Fed spending to GDP

some interesting information regarding Federal spending and revenue as a percentage of GDP

The Federal Reserve's Zombie Economy (quotes)

Where are we headed?

“The Fed continues to operate an open bar for the fiscal drunks in Washington,” says economist Ed Yardeni.

“Central banks cannot solve structural problems in the economy,” Stephen Cecchetti, head of the monetary department at the Bank for International Settlements

Stephen Roach of Morgan Stanley has said: “Washington policymakers are doing everything they can to forestall rational economic adjustments.”

The Federal Reserve's Zombie Economy

By Elizabeth MacDonald

Published December 13, 2012

Read more: http://www.foxbusiness.com/economy/2012/12/13/federal-reserve-zombie-economy/#ixzz2Ex4phXLA

If We Don’t Measure Leverage...

Finally someone deals with the leverage issue....I compare leverage to a rubber band....at some point, if you stretch it far enough, it will break!

If We Don’t Measure Leverage, We Risk More Crises

By Mark Buchanan -Dec 9, 2012

You can’t control what you don’t measure.

In engineering, control theory is all about using information gained by measuring a system to plan and carry out intelligent actions that will control it. Ideally, it leads to desirable outcomes, such as a nuclear reactor that doesn’t melt down, or a robotic arm that does precisely what it is supposed to do.

In the case of the economy, we might not be measuring everything we need to achieve control.

For at least half a century, policy makers seeking to control inflation and unemployment have typically focused on managing interest rates. The U.S. Federal Reserve lowers its target rate if the economy stalls, and raises it if inflation appears on the horizon. The recent financial crisis, however, had more to do with the amount of borrowing people did and the way such leverage fueled a bubble in the housing market.

Where does leverage currently fit in the equation of macroeconomic stability? Surprisingly, the answer seems to be that it doesn’t.

For 15 years, Yale economist John Geanakoplos has argued that policy makers should pay more attention to leverage. Prevailing interest rates determine the cost of borrowing, if a borrower ultimately repays the loan.

Independent Quantity

Leverage -- reflected by how much collateral people or firms need to put down to borrow and might lose if they fail to pay the loan back -- determines how much someone can buy with a given amount of starting capital. It’s an independent quantity that also influences what happens in the economy, whether borrowing is easy and attractive or not.

Importantly, leverage isn’t a fixed quantity. It changes over time as people get more or less optimistic and lenders more or less confident of being repaid. Geanakoplos makes a convincing case that such changes in leverage can and routinely do drive major economic booms and busts, and that managing leverage should be as much a part of the Fed’s activities as managing interest rates.

The core of his argument rests on a common-sense insight: An increase in leverage generally leads directly to an increase in prices. Consider the housing market. At any moment, you’ll find that some people are more optimistic than others, more convinced that prices will go up in the future and hence eager to invest on that belief. If banks change their practice to require only a 5 percent down payment, rather than 20 percent, these optimists have more to spend. They can purchase up to 20 times the value of their own funds, rather than just 5 times, hoping to profit when things go well. As more money chases the available houses, prices go up, which makes the optimists even more bullish.

In a series of papers and presentations, Geanakoplos has documented how the leverage effect operates in the real world (see further discussion on my blog). From 2000 to 2005, for example, down payments on home mortgages fell from about 15 percent to 3 percent. Leverage increased similarly for banks and hedge funds borrowing to buy mortgage-backed securities. Housing prices rocketed up, spurring home-building and all kinds of other economic activity.

The boom also set the stage for collapse. As markets grew more volatile, and everyone more uncertain, lenders of all kinds naturally wanted to preserve their money, so they increased collateral demands accordingly. By 2008, investors could buy only $1.20 in mortgage securities for each dollar of their own money, compared with $15 in 2006. The down payments required on new mortgage loans rose to as much as 30 percent.

Leverage Cycle

Geanakoplos argues that this dynamic is not a one-off peculiarity of the latest financial crisis, of modern banking, deregulation and derivatives. He sees it as a natural cycle -- the leverage cycle -- that is fully able on its own to drive an economy up and down even if interest rates stay the same. He suggests we’ve had three crises linked to the leverage cycle in the past 20 years: in 1994, in 1998 and in 2008.

