Sixty percent of women in the United States who are 65 or older do not have enough income to cover basic expenses without help, even if they are married, according to the report.
That is compared to 41 percent of men in that age group.
The report compares income, not including food stamps or help with utility bills, to very basic monthly expenses for housing, food, transportation and health care. For a single person, this Elder Economic Security Standard Index, developed by Wider Opportunities for Women, estimates an annual income of $19,000 to $28,000, depending on whether they own their homes outright, rent or pay a mortgage. For married couples, the necessary income to cover basic expenses ranges from $29,500 to $39,000.
More than half the nation’s elderly do not make enough. But women, who typically outlive men, are more vulnerable. Nearly half of white women, 61 percent of Asian women and three-quarters of black and Hispanic women have incomes that fall below the Elder Index levels. Men 65 or older report incomes that are almost 75 percent higher than women’s.
There are two trends that promise a miserable future for women.
First, the sexual revolution, which has enabled female promiscuity on a scale heretofore unseen, has done serious damage to marriage, and will continue to do so as men realize that informal LTRs are preferable to legal marriages. This means that women are less likely to have husbands in the future, ad will be less assured of having access to a man’s wealth. This will be problematic for women since it is already difficult for them to make ends meet without spousal or government help.
Second, the current federal spending trend is unsustainable. Quite simply all the benefits that today’s retirees take for granted, plus all the other benefits that politicians continue to promise them in their various bids for election, will simply not exist in the future. People cannot have everything, which is one way of saying that resources are finite. At the current rate of consumption, they will eventually be squandered, and no one will have anything. This means that women will be even worse off because the government will not be able to provide for them anymore, particularly if environmentalists of the left wing manage to impose their plans for destroying the economy for Gaia.
Women will have three options to avoid this mess. They can either take their future financial security into their own hands by getting degrees and jobs (and real jobs, wherein one actually contributes to the economy and doesn’t merely engage in busy work), they can marry beta providers (trololol), or they can become part of an alpha harem (and here alpha refers to a man who can command resources to provide for multiple women). My guess is that women will go down first path until the bottom falls out of the economy and demand for superfluous workers declines, and then they will go down the third path, which will incidentally lead to the decline of civilization.
Is being poor self-reinforcing because it forces one to spend more on stuff a little bit at a time over time, as opposed to saving up and/or forking over a large sum at once, and eventually spending less?
I don’t consider myself “poor,” but I do have a personal situation that illustrates the question:
I have dental problems. That’s no secret — I’ve talked about it, and other people have talked about it, both to my face and behind my back (no, Sully, it’s not “meth mouth” — I’m not a druggie).
I’ve had these problems for years, and have taken steps toward getting them corrected. A couple of years ago, for example, I had all of my top teeth pulled and got a denture. That ended up costing around a thousand bucks.
The denture only got used for awhile. My remaining bottom teeth are so fragile that if I wear the denture, it breaks them … and I haven’t been able to afford to address the bottom teeth yet.
Essentially, I need another thousand bucks worth of dental work (at a minimum — if I go to one of the $299 denture places, they’ll extract my remaining teeth for $30 a pop, so $600 for two dentures since the old one has long since ceased to fit due to gum shrinkage, and $340 for the extractions).
Since I don’t have a thousand spare bucks to get all that done, I spend money on benzocaine gel, over-the-counter pain relievers and decongestants (I’ve noticed that usually the most painful times are when I’m congested — I guess the sinuses press on the tooth nerves), occasionally on antibiotics, etc.
I can attest with certainty that I’ve also missed out on opportunities to make more money due to this problem. Not only am I embarrassed to be seen this way (which means that I no longer do public speaking engagements, which have been an occasional income source in the past), but I spend probably a week out of each month in severe, sometimes literally blinding, pain that reduces my personal productivity.
And, like I said, I don’t consider myself “poor.” Granted, I personally make little enough that even if I consented to fill out tax returns I’d have little or no liability; and granted, until very recently about half (sometimes more!) of what I made went to a child support obligation; but my significant other makes fairly good money, nobody’s starving at my house, and we do live beyond the bare necessities.
I suspect that laying out a thousand bucks at a whack is a pretty big deal for most people, and out of the question for the truly “poor.”
I also suspect that this is self-reinforcing because various things nickel-and-dime the truly poor to death and stop them from getting out of the hole.
A newer car would set them back three grand, but they can’t manage that … so they trickle out $50 or $100 a month repairing the old clunker because they absolutely have to have it to get to work.
Or they mow two or three yards a week and know they could make good money running a full-time lawn service, but they can’t fork over for the additional equipment and other startup costs, so they just keep on working at Taco Bell.
Or any health problem — mine above is just an example — costs them X days in lost income from being off work each year, but they can’t get the cash together to get it correctly addressed, so they spend a little bit at a time on pain reduction and such and just try to muddle through.
I assume that this is a well-described economic phenomenon, but I thought I’d bring it up for comment. It’s pretty much a matter of needing to post something to the blog, and the only thing on my mind being this damn toothache. So anyway, discuss.
The “Fair” Tax is a really, really bad idea (see here, here and here for more on why). But, one of this really, really bad idea’s really, really bad effects is fixable.
