Treasury bonds had a really good year in 2011 with the 10-year bond yielding under 2% at the end of the year for the first time since at least 1977 and the 30-year bond under 3%. This is good news for bonds at first glance. But is it?
An improving economy and a Federal Reserve ending Operation Twist, where short-term Treasury bills are sold to buy long-term Treasury bonds, comes to an end, leaving future gains for bonds in doubt. Unless the economy declines, interest rates will head higher in 2012. There are few reasons remaining for the Federal Reserve to continue pushing rates lower.
How high rates go and when is anybodies guess. History has an interesting reference though. When we consider the low 10-year Treasury bond yield at the end of 1977, one concern comes to mind. A few years later interest rates pushed toward double digits and later went well over 10%.
If history repeats, which is no certainty, interest rates could head a lot higher. There are notable differences, however. Inflation is less an issue today than in 1977. Demographics are significantly different. Tax rates are lower and greater global trade should keep inflation lower. Energy prices are less an issue today because of more efficient use of these resources.
The differences aside, one overwhelming fact remains: Interest rates can go from very low to very high very quickly. The good 'ol days of low interest rates are coming to an end. It might take another generation to see these rates again.
Anybody for a 14% 30-year Treasury bond?
Showing posts with label economic indicators. Show all posts
Showing posts with label economic indicators. Show all posts
Tuesday, January 3, 2012
Tuesday, August 10, 2010
The Not So Big Problem of the U.S. Budget Deficit
One and a half trillion dollars in added debt per year seems like an insurmountable problem, but is it? The red ink pouring out of Washington has so many people up in arms that our economy may falter or sink into a double-dip recession. Our leaders should review the 1930s before embarking on such austerity.
After World War II, the United States had a national debt of around 120% of GDP. The United States never paid any of that debt down... ever. Okay, there were two years with a small budget surplus, but that was so small it was only a fraction of a percent and the next year it was spent. So what gives? The national debt was huge in 1945, never paid down, and became a small, manageable debt in subsequent years. Why? And more important, how?
We need to fast forward to the 1990s and the largest budget surpluses our federal government ever had. (On percentage terms President Andrew Jackson paid off 100% of the national debt. It did not last long.) How did President Clinton run so many and so much surplus? It was simple really. President Clinton understood that the budget deficit can be eliminated by increasing spending slower than economic growth. It takes a few years, but it always works and keeps the economy humming.
Let me illustrate. If your national economy is $1,000 and the government takes in $90 in taxes and spends $100, you have a budget deficit of $10. If the economy grows 5% the next year to $1,050 and tax revenue collected remains the same in percentage terms, you collect $94.50. If spending increases 2%, your government spends a total of $102. The budget deficit for the year is $7.50, a decline of 25% in your budget deficit.
When using really big numbers, like the size of our real economy and government finances, the numbers are compelling. The federal government can spend more and actually be financially in a better fiscal position as the debt is a smaller percentage of the economy. Running a budget surplus can injure a national economy, especially in weak economic times. The real trick is to increase the total national debt less than the economy grows.
During a recession the economy shrinks so the debt burden grows fast and scares politicians and guys on the street. It shouldn't and here is why. Economic performance is measured in inflation adjusted terms. If the government reports 3% economic growth and inflation is 2%, the economy grew 5%. The government adjusts the numbers to reflect real growth. However, the economy grew 5% in dollar terms. If the national debt grew less than 5%, not he 3% reported, the deficit is easier to manage than the year before.
With all this said, $1.5 trillion deficits are not something we want to repeat each year. However, the sky is not falling. The national debt of the United States is well below all-time highs compared to GDP and is currently under 100% of GDP. The concern is how fast we are increasing the debt burden.
Congress does not need to irritate the President into lowering spending. Just increase spending slower than the economy grows and in a few years we are back in the black.
Now you can smile and enjoy the day.
After World War II, the United States had a national debt of around 120% of GDP. The United States never paid any of that debt down... ever. Okay, there were two years with a small budget surplus, but that was so small it was only a fraction of a percent and the next year it was spent. So what gives? The national debt was huge in 1945, never paid down, and became a small, manageable debt in subsequent years. Why? And more important, how?
We need to fast forward to the 1990s and the largest budget surpluses our federal government ever had. (On percentage terms President Andrew Jackson paid off 100% of the national debt. It did not last long.) How did President Clinton run so many and so much surplus? It was simple really. President Clinton understood that the budget deficit can be eliminated by increasing spending slower than economic growth. It takes a few years, but it always works and keeps the economy humming.
