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sjk
Participant[quote=SK in CV][quote=earlyretirement]Excellent. Thanks for sharing.[/quote]
No, it’s really not so excellent. It is almost worthless. Much of it is based on a wholly bogus premise:
Just take a look at their [the CBO] 2002 projection, after passage of the Bush tax cuts:
The CBO predicted the FY2012 surplus would be $641 billion, the national debt would total $3.5 trillion, the debt held by the public would total $1.273 trillion, and GDP would total $17.2 trillion. They missed by that much.
The actual FY12 results were:
The true deficit was $1.37 trillion (amount national debt increased – not the phony deficit number reported by the mainstream media).
The national debt was $16.1 trillion.
The debt held by the public was $11.3 trillion.
GDP was $15.8 trillion.
Based on these results, I won’t be asking the CBO for help with my Super Bowl bet. Making ten year predictions is beyond worthless, but public policy in Washington DC is based on these useless CBO projections.Why was that projection off? Well it’s true that projections 10 years out are problematic to begin with. They are based on laws and regulations remaining unchanged. That doesn’t happen. At least 4 different things happened between the 2002 CBO projection for 2012, and 2012.
1. Tax cuts passed in 2002 were scheduled to go into effect in 2006. Subsequent legislation moved those cuts up by 3 years, to 2003, cutting revenues by trillions of dollars.
2. War in Afghanistan ultimately added trillions to expenditures.
3. War in Iraq ultimately added trillions to expenditures.
4. Credit crisis/Mortgage crisis both reduced revenues by trillions of dollars and remediation increased expenditures by trillions of dollars.
When an entire an argument is based on a faulty premise, then the argument itself is of no value. This one fits that description perfectly.[/quote]
SK,you are unable to deal with the facts or the truth on this matter……You are part of the problem….but I wish you a good day never the less.
Regards,
December 25, 2012 at 6:49 AM in reply to: OT:It’s Not a “Fiscal Cliff” … It’s the Descent Into Lawlessness #756822Participant[quote=paramount]And IMO John Corzine/Global MF is the poster child of this lawlessness.[/quote]
Mr.Corzine built the company with rehypothecation in mind IMO:
http://newsandinsight.thomsonreuters.com/Securities/Insight/2011/12_-_
MF Global and the great Wall St re-hypothecation scandal
Business Law Research Note: This version of the article has been modified from the original to make it clear that re-pledged collateral may come from straight repos and not just re-hypothecation. Some of the financial figures from banks’ disclosures have been adjusted accordingly.
(Business Law Currents) A legal loophole in international brokerage regulations means that few, if any, clients of MF Global are likely to get their money back. Although details of the drama are still unfolding, it appears that MF Global and some of its Wall Street counterparts have been actively and aggressively circumventing U.S. securities rules at the expense (quite literally) of their clients.
MF Global’s bankruptcy revelations concerning missing client money suggest that funds were not inadvertently misplaced or gobbled up in MF’s dying hours, but were instead appropriated as part of a mass Wall St manipulation of brokerage rules that allowed for the wholesale acquisition and sale of client funds through re-hypothecation. A loophole appears to have allowed MF Global, and many others, to use its own clients’ funds to finance an enormous $6.2 billion Eurozone repo bet.
If anyone thought that you couldn’t have your cake and eat it too in the world of finance, MF Global shows how you can have your cake, eat it, eat someone else’s cake and then let your clients pick up the bill. Hard cheese for many as their dough goes missing.
FINDING FUNDS
Current estimates for the shortfall in MF Global customer funds have now reached $1.2 billion as revelations break that the use of client money appears widespread. Up until now the assumption has been that the funds missing had been misappropriated by MF Global as it desperately sought to avoid bankruptcy.
Sadly, the truth is likely to be that MF Global took advantage of an asymmetry in brokerage borrowing rules that allow firms to legally use client money to buy assets in their own name – a legal loophole that may mean that MF Global clients never get their money back.
REPO RECAP
First a quick recap. By now the story of MF Global’s demise is strikingly familiar. MF plowed money into an off-balance-sheet maneuver known as a repo, or sale and repurchase agreement. A repo involves a firm borrowing money and putting up assets as collateral, assets it promises to repurchase later. Repos are a common way for firms to generate money but are not normally off-balance sheet and are instead treated as “financing” under accountancy rules.
MF Global used a version of an off-balance-sheet repo called a “repo-to-maturity.” The repo-to-maturity involved borrowing billions of dollars backed by huge sums of sovereign debt, all of which was due to expire at the same time as the loan itself. With the collateral and the loans becoming due simultaneously, MF Global was entitled to treat the transaction as a “sale” under U.S. GAAP. This allowed the firm to move $16.5 billion off its balance sheet, most of it debt from Italy, Spain, Belgium, Portugal and Ireland.
Backed by the European Financial Stability Facility (EFSF), it was a clever bet (at least in theory) that certain Eurozone bonds would remain default free whilst yields would continue to grow. Ultimately, however, it proved to be MF Global’s downfall as margin calls and its high level of leverage sucked out capital from the firm. For more information on the repo used by MF Global please see Business Law Currents MF Global – Slayed by the Grim Repo?
Puzzling many, though, were the huge sums involved. How was MF Global able to “lose” $1.2 billion of its clients’ money and acquire a sovereign debt position of $6.3 billion – a position more than five times the firm’s book value, or net worth? The answer it seems lies in its exploitation of a loophole between UK and U.S. brokerage rules on the use of clients funds known as “re-hypothecation”.
RE-HYPOTHECATION
By way of background, hypothecation is when a borrower pledges collateral to secure a debt. The borrower retains ownership of the collateral but is “hypothetically” controlled by the creditor, who has a right to seize possession if the borrower defaults.
In the U.S., this legal right takes the form of a lien and in the UK generally in the form of a legal charge. A simple example of a hypothecation is a mortgage, in which a borrower legally owns the home, but the bank holds a right to take possession of the property if the borrower should default.
In investment banking, assets deposited with a broker will be hypothecated such that a broker may sell securities if an investor fails to keep up credit payments or if the securities drop in value and the investor fails to respond to a margin call (a request for more capital).
Re-hypothecation occurs when a bank or broker re-uses collateral posted by clients, such as hedge funds, to back the broker’s own trades and borrowings. The practice of re-hypothecation runs into the trillions of dollars and is perfectly legal. It is justified by brokers on the basis that it is a capital efficient way of financing their operations much to the chagrin of hedge funds.
U.S. RULES
Under the U.S. Federal Reserve Board’s Regulation T and SEC Rule 15c3-3, a prime broker may re-hypothecate assets to the value of 140% of the client’s liability to the prime broker. For example, assume a customer has deposited $500 in securities and has a debt deficit of $200, resulting in net equity of $300. The broker-dealer can re-hypothecate up to $280 (140 per cent. x $200) of these assets.
But in the UK, there is absolutely no statutory limit on the amount that can be re-hypothecated. In fact, brokers are free to re-hypothecate all and even more than the assets deposited by clients. Instead it is up to clients to negotiate a limit or prohibition on re-hypothecation. On the above example a UK broker could, and frequently would, re-hypothecate 100% of the pledged securities ($500).