I’ve mentioned the solution in passing before, but I figure it’s worth elaborating on. That way if it gets used (I hope it doesn’t, because I hope the tax never gets implemented), I can brag about how I reduced the damage or something; and if it doesn’t get used (and the tax gets implemented without it), I can bellyache about how it could have been made not quite so really, really bad if anyone ever listened to me.
The really, really bad effect in question is the “Fair” Tax’s impact on people with savings upon which income taxes have already been paid. Roth IRAs, for example. The holders of such accounts paid income tax on that money before they socked it away, and now under the “Fair” Tax, they’ll take an additional 30% tax hit when they spend it.
The solution is something I’m calling the S-Dollar. The “s” is for “saved.” It’s a second currency, to be issued/created with implementation of the “Fair” Tax. Like this:
- A section gets added to the “Fair” Tax bill specifying that post-income-tax dollars in designated types of financial institution accounts (once again, Roth IRAs are first that come to mind) as of a date certain will automatically become “S-Dollars,” which will thereafter have the same value as, and exchange equally for, regular US dollars.
- When these “S-Dollars” are spent, the “Fair” Tax is not levied on the purchases made with them — but upon the first tax-free expenditure of an “S-Dollar,” it thereafter becomes a regular dollar, once again subject to the “Fair” Tax.
Obviously some technical gimmickry will be required to implement the “S-Dollar.”
I’m guessing it won’t be too difficult to do when it comes to digital transactions — just give account-holders a special debit card and set up a transaction in terminal software to handle it. When money leaves the debit account, no tax. But once it’s in the merchant’s account, it’s “regular” money again.
If a physical cash solution is needed, special Federal Reserve Notes of a different color. The merchant knows not to charge tax on stuff bought with those; when he deposits them in his bank, they go into his account as “regular” dollars and the bank turns the notes in to the Treasury Department for destruction (it gets “regular” dollars in exchange too, of course). Eventually, the “S-Dollars” would all become “regular” dollars and the program would be shut down.
Presumably there’d be some schemes to re-use (or counterfeit!) the “S-notes,” but that’s just a cost of doing the tax business (and some of them would be caught — no matter what guff the “Fair” Taxers throw out about “eliminating the IRS,” there will still be revenue agencies).
Anyway, that’s my little plan for letting people spend their pre-”Fair”-Tax, already-income-taxed savings without taking the extra 30% hit.
But, once again, I’d rather the stupid and evil “Fair” Tax scheme doesn’t ever get implemented.
I have been enjoying myself in the Austrian Alps last week and hence the lower output. Here is my look though, of a number of notable news stories and contributions.
Benoît Cœuré, Member of the Executive Board of the ECB has penned a speech (and argument) on global (excess) liquidity. Izabella likes it and I agree with her that it is a good piece. I am not sure though that it is that much different than the Savings Glut argument put forward by Bernanke, but I may be missing the fine print (i.e. need to read it more carefully). The biggest problem I have is that he assumes that the lack of safe government (i.e. AAA rated assets) is cyclical and due to market failure or other “temporary” factors. Izabella interprets it as follows,
What’s the solution to this vicious liquidity circle? Simple, says Cœuré. The euro area needs to regain its role as a global supplier of safe assets. Something which could be achieved by a) ensuring that Eurozone countries have become fiscally sound and b) diverting excess liquidity from other zones back into “programme countries” by way of the IMF.
I disagree. The failure of euro zone economies and indeed large parts of the OECD edifice in general to provide “safe haven” assets is deeply structural and tied to population ageing. Unfortunately, there is little prospect that the euro zone economies will be able to supply AAA rated securities for a long time and herin lies the rub. Of course, if we are talking euro bonds, but then again. I will believe it when I see it.
Japan and the currency wars
A recent Bloomberg article suggested that Japan has been “secretly” selling JPY to try to stem the tide and force through depreciation of the Yen.
Japan used so-called stealth intervention in November as the government sought to stem yen gains that hammered earnings at makers of exports ranging from cars to electronics.Finance Ministry data released today showed Japan conducted 1.02 trillion yen ($13.3 billion) worth of unannounced intervention during the first four days of November, after selling a record 8.07 trillion yen on Oct. 31, when the yen climbed to a post World War II high of 75.35 against the dollar. The currency’s strength has eroded profits at exporters such as Sharp Corp. and Honda Motor Co., just as faltering global growth undermines demand.
Open market operations to sell domestic currency are so old school. Didn’t they get the memo in Japan? In a world where all major central banks are either at or very close to the zero bound, it is central bank balance sheet expansion (quantitative easing) that matters. On this note, both Japan and the Fed are being left decisively behind by the ECB and BOE (at least in the past six months). Of course, even the usage of “standard” measures in Japan is being contested and as long as this is the case, the Yen will continue to strengthen.
Don’t bet on deflation with the current team of global central bankers
Elsewhere, I am wondering where all the deflation, let alone disinflation, is. I am a sworn deflationist and I believe in the main thesis of the deleveraging/depression/deflation crowd. However, I have the utmost respect for the inflationist bias of global central banks and with the current batch of policy makers at the helm, deflation is a very remote risk.
The latest data show that inflation in China recently quickened as well as producer prices in the UK increased in the week that the BOE announced another round of QE. Of course, this is not all clear cut. Chinese real M1 (YoY) recently moved into negative territory for the first time since 1996 and in the UK, it is noteworthy that core inflation (ex food, beverages, tobacco and petroleum) came in noticeably lower in January.
