Why Increasing Income Inequality Matters

Both Janet Yellen, Chair of the Federal Reserve Bank (FED), and Christine Legarde of the International Monetary Fund (IMF) have both noted recently the problem of increasing income inequality across the economic spectrum. Both seem to talk about this problem as through it were primarily a problem or sociologists. Of course, when one is driving the economy into the ground eventually one will see the social implications rise to the surface.

The financial Crisis of 2007 quite naturally focused on vast monetary losses world wide — most of which have still not been accounted for. Both the FED and the IMF focused, and are still focusing, on the rebuilding of financial institutions in order to make money increasingly available again to rebuild economies from whithin. The thought is always that when the money starts to flow at the top, jobs will be created, products will be made and sold to an increasingly employed public. The money making potential reformulated at the top will thus “trickle down” and the economy of the whole society will benefit. As it has also been said, ” a rising tide floats all boats.”

One of the problems is that “trickle down” has never worked as well as it’s supposed to work. Lot’s of people are back to work, but increasingly with marginal jobs, many of which don’t pay very well at all. Jobs have also gone offshore, or have increasingly been automated due to vast advances in robotics, artificial intelligence and related information technologies. People at the top, running businesses are making more money since their need for employees declines and you don’t need to set aside fringe benefits for robots. Nevertheless, income to expense ratios increase reflecting an overall substantial improvement in productivity.

However, productivity should always increase and that gives us time to create new products and new jobs as well to offset the loss of jobs through automation. So, what’s different now? Certainly, creation of new products and new jobs is ongoing but is not keeping pace the recent loss of jobs which peaked in 2010-12. The bottom 95 percent of wage earners is recovering somewhat but not as fast as those 5 percent at the top, who are accumulating more and more capital and not using it to, in effect, recapitalize the whole system. The income inequality is of such vast proportions that after a certain point the extra money just makes more money and those increasing quantities of money just sit in a bank or IRA somewhere and slowly transform into yet more money which does nothing for the economy.

People at the bottom (bottom 95 percent) spend less and less. Their incomes have declined and thus they have no extra money to spend. They purchase their basic needs at the lowest prices that can be found. They are driving the purchasing prices of all commodities in a downward direction. They save everywhere they can. They do for themselves what they formerly would have hired done. They plant gardens & raise chickens. They rent housing because they have insufficient funds to buy or they don’t qualify for loans for housing or even to purchase autos for transportation. They often buy second hand stuff they can fix up.

Overall, those at the top have vastly larger incomes that those at the bottom. They can’t spend everything they have and even in a marginally productive economy they use money to make far more money than they can spend. So the extra money sits (technically invested) and it is only a myth that it contributes to economic growth.

Gradually, those with the increasing amounts of money start to give it away (philanthropy is increasing). They create new businesses and new products, but only those that are really useful and cheap can be effectively marketed on a wide scale. Increasing those with marginal incomes buy less and less and in this puts downward pressure on prices and business makes the effort to build it’s widgets for less and less, but automating everything possible. Those without much money just buy less and less or just wait until prices decline further. This moves us increasing toward serious deflation. Indeed, why buy when the price at the end of the year may be half what it is now?

Increasing, income inequality will drive deflation. Many people will survive and for a while they may have enough cushion in available cash to survive and, indeed, thrive. But gradually the apparent growth of the economy will go negative. Financial houses, banks and national or transnational agencies like the FED & IMF may not know what to do. Traditionally, deflation is not something which is handled well by central bankers. It’s best treated by inflationary strategies which are not natural ways of thinking for central bankers. Even worse, governments should increase spending as well, but governments also seem quite unable to consider this approach. Their debts are often high to begin with and increased spending to stimulate the economy seems opposite from what should be done.

However, as deflation takes hold and total collapse of the economic system begins to appear imminent, government as well as major banks may be forced to act — it will hard but necessary.

Leek Noodle Soup

Made a great new soup tonight. Quick and easy.