This asymmetry of rules makes exploiting the more lax UK regime incredibly attractive to international brokerage firms such as MF Global or Lehman Brothers which can use European subsidiaries to create pools of funding for their U.S. operations, without the bother of complying with U.S. restrictions.
In fact, by 2007, re-hypothecation had grown so large that it accounted for half of the activity of the shadow banking system. Prior to Lehman Brothers collapse, the International Monetary Fund (IMF) calculated that U.S. banks were receiving $4 trillion worth of funding by re-hypothecation, much of which was sourced from the UK. With assets being re-hypothecated many times over (known as “churn”), the original collateral being used may have been as little as $1 trillion – a quarter of the financial footprint created through re-hypothecation.
BEWARE THE BRITS: CIRCUMVENTING U.S. RULES
Keen to get in on the action, U.S. prime brokers have been making judicious use of European subsidiaries. Because re-hypothecation is so profitable for prime brokers, many prime brokerage agreements provide for a U.S. client’s assets to be transferred to the prime broker’s UK subsidiary to circumvent U.S. rehypothecation rules.
Under subtle brokerage contractual provisions, U.S. investors can find that their assets vanish from the U.S. and appear instead in the UK, despite contact with an ostensibly American organisation.
Potentially as simple as having MF Global UK Limited, an English subsidiary, enter into a prime brokerage agreement with a customer, a U.S. based prime broker can immediately take advantage of the UK’s unrestricted re-hypothecation rules.
LEHMAN LESSONS
In fact this is exactly what Lehman Brothers did through Lehman Brothers International (Europe) (LBIE), an English subsidiary to which most U.S. hedge fund assets were transferred. Once transferred to the UK based company, assets were re-hypothecated many times over, meaning that when the debt carousel stopped, and Lehman Brothers collapsed, many U.S. funds found that their assets had simply vanished.
A prime broker need not even require that an investor (eg hedge fund) sign all agreements with a European subsidiary to take advantage of the loophole. In fact, in Lehman’s case many funds signed a prime brokerage agreement with Lehman Brothers Inc (a U.S. company) but margin-lending agreements and securities-lending agreements with LBIE in the UK (normally conducted under a Global Master Securities Lending Agreement).
These agreements permitted Lehman to transfer client assets between various affiliates without the fund’s express consent, despite the fact that the main agreement had been under U.S. law. As a result of these peripheral agreements, all or most of its clients’ assets found their way down to LBIE.
MF RE-HYPOTHECATION PROVISION
A similar re-hypothecation provision can be seen in MF Global’s U.S. client agreements. MF Global’s Customer Agreement for trading in cash commodities, commodity futures, security futures, options, and forward contracts, securities, foreign futures and options and currencies includes the following clause:
“7. Consent To Loan Or PledgeYou hereby grant us the right, in accordance with Applicable Law, to borrow, pledge, repledge, transfer, hypothecate, rehypothecate, loan, or invest any of the Collateral, including, without limitation, utilizing the Collateral to purchase or sell securities pursuant to repurchase agreements [repos] or reverse repurchase agreements with any party, in each case without notice to you, and we shall have no obligation to retain a like amount of similar Collateral in our possession and control.”
In its quarterly report, MF Global disclosed that by June 2011 it had repledged (re-hypothecated) $70 million, including securities received under resale agreements. With these transactions taking place off-balance sheet it is difficult to pin down the exact entity which was used to re-hypothecate such large sums of money but regulatory filings and letters from MF Global’s administrators contain some clues.
According to a letter from KPMG to MF Global clients, when MF Global collapsed, its UK subsidiary MF Global UK Limited had over 10,000 accounts. MF Global disclosed in March 2011 that it had significant credit risk from its European subsidiary from “counterparties with whom we place both our own funds or securities and those of our clients”.
CAUSTIC COLLATERAL
Matters get even worse when we consider what has for the last 6 years counted as collateral under re-hypothecation rules.
Despite the fact that there may only be a quarter of the collateral in the world to back these transactions, successive U.S. governments have softened the requirements for what can back a re-hypothecation transaction.
Beginning with Clinton-era liberalisation, rules were eased that had until 2000 limited the use of re-hypothecated funds to U.S. Treasury, state and municipal obligations. These rules were slowly cut away (from 2000-2005) so that customer money could be used to enter into repurchase agreements (repos), buy foreign bonds, money market funds and other assorted securities.
Hence, when MF Global conceived of its Eurozone repo ruse, client funds were waiting to be plundered for investment in AA rated European sovereign debt, despite the fact that many of its hedge fund clients may have been betting against the performance of those very same bonds.
OFF BALANCE SHEET
As well as collateral risk, re-hypothecation creates significant counterparty risk and its off-balance sheet treatment contains many hidden nasties. Even without circumventing U.S. limits on re-hypothecation, the off-balance sheet treatment means that the amount of leverage (gearing) and systemic risk created in the system by re-hypothecation is staggering.
Re-hypothecation transactions are off-balance sheet and are therefore unrestricted by balance sheet controls. Whereas on balance sheet transactions necessitate only appearing as an asset/liability on one bank’s balance sheet and not another, off-balance sheet transactions can, and frequently do, appear on multiple banks’ financial statements. What this creates is chains of counterparty risk, where multiple re-hypothecation borrowers use the same collateral over and over again. Essentially, it is a chain of debt obligations that is only as strong as its weakest link.
With collateral being re-hypothecated to a factor of four (according to IMF estimates), the actual capital backing banks re-hypothecation transactions may be as little as 25%. This churning of collateral means that re-hypothecation transactions have been creating enormous amounts of liquidity, much of which has no real asset backing.
The lack of balance sheet recognition of re-hypothecation was noted in Jefferies’ recent 10Q (emphasis added):
“Note 7. Collateralized Transactions
We pledge securities in connection with repurchase agreements, securities lending agreements and other secured arrangements, including clearing arrangements. The pledge of our securities is in connection with our mortgage−backed securities, corporate bond, government and agency securities and equities businesses. Counterparties generally have the right to sell or repledge the collateral. Pledged securities that can be sold or repledged by the counterparty are included within Financial instruments owned and noted as Securities pledged on our Consolidated Statements of Financial Condition. We receive securities as collateral in connection with resale agreements, securities borrowings and customer margin loans. In many instances, we are permitted by contract or custom to rehypothecate securities received as collateral. These securities maybe used to secure repurchase agreements, enter into security lending or derivative transactions or cover short positions. At August 31, 2011 and November 30, 2010, the approximate fair value of securities received as collateral by us that may be sold or repledged was approximately $25.9 billion and $22.3 billion, respectively. At August 31, 2011 and November 30, 2010, a substantial portion of the securities received by us had been sold or repledged.We engage in securities for securities transactions in which we are the borrower of securities and provide other securities as collateral rather than cash. As no cash is provided under these types of transactions, we, as borrower, treat these as noncash transactions and do not recognize assets or liabilities on the Consolidated Statements of Financial Condition. The securities pledged as collateral under these transactions are included within the total amount of Financial instruments owned and noted as Securities pledged on our Consolidated Statements of Financial Condition.