I will change my views on the basis of changing data, but I am beginning to think that the bout of global headline disinflation we are expecting as a result of the global slowdown will reverse itself much, much quicker than many (including me) have expected. Arguably, we still need decisive easing in emerging markets and QE3 from the Fed, but it is more a matter of when and not if this happens and as such, global central bankers remain fully committed to creating inflation.
The main problem so far for those arguing for strong central bank action (including me) is the absence of nominal growth in output in excess of consistently rising headline inflation. Could this be a result of doing too little, perhaps, but at the moment stagflation remains the best way to describe our current economic situation and thus inflation in all forms is a drag on growth. Should the genie finally come out of the bottle in the form of consistent wage increases central bankers may find that they got more than they bargained for even if the alternative is equally painful.
The Greek experiment is about to end
Greece remains the main talking point and also the only thing that appears to prevent equity markets ripping to new highs. Greece is bankrupt and while I understand that the patience of the rescue committee will run out at some point, I am astounded that anyone expects this hideous experiment to end well. Greece will see its fifth year of contraction this year and for what? A membership of a currency union that does not work anyway?
We are told by the Troika, the EU and the IMF that failure to reach a deal would be catastrophic and thus that Greece has no way out but to take the medicine. However, Greece has a real choice and the stronger she is pushed the more obvious the end result is. Internal devaluation and decades of austerity don’t work; not in Greece and not elsewhere. This remains the KEY issue that the euro area politicians and the ECB have not understood. The social fabrics of society won’t stand the pressure and strain. Textbooks tell us that the cure is simple when you can’t devalue, but practical experience have now shown otherwise.
I am neither on the Greeks’ nor the IMF/Troika’s side, but I simply point out the obvious destiny of current events; failure! Even if Greece manages to appease its creditors with austerity, the end result in terms of Greek macroeconomic balances is still unsustainable and thus the underlying problems will not have been solved.
The ECB and the IMF will likely face significant drawdowns on their Greek bondholdings regardless of whether they use such drawdowns as ”carrot” for Greece to push through austerity measures. This is what the establishment has not yet understood.
MF Global investigation fails to uncover illegal activity?
Megan McArdle has an amazing article suggesting that the investigation on the failure of MF Global is finding it difficult to uncover anything illegal.
Megan quotes a piece from Reuters (no link available)
Lawyers and people familiar with the MF Global investigation of the firm that was run by former Goldman Sachs head Jon Corzine say that even though the hunt is still on to find out whether or not officials at MF Global intended to pilfer customer money in a desperate bid to keep the brokerage from failing, the trail at this point is growing cold.
This seems very odd to me even if I have not followed the aftermath in detail. I completely agree with the sentiment expressed by Megan.
I don’t understand how this could be true. To be clear, I am not saying that it couldn’t be true-only that I don’t understand how such a thing could have happened. There is more than a billion dollars missing from supposedly segregated client accounts. I understand that it was chaotic, but what kind of chaos causes you to accidentally move money out of money that any moderately sophisticated compliance system should have automatically flagged for approval?
While my professional responsibilities are confined to the smooth running of a macro research product I sit in an office, and work, with asset managers and ever since the failure of MF global I would imagine that their general level of concern has increased. This is understandable. If your main counterparty as an asset manager (i.e. your prime broker) essentially decides to steal your deposits and/or allocate them to losing trades against the principle of segregated accounts, it really does not matter what you do. No matter the tightness of the shop run on the asset managers’ end, he will face significant and perhaps even fatal losses.
Obviously counterparty risk is as old as finance itself and any decent asset manager today will deal with more than one broker and even have a strategy on how to manage counterparty risk. Ultimately though, mutual trust between asset managers and their prime brokers is a commodity which has been severely impaired by the MF Global failure and this is an issue for all players in financial markets.
Dealing with vintage data in economic forecasts using instrument variables (wonkish!)
A recent note from the George Washington University points to an interesting study from Warwick University on the forecasting of data vintages in the context of US output and inflation forecasts. The problem is as follows;
Consider a simple benchmark autoregressive model that a forecaster might use to forecast an economic variable yt. In order to estimate the parameters to be used for the forecast, typically the forecaster will obtain the most recently updated data on yt (i.e. the vintage of yt available at that time) and estimate the model using those data. However, the data in this single time series may in fact be coming from different data generating processes. The data some time back in the series have gone through monthly revisions, annual revisions, and perhaps several benchmark revisions. The most recent data, however, have been only “lightly revised,” as Clements and Galvão term it. Therefore, Clements and Galvão argue that the data in a single vintage are of“different maturities.” Forecasters may want to forecast future revisions to data as well as exploit any forecast ability of data revisions to improve forecasts of future observations. In their article, Clements and Galvão suggest that a multiple-vintage vector autoregressive model (VAR) is a useful approach for forecasters working with data subject torevisions. This comment discusses the importance of taking revisions into consideration and compares the multiple-vintage VAR approach of Clements and Galvão to a state-space approach.
This is a significant issue but remember; if the following holds, we need not worry too much about it.
If the revisions are unpredictable and the early data are efficient estimates of future data, then we may not need to be concerned about the different vintages.