If you take his view seriously, it looks as if economic theory, and the Fed policy based upon it, hasn’t been paying attention to the right variables. Some economists are working to include leverage in the basic models that central banks use, and we can hope they will succeed. The Fed is beginning to collect data of the kind that would be useful for identifying leverage changes and their effect on economic activity, but how far leverage control will enter practical policy and regulation on banking and investment firms remains unclear.

Crises incur real damage, in the form of lost jobs, credit- starved companies and people who can’t borrow to buy a car or fix their house. Banks wouldn’t be in such precarious condition, and so many homeowners wouldn’t be underwater, if leverage had not reached such extreme proportions before falling back again. To avoid such outcomes in the future, we need to find ways to manage leverage as well as interest rates.

Since the crisis, there have been myriad proposals for new measures to detect systemic risk. The mathematics and data used are getting ever more complex. Yet one of the most important measures may be one of the simplest. We’ve understood the benefits and potential dangers of leverage for a long time. Now we need to start measuring it.

(Mark Buchanan, a theoretical physicist and the author of “The Social Atom: Why the Rich Get Richer, Cheaters Get Caught and Your Neighbor Usually Looks Like You,” is a Bloomberg View columnist. The opinions expressed are his own.)

To contact the writer of this article: Mark Buchanan at buchanan.mark@gmail.com.

To contact the editor responsible for this article: Mark Whitehouse at mwhitehouse1@bloomberg.net.

http://www.bloomberg.com/news/2012-12-09/if-we-don-t-measure-leverage-we-risk-more-crises.html

Some amazing Greenspan quotes

Some amazing Greenspan quotes:

"Reducing U.S. long-term deficits will inevitably cause economic pain."

“The presumption that we’re going to have a painless solution to this, I think, is fantasy. There are a lot of risks out there but the one thing I can be reasonably certain of is we won’t get through this whole issue without some pain.”

“A credible framework to set federal fiscal policy on a stable path -- for example, one on which the ratio of federal debt to GDP eventually stabilizes or declines -- is thus urgently needed to ensure longer-term economic growth and stability”

…the “key part” of the deficit is“government social benefits to persons.”

“Two percent is going to be our normal for now. “What is going to be the key factors in the long-term productivity outlook is innovation. I think there are types of things out there we can have no insight into.”

(during his tenure as Fed chairman one of his main tenants of 'why' we could continue with the growth levels that were being experienced was due to the 'new paradigm' of productivity gains - that did not quite pan out!....so here he is right back pushing productivity as the key yet having no idea where that might come from!)

December 2012

http://www.bloomberg.com/news/2012-12-06/greenspan-says-painless-solution-to-u-s-debt-is-fantasy.html

Greek debt skyrockets...

This looks like a problem with no end...an amazing trajectory, circular issues (controling costs while attemtping to generate improved levels of GDP) - does this have a foreseeable ending that works out for anyone's good?

 

debt, debt and more debt...

As you take a look at the following graphic representations of the debt of our country the first question that comes to my mind is - where is this headed?  And at what warp speed? 

I thought that we learned during the last two economic meltdowns that too much debt is ALWAYS a bad thing for everyone involved. Yet, our fearless leaders continue to take us down the path of more debt (or maybe it's just the course of least resistance - it's very hard to draw the line and say NO!) a band aid here and an increase in the debt ceiling there but never, ever cut spending. But at some point the party ends and not very many people go home with party favors worth having…

 

US Total Federal Debt - talk about a fiscal cliff in reverse this trend looks better than an F 15's takeoff trajectory….

 

 

US Federal Debt as a % of GDP - at least we are not at Greece's level of 180% but we try harder!

revised 3rd qtr GDP

 

U.S. GDP growth accelerated to 2.7% in the third quarter, supported by a rise in government spending.

GDP for 3Q was revised from 2.0% to 2.7%, a much more palatable rate of growth. However, the details of the report were not as exciting. The revision included:

            - a drop in personal consumption from 2.0% to 1.4%,

            - a drop in the savings rate from 3.7% to 3.6%,

            - and weaker personal income.

Inventories were the real story behind the upward revision, initially subtracting 0.1% from GDP and now adding 0.8%. This is not necessarily a good thing for 4Q because that build-up will have to be given back.

Federal government spending was up 9.5% and total government spending (including state and local) was up 3.5%, also boosting the headline growth rate. That jump in government spending is also unlikely to be replicated.