Let me illustrate. If your national economy is $1,000 and the government takes in $90 in taxes and spends $100, you have a budget deficit of $10. If the economy grows 5% the next year to $1,050 and tax revenue collected remains the same in percentage terms, you collect $94.50. If spending increases 2%, your government spends a total of $102. The budget deficit for the year is $7.50, a decline of 25% in your budget deficit.
When using really big numbers, like the size of our real economy and government finances, the numbers are compelling. The federal government can spend more and actually be financially in a better fiscal position as the debt is a smaller percentage of the economy. Running a budget surplus can injure a national economy, especially in weak economic times. The real trick is to increase the total national debt less than the economy grows.
During a recession the economy shrinks so the debt burden grows fast and scares politicians and guys on the street. It shouldn't and here is why. Economic performance is measured in inflation adjusted terms. If the government reports 3% economic growth and inflation is 2%, the economy grew 5%. The government adjusts the numbers to reflect real growth. However, the economy grew 5% in dollar terms. If the national debt grew less than 5%, not he 3% reported, the deficit is easier to manage than the year before.
With all this said, $1.5 trillion deficits are not something we want to repeat each year. However, the sky is not falling. The national debt of the United States is well below all-time highs compared to GDP and is currently under 100% of GDP. The concern is how fast we are increasing the debt burden.
Congress does not need to irritate the President into lowering spending. Just increase spending slower than the economy grows and in a few years we are back in the black.
Now you can smile and enjoy the day.
Thursday, May 6, 2010
Economic Growth Rate, Development, and Indicators of the Next 50 Years
Politicians have had a singular mind when it comes to economic growth rates and development over the last 150 years. The common man has used these political indicators as a personal guide toward economic success.
Since the mid 18th Century, economic growth has been defined as a growing Gross Domestic Product (GDP). The common man understands this as having more and more stuff as each year passes by. All this growth has been carried on the back of cheap energy, and more to the point, cheap carbon based energy: oil, natural gas, and coal.
The Industrial Revolution gave us mass production and the resulting wild swings in economic performance. By the 1920s, production grew so rapidly that demand could never keep up. The economy faltered and then collapsed as the machines produced more than people could possibly buy. WWII sopped up the excess production and the economy started humming again.
Since WWII, worldwide debt has exploded. The excesses of production ramped up each year and debt and mild to moderate inflation, mixed with crude oil, fueled the near straight line advance of Western economies.
The end of the era of cheap oil will create a paradigm shift in economic growth thinking. Growth rates are unsustainable. Oil is getting harder and harder to find as we see by the deep ocean drilling around the world just to keep up with demand.
The concept of more disposable stuff every day to amuse us will turn out to be a blip on the historic map. When one car was not enough, we bought two, then three, then Hummers and SUVs. A one thousand square foot home gave way to fifteen hundred, then two thousand, then three thousand square feet of living space. Many of us live in museums or grand cathedrals today.
More flat screen TVs, computers in every room, cells phones, iPods, are now the must have lifestyle. There is no more time in our lives to enjoy what we already have and the Earth cannot tolerate the abuse any longer.
Economic growth in the future will look much different. Occupations of tomorrow do not even exist today, but soon. A stable GDP will be the new successful economic norm. Living within our, and the planet’s, means will be the only acceptable way to live.
Some future jobs are here today with alternative energy. But the real jobs will come from zero energy homes, homes that produce more energy than they consume, while providing all the comforts of life. We already know how to build homes like this, even in cold climates. We got so used to cheap energy that we built our homes any way we felt and forced the interior environment to our liking by burning more oil.
Transportation has been a solitary event. We drive in our cars, alone. We build more and more highways. The more roads we build, the more we drive. In 2007, in the U.S. alone, we consumed over 22,000,000 barrels of oil a day, just shy of 1 billion gallons every day, day after day. We have come off the 2007 peak consumption year numbers, but not by much, and only because of a recession.
Future good-paying jobs will produce products that consume less. Future jobs will include consulting with businesses and the common man to do more with less. It is certain we will drive less. Once we stop running the rat race of more and focus on better, our lives will become less cluttered and hectic.
Think of some of the real benefits to our society when we produce more of what we consume locally. Electricity transmitted long distances from coal power plants lose a third or more of the electricity produced from transmission, and coal fired power plants are less than 50% efficient.