Most economists assume that the statement above is true and simply force through their model. Being a great believer in practical usability when it comes to empirical economics, I would argue that in most cases this will not cause too many problems in most cases. However, a growing body of evidence suggest two important issues to consider. Firstly, revisions are predictable and thus provide important ex-ante information which should be incorporated into the the forecast. Secondly, even if revisions are unpredictable, the manner in which data is revised may itself provide important information on future data readings.
I agree, but the problem is potentially much more severe. Another issue then concerns that situation where you try to forecast Y(t) as a function of X(t) where both variables may be subject to revisions. Normally, we would solve this issue by restricting X(t) to variables where revisions are minimal (or absent alltogether). One way to do this is to use market based data (market prices, closing values of securities etc) which are, by definition, not revised. However, in the context of the e.g the classical leading indicators framework pioneered by Geoffrey H Moore, this issue re-emerges X(t) is cast in the form of real economic variables (themselves potentially subject to revision).
We have replicated and refined many of the LEIs described by Moore et al and applied it to various economic data series with specific fitting of a time series regression in each case. However, such an approach may still suffer from vintage data issues (as described above. One solution that I been thinking about is to imagine two forms of right hand variables. X(t, economic) and X(t, market based); if the latter is unrevised it might be possible to find an instrument for X(t, economic) (final revision!) using a variation of X(t, market based). This would, in my opinion, constitute an elegant way to solve the issue of data revisions in your explanatory variables.
In practice, you could also try to replace Y(t, economic) with Y(t, market based), but this is probably too a-theoretical and ad-hoc.
Regular readers of this blog know I watch reports from Vietnam as an indicator of how Governments deal with large flows of money out of fiat and into gold. Non-first world countries feel this more I think and thus they give us a view into the future as to how first world countries will respond when they get hit with a real loss of faith in the ability of fiat to hold value over time and/or a view that there are few productive investment opportunities in the economy.
This Mineweb article on India raising import taxes on gold and silver has some interesting quotes in this respect:
“…this hike will discourage imports … that is what the government wants, since imports have made a huge dent in India’s growth story and growth seems to be flagging”
“The shift away from financial savings to something which will just lie in lockers around the country could be a large contributing factor to lower growth…”
“Another expert with a nationalised bank pointed out that money locked up in the yellow metal effectively disappears from the economy to become jewellery or sits idle in cupboards and bank lockers.”
“Money spent on gold is practically wasted and it is also excluded from the financial intermediation system. Imports needed to be curbed.”
“The massive jump in gold imports has also led to an increase in current account deficit.”
No surprise that most of this plays on the “gold is useless” meme. In actual fact I agree with that. One’s savings are better invested in productive businesses and entrepreneurs rather than an inert metal.
However, what the financiers, technocrats and politicians don’t get is that movements into gold are a clear signal or vote by savers that the economy is crap. The solution is not to block the signal, but to solve the underlying problem. Actually the way to solve it is to get out of the way and stop fiddling with the economy but that would put them out of a job I suppose.
What these guys are doing is taking painkillers so the pain in their chest won’t bother them. Then they’ll all be surprised when they get a heart attack. Indeed, money flowing into gold is painful. That’s the point.
The summer travel season is finally in full swing. While gas prices remain high, many major retailers are taking steps to cut costs for
disgruntled drivers. Wal-Mart is leading the charge, reducing their fuel prices by 10 cents per gallon for the summer months. The retail giant will offer discounted prices at gas stations in 18 states until September 30. Many other stores have followed suit with their own deals. Here’s a list of other major merchants helping Americans save at the pump this summer.
The drug store chain is offering a free $10 gas gift card to ExtraCare Rewards members when they purchase $30 worth of select
products. The promotion runs through August 28, so there’s still plenty of time to cash in.
KROGER AND SHELL
The grocery chain has been offering discounted gas for quite awhile now, but their partnership with Shell has really turned up the
savings. With 100 points on your rewards card, you’ll get 10 cents off per gallon on a fill up at both Kroger and Shell stations. If you’re
not satisfied with that discount, Kroger also offers $1 off per gallon when you earn 1,000 points on your rewards card.
Do you eat a bowl of cereal every morning for breakfast? If so, you’re well on your way to saving on fuel. When you collect 10 UPCs
from cereal boxes and mail them in, Kellogg’s will send you a $10 prepaid gas card. Submissions must be received by December 31 and there’s a limit of five cards per household.
Big warehouse stores like Costco and Sam’s Club keep popping up all over the place. While they typically have some of the lowest gas
prices around, a fill-up still requires a membership. Joining the club can be done for around $50, so if your car guzzles gas, the long-term savings are worth it.
Gas discounts aren’t the only way to save, though. Here are a few more general savings tips to help you travel for less this summer.
Gift cards are becoming a currency all of their own. Cards for popular fuel stops like Shell can be bought and sold at sites like
GiftCardGranny.com. Also, with merchants like Wal-Mart reducing gas prices for the summer, a discount Wal-Mart gift card can really compound the savings.
LOW OCTANE GAS
Unless you’re driving a top of the line sports car, premium gas probably isn’t necessary. Most cars on the road will perform just fine
with lower octane gasoline and it’ll save you a couple of bucks on a fill.
SLOW & STEADY
If you want to save some extra money, let up on that lead-foot for just a little while. Driving at high speeds and starting and stopping
quickly burns more fuel.