According to Jefferies’ most recent Annual Report it had re-hypothecated $22.3 billion (in fair value) of assets in 2011 including government debt, asset backed securities, derivatives and corporate equity- that’s just $15 billion shy of Jefferies total on balance sheet assets of $37 billion.
HYPER-HYPOTHECATION
With weak collateral rules and a level of leverage that would make Archimedes tremble, firms have been piling into re-hypothecation activity with startling abandon. A review of filings reveals a staggering level of activity in what may be the world’s largest ever credit bubble.
Fuelling hyper-hypothecation and joining together daisy chains of liability through the pledging and re-pledging of collateral have been banks around the world. Once in the system collateral is being pledged and re-pledged over and over again either through sale and repurchase agreements or re-hypothecation as demonstrated by a review of SEC filings. For instance, Goldman Sachsdisclosed recently that it had re-pledged $18.03 billion of collateral received as at September 2011, Oppenheimer Holdings re-pledged approximately $255.4 million of its own customers’ securities in the same period, Canadian Imperial Bank of Commercere-pledged $72 billion in client assets, Credit Suissesold or re-pledged CHF 332 billion of assets (received under resale agreements, securities lending and margined broker loans), Royal Bank of Canadare-pledged $53.8 billion of $126.7 billion available for re-pledging, Knight Capital Groupdelivered or re-pledged $1.17 billion of financial instruments received, Interactive Brokers re-pledged or re-sold $7.9 billion of $16.7 billion available to re-sell or re-pledge, Wells Fargo re-pledged $19.6 billion as at September 2011 of collateral received under resale agreements and securities borrowings, JP Morgansold or re-pledged $410 billion of collateral received under customer margin loans, derivative transactions, securities borrowed and reverse repurchase agreements and Morgan Stanley re-pledged $410 billion of securities received.
LIQUIDITY CRISIS
The volume and level of re-hypothecation suggests a frightening alternative hypothesis for the current liquidity crisis being experienced by banks and for why regulators around the world decided to step in to prop up the markets recently. To date, reports have been focused on how Eurozone default concerns were provoking fear in the markets and causing liquidity to dry up.
Most have been focused on how a Eurozone default would result in huge losses in Eurozone bonds being felt across the world’s banks. However, re-hypothecation suggests an even greater fear. Considering that re-hypothecation may have increased the financial footprint of Eurozone bonds by at least four fold then a Eurozone sovereign default could be apocalyptic.
U.S. banks direct holding of sovereign debt is hardly negligible. According to the Bank for International Settlements (BIS), U.S. banks hold $181 billion in the sovereign debt of Greece, Ireland, Italy, Portugal and Spain. If we factor in off-balance sheet transactions such as re-hypothecations and repos, then the picture becomes frightening.
As for MF Global’s clients, the recent adoption of an “MF Global rule” by the Commodity Futures Trading Commission to ban using client funds to purchase foreign sovereign debt, would seem to suggest that it was indeed client money behind its leveraged repo-to-maturity deal – a fact that will likely mean that very few MF Global clients get their money back.
Written with contributions from Nanette Brynes.
(This article was first published by Thomson Reuters’ Business Law Currents, a leading provider of legal analysis and news on governance, transactions and legal risk. Visit Business Law Currents online at http://currents.westlawbusiness.com.
December 13, 2012 at 9:22 AM in reply to: Quantitative Easing Benefits the Super-Elite … And Hurts the Little Guy and the American Economy #756244Participant[quote=flu]Not my problem…..
I was against all this “tax people more (particularly “quasi-rich”), so we can spend even more then we collect”…But apparently a lot of voters thought it was a good thing…Because after all, it’s always rich people’s fault….
Not my problem, not my concern… Now where are my refinance papers again….[/quote]
Enjoy your place setting at the captain’s table flu, it will be in do course, as your on the Titanic…..
Regards,
Participant[quote=EconProf]This meaty article will prompt many pro and con contributions by Piggs. It is a healthy debate to have, since our fiscal future and our state’s economy depends upon it.
The question is whether state employees are overcompensated or not compared to similar private sector occupations. While many dueling statistics can be brought forth by both sides, I’d like to pose one question: What is the quit rate for public sector workers compared to similar private sector workers?
I’ve heard that the public sector workers almost never quit, suggesting that they know they have a good deal. But that’s only anecdotal. Any Piggs have any statistics?[/quote]This has some data, I think the gap has become much wider in the last few years…
http://www.heritage.org/about/staff/departments/center-for-data-analysis/models-and-data
Regards,
Are California Public Employees Overpaid?
Heritage Foundation Working Paper (comments welcome)
Jason Richwine ([email protected])
Andrew Biggs ([email protected])Introduction
Public-private pay comparability has become a major political issue in the past year, with some claiming that public workers are overpaid and others claiming they are paid too little. An important aspect of this debate is the difference between federal workers on the one hand and state and local workers on the other. Although federal workers earn higher wages and benefits than comparable private workers, the state-local situation is more complicated. Compared to private workers, state-local workers tend to earn less in wages but more in benefits. The net impact on overall pay is controversial.
The Center on State and Local Government Excellence, the Center for Economic and Policy Research, the Economic Policy Institute, and the Center on Wage and Employment Dynamics (CWED) have all released similar studies arguing that the wage penalty and benefit premium for state-local workers either cancel out or tilt in favor of private workers.
While these studies more or less properly measure wage differences, none of them considers the full benefit premium enjoyed by state-local workers. A full accounting of benefits needs to include retirement healthcare, job security, and pension funding using the proper private sector discount rate. After including these missing pieces of the benefits pictures, we find that state-local compensation is substantially higher than previous estimates.
Because state-level data varies widely in quality and availability, it is still difficult to say whether state-local workers are overpaid on a national level. This paper focuses exclusively on public workers in California, a large state with reasonably good benefits data. Because the authors of the CWED report also focus on California, we contrast our methods and results with theirs throughout this paper.
CWED concluded that California public workers are not overpaid. However, we find that CWED’s analysis of benefits leads to a substantial understatement of state-local compensation in California. With a more complete accounting of benefits, public employees in California in fact earn up to 30 percent more in total compensation than comparable private sector workers.
Wages
Our public-private wage comparison is very similar to CWED’s. We use the same dataset and the same basic regression analysis.
Data and Methods. We averaged the 2006 through 2010 years of the Current Population Survey. The five-year average is more representative of recent trends in government pay, and the larger sample size allows us to add more detailed control variables.
We used the Annual Demographic Supplement of the CPS, which contains information on annual earnings. The analysis is limited to adult civilians working full-time for a wage or a salary during the whole previous year.
We dropped workers with imputed earnings, since the imputation process does not take government status into account. People with annual earnings less than $9,000 were also dropped.
In addition to dummy variables for federal, state, and local government employment, we used the following controls: usual hours worked per week, experience (age – education – 6), experience-squared, years of education, firm size (6 categories), broad occupation (10 categories), immigration status, race, gender, marital status, and year dummies to account for inflation. We also included interaction terms: experience x education, experience-squared x education, marital status x gender, and gender x race.