Think of it: local food that requires less shipping; cars that run on electricity produced by your own home, your home producing more electricity than you personally use. We will do less and get more in the form of a less anxiety-driven, hectic lifestyle. The engines of production will allow the entire human race to live a comfortable life.
We don’t need to work 40 hours per week. We work so much so we can buy all the gadgets, extra TV’s, SUV’s, 5,000 square foot homes, and all the trinkets we are told we must have. We need to work longer hours to pay for the extra car we need to get to work. We dine at restaurants because we are too tired after a long day at work; we work to pay for the added expense of dining out. The cycle never ends… unless you step off the hamster wheel yourself.
And oil, no longer easy to find, will not bail us out. Now we will work smarter or suffer the consequences. The old answer to every problem, “just burn more oil”, will no longer work.
It is a better world we will become. The environment will get a rest, heal, and then nurture us. We can live better by burning less. It is the new economic growth and development paradigm. If we know what is good for us.
Since the mid 18th Century, economic growth has been defined as a growing Gross Domestic Product (GDP). The common man understands this as having more and more stuff as each year passes by. All this growth has been carried on the back of cheap energy, and more to the point, cheap carbon based energy: oil, natural gas, and coal.
The Industrial Revolution gave us mass production and the resulting wild swings in economic performance. By the 1920s, production grew so rapidly that demand could never keep up. The economy faltered and then collapsed as the machines produced more than people could possibly buy. WWII sopped up the excess production and the economy started humming again.
Since WWII, worldwide debt has exploded. The excesses of production ramped up each year and debt and mild to moderate inflation, mixed with crude oil, fueled the near straight line advance of Western economies.
The end of the era of cheap oil will create a paradigm shift in economic growth thinking. Growth rates are unsustainable. Oil is getting harder and harder to find as we see by the deep ocean drilling around the world just to keep up with demand.
The concept of more disposable stuff every day to amuse us will turn out to be a blip on the historic map. When one car was not enough, we bought two, then three, then Hummers and SUVs. A one thousand square foot home gave way to fifteen hundred, then two thousand, then three thousand square feet of living space. Many of us live in museums or grand cathedrals today.
More flat screen TVs, computers in every room, cells phones, iPods, are now the must have lifestyle. There is no more time in our lives to enjoy what we already have and the Earth cannot tolerate the abuse any longer.
Economic growth in the future will look much different. Occupations of tomorrow do not even exist today, but soon. A stable GDP will be the new successful economic norm. Living within our, and the planet’s, means will be the only acceptable way to live.
Some future jobs are here today with alternative energy. But the real jobs will come from zero energy homes, homes that produce more energy than they consume, while providing all the comforts of life. We already know how to build homes like this, even in cold climates. We got so used to cheap energy that we built our homes any way we felt and forced the interior environment to our liking by burning more oil.
Transportation has been a solitary event. We drive in our cars, alone. We build more and more highways. The more roads we build, the more we drive. In 2007, in the U.S. alone, we consumed over 22,000,000 barrels of oil a day, just shy of 1 billion gallons every day, day after day. We have come off the 2007 peak consumption year numbers, but not by much, and only because of a recession.
Future good-paying jobs will produce products that consume less. Future jobs will include consulting with businesses and the common man to do more with less. It is certain we will drive less. Once we stop running the rat race of more and focus on better, our lives will become less cluttered and hectic.
Think of some of the real benefits to our society when we produce more of what we consume locally. Electricity transmitted long distances from coal power plants lose a third or more of the electricity produced from transmission, and coal fired power plants are less than 50% efficient.
Think of it: local food that requires less shipping; cars that run on electricity produced by your own home, your home producing more electricity than you personally use. We will do less and get more in the form of a less anxiety-driven, hectic lifestyle. The engines of production will allow the entire human race to live a comfortable life.
We don’t need to work 40 hours per week. We work so much so we can buy all the gadgets, extra TV’s, SUV’s, 5,000 square foot homes, and all the trinkets we are told we must have. We need to work longer hours to pay for the extra car we need to get to work. We dine at restaurants because we are too tired after a long day at work; we work to pay for the added expense of dining out. The cycle never ends… unless you step off the hamster wheel yourself.
And oil, no longer easy to find, will not bail us out. Now we will work smarter or suffer the consequences. The old answer to every problem, “just burn more oil”, will no longer work.
It is a better world we will become. The environment will get a rest, heal, and then nurture us. We can live better by burning less. It is the new economic growth and development paradigm. If we know what is good for us.
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