Instead of waiting to hit the pump until you’re down to the last drop, plan your purchase in advance. Websites like GasBuddy.com
will help you find the lowest local gas prices. They even have a mobile app to help you save on the go.
A combination of frugality and going green has led to a resurgence of carpools. If you’re trying to track one down, websites like
eRideShare.com and CarpoolConnect.com are useful resources for both drivers and riders.
As long as you’re not still in high school, riding the bus probably isn’t as torturous as you remember. If public transport isn’t an
option, you can always dust off the old bicycle. It costs next to nothing to maintain and it’ll get your blood pumping better than a cup
of coffee in the morning.
The easiest way to save on gas is to just stay at home. Most shopping needs, including groceries, can be satisfied online which keeps you from burning gas outside in the blazing heat.
Those interested in this issue, which I have covered in this
post, will find FOFOA’s latest post
FOFOA agrees with Marx that “the history of all hitherto existing society is the history of class struggle” but says that he got the classes wrong:
The two classes are not the Labour and the Capital, the rich and the poor, the proletariat and the bourgeoisie, or the workers and the elite. The two classes are the Debtors and the Savers. “The soft money camp” and “the hard money camp”. History reveals the story of these two groups, over and over and over again. Always one is in power, and always the other one desires the power.
What is the relevance of this to gold? FOFOA argues that:
… when the soft money guys are in power the transfer of wealth happens slowly and gradually, and wealth flows from the Savers to the Debtors. But when “soft money” collapses – and it ALWAYS collapses – there is a very RAPID transfer of wealth in the other direction, from the Debtors back to the Savers.
… By selling your debt-financed paper savings and buying physical gold today you are making the conscious CHOICE to join the camp of the true Savers.
After a week where the deck of cards that make up the Eurozone got its so far largest jolt and where there is now not only an imminent danger of a total economic collapse in Greece but also, much more worryingly, signs that Germany herself are beginning to tire of a common monetary union I thought it would be nice to take a longer term and structural perspective on the global economy. And what better way to do this than to dig into the world of academia.
As some of you may know I recently earned my degree from the Copenhagen Business School and on that occasion I also produced a thesis which I’d like to share here.
This thesis is built upon two core arguments. The first is the notion that the demographic transition should be narrated through the perspective of ageing rather than population growth and the second is that ageing on a macroeconomic level represents a strong driver of international capital flows. These two arguments are used to discuss the standard prediction in a life cycle framework that ageing leads to dissaving in the aggregate and thus how old economies should tend towards running current account deficits. Using Japan and Germany as the subjects of analysis, this thesis develops the idea that rapidly ageing societies are not, in the main, characterized by dissaving but rather by the fight against it. Finally, a small empirical exercise acts as a perspectivation on the results to suggest why ageing might lead to a reliance on exports and foreign asset income to achieve growth and what this means in a global context.
In many ways, the ideas, thoughts and arguments that have gone into this work are shaped by the discussions and the activity here at this space and my interaction with the people I have come to know through my online presence. In this way, it is only apt that I present it here I think.
I believe that works such as this (and any other academic/economic piece of research) should be judged on two separate accounts. One is its contribution to the methodology, discourse and lingo of its specific academic field which in my case is international macroeconomics and the second is on its contribution to the more market and policy oriented aspect of its topical sphere which in this case is the international economy and in particular global current account imbalances. I believe my thesis has something to offer on both accounts.
On the first, I will immediately disappoint the purists in announcing that my thesis does not develop a new model although I believe there are clear pathways from the arguments for anyone who likes to tinker with neo-classical modelling. In stead, I think there are two important points that I would like to emphasize as future reference and working points for my academic colleagues.
The first is that economists need a much more broad and dynamic theory of demographic changes than is the original idea of a demographic transition. In my thesis I present this through an attempted coup de grace of the notion that demographic changes should be seen through the perspective of population growth. As an alternative I propose a focus on population ageing. In itself this is not controversial and is already an inbuilt narrative in many (if not most) macroeconomic studies that deal with demographic change . However, my aim here is more fundamental. What I consequently want to establish is the simple fact that the demographic transition is not over and not only that, it is non-linear and path dependent. Once we realize this, it opens up a whole new area of research in which macroeconomics is fused with anthropology and life course theory (sociology) in a way which I believe is crucial in order to truly understand what the macroeconomy, as we tend to call it, actually is.
Second, I raise and discuss the issue of dissaving as a function of old age. Specifically, I imply (although I do not show formally) that what may appear obvious on the microeconomic level may not be so obvious on the macroeconomic level. In other words, there is a an aggregation problem  here and it is exactly tied to the fact that while dissaving may seem imminently rational and inevitable in a microeconomic perspective it is not all obvious to me why societies as a whole should want to dissave in the context of persistently low fertility rates and rapid population ageing. Realizing that dissaving will at some point be a binding constraint for e.g. an economy such as a Japan in which ageing simply continues relentlessly, I develop the idea that rapidly ageing societies are not, in the main, characterized by dissaving but rather by the fight against it which has come to represent the key proposition of my thesis. I show this in relation to Germany and Japan as the two oldest economies in the world and try to build frame of reference on which to examine and judge other economies who will inevitably move in the same direction as these two economies.