Choice of Controls. Most control variables in wage regressions are uncontroversial, but there is some debate among economists over whether to include certain ones. For example, our inclusion of firm size means that California state workers are compared only to workers at large firms (1,000+ employees), which tend to pay higher salaries than smaller firms.
Since firm size is a characteristic of employers rather than employees, this is controversial. Some argue that larger firms tend to pay higher wages because they are more successful, that a state government cannot be “successful” in any market sense, and therefore that a firm size control is inappropriate. However, working at a large firm reflects to some extent an employee’s preferences for whatever characteristics large firms tend to exhibit. If state-local workers quit in favor of private sector jobs, they would likely choose a private firm that is above-average in size. For that reason, we believe controlling for firm size is the better choice for both wages and benefits. Excluding the firm size control would make the observed state and local wage penalties substantially smaller than what we are reporting here.
Some economists also control for union status, but we do not feel that is appropriate. Collective bargaining drives up wages, and California’s decision to allow state workers to unionize is essentially another means of boosting compensation. One could argue that union membership, like firm size, is also a state worker’s revealed preference that he would continue to seek in the private sector. Unlike firm size, however, this preference could be driven mainly by the higher wages and benefits of unionized labor, which should be included in the state-local premium. Controlling for union status would likely raise our estimate of the wage penalty but would not change any of our conclusions.
The CWED report includes firm size but excludes union status, just as we do.
Results and Conclusion. Results of the regression are displayed in Table 1. The first column lists key independent variables, and the second column shows the percentage increase in wages associated with a one unit increase in each variable. For example, an additional year of education leads to a 9.9 percent increase in wages, all else equal.
Table 1: Wage Regression Results, 2006-2010.
Control Variable Coefficient (%)
hours worked per week 1.7
experience (in years) 3.9
education (in years) 9.9
foreign-born -11.4
married 18.0
black -16.6
Hispanic -10.7
woman -14.0
federal worker 4.8
state worker -10.2
local worker -0.6
Observations 25,576
Adjusted r-squared 0.506
Note: All coefficients significant at the 95 percent level or higher, except local worker. Additional controls not shown; see text for details.Source: Authors’ calculation from Current Population Survey.
The most important variables in the list for our purposes are state and local government status. After controlling for observable skills and a detailed list of personal characteristics, state workers in California earn about 10.2 percent less in wages than private sector workers. Local workers see a much smaller, statistically insignificant penalty of 0.6 percent. Combining state and local workers together yields a significant penalty of 3.7 percent (not shown in the table).
Benefits
Our results for wages are similar to CWED’s, but we begin to diverge with benefits. We first review the “standard” benefit calculations used by CWED and other groups, and then we describe the omitted or undercounted portions.
“Standard” Benefit Calculation. The Bureau of Labor Statistics (BLS) publishes benefit/wage ratios for private and state-local workers collected through the Employer Costs for Employee Compensation (ECEC) survey. These figures include: paid leave, such as vacation, holiday or sick pay; supplemental pay, such as overtime and bonuses; insurance, such as life and health coverage; retirement and savings, which includes employer contributions to defined benefit and defined contribution pension plans; and legally required benefits, such as Social Security and Medicare payroll taxes.
In the Pacific Census region, which includes California, benefits for state-local employees were 55.5 percent of wages (or 37.5 percent of total compensation). For private sector workers in large firms, benefits equaled 50.3 percent of wages or (33.5 percent of compensation). BLS does not release state-specific data due to small sample sizes. If California has more generous public sector benefits than other states in the region, which is likely given our review of the pension and retiree health data, then the BLS Pacific Region figures may slightly understate total California compensation.
Omitted or Undercounted Benefits. We possess employee benefit data at nowhere near the level of detail that we have for salaries with the CPS. Given the limitations of BLS data on employee benefits, the CWED and other studies do a reasonable job of approximating total employee compensation. However, the CWED and other studies omit or understate two important benefits for public sector employees: retiree health care and defined benefit pensions.
Retiree Health Benefits. The existing studies omit retiree health benefits, which are not included in BLS compensation data as there are no payments to active employees. For private sector workers this omission is generally unimportant—private workers retire later, relatively few private workers receive retiree health coverage, and eligibility has been tightened and premiums increased for those who do. In contrast, almost 90 percent of state and local governments offer retiree health benefits to employees who retire in their 50s, with the government paying much of their costs, often including Medicare premiums and deductibles. State actuarial reports show the annual accruing costs of California retiree health benefits equal approximately 6.5 percent of total compensation.
Moreover, even these actuarial figures will understate the true value of retiree health coverage. The reason is that that the costs of coverage are calculated as the amount by which retiree coverage increases costs to the employer plan by increasing the average age of the covered population. However, there is an additional subsidy to the retiree as he otherwise would have to purchase coverage in the individual health market, which is approximately 25 percent more expensive for a given policy than group coverage. Thus, the true subsidy to the individual is the employer cost plus the cost difference between individual and group health coverage. In this case, the total subsidy would equal approximately 8.125 percent of total compensation.
Controlling for Pension Discount Rates. An important difference between public and private sector employment is the predominance of traditional defined benefit (DB) pensions in the public sector versus 401(k)-type defined contribution (DC) plans in the private sector. All pay comparisons to date have failed to accurately capture certain important distinctions between the two.
Employer contributions to pensions are only a proxy by which we infer the value of an actual future pension benefit. To accurately infer that value, we must consider both the size of the employer contribution and the implicit rate of return paid on it from the time of payment through the time the benefit is received.
For DC pensions, the return on contributions is straightforward. Individuals may invest employer contributions as they choose, in assets with a mix of risk and return they find optimal. For comparability with DB pensions, which are generally riskless to the employee, we assume that individuals invest DC assets in guaranteed U.S. Treasury securities, currently yielding around 4 percent annually over 20 years.
For DB plans, however, the implicit rate of return on contributions is a function of the plan’s benefit formula. This return can differ from person to person, but on average it will equal the discount rate or assumed investment return for the program as a whole.
In private sector DB plans, the discount rate equals the interest rate on a portfolio of high quality corporate bonds. Currently, such a portfolio yields approximately 5.5 percent. State and local pensions generally assume a discount rate of 8 percent, based on the expected return on assets held by the fund. This means that the employer contribution today is equal to the eventual benefit discounted back to the present at a 5.5 or 8 percent interest rate. Put another way, it means that public sector employees receive a guaranteed return of 8 percent on their employers’ pension contributions.
If we compare only the size of employer contributions while excluding the implicit return, we will understate true compensation delivered through DB pensions. To account for this, we calculate an adjustment factor to defined benefit pension contributions to account for how different annual rates of return compound over time. Most participants in defined benefits plans do not have a full career under such plans prior to retirement. In the state-local sector, it is common for employees to have approximately 25 years of service prior to retirement. We will assume the same length of service for all employees with DB pensions. We estimate the effect of different implicit rates of return by compounding over one-half the assumed number of service years for the employee.