Fill a large sauce pan with about 4-5 cups of chicken stock — previously prepared or purchased. The low salt with no MSG added kind is just fine. Add about two cups of previously prepared, frozen stewed tomatoes (see my blog from a few days ago if you want to prepare your own).

Cut a large leek or two into thin slices, then chop further and add to the developing soup. Add a large handful or two of baby kale, broccoli and cut up baby carrots. Also, add about 1/2 to 3/4 pounds of previously cooked and cut up chicken pieces. Bring the mixture to a boil and cook on low heat or simmer for about 10-15 minutes.

Add several large handfuls enriched egg noodles, bring to a low rolling boil. Cook for seven minutes and turn off the heat. Add several teaspoons of dried basil and dried parsley, stir in these spices and add a little salt and pepper if necessary. Let the hot soup sit covered for about 10 minutes. Stir soup several times during that 10 minutes returning the cover each time. Stirring will help the spices and other ingredients blend together. This improves the flavor of the soup.

Serve and eat with several crusts of whole grain bread.

Deflation — The Way To Fight It Is To Promote Inflation

In the U.S. in the last several years since the advent of the so-called financial crisis, the approach of the national government and the Federal Reserve Bank has been to spend vast sums of money to stimulate the economy and to rebuild the money supply by loaning another large sum to recapitalize the banks. In addition, the Federal Reserve spent an additional several trillion to purchase government notes over a period of several years. The latter afforded a direct inflationary stimulus as it, in effect, required the U.S. Treasury to print new money to support the Federal Reserve’s government bond purchases. These actions, in effect, fought off the initial problem of deflation created by the initial financial crisis.

In 2007-8, the banks initially had very little money to lend and so were quickly put back into business by the government’s TARP act, and through additional short term loan preferences initiated by the Federal Reserve. The bond buying program of the Federal Reserve (Quantitative Easing) further stimulated, perhaps artificially the value of stocks (assets) and increased the price of commodities.

Now, the Federal Reserve is slowly reversing the Quantitative Easing program from which it may exit completely by the end of the year. Stocks are up substantially, the value of housing has come back and many areas of business activity have come back substantially. Unemployment is down to almost those levels seen prior to the advent of the financial crisis, but something remains amiss as the country does not feel as though it is in a real recovery.

In general, those who had real wealth before the advent of the financial crisis have it again. They are happy — or at least they should be. Their stocks and most of their other investments have recovered. Housing prices which were cut by 40-50 percent or more  in 2007-2008 have recovered substantially. Many can now sell their houses as they are no longer underwater. Others, who were unable to retire, as the value of the stocks in their IRAs had dropped substantially, but have now for the most part recovered. Many of these individuals who may have been unable to retire back in 2008-2009 , now have substantially more flexibility. Many can sell their homes and move to a retirement location, and the value of their IRAs will support that move as well. However, those who had speculated in the housing bubble or who had lost jobs subsequent to the initial crisis, and not found work comparable to what they had in 2007-8 may still be finding hard, as while jobs have recovered, salaries are certainly not what they were then. Indeed, many bankruptcies occurred while many others simply have had more difficulty digging out of the deep hole the financial crisis put them in.

Further, those entering the workforce have had a harder time as well. Entry level positions dried up substantially in many fields and career development was substantially slowed everywhere. Many have tried to learn new skills and had to borrow money. Some have been successful while others still have not been. This has left student debt at an all time high. It remains to be seen how this can be resolved.

Business complains that people are not sufficiently well-trained to enter the more technical areas of the workforce. However, businesses have not been especially helpful in creating a path into some of these jobs, and further has taken the approach of eliminating potentially high-paying jobs as much as possible through new computer-based technical solutions that may involve artificial intelligence, robotics or some combination of these two strategies. Of course, many jobs in the U.S. continue to be lost through “off-shoring,” i.e., the jobs are simply moved to developing countries with more favorable labor costs. The later is only a temporary solution as these jobs will ultimately be automated as well through artificial intelligence & robotics.

