic controllers are not the only federal employees being told to take the week off.

So far, the sequester appears to have pleased no one, except perhaps those fiscal hawks who agree to anything so long as the federal government is shrunk. The cuts are blind, irrational, hastily arranged, uncaring, arbitrary and dangerous. Few doubt that federal expenditure is too high, but even if one is persuaded that cuts need to be made right now – which, as we remain stuck in a stagnant economy, flies in the face of macroeconomic reason – the sequester is the wrong way to make cuts and is already cutting the wrong things. The Congressional Budget Office estimates that the sequester alone will cost 0.6 percent in GDP this year. The cuts are not merely the enemy of good economic management but an automatic depressant upon the nation’s economic health.

A government watchdog warned that regulators need to be more aggressive in reducing exposure among major Wall Street firms if they want to eliminate concerns about "too-big-to-fail" banks. Christy Romero, special inspector general for the $700 billion Troubled Asset Relief Program, said in a report that not enough has been done by government overseers to address the interconnected nature of the largest and most complex financial companies. The ties among major Wall Street firms that posed a challenge at the height of the 2008 financial crisis remain a problem.

The special inspector general's report comes amid a continuing debate over whether Washington has truly eliminated the chance a large financial firm on the verge of collapse would need to be rescued by the government. It's pretty clear that the market is saying too-big-to-fail is still a problem, that these huge Wall Street banks are too complex, too interconnected, too large. Romero suggested regulators use the detailed structural plans they are receiving from the largest banks, known as living wills, to identify and eliminate potential problem areas among major firms. Obama administration officials have stressed that the 2010 Dodd-Frank financial overhaul means no financial firm would again enjoy a government bailout. But not everyone is convinced. While current law prevents bailouts to specific institutions, there could still be a demand to use taxpayer dollars in the face of a future financial crisis.

Last week the International Monetary Fund hosted a conference of some of the world’s top macroeconomists to assess how the most intense crisis to have shaken the industrialized economies since the Great Depression has changed the profession’s collective understanding of how the world economy works. After five years of coping with the consequences of the disaster, there is still so much uncertainty about what policies are needed to prevent another financial shock from tipping the world economy into the abyss again a few years down the road.

In determining what is a sustainable level of government debt, or whether central banks should focus on anything other than inflation, or what should be done to prevent further bubbles from destabilizing economies, we still don't have the answers, even if we have learned that some of the answers we thought might work have been disproved.

If you are one of the nearly five million American workers who have been unemployed for over six months, or one of the six million Spaniards, three million Italians or 1.3 million Greeks without a job or a clear prospect of finding one, this amounts to a tragedy.

Considering that the large and complicated financial institutions that set off the crisis five years ago have only gotten bigger, too big to fail has grown even bigger than ever and if it's too big to jail, it probably its too big to be allowed to fail; and that means that the gap in knowledge is downright scary.

Some things never change. Them that's got shall get; them that's not shall lose; so the Bible said, and it still is news.