The adjustment factor equals:
,
where the expected return equals 5.5 percent (private) or 8.0 percent (state-local) and the riskless return is 4 percent. This factor, which is greater than 1 so long as the expected return exceeds the riskless return, is multiplied by each sector’s employer contribution to DB pensions. The resulting value equals the equivalent employer contribution were all workers to hold defined contribution pensions.
These factors are multiplied by the normal cost of California pension plans, which is the cost (as a percent of salaries) of benefits accruing in a given year. Based on a weighted average of normal costs for California’s major pension funds—CalPERS, CalSTRS, the University of California pension, and the pensions of city employees in Los Angeles, San Francisco and San Diego—we calculate that the higher implicit return on public defined-benefit pensions increases the compensation of California’s government workers by approximately 4 percent.
Job Security
The final factor we consider is job security. According to the BLS Job Openings and Labor Turnover Survey (JOLTS), a private sector worker has an approximately 20 percent chance of being fired or laid off in a given year while for state-local employees the probability is only 6 percent. This effectively gives federal employees an insurance policy against being discharged. Here we attempt to ascribe a value to that insurance.
Adam Smith in The Wealth of Nations originated the idea of what are today called “compensating wage differentials,” that is, changes to wages to balance the positive or negative characteristics of jobs. Smith explains how this applies to the risk of unemployment:
Employment is much more constant in some trades than in others. In the greater part of manufactures, a journeyman may be pretty sure of employment almost every day in the year that he is able to work. A mason or a bricklayer, on the contrary, can work neither in hard frost nor in foul weather, and his employment at all other times depends on the occasional calls of his customers. He is liable, in consequence, to be frequently without any. What he earns, therefore, while he is employed must not only maintain him while he is idle, but make him some compensation for those anxious and desponding moments which the thought of so precarious a situation must sometimes occasion…. The high wages of those workmen, therefore, are not so much the recompense of their skill as the compensation for the inconsistency of their employment.
Just as positions with a high incidence and duration of unemployment should pay a compensation premium, positions with greater job security – such as public sector employment – should pay less than otherwise similar jobs.
Theory. To estimate the value of job security on effective compensation, we calculate what in financial economics is termed a “certainty equivalent,” which represents a guaranteed payment which individuals would find equally attractive to a higher but uncertain payment. For instance, an individual might be willing to accept a guaranteed payment of $45,000 in lieu of a 50 percent chance of winning $100,000. The more risk averse individuals are, the lower the certainty equivalent is relative to the probability-weighed expected value of the risky payment.
In this case, we effectively ask how much lower salary a private sector worker would accept to have the job security of a public sector employee. To calculate this value, we begin with an isoelastic/CRRA utility function of the formwhere u is the utility derived from consumption c, and ρ is the coefficient of constant relative risk aversion (CRRA). What this indicates is that the welfare generated by income will rise as income rises, but at a decreasing rate. Moreover, the rate at which the marginal utility of consumption declines increases with the risk aversion of the individual. A more risk averse individual will be willing to accept a lower certainty equivalent income, because the increase in expected utility by accepting employment risk is lower.
Data. Using this utility function, we first calculate the utility of total compensation for a worker assuming he retains his job full time, assuming total compensation of $85,000. We then calculate utility in the case the worker becomes unemployed, which involves assumptions regarding the duration of unemployment, the level of unemployment benefits, and the compensation of the new job the individual may find. For the baseline case, we assume a duration of unemployment of 19 weeks, unemployment benefits of $450 per week (the California maximum) and a current position pay premium of 15 percent, which is approximately the amount by which we calculate that California public sector compensation exceeds that paid to similar private sector workers. Using these assumptions, annual compensation in the event of unemployment is $54,400, for which we also calculate a utility value.
The expected utility is the weighted average of utility if the individual remains employed throughout the year and utility if the individual is discharged. In this exercise, we do not wish to calculate the salary reduction an individual would accept to have a zero probability of being discharged, but merely the difference between the private sector rate (20 percent) and the public sector probability (6 percent). Thus, we approximate by assigning a probability of discharge equal to the difference between the two (14 percent). Expected utility is equal to the weighted utilities of consumption assuming the individual is discharged (14 percent probability) or remains employed throughout the year (86 percent probability).
To calculate the utility of consumption we require a value for the risk aversion of public sector employees. We obtain this from Munnell et al (2007). Based on data from the Panel Study of Income Dynamics, they estimate a CRRA for public employees of 5.4, which is significantly higher than the estimate for private sector workers of 2.8. Other studies have concluded that public employees are more risk averse than private sector workers.
We derive the certainty equivalent compensation by calculating the riskless compensation whose utility would equal the expected utility of compensation under the risk of unemployment. This value is $73,840. The base compensation of $85,000 exceeds this value by approximately 15 percent, thereby generating our estimate of the job security compensation premium. Using a more conservative assumption that California workers, were they to work in the private sector, would have half the probability of becoming unemployed (perhaps due to their higher average education) the job security pay premium is around 5 percent.Graphical Illustration. The intuition of the calculations may be more understandable using a simple chart. Figure 1 shows a stylized utility function, where the curved line shows the relationship between income (on the horizontal axis) and utility (on the vertical axis). Higher income generates more happiness, but at an ever-declining rate. Point A represents the income/utility if the individual keeps his job throughout the year, while Point B represents the income/utility should he lose his job. Point C, which lies between the two, represents the individual’s expected utility from his employment – that is, the probability weighted average of the utilities at Points A and B.
Point D lies to the left of Point C and represents the certainty equivalent income, that is, the compensation with zero probability of discharge that that would generate the same utility as the non-guaranteed compensation the individual currently receives.
Summary
Whether public sector employees receive greater or lesser compensation than similar private sector workers is an empirical question that demands analysis of salaries, benefits, and job security. In the case of California public employees, we find that salaries are slightly lower in the public sector. Initially, benefits appear only slightly higher, implying rough parity in public and private compensation. However, properly accounting for retiree health benefits and DB pensions generates a public compensation premium of around 15 percent. The additional job security granted to public sector employees is equivalent to an approximately 15 percent increase in compensation, meaning that the total public sector pay premium in California may be as high as 30 percent.April 2010, at http://www.slge.org/vertical/Sites/%7BA260E1DF-5AEE-459D-84C4-876EFE1E4032%7D/uploads/%7B03E820E8-F0F9-472F-98E2-F0AE1166D116%7D.PDF (February 23, 2011).
John Schmitt, “The Wage Penalty for State and Local Government Employees,” Center for Economic and Policy Research, May 2010, at http://www.cepr.net/documents/publications/wage-penalty-2010-05.pdf (February 23, 2011).
Jeffrey Keefe, “Debunking the Myth of the Overcompensated Public Employee,” Economic Policy Institute, September 15, 2010 at http://epi.3cdn.net/8808ae41b085032c0b_8um6bh5ty.pdf (February 23, 2011).
Sylvia A. Allegretto and Jeffrey Keefe,“The Truth about Public Employees in California,” Center on Wage and Employment Dynamics, Institute for Research on Labor and Employment, University of California Berkeley, October 2010, at http://www.irle.berkeley.edu/cwed/wp/2010-03.pdf (February 23, 2011).
