Tag: Debt

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Most Americans are totally broke

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By Quentin Fottrell, Marketwatch

January 6, 2016 | 1:24pm

Americans are starting 2016 with more job security, but most are still theoretically only one paycheck away from the street.

Approximately 63 percent of Americans have no emergency savings for things such as a $1,000 emergency room visit or a $500 car repair, according to a survey released Wednesdayof 1,000 adults by personal finance website Bankrate.com, up slightly from 62 percent last year. Faced with an emergency, they say they would raise the money by reducing spending elsewhere (23 percent), borrowing from family and/or friends (15 percent) or using credit cards to bridge the gap (15 percent).

This lack of emergency savings could be a problem for millions of Americans. More than four in 10 Americans either experienced a major unexpected expense over the past 12 months or had an immediate family member who had an unexpected expense, Bankrate found. (The survey didn’t specify the impact of that expense.) “Without emergency savings, you may not have money to cover needed home repairs,” says Signe-Mary McKernan, senior fellow and economist at the Urban Institute, a nonprofit organization that focuses on social and economic policy. “Similarly, without emergency savings, people could raid their retirement account.”

https://nypost.com/2016/01/06/most-americans-are-totally-broke/?utm_campaign=SocialFlow&utm_source=NYPFacebook&utm_medium=SocialFlow

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It is only a matter of time before the next recession strikes. The rich world is not ready

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Jun 13th 2015

THE struggle has been long and arduous. But gazing across the battered economies of the rich world it is time to declare that the fight against financial chaos and deflation is won. In 2015, the IMF says, for the first time since 2007 every advanced economy will expand. Rich-world growth should exceed 2% for the first time since 2010 and America’s central bank is likely to raise its rock-bottom interest rates.

However, the global economy still faces all manner of hazards, from the Greek debt saga to China’s shaky markets. Few economies have ever gone as long as a decade without tipping into recession—America’s started growing in 2009. Sod’s law decrees that, sooner or later, policymakers will face another downturn. The danger is that, having used up their arsenal, governments and central banks will not have the ammunition to fight the next recession. Paradoxically, reducing that risk requires a willingness to keep policy looser for longer today.

https://www.economist.com/news/leaders/21654053-it-only-matter-time-next-recession-strikes-rich-world-not-ready-watch

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A Beginner’s Guide to Austrian Economics

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A Beginner’s Guide to Austrian Economics
by Jason Peirce

“Everyone carries a part of society on his shoulders; no one is relieved of his share of responsibility by others. And no one can find a safe way out for himself if society is sweeping towards destruction. Therefore everyone, in his own interests, must thrust himself vigorously into the intellectual battle. None can stand aside with unconcern; the interests of everyone hang on the result. Whether he chooses or not, every man is drawn into the great historical struggle, the decisive battle into which our epoch has plunged us.” – Ludwig von Mises

December 16, 2014—Of course, Mises above is addressing the need for “everyone” to understand basic, sound economics. This is why it’s heartening to see such renewed interest in the Austrian School since the 2008 financial crisis.

Here is a beginner’s guide in which we’ll briefly examine the basic principles and answer the basic questions about Austrian economics.

The “Austrian School” of economics grew out of the work of the late 19th and 20th century Vienna economists Carl Menger, Eugen von Bohm-Bawerk, Ludwig von Mises, and Friedrich Hayek (though of course Austrian School economists need not hail from Austria). Austrians focus strongly on the analysis of individual human action. This is known as praxeology, the study of the logical implications of the fact that individuals act with purpose, from which all economic theory can be deduced. Austrians also note the correlation between greater economic freedom and greater political and moral freedom. This in part explains why Austrian economics is the intellectual foundation for libertarianism. Austrians rightly attribute the repeated implosions of mainstream Keynesian economics to the latter’s focus on empirical observations, mathematical models, and statistical analysis.

It’s important to note that Austrians sound a minority voice in economics and are widely marginalized by mainstream Keynesian economists in academia and media. Consider why this may be. It’s certainly not due to unsound theory. Perhaps because of academic group-think, since tenure is largely denied for Austrians? Or maybe because there is a lack of financial incentive to be Austrian, because Austrians cannot be “Jonathan Gruber-ized” and bought and sold by government, bankers, and the moneyed lobbyists and powers-that-be? What do you think?

The Austrian contributions to economic thought are best-evidenced when comparing Austrian economics to mainstream Keynesian economics. Here are 3 examples of how Austrians differ from Keynesians:

Example 1: The Role of Savings, Capital, and Prices

Keynesians assert that consumer and government spending drive economic growth and that GDP determines the strength of the economy. Seeing savings as the enemy of growth, Keynesians advocate government deficit spending, monetary inflation, and artificially low interest rates to boost “aggregate demand.” Of course, inflation, spending, and debt destroy savings, capital, and prices.