Finally, and on the second overall account it is with no hesitation whatsoever that I claim how my thesis goes a long way to frame the Gordian knot currently facing the global economy as it exits its worst recession since the great depression. In short, if ageing economies find it difficult to create growth based on domestic demand and momentum and if they are reluctant to rapidly dissave into a very uncertain future where they would rely on foreign credit, the logical consequence is that they must be dependent on exports to grow. Now, the onset and path of this export dependency may vary from country to country, but in a world where all economies are ageing and where, worryingly, a large host of economies are converging to very low levels of fertility, it creates an obvious and practical problem. Who is going to run the deficits to match the desired level of savings of all these ageing economies?
Naturally, not everybody can export at the same time but just take a look at the discussions currently characterising the global economy. Everyone who is claiming a recovery is claiming one on the basis of growth in external demand, but this obviously cannot be true. So, you get the trade wars between China and the US, you get internal squabbles in the Eurozone over whether Germany should sacrifice its competitiveness and just how Greece, Spain etc are suppose to pay down their debt while seeing some form of growth at the same time. All this is about a lot of economies feeling the real and future pressure of deleveraging while only a few brave souls dare to proclaim that they seek growth through domestic sources. Something has to give and one obvious result will be lower trend growth quite simply because there will be lower accumulation of debt either because the capacity to pay off debt has shrunk or because the current level of liabilities disallows any further rapid debt accumulation. However, another consequence will also be an externality represented this higher level of desired external savings present in so many economies at the same time and behind it all, as a the underlying current, I believe is demographic change and how it affects the working of modern capitalist systems.
So, am I going for an early catch of the nobel here?
Hardly and thus the thoughts above represent my attempt to take the conclusions of my work as far as possible (and possibly way too far) on an overall conceptual level. Consequently, if you care to leaf through the thing, you will see lots of concrete empirically rooted points and arguments which are more down to earth than the barrage you have just worked your way through above.
In the end and because of my desire to continue my studies on a PhD level, I have (unconsciously I think) written my thesis with an open end and with many strings that can and should be picked up later. This is naturally what I hope to do in the future. For now, I invite you to have a look and by all means do not read it all, but you may just find some it interesting. Comments of all kinds are naturally welcome.
 – After all, it goes back to the idea of a life cycle and more formally the notion of overlapping generations which are two classic methodological concepts in macroeconomics.
 – Aggregation problems are not new of course and have haunted macroeconomic representative agent modelling for a long, long time. However, I think that the specific issue in the context of the life cycle in many ways represent the original sin in the context of aggregation problems (but I may be wrong here).
Popular myth and, allegedly, the laws of aerodynamics have it that the bumblebee should not be able to take flight. Yet still, our good bumblebee refuses to be pulled down by such details and year after year it takes flight as if nothing has happened. This allegory applies, with some imagination, to Japans economy too. Year after year it consequently appears able to simply ramp up domestic debt to cover the shortfall of domestic demand at the same time as low investment demand, a savvy export sector, and a strong net foreign asset position mean that Japan does not have to rely on foreign investors to finance government debt outlays. Together with a central bank stuck in perpetual QE mode due to persistent deflation this has so far constituted the core of Japan’s bumblebee moment.
Recent comments and analysis however suggest that while the bumblebee should certainly continue to enjoy the ability to defy gravity, Japan’s time just may be up. In particular two pieces of research authored by Societe Generale’s Dylan Grice (see here and here) as well as a recent piece by Kenneth Rogoff have added to the concerns that Japan may be headed for a Greek party of their own. In reality of course, the sudden focus on Japan is a direct function of the change in market discourse since end 2009 and the focus on government debt sustainability and how to rein in fiscal policy (if at all). Thus it is only logical to expect the great eye of the market to also turn to the biggest sovereign debtor in the world which just happens to be the oldest (demographically speaking) too.
In order not get confused here is Grice himself;
To recap, the thesis I outlined back in January 1 was that since Japanese households (the biggest effective drivers of JGB demand) are set to dis-save in coming years as they retire (left-hand chart below) there will soon be no one left to finance the government’s nosebleed deficits at current yields. Indeed, the chart below suggests households are already running down assets. And because the interest rates which might attract international investors will inevitably blow up the budget (debt service is already 35% of government revenues at existing yields) there is a very clear and present danger that the government reverts to the well- established historical precedent for cash-strapped governments of currency debasement.
As you can see, the issues here are complex but intellectually they are hugely important since what happens in Japan may tell us a lot about what will happen in other ageing economies such as, most notably, Germany but essentially a whole host of OECD economies (and China) who are set to move in the same direction as Japan. In this sense, I should immediately admit that on an intellectual level I agree with almost everything Grice says and especially his focus on Japan and the nature and extent of dissaving.
But, and in order not to make this into a fan letter, I am going to quibble a little bit with Grice in what follows.
Firstly, and on a very specific point, the chart (in Grice’ last note) which shows how Japanese households are actually running down their assets does not fit with the picture I get from my data (BOJ).
Now, I certainly don’t want to start the chart wars II here and obviously, there are many ways to define the stock of savings which might prove me as wrong as Grice is right (and vice versa). What is certain is that the incremental flow from household saving (if any) will not be enough to offset the incremental flow of bonds issued by the ministry of finance. This leaves the crucial role of corporate savings which is quite high in Japan and which also seems to be responsible for the Japan’s external surplus (on the trade balance at least).