An interesting compromise position on firm size, which we may incorporate into future drafts, is used in: “The Economic Policy Institute is Wrong: Public Workers are Overpaid,” Center for Union Facts, February 22, 2011, at http://www.unionfacts.com/downloads/Public_Sector_UnionsBrief.pdf (February 23, 2011).
The overstatement would be small because of the size of California’s population relative to that of other states.
“State of California Retiree Health Benefits Program,” Gabriel Roeder Smith & Company, October 23, 2009, at http://www.sco.ca.gov/Press-Releases/2010/OPEB_February_2010.pdf (February 23, 2011).
Melinda Beeuwkes Buntin, José S. Escarce, Kanika Kapur, Jill M. Yegian, and M. Susan, “Trends and Variability in Individual Insurance Products,” Health Affairs, September 24, 2003.
Alicia H. Munnell, Kelly Haverstick, and Mauricio Soto, “Why Have Defined Benefit Plans Survived in the Public Sector?” State and Local Pension Plans Brief 2.Chestnut Hill, MA: Center for Retirement Research at Boston College, 2007.
Don Bellante and Albert N. Link, “Are Public Sector Workers More Risk Averse Than Private Sector Workers?”
Industrial and Labor Relations Review. Vol. 34, No. 3 (Apr., 1981), pp. 408-412.At this point it is difficult to estimate probabilities and durations of unemployment for public sector workers, though we are investigating possible methods to do so.
Participant[quote=bearishgurl][quote=EconProf]I’ve heard that the public sector workers almost never quit, suggesting that they know they have a good deal. But that’s only anecdotal. Any Piggs have any statistics?[/quote]
EconProf, I don’t know about recent years (since unemployment has been higher in SD). But in the past, there WAS a big danger of losing an employee who has already spent 6 mos to 1 yr (depending on position), on probation and “training.” These were employees who were not yet vested, which took five years (with no LWOP or State Disability Leaves in that five years which were not paid back).
There is an abyss of hoops to jumps thru (and putting up with a load of BS that goes along with that jumping) between an employee’s hiring and vesting, much moreso when on probation. And every time an employee changes classifications (even if a “lateral” move), they are put back on “probation.” It is not uncommon for a public employee to serve 2-3 probationary periods back to back. This in no way implies they will be treated “fairly” while serving a probation.
Employees who were hired with marketable degrees/skills tend to defect before vesting. The danger of staying and vesting (even losing 3-4 years of an employees prime working years) is that they will use a computer on whichever agency they work for’s “network” day in, day out which is entirely proprietary to that agency. The procedures they have to follow day in, day out are also proprietary to that agency. Hence, the need to serve a *new* probationary period at each agency they go to. Many of the job classifications are proprietary to one agency only. After 3-4 years on the job, even if an employee WANTS to get out and work in a “private” job, their resume is now full of duties which have no value to private employers. Especially if their gov position was their first “real” job, a gov employee would very likely have to take a big downgrade in pay if they quit and took a position in the private sector.
After five years, vacation and sick leave accurals typically increase, making it harder to find a gig with even close to similar benefits elsewhere.
One thing private sector employees have over public sector employees is more freedom on the job, namely:
-freedom to visit websites they want to on the “company” computer (within reason);
-ability to telecommute (don’t have taxpayers coming in for services or have to see the agency’s “clients” day after day. And agency’s computers/proprietary information isn’t allowed to be taken home);
-and, don’t have to follow a strict dress code (ex. courts and taxpayers expect professional attire at all times).
Even AFTER vesting, there isn’t a great deal of incentive to work year after year in the public sector unless the public employee just LOVES their duties, their clients, their bosses/coworkers, etc. If they have skills which could get them hired in the private sector immediately (and the job market is such that they can), they often DO quit. The amount each year their pension grows is minuscule in proportion to the hoop-jumping, politics and other BS they have to put up with on a daily/weekly basis year after year.
The above applies to “rank and file workers” who obtained their positions by scoring on an examination and are protected by civil service rules. These employees are the vast majority of government workers.
The above does NOT apply to executive-level workers or officials who are brought in on interviews and reference checks alone (often from another city, county or state and perhaps even from the private sector), and who hammered out their contacts out with the public hiring agencies. These workers have no civil service protection and can (and often do) sue for breach of contract if they are let go before their contract expires. Hence the massive payouts in the OP, which were either in these employees’ contracts to begin with, or paid a lump sum to an employee to get rid of them early (settlement of breach of contract).
I CAN tell you that governments NEVER pay out humungous sums for former employees unless said employee has them over a barrel in some way! Here are three examples where they WOULD pay out but there are several more:
The employee had an ironclad, enforceable contact with the agency to get paid a certain sum over a certain period of time and the agency decides to terminate it early (for any reason);
their own employees made HUGE, GLARING and embarrassing mistakes with said employee;
or, an employee can properly substantiate in a government tribunal or court of law substantial fraud, waste or abuse perpetrated by any officer or employee of said agency, informed their supervisor and/or agency head and the agency PTB looked askance at the complaint(s) and actually retaliated against said informer (whistleblowing statute or qui-tam action filed).
In fact, the opposite is true. Every single government has a passel of attorneys on staff who do NOTHING every day but fight off monetary claims coming from ouside AND inside the agencies of the jurisdiction they represent. The small governments contract out this function to private law firms, but nevertheless, they operate in much the same way as attorneys representing insurance companies, except public entities are “self-insured” (excluding worker’s comp coverage).
If these agencies are “stuck” and/or don’t want a bright flashlight shown to the public on a particular issue (don’t want the press to get wind of it), and/OR they can’t possibly win in court, they’ll quietly pay an employee to “go away” but not without an indefinite “gag order” as part of the deal.
The payouts come out of the following year’s budgets of said offending agencies, as do their “attorney fees.” This often results in “billets” being removed from their budgets (cuts in staff resulting in layoffs or unfilled vacancies dropping from their staffing list).
There is always much more to these large payouts (upon an employee’s termination/retirement of a government job) than meets the eye.[/quote]
Have a read…….
http://online.wsj.com/article/SB10001424052748704657704576149941061124736.html
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By ANDREW BIGGS AND JASON RICHWINELeaders across the country are proposing restrictions on public employees’ pay and benefits in order to put their budgets on a more sustainable path. The political left’s counterattack is that government workers aren’t overpaid compared to those in the private economy. Who’s right?
Consider a study released last October by the Center on Wage and Employment Dynamics at the University of California, Berkeley, which concluded that Golden State public employees “are neither overpaid nor overcompensated.” The Economic Policy Institute has generated reports arguing that government workers are underpaid.
These studies are misleading. Public-private pay comparisons vary from state to state, but a full accounting shows clearly that large, union-dominated states tend to overpay their workers. California is a good example.
The Berkeley study begins by studying salaries, where its methods are solid. Using individual-level data from the Census Bureau’s Current Population Survey, it compares public and private wages while controlling for differences in age, education and other earnings-related characteristics. Using essentially the same methods, we found that California state and local government employees receive wages about 4% lower than those received by similarly skilled workers in large private firms, which offer the most generous pay and benefits. But if we compare public employees to all private workers, the 4% penalty becomes statistically zero.