This leaves many without jobs or with part-time or low paying near full time jobs with marginal benefits or with entry level jobs with salaries insufficient to live on. People are adjusting as well as they can, and while, in many cases, they are working, they are not doing as well as they expected to do. It’s hard, for example, to appreciate the plight of those who may nominally be working full time, but who may require food stamps to get by. Still, many are adjusting and finding ways to modify their spending and saving, and learning new skills in order to do things for themselves that they would normally have had done by other laborers.

In summary, while those originally in the upper 5-10 percent of of the wealth in 2007 have now come back substantially, the rest of the population is still a work in progress. They don’t have enough money to spend to really restart the economy. The upper 5-10 percent has more than enough and can’t stimulate  the economy any more than they have been doing. Thus, until we move the recovery further into Main Street, there will not be enough money spent on the products business is trying to provide and the pressure will be on reducing prices to stimulate buying — and many of the have-nots will not be able to buy most expensive items no matter what price they are reduced to. While this is not yet a strong deflationary stimulus, things are moving in that direction. Eventually even those who have the money may put off buying items, knowing that if they wait the price may be substantially lower in the spring than it is now.

In the U.S., tax reform as well as a substantial program of infrastructure renewal may be helpful in stemming this tide. How this is to be accomplished by a Congress that now holds the record as the least productive Congress in the history of the republic cannot be imagined at this stage. If the next Congress is an improvement the one we have now, then we have a chance. If not, then we have a much big problem going forward. It will only get worse with time, even though the current downward pressure on prices would be expected to also be helpful to some extent.

The rest of the world has a larger problem. I’ll try to take a look at parts of that larger problem in the next several blogs.

The State Of The Economy Is Reflected In How Generous We All Feel

The state of the U.S. economy is only partly reflected in the percentage of the workforce which remains unemployed, which is now at a low of 5.8 percent having peaked in 2009 a few months after the beginning of President Obama’s first term in office. The stock market has also substantially recovered from 2008 lows after decimating IRA accounts and now also housing prices have also recovered rather more than was expected by now. It’s hard not to see this as a substantial recovery, yet if you had nothing in 2009 then likely you still have nothing and perhaps even dimmer prospects than you may have had in 2008-9.

A side effect of the long and progressive and perhaps artificial stimulation of the stock market by the so-called “quantitative easing” program initiated by the Federal Reserve, has been to elevate commodity prices creating also a potential inflationary stimulus which many expect, but has been, as yet nowhere in sight. Yet, since the Federal Reserve spent money it didn’t have, more money effectively went into circulation. the government also spent money it didn’t have and thus increased the size of the federal debt. Thus, while we are close to broke as a nation, we are more fully employed and our property values are on the increase. There are some problem areas but it’s not a completely negative story.

We are told that many have stopped looking for work — some retired early and it’s reasonable to expect that to continue as the “baby boomers,” the largest generation in the history of the country, is now starting to retire en mass. Those now entering the labor force are doing so in smaller numbers than those retiring. Also, in 2008 when many experienced a drop in the value of their IRAs, they postponed retirement, but now as markets have improved many are ready to retire and so rates of retirement going forward may be even larger than previously thought. At the same time, we are told that many are still delaying retirement — for a host of reasons. We’re going to have to let current trends shake out a bit before we know how things will all work out.

Finally, even while the employment picture may not have substantially improved for some who may need further training or skills that they somehow they never were able to get, healthcare population-wide seems to be improving not withstanding the sincere efforts of GOP and Tea Party Congressional Representatives and Republican governors to sabotage the Affordable Care Act (aka Obamacare).

Nevertheless, by any measure, life in the United States is improving since the Financial Crisis of 2007. Not everyone is convinced of that, some only grudgingly admit it, and some are convinced still that things will yet turn bad again. It’s complicated and you will see it differently, depending on where you were in your life in 2008, but even while many ups and downs may remain one hopes the country will see it’s way through continued improvement in the next several years and that more and more will see it that way in due course.