Yet, in order not depart down the path of reinventing the wheel I will immediately refer to my most recent notes on Japan and this in particular in which I butt heads with the FT’s Martin Wolf on exactly the issue of (dis)saving in Japan and the distinction between corporate and private savings. Essentially then, this is a question of perspective and timing since I agree with all parties involved here on, at least, two accounts. Firstly, Japan government finances in an extraordinarily bad shape and the future ability of Japan to ever hone up to its liabilities is very, very slim. Secondly, dissaving is very likely to become a binding constraint in Japan at some point which would epitomized by how Japan would need to borrow from foreigners in order to finance an external deficit. In this case, and I agree with Grice here, it is game over.
But how we get from here to there may be just as important as what happens when we get there. In fact, yours truly have just defended his master’s thesis on exactly this topic and the overall conclusion, which fits quite well in the present discussion, is as follows;
Ageing societies are not, in the main characterised by aggregate dissaving but rather by the fight against it.
While my thesis councillor did indeed like the entire ouvre he was none to happy about this one. And can can you blame him? Isn’t it almost tautology? As I did on my day of graduation I will stand my ground and argue that it isn’t.
The crucial issue in my opinion is the change in perspective from waiting for the inevitable pop in Japan, Germany etc to a look at the main characteristics of an ageing economy such as Japan, Germany  and soon others. In a nutshell, these sum up to a deeply export dependent economy which exactly manages to keep the boat afloat because of higher domestic savings than merited by domestic investment demand and thus an external surplus. Naturally, and as a very important aside, Japan also has its own central bank who has been in QE for the better part of two decades and thus serves to allow government debt to grow without Japan needing foreign money.
This perspective provides us with two very important pieces of insight I think. One is that a rapidly ageing economy will not be able to revert to a growth path characterised by external borrowing and thus a net contribution to the unwinding of global imbalances. The second is that the global process of ageing becomes an externality to the whole global macroeconomic system because it puts more and more economies in a situation where they need to maintain external surpluses in order to prevent the forces of dissaving or, more accurately, the slump in internal demand as ageing pushes up the dependency ratio.
Now, think about the discourse we are having exactly at this point in time. It is a perfect mirror on the two points above with the added spice, in the context of the Eurozone, of how economies embarking on internal devaluation are also forced to find growth based on external demand because whatever growth they were able to generate from domestic activities in the first place are now being effectively choked off.
Moving back into the real world, Grice believes that Japan’s time may just be up and he specifically points to the fact that Japan needs to roll over 213 trillion while at the same time, the biggest holder of Japanese government bonds has openly announced that it has no inflows with which to suck up extra JGB supply.
I honestly don’t know whether he is right. He may be and if so, Japan will stand as a poster example of just how an ageing economy can take it before it folds in on itself in the sense of trying to maintain a modern market economy that is. However, I am inclined to call him on his bet and in this sense I am much closer to Buttonwood’s take on the situation;
(…) the huge amount of Japanese debt rolling over this year need not be a problem. Investors will simply recycle their existing holdings. Takahira Ogawa, a sovereign analyst at Standard & Poor’s, thinks there is more scope for the Bank of Japan to buy government debt, as central banks have done elsewhere.
Of course, such measures just postpone the evil day. The crisis will surely arise when Japan becomes dependent on foreigners for finance, or if a sharp rise in inflation or a sudden slump in the currency causes domestic private investors to take fright. But since the country is still running a current-account surplus, the yen is trading at 90 to the dollar (compared with 124 in June 2007) and deflation is forecast for the rest of the year, the apocalypse seems unlikely to occur in 2010.
Thus I would point to the continuing surplus in the corporate sector, the fact that households are not yet drawing down their deposit base, and most importantly; the fact that the BOJ has every right and reason to continue keeping the QE taps open as long as deflation is running at +2% on an annual basis. In fact, here is one of the other feedback loops from ageing right here; namely that as domestic demand simply spirals downwards, the economy gets caught in a deflationary trap (the liquidity trap in monetary policy circles) which only serves to push up domestic government debt thus forcing the central bank’s hand on QE and making it even a larger imperative to maintain an external surplus.
However, before I myself try to emulate the bumblebee by defying gravity with another complex argument, I think I will hold off with this one for another day.
 – See this excellent piece by Edward which exactly touches on a similar issue in the context of Germany.
Many people feel tremendous stress regarding financial matters and this often has detrimental effects on their relationships and is one of the leading factors for divorce. Like a doctor who elucidates an extremely negative diagnoses I somewhat dread explaining The Great Credit Contraction to people because of the massive effects it is having upon both the individual and the world. When I do take the time to explain it I am usually asked: What should I do?
Of course, the answer is unique to every individual based on their utility calculation but I think it is important to understand the different forces at work in the finance universe, have tools to measure your own financial vital signs and then build solid, healthy and strong personal financial statements as you enjoy the quality of life you desire. Important principles to understand are (1) opposites, (2) self-sufficiency for survivalism in the suburbs and (3) preparation.
The American consumer has begun to strengthen their financial statements with a tremendous increase in the savings rate. While this is good for the American consumer it will continue to weigh on revenue, earnings and the general economy because of the nature of the debt-based monetary system.
