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Friday

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The debt time bomb that keeps growing and now equals nearly half of U.S. GDP

"Corporate debt is at its highest level relative to U.S. GDP since the financial crisis , and while not now a concern, that mountain of corporate IOUs could quickly turn into a heap of worry under the right circumstances."

"Fueled by low interest rates and strong investor appetite, debt of nonfinancial companies has increased at a rapid clip, to $8.7 trillion, and is equal to more than 45 percent of GDP, according to David Ader, chief macro strategist at Informa Financial Intelligence."

"According to the Federal Reserve, nonfinancial corporate debt outstanding has grown by $1 trillion in two years."

"Everything is fine until it isn't," Ader said. "We don't need to worry about that until we're in a slowdown and profit declines."

"Low rates have encouraged companies to borrow, but instead of using the money to expand, they have used it to boost their share prices, he said."

Do Red States Tax and Spend Less Than Blue States

"Traditionally, conservatives favor a government of limited size and advocate for reductions in taxes and government spending, while liberals favor a larger, more active government. A larger government requires a higher level of public spending, which necessitates higher revenue to avoid increasing the deficit. Hence, it is reasonable to expect that largely conservative states collect less revenue and spend less than largely liberal states. Could a long-standing conservative (liberal) state effectively implement its political agenda and reduce (increase) the size of the government? We examine whether the political leaning in each state influences its state and local government revenues and expenditures."

How The Federal Reserve Manages Money Supply

The federal reserve is a private association of banks and financial institutions. As it's actions have significant economic implications, the federal reserve does have an appointed head by the president but all other bank governors are selected by the banks who are members of the federal reserve.

It exists primarily to prevent bank panics by requiring banks hold a percentage of their reserves in cash and be a lender of last resort to banks who face demands for cash that they don't have in their own vaults and other banks are unwilling to lend to them.

The federal reserve occasionally changes the reserve rate for banks and often changes the discount rate, the rate they charge to banks at last resort that need a loan that no private bank will give them. Changing the discount rate influences the rate banks charge on loans. In times of extreme recession, the fed will do quanative easing aka open market operations which means that they either force banks to buy government bonds so that they have more cash to loan out or force them to pay back the bonds to take money out of the market.

The rational for doing this is publicly stated by the fed. The reserve rate, discount rate, and total open market amounts are released. Internal deliberations and individual transactions with banks are kept private to avoid market speculation. While the federal reserve sounds scary and has a massive impact on the economy, it generally does a good job at moderating inflation and recessions. Obviously people can and do disagree whether more or less unemployment or inflation is better.

GOP Tax Cuts Expected To Push Up Nation’s Debt

"When Republicans began assembling their tax overhaul proposals they were aiming to make them revenue neutral; the tax cuts could not lead to increased deficits. Holding the line on deficits has long been the goal of Republican deficit hawks."

"But that goal is now just a memory. Both the House and Senate proposals provide overall tax cuts in the $1.5 trillion range over the next decade. But there's no plan to offset them with cuts in government spending or new revenues. So over the next 10 years, the tax cuts are likely to add about $1.5 trillion to the national debt, according to the nonpartisan Congressional Budget Office."

Change in Hourly Wages, Compared to One Year Ago (Cents)

Today the US Bureau of Labor Statistics reported that the average hourly wage has increased by 63 cents an hour compared to last year. How does that compare to recent years? It seems like wage growth remains quite healthy.

Data Source: U.S. Bureau of Labor Statistics, Average Hourly Earnings of All Employees: Total Private [CEU0500000003], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/CEU0500000003, November 3, 2017. Comparison of this year's average hourly earning compared to one year ago in cents.

The Old Debt and Entitlement Charade

"The establishment is trying to pull a big one over on the public yet again. One of the designated topics for the last presidential debate goes under the heading, "debt and entitlements." This should have people upset for several reasons.

The first is simply the use of the term "entitlements." While this has a clear meaning to policy wonks, it is likely that most viewers won't immediately know that "entitlements" means the Social Security and Medicare their parents receive. It's a lot easier for politicians to talk about cutting wasteful "entitlements" than taking away seniors' Social Security and Medicare.

The ostensible purpose of the debate is to allow voters to be better informed about the candidates' views. So if the purpose is conveying information, why not use terms that most voters will understand?"

Quarterly Change in Gross Domestic Product, 2007-2017

The economy is continuing to grow at a good clip, although still not as strong as in some quarters of 2013 and 2014, when we were accelerating out of the recession. Real gross domestic product (GDP) increased at an annual rate of 3.0 percent in the third quarter of 2017 (table 1), according to the "advance" estimate released by the Bureau of Economic Analysis. In the second quarter, the revised numbers show that the real GDP increased 3.1 percent.