The single statistic no one can argue against is the increased philanthropic direction of the country. Last year philanthropic giving by all individuals in the U.S. increased by 4.4 percent. Also, philanthropic giving by billionaires increased substantially as well. Yet the dominant amount of giving still resides with non-billionaires. The latter are nevertheless doing very well in this economy as their wealth increased by about 12 percent in 2014, but there is evidence that they are giving a lot of it back, up to about three percent of their net worth — which is a lot. Combined (worldwide) their net worth is a little over seven trillion, which it should be said exceeds the market capitalization the entire DJIA (Dow Jones Industrial Average). Yet, only about 20 percent of billionaires worldwide reside in America. Many have taken the pledge offered by Bill Gates and Warren Buffet to give back at least half of their accumulated wealth — and this program is only getting started. Philanthropic giving dropped substantially in the early days of the financial crisis, but today it is making a major comeback.

One should be careful in concluding that we are not in a recovery. Not everyone will share equally in an economic recovery but gradually it should touch us all.

Chicken-Rice Soup With Leek

Preparations:

In preparing this soup I go to the Farmer’s Market and buy three large leeks, and a dozen or more medium to large size Roma tomatoes. Alternatively, it’s toward the end of the growing season and I have plenty of fresh leeks and Roma tomatoes coming out of the garden. I also need garlic, a small red onion, celery stalks, small carrots, the beans from at least two small packages of edamame (soy beans), and fresh or dried spices (tarragon, basil and parsley), and a tsp pf dry caraway seeds. Perhaps some of these ingredients will come fresh from the garden as well.

You will also need 3-4 cups of chicken stock and about a half pound or more of cut-up and previously cooked chicken. You can buy the stock and one or two chicken breasts and go from there. Alternatively, you can make the chicken stock and the chicken from scratch by buying and roasting a chicken. If you do that, buy a chicken from a local farmer or one at least that has not been factory-farm-raised with hormonal, antibiotic additives — one that tastes like chickens used to taste, and may yet taste that way again. I do that and have a good meal from the roasted chicken and then cut off the remaining meat and use the bones to make 3-4 cups of stock for the soup while saving some of the chicken for addition to the soup later:

Chicken Stock:

Add the chicken bones to 4-5 cups of water and boil slowly uncovered for about an hour. You can add about 8-10 peppercorns a stalk of celery and a few baby carrots, and later discard the bones and these additives after filtering or decanting the stock from them. Set aside the stock and prepare the stewed tomatoes from about a dozen fresh Roma tomatoes:

Stewed Tomatoes:

First, quarter a dozen Roma tomatoes. Remove the seeds and skins with a sharp knife and collect the tomatoes in a sauce pan. Add a tsp of salt, cover and heat slowly under low-medium heat. Separately, finely cut and dice a large celery stalk, five to six cloves of garlic (use more if cloves are small), and about a third of a large red onion. Mix these ingredients and saute them lightly in a little olive oil and add the mixture to the smoothly boiling tomatoes, stirring in the sauteed mixture initially and then occasionally stirring several times over the next half hour while continuing to cook the tomatoes.

The Soup:

Add a large handful of wild rice to the chicken stock and boil under low heat covered for about half an hour. Then, add about half of the stewed tomatoes to the chicken stock-rice mix and freeze the remaining half of the stewed tomatoes for use later with another dish.

To the soup add the following mixture of cut vegetables: the white, blanched ends of three large leeks cut into small slices; a dozen small carrots and 3-4 celery stalks both cut into small slices; and about a cup of freshly steamed edamame (soy) beans shucked from their pods. Boil the rice-stewed-tomatoes-vegetable mix for another 15-20 minutes to finish cooking the rice and added vegetables. About 5-10 minutes before the end add about 1/2 to 3/4 pound of cut-up, previously cooked chicken cut in small pieces but not finely chopped. Stop the boiling and add at least a tsp each of dried basil, parsley and tarragon. If these spices are fresh, cut them up finely and add but in larger amounts (about doubling). Add also a tsp of dry caraway seeds. Stop heating, cover and stir occasionally the let the spice/herb flavors blend into the soup.

Dish up, add salt and pepper to taste (minimal as the spices will carry the flavor, and some salt you will note has been added along the way). Serve with toasted whole grain bread.