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Public employees really pull ahead in non-wage benefits.Slideshow: Teachers Revolt
Public employee protests spread across the Midwest.
Public employees really pull ahead in non-wage benefits. The Berkeley study concludes that counting benefits means that public workers’ total hourly compensation is about 2% higher than that of private workers. But our research shows that the study underestimates what public workers receive from pensions and retiree health programs. It also doesn’t account for the value of job security in government employment. Once these are noted, the balance tilts clearly in favor of public workers.
The first error in the Berkeley study concerns defined-benefit pension plans. The study erroneously conflated what governments pay into defined-benefit plans with what workers will eventually receive in retirement. So if governments contribute 10% of employee pay to defined-benefit pensions while private employers contribute 10% to 401(k)-type pensions, these studies conclude that pension compensation is equal.
But here’s the problem: State and local pensions effectively guarantee employees an 8% return on both their contributions and those made by their employer. By contrast, a private-sector employee with a 401(k) can achieve a guaranteed return of only around 4% by investing in U.S. Treasury securities. Most economists believe governments are foolish to base their funding decisions on the assumption of high investment returns, but the benefits for public employees are guaranteed in any case.
Over a career, the difference between a 4% and 8% return is significant. Using data from California’s major pension funds, we calculate that the higher implicit return on public pensions increases the compensation of California’s government workers by around 4%.
The Berkeley study’s second error is the omission of retiree health benefits. Private workers retire later and relatively few receive retiree health coverage. For those who do, eligibility has been tightened and premiums increased. But almost 90% of state and local governments offer retiree health benefits to employees. They generally retire in their 50s, at which point the government often pays most of their costs, including Medicare premiums and deductibles.
State actuarial reports show the annual cost of California retiree health benefits could top 8% of total compensation. Thus an accurate accounting of pension and retiree health benefits shows that public employees in California are paid about 15% more than individuals working for large private firms (accounting for age, education, etc.).
Another major benefit of public employment is job security. The Bureau of Labor Statistics reports that, on average, a private worker has about a 20% chance of being fired or laid off in a given year. In state and local government, the discharge rate is only about 6%—and several studies have found that public employees are more risk-averse than other workers, meaning they place particular value on job security. We estimate that government job security is equivalent to about a 15% increase in compensation.
Overall, our research suggests that government workers in California are compensated up to 30% more generously than are similar employees in large private firms. And the California experience is similar to that of other large states with powerful public unions. Elected officials are right to reassess public worker compensation as they try to close their budget deficits.
Mr. Biggs is a resident scholar at the American Enterprise Institute. Mr. Richwine is a senior policy analyst at the Heritage Foundation.
Participant[quote=flu]Time to shift strategy….Looks like black friday sales are coming in good. Just got off the phone with a few folks that run shops in the mall. Sales are up 5-10% compared to last black friday…
Walmart claiming it’s done better than ever before…
Wonder how others are doing…[/quote]
I see it more like David Rosenberg flu….
Regards,
From Gluskin Sheff
What A Joke
The Saturday Globe and Mail (page 811 ran with this special feature:
Ready to Spend: An American Comeback Story
Once again, I have to stress that the true measure of a country’s standard of living is national income, not narcissistic spending. And the critical driver of income, beyond working-age population growth, is productivity. Not just labour, but multi-factor productivity. All the talk is about the revival of the consumer, but as we see in this post-Thanksgiving period, retailers are stepping over themselves to lure in shoppers by opening earlier than ever and discounting like they never have before. Call it deflationary growth. But what the article fails to notice is the downtrend in business capital spending. The article doesn’t mention that there has been no capital deepening in the USA. in well over a decade.
And what the article does seem to heed is the message that was so clearly delivered by Ben Bernanke last week, which is that the U.S. economy’s non-inflationary speed limit is in secular decline. And with that, as I put my market strategist hat on. I would say the fair-value P/E multiple is really only being supported now by the artificial manipulation by the Fed to drive real interest rates into record negative terrain.
* * *
And some other thoughts from Rosie:
Beware of all the talk of how great the post-Thanksgiving sales have been. All the comparisons are with year-ago levels, and a year ago, sales were not being pulled into Thanksgiving day as they were this time around, so these are not apple-to-apples benchmarks (the sort of person that leaves the family dinner on Thursday to head to Best Buy, Toys R Us, Target and Wal mart so as to be the first to line up for the 8 PM door-opening blockbuster deserves some social commentary — I’m not sure that is what the pilgrims had in mind when it came down to giving thanks). We heard the same blow-out Black Friday and Cyber Monday data this time in 2011 and the rest of the shopping season was a bit of a dud (see Early Push for Sales Undercuts Black Friday on page B1 of today’s NYT).
Meanwhile, the spending culture is alive and well in America, nonetheless, with ShopperTrak data showing 300 million store visits on Black Friday alone (that’s almost the entire population — didn’t anyone make it to work?). It’s not “Black Friday” any more but it has now become a four-day “Black Weekend” and as such, year-over-year data are very misleading (nobody can accuse the retailing lobby from not being creative — it is trying to make it a five-day weekend now with the extension to Mobile Tuesday I kid you not — see page 32 of the NYT).
There was a pundit on CNBC early this morning stating that the American consumer is “on fire”. Yet ShopperTrak also noted that while traffic was UP 3.5% year-on-year on Black Friday, actual dollar sales fell 1.8% (which goes to show how intense the “doorbuster promotions” were in cannibalizing retailer margins). Today’s WSJ cites an IBM survey, based on data from 500 retailers, that the average order per customer shrank 4.7% from a year ago. And an analysis by Chase Paymentech (a sub of JPMergan Chase) concluded that in-store sales tumbled 7% YoY on Saturday. The National Retail Federation was predicting, based on its survey, 147 million shoppers hitting the malls, but the actual, 137 million that it tracks fell short.
While Cyber Monday could provide a lift (after all, for the first time, over half of consumers said they shopped on-line over the weekend), this does not detract from the view that what the retailing community has done is condition the consumer to conduct as much of the holiday shopping as possible over one weekend. Again, remember last year’s pattern… if you loaded up on the S&P retailing group in mid-November of 2011, you ended up losing money by the end of the year… despite the initial “bullish” holiday spending data.
So the one conclusion to make right is it is too early to tell how the holiday shopping season will unfold, but we came off a Q3 where both the quarterly rate and YoY pace was 2% in real terms which is actually close to half the long-term trend. Retail sales slipped 0.3% in October if memory doesn’t escape me. And real personal incomes excluding government handouts peaked and began to roll over in July. Retailers have a declining personal savings rate to thank because the sort of low-paying jobs that are being created are hardly generating anything close to an enthusiastic trend on household incomes. I realize that the latest “bullish” University of Michigan consumer sentiment data captured everyone’s attention, but the weekly tracking by Rasmussen is actually showing that the influence from lower gas prices and higher equity/home values may be waning — this index slipped to 89.1 as of November 23rd from 95.2 on November 9th to stand at a six-week low.