YIN AND YANG
At the heart of many branches of classical Chinese philosophy and science is the concept of yin and yang. The yin and yang is used to describe how seemingly disjunct or opposing forces are interconnected and interdependent in the natural world and give rise to each other in turn. According to the philosophy yin and yang are complementary opposites within a greater whole. Everything has both yin and yang aspects which constantly interact and never exist in absolute stasis. An excellent example in Western culture is Star Wars with the Jedi among the Light side of the Force and the Sith among the Dark side of the Force.
So likewise in finance this principle of opposites is present:
FINANCIAL VITAL SIGNS
In financial accounting there are a few basic ratios that are used to analyze financial health. Applying the principles behind these ratios to your personal situation can be extremely helpful in measuring your financial health.
Of course, this presumes you keep financial statements which I doubt the vast majority of Americans do, in written format, which is a primary reason they are in their current situation. One of the reasons the American consumer based economy has been shattered to pieces is because of the weakness of their balance sheets. Even worse is that most American’s neither know nor understand the true state of their financial health.
Companies usually issue annual financial statements and therefore assets and liabilities are generally divided into current or long-term. To distinguish current from long-term the standard is whether the transaction comes due within one year. Three important ratios are:
1. Net worth which is assets minus liabilities.
2. Current ratio which is current assets divided by current liabilities.
3. Debt-to-equity ratio which is total liabilities divided by stockholder’s equity.
Because most individuals go through monthly financial cycles, such as paychecks, rent, mortgages, cell phone, cable, insurance, etc. I recommend shortening the standard for distinguishing current assets and liabilities from long-term; perhaps use 1, 3 or 6 months as the standard instead of a year.
The use of these ratios for financial vital signs will give a quick snapshot of your overall net worth, liquidity and leverage. You can quickly build a spreadsheet using Google Docs and have most of this automatically calculated.
IMPORTANCE OF GOLD AND SILVER
The FRN$ has no definition, is an illusion and merely a figment of people’s imagination. Do you know the answer to what is a dollar? The owner’s of FRN$ are guaranteed no purchasing power.
By contrast, an ounce of silver or half of a gram of platinum will purchase approximately 2-4 gallons of gasoline or a nice steak dinner and with tools like GoldMoney you can even pay for the good or service with the physical bullion as the currency. I recommend gold as the unit of account for the most accurate mental calculation of value. Also, you will need to determine your own gold standard.
EARNED VERSUS PASSIVE INCOME
Work is a wonderful activity which can lead to personal development. Sometimes work can interfere with one’s satisfaction, happiness and lifestyle balance.
When designing one’s lifestyle there are many risks that responsible people plan for by using instruments such as life or fire insurance. The failure to plan can lead to financial destruction. So likewise it is wise to plan one’s financial situation to include not only earned income but also passive or residual income.
Passive or residual income are earnings an individual derives from a rental property, dividends, interest payments, limited partnership and etc. in which he or she is not actively involved. If part of your income is derived from passive or residual sources then should you become incapacitated through injury or disease, decide to take a cruise around the world, etc. then your income would not cease.
Therefore, I think it is important to distinguish between earned and passive income when measuring one’s financial vital signs.
You can buy gold with time through your labor but you cannot use your gold to buy time because time moves on wings of lightening never to be returned. Likewise as Randy Pausch observed in his Last Lecture, “We do not beat the Reaper by living long but by living well.” When your financial condition is extremely solid then you can pursue those hobbies, activities, etc. that will bring you the fulfillment you seek.
Net wealth is a function of three variables, (1) number of months, (2) standard of living and (3) without ‘working’. To determine your ’standard of living’ you need to examine your current expenses to determine your total monthly expenses. Once your passive income or passive cash-flow exceeds your expenses then your net wealth can approach infinite but keep in mind that managing your financial condition will always require some of your time and attention.
Every individual will need to determine whether they want to measure their financial vital signs and what values they want to seek. As with our physical vital signs there is no one that cares as much about them as ourselves and each of us intuitively knows the true state of our condition.
Being fairly conservative, extremely debt adverse and having an affinity towards sound money, cash-flow investments and self-sufficiency my ratios may be different than others who may have less financial responsibility. I recommend (1) a positive net worth, (2) a current ratio greater than 10, (3) a debt-to-equity ratio below 10% and (4) net wealth in excess of 24 months. Achieving these type of financial vital signs may require significant discipline but it is possible.
There are many benefits such as the freedom to live location independent, protecting your financial privacy and personal privacy, having control over who, when and where you interact with others, etc. You also will have much more margin for error and not be in the financial condition of many Americans of being two paychecks away from insolvency. How stressful!
The issue is not whether working 100 hours a week as an investment banker is better than doing yoga, scuba diving in exotic caves or playing with grandchildren. Everyone has their own preferences. The issue is having the personal freedom and financial soundness to be able to do what you want, when you want, with whom you want and where you want.
The American consumer increasingly stressed over monetary matters and the economy. This is changing behaviors as evidenced by the rising savings rate will slow GDP and may turn into habits which last for years if not decades. A teenager whose parents get evicted will likely be permanently affected by the experience.
In your case I would recommend keeping financial statements and calculating ratios to track your financial vital signs. For those that want to have an extremely solid financial condition I recommend (1) a positive net worth, (2) a current ratio greater than 10, (3) a debt-to-equity ratio below 10% and (4) net wealth in excess of 24 months. Then you will be in better financial condition to weather The Great Credit Contraction.