“Keynes did not teach us how to perform the ‘miracle of turning a stone into bread’ but the not-at-all miraculous procedure of eating the seed corn.” – Mises

On the other hand, Austrians rightly see that savings and production drive economic growth and determine the strength of an economy. Also, Austrians recognize that prices act as signals in the economy, and that natural interest rates and prices determine the amount of savings and production in the economy.

“The essence of Keynesianism is its complete failure to conceive the role that saving and capital accumulation play in the improvement of economic conditions.” – Mises

https://www.voicesofliberty.com/article/a-beginners-guide-to-austrian-economics/

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Which Cities/States Will Be The First To Default When The Economy Rolls Over?

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Which Cities/States Will Be The First To Default When The Economy Rolls Over?

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

What happens to local governments when the economy rolls over?

Though we’re constantly reassured the “recovery” that’s stumbled for five years has years of strong growth ahead, history suggests the “recovery” is due to roll over. Few recoveries last longer than 5 or 6 years, and the business cycle is graying fast: subprime auto loans are not exactly the foundation of “strong growth.”
 
So what might push the economy over the cliff? The strong U.S. dollar is crimping overseas sales and profits, the global economy is already recessionary, mortgage applications have dried up, auto sales are being driven by subprime loans, and the valuation bubbles in stocks and real estate are due for a breather, if not an outright reversal. Retail sales are flat, and with all these headwinds, growing profits by 10% to 20% a year becomes impossible for the vast majority of enterprises.
 
So what happens to local governments when the economy rolls over? Tax revenues decline.
 
The consensus is that local governments are sitting pretty: sales and property values have risen smartly, pushing tax revenues higher, and the cost of borrowing money via tax-free municipal bonds has fallen. Nice, but these are all functions of expansion and rising tax rates.
 
The uneven nature of the “recovery” has left some cities and states more vulnerable to a downturn than others.Let’s catalog the various risk factors that might become consequential as the global and U.S. economies weaken.

1. Those dependent on foreign tourism. The weak dollar made America a bargain destination for the past decade. As the dollar strengthens and other currencies lose purchasing power, America is no longer a bargain–especially as job cuts decimate the number of people who can blow a few thousand dollars on overseas vacations to the U.S.
 
2. Auto manufacturing-dependent locales. Vehicle sales have been strong, and the cheerleaders claim sales will keep rising for years to come. Really? With what money? As soon as layoffs hit the marginal workforce and the subprime auto loan bubble implodes, vehicle sales will follow suit.
 
3. Cities and states that depend heavily on capital gains taxes. Once the current housing and stock bubbles deflate–or simply stop expanding–tax revenues from the enormous capital gains reaped in the past five years will wither.
 
4. Locales dependent on high income taxes. Given that most of the job growth of the past five years has occurred in low-wage sectors, adding jobs hasn’t boosted income taxes much. High income-tax states have jacked up rates on high-income earners, but there is no law of nature that says high-income jobs will survive a global downturn.
 
Rather, enterprises desperate to tighten operating costs will want to jettison high-cost employees first.
 
5. Local governments with enormous debt burdens. With interest rates low, municipalities and states went to the bond market over the past few years for “free money.” Once tax revenues plummet, the interest on all that “free money” will take a larger percentage of tax revenues, heightening the cost of new bond debt as buyers start adding in the risk of eventual default.
 
6. Locales with high fixed costs. These include high healthcare costs for homeless, elderly, government employees, etc., interest on all those bonds, government employee pensions, etc. The fixed costs only increase every year, regardless of tax revenues. Every local government with high fixed costs is in a tightening fiscal vice once tax revenues plummet.
 
7. Local governments with generous employee benefits and pensions. Once the stock market rolls over, the big capital gains that have funded public pension plans dry up, and the annual contribution has to be paid out of declining tax revenues.
 
Should interest rates actually rise, pension fund bond portfolios would plummet in value, too.
 
8. Local governments dominated by self-serving entrenched interests. That is, all of them: sclerotic, self-serving, entrenched interests resolutely refuse to accept any cuts in their swag. As tax revenues fall off a cliff, government managers will face a dilemma: they can’t cut costs because the self-serving interests have made that politically impossible, and they can’t borrow money for operating expenses.

That leaves defaulting on debt as the only choice left. And since that’s the only choice left, that’s what they’ll do.
 
The vice will close on some cities and states sooner than others, but it will eventually squeeze every city and state with declining revenues and rising fixed costs into default.

https://www.zerohedge.com/news/2014-11-12/which-citiesstates-will-be-first-default-when-economy-rolls-over