Moreover, it will be interesting to see the extent to which the 40% of the five million Americans that received unemployment insurance react ahead of the possible expiry of their emergency benefits (see page A4 of today’s WSJ — Deadline Looms for Long-Term Unemployed) The spending impact could be as much as a $60 billion annual rate.
And business sentiment is certainly moribund, underscored not only by the survey data but also by the IPO calendar, which is devoid of any new deals in the pipeline both this week and next (see A Cold December for IPOs on page C3 of today’s WSJ).
THE BIG PICTURE
We remain in the throes of a secular era of disinflation. We also are in a long-term period of sub-par economic growth and below-average returns. This has become so well entrenched that U.S. pension plans now have more exposure to bonds than to stocks, as we highlighted two weeks ago. Look, this is not about being bearish, bullish or agnostic. It’s about being realistic and understanding that in our role as market economists, it is necessary to provide our clients with information and analysis that will help them to navigate the portfolio through these stressful times. Our crystal ball says to stick with what works in an uncertain financial and economic climate — in other words, maintain a defensive and income-oriented investment strategy.
It is our contention that in this post-bubble, mean-reverting process, the ability for policymakers to re-create the credit cycle, reflate asset values and ignite a consumer-led recovery is going to be thwarted by secular changes in attitudes towards borrowing, saving, discretionary spending and homeownership. In other words, even after enough debt is paid off, the baby boomers’ spending years will be focused on putting their money in the coffee can. The first of the boomers are now turning 65 and the median boomer is now 55, going on 56. At the margin, they will now be forced to plan for retirement by setting aside an ever-greater part of their paycheques as opposed to relying on the perceived level of their future net worth, which had become the norm over the past two decades as inflated asset values, first in equities and then in residential real estate, triggered unrealistic expectations of the intrinsic value and capital gains potential of their asset base — an asset base concentrated in inherently unproductive items such as the house.
The missing piece in most analysis regarding the efficacy of government policy in terms of rejuvenating a new cycle of borrowing and spending is the extent of trauma that has taken place on the household balance sheet since the housing bubble popped in 2006 and the equity bull market reversed course in 2007. We estimate that the cumulative loss of household net worth, even with the recovery in recent years. is $4.7 trillion. In other words, a 7% hole has been driven into the household balance sheet over a five year span, which has not happened since the 1930s. Household wealth is no higher today than it was in 2006, and this realization is really only now setting in.
The process of a secular rise in the U.S. personal savings rate and the dampening effect this will have on aggregate demand will be incredibly disinflationary for some time. While fiscal stimulus indeed cushioned the blow, the current reality is one of restraint, at a time when the output gap is closer to 6% — where it normally is in periods of deep recessions, not year-four of an expansion.
From a top-down perspective, what drives inflation is the shape and interaction of two different curves — the economy’s aggregate supply curve and the aggregate demand curve. The movements in these curves tell us where the “output gap” is at any moment in time—the “gap” between where the economy is actually operating and the level it would be operating at if it were running flat out at full employment. In other words, the “gap” measures the degree of slack in the labour and product markets, and this “gap” at 6% currently augurs for ‘fair-value’ or ‘equilibrium’ policy rates to be -2.4% according to our research, which is why at the zero bound. the Fed has been and will continue to focus on non-conventional measures aimed at lowering the cost of capital.
Participant[quote=flu]Man… I hate fidelity…
Fees galore….
Maybe I’m just spoiled with Schwab…But seems like fidelity went from good to worst recently…Anything you do is fee this ,fee that…
Roll money in.. no fee. Roll same money out…fees. Fees fees fees fees fees..
(end vent)[/quote]
Fidelity…. AKA The flying pig……
Participant[quote=squat250]so I was in line with my kids at barnes and noble buying the new diary of a wimpy kid and other stuff when i was presented with a deal — buy $75 in gift cards, get free $10 gift card (but $10 card only valid after 12/26). great I say. I’ll do that deal. In fact, I buy $225 in gift cards. heck we eat that much in chai tea and cookies in the cafe there probably per quarter. plus I want barnes and noble to thrive so I feel good about lending them $225.00.
then the sales lady says we can pay for the new gift card with an old gift card i have in my hand.
And my oldest kid immediately spots the angle.
Continuously trade in purchased gift cards for new gift cards, make $10 for every $75 exchanged.
fine print says limit is $1000 in gift card exchanges per day. Still that’s $133 or thereabouts…
I was pleased that my kid saw the possibility in the deal. We did it once and cleared an extra $30.00 while putting no new money into the transaction.
Why in the heck would this company allow people to buy new gift cards with old gift cards when there is financial benefit to doing so?[/quote]
Thanks for the short tip…..LOL
November 11, 2012 at 4:50 PM in reply to: OT-Why Did CIA Director Petraeus Suddenly Resign … And Why Was the U.S. Ambassador to Libya Murdered? #754389Participant[quote=EconProf]I am usually skeptical of conspiracy theories, especially sweeping and detailed accounts like this one. However, it has a ring of credibility to it, especially in how it fills in a lot of blank spaces in our understanding of the Bengazi incident. It appears that now that the election is over, a lot of political and economic coverups will be unmasked–too late, unfortunately.[/quote]
🙂
ParticipantA good read indeed………..Best to all.
ParticipantAugust 12, 2012 at 2:26 PM in reply to: dang those overpaid underworked wastrel firefighters again.. #750108Participant[quote=sdduuuude]Here’s some real hero-types !
Viva la union.
It’s just government “prostitution” IMO……Sorry, but I just have to…..
August 1, 2012 at 9:55 PM in reply to: Neil Barofsky Gave Us The Best Explanation For Washington’s Dysfunction We’ve Ever Heard #749359Participant“http://theautomaticearth.comt/Finance/li… “The “resolution” of the LIBOR scandal (which will probably never be completed) will show us once again that we have a choice to make between either saving the banks or saving our economies and societies. We can’t do both. But in all honesty, I doubt that the prospect of such a choice is real. It looks to me like the choice has long since been made by a succession of unrepresentative representatives we elected with our empty votes, and who have left us with a runaway crossover between Frankenstein and the Sorcerer’s Apprentice. I wasn’t kidding when I said the other day that if you want your vote to count, you’ll have to get out into the streets to do so.
The LIBOR affair is one in a series of things laid bare by the ongoing financial crisis that will inevitably, at one point or another, force us to confront the moral bankruptcy that has come to control our societies”I see it the same,good article.
sjk
April 30, 2011 at 4:58 PM in reply to: OT: California Prison Academy: Better Than a Harvard Degree #691876ParticipantWow, I can’t believe someone
Submitted by CA renter on April 30, 2011 – 3:03pm.
Wow, I can’t believe someone thinks prison guards are overpaid…talk about one of the worst and most difficult jobs out there. Again, if the job is so easy, and the guards are compensated so well, why aren’t all the complainers signing up?
If you’re not giving up your job to become a prison guard, then either you’re not thinking straight, or something inside of you truly knows that you are better off where you are than if you were to become a prison guard.You must be a governnment worker??
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