Resuming the Blog

I’ve just taken a couple of months vacation from this blog and now is perhaps a good time to resume writing. I’m not certain I will write every day as I did before my vacation, but I do feel as though my batteries have been regenerated. I will try to write 2-3 times a week at least. As before, the posts may have little to do with what is going on in the world. While what is happening currently is certainly important, most of us frankly need a rest from the madness.

While I was away I invested in a “fitbit” device and, as advertised, it is helping me to stay focused on my exercise routines generally and also has helped me keep track of what I’ve been doing to stay fit. I’ve also kept regular readers in mind and I have more to say. I’ve done a bit of reading and thinking and I’ll say more about that as we go along.

Where Has Recovery From The Financial Crisis Of 2008 Brought Us?

While it may have been a mistake to fix or try to fix the banking system in 2007-8 with federal government (AKA public) funds, that’s what we did and now we must live with the consequences. Housing markets also failed as millions of homes were purchased earlier at prices that were no longer anywhere near what they could sell for in 2008-9 or even later. Indeed, the whole market effectively tanked as most houses could not be sold at any price. So much was owed to banks or other mortgage holders that sales could not occur unless banks were willing to write off what was still owed once a price was agreed upon — and banks or holders of bundled derivative mortgages at that point were not willing to write off those kinds of losses. The losses would have been in the multi-trillion dollar range. The prospect that grim was frankly to complex and scary to face. Further, it’s fair to say, no one in the financial community could figure out how to do it without possibly creating a full scale panic. Housing markets were effectively not open for business. Few loans were granted and few houses were sold.

The Federal Reserve Bank effectively went about the business of getting the banks up and running again. However, the banks were not totally up for the process. Even as the TARP program got underway, many failed so-called “stress tests” that may have been watered down a bit at the beginning. There was talk of nationalizing the banks, but nothing even came to it as most of the banks with the additional help of overnight loans from the Federal Reserve slowly began making a profit again and helping to reestablish business as usual (or close to business as usual).

In the early days of the crisis equities to a serious dive, dropping to perhaps half their original value. This deep loss in equity value was further driven by stockholders who took trillions out of markets and by rapidly failing businesses that could not sustain themselves with out cash loans. Many small banks failed, but the FDIC was able make good on all deposits. Thus, while there was a lot of fear that focused on the long run future of the financial system, the Federal Reserve Bank and Treasury managed to hold things together, while and insufficient federal government financial stimulus promised to restore order in the financial system and get people back to work. Unemployment quickly grew and before long exceeded 10 percent. In some regions of the country unemployment was much greater while much less in others.

Equity losses assured a large drop in IRAs and other retirement funds and those close to retirement simply put everything on hold while stock prices have slowly recovered (and thus IRAs have recovered as well). Unemployment has again diminished to near pre-financial crisis numbers. So, where are we?

Debt is still everywhere and the banks are still hiding their real losses, but there are signs that they may be divesting many of the bad investments made prior to 2008, and that will result in some recovery with much of it still written off. The financial system is more stable and safer than it was in the immediate aftermath of the 2008 crisis, but it is hard to argue that the nation is not broke. We have nearly a $20 trillion national debt, which may be about to be paid off in the short term with hyper-inflated dollars. The Federal Reserve Bank has effectively allowed Treasury to print 5-6 trillion or more to fund it’s Quantitative Easing (QE) policy (buying government treasuries and thus effectively pushing down the interest the government has to pay to borrow money to finance the debt).

QE also drove up the cost of commodities and the apparent value of equities, which now appear artificially overvalued. As QE fades the overvalued equities market is likely to drop as well. Yet at the same time with trillions more in the system and large national debt looming many argue that hyperinflation is a threat. Indeed, we may be able to pay of many debts with this increased money supply, but our creditors are no idiots and when the real value of their payments are understood, we run the risk of future sales of goods, both food and oil for example, being elevated to the real value of the dollar, or of sales being cut off completely unless we pay in some currency other than dollars. Dollars may be just fine within the country, but not outside the country.