Gross domestic product (GDP) is the value of the goods and services produced by the nation’s economy less the value of the goods and services used up in production. GDP is also equal to the sum of personal consumption expenditures, gross private domestic investment, net exports of goods and services, and government consumption expenditures and gross investment. Real values are inflation-adjusted estimates—that is, estimates that exclude the effects of price changes.

For more information about this series, please see https://www.bea.gov/newsreleases/national/gdp/2017/gdp3q17_adv.htm

Data Source: U.S. Bureau of Economic Analysis, Real Gross Domestic Product [A191RL1Q225SBEA], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/A191RL1Q225SBEA, October 27, 2017.

Payroll Change Over Previous Month

Friday was the first time in seven years that the US Economy showed a loss of jobs. 33,000 jobs loss is tiny compared to the losses during the Great Recession, but it's not good news either. Some economists blame the speed bump on the severe weather that hit the southern states during the month of September, but it's also a sign that the US economy is struggling to grow and that we may be heading towards a recession. https://www.bls.gov/news.release/empsit.nr0.htm

Data Source: U.S. Bureau of Labor Statistics, All Employees: Total Nonfarm Payrolls [PAYEMS], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/PAYEMS, October 8, 2017.

Moderately well understood

"For decades, economists have puzzled over the reduction in macroeconomic volatility in the U.S. and world economies after the mid-1980s: In the last 25 years or so of the 20th century (highlighted by the blue bar in the graph), domestic output, employment, and inflation all fluctuated far less than they had in prior years. The data make the stabilization of the economy clear, yet economists haven’t reached consensus over the causes or duration of the Great Moderation."

"The Federal Reserve points to monetary policy as a primary cause of the moderation, through orderly responses to inflation and GDP changes after the Great Inflation of the 1980s. Instead of waiting for the signs of economic recession or rising inflation to appear before acting, as was common in the “go-stop” practices of the 1960s and 1970s, the Federal Reserve began following a more systematic, rules-based approach. Another proposed cause is the structural change of the economy and the labor market. In the 1980s, labor patterns shifted away from manufacturing and toward less-volatile sectors. Also, new technology sped up communication and allowed producers to track inventory and demand more easily, leading to more stable output over time."

"It’s easy to look to clear economic and policy changes as contributors to the Great Moderation, but there may be another factor at play: luck. Statistical models such as those proposed by Stock and Watson or Galí and Gambetti assert that, although some economic shocks did occur during the early part of the Great Moderation, they were less severe and better handled than those of the 1970s. While others dispute this claim, it still brings to mind the question: If luck is responsible, how long will it last?"

Vulture Capitalists Circle Above Puerto Rico Prey

"Puerto Rico is devastated. Two hurricanes plunged the island into darkness and despair. Crops perish in the fields. The landscape of ruined buildings and towns resemble Hiroshima after the atomic bomb was dropped on it. Over three million people are desperate for food, water, electricity and shelter. "

"After a slow start, the Trump Administration is now speeding up the flow of supplies to the island. A top US general has been given command of the relief efforts. And, like so many others, Yarimar Bonilla watches with a broken heart as her native Puerto Rico struggles. This noted social anthropologist – a scholar on Caribbean societies — says the hurricanes have made an already bad fiscal and economic crisis worse, and she sees darker times ahead unless major changes are made in the structure of power and in Puerto Rico’s relationship with the United States.'

Federal Debt Service Payments as Percent of Gross Domestic Product

A combination of low interest rates and a strong economy means the US is spending a typical amount of the entire US economy on federal debt servicing. In 1970s and 1980s, with inflation, a weak economy, and heavy deficit spending, the federal government was spending a much greater portion of the gross domestic product on debt service.

Federal Reserve Bank of St. Louis and U.S. Office of Management and Budget, Federal Outlays: Interest as Percent of Gross Domestic Product [FYOIGDA188S], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/FYOIGDA188S, February 28, 2017.

Real Gross Domestic Product Growth, 2012-2017

While the economy saw an uptick in the second quarter of 2017, the great economic boom under President Trump so far hasn't happened. That said, the US economy as a whole continues to grow.

Data Source: U.S. Bureau of Economic Analysis, Real Gross Domestic Product [A191RL1Q225SBEA], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/A191RL1Q225SBEA, August 29, 2017.