It is said that “history doesn’t repeat, but it rhymes.” Looking at some of the rhyming couplets between 1929 and 2008:

• Real estate bubble that collapsed beginning about two years ago
• Collapsing credit bubble, high levels of debt and “financial innovation”
• High levels of credit losses, banks tightening lending policies
• Economy sliding into recession, but stock market diverging
• Similar extreme income inequality between rich and poor

The PCE statistics were released this morning, including a claim that PCE inflation for April was 0.2%. Including food and energy. All I can say is that the government inflation figures are becoming more and more unrealistic in the face of rapidly rising prices.

Obviously it is in the government’s interest in many ways to keep reported inflation low. And in my view, they’ve moved beyond statistical games to outright falsification.

The University of Michigan consumer survey this morning reported that inflation expectations were the “highest in 20+ years.” I guess the consumers aren’t fooled.

For a good read on the actual effects of energy price inflation, Desmond Lachlan:

Past experience suggests that if the recent run-up in oil prices is sustained, it alone will subtract more than a full percentage point from U.S. GDP growth in 2008. That experience also suggests that, over the longer haul, the recent doubling in oil prices will subtract another full percentage point from U.S. GDP growth beyond 2008. Since these oil price increases have occurred in the context of a housing bust and a credit crunch, one must assume that the U.S. economy is facing the real risk of a recession that is both deeper and more protracted than the postwar average. And if the recent spike in oil prices threatens to tip the U.S. economy into recession, just imagine what a further run-up in prices—say, to the $150 to $200 a barrel range—would do.

The Fed’s Richard Fisher speaks to the ludicrously underfunded Federal entitlement programs, Social Security and Medicare:

Let’s say you and I and Bruce Ericson and every U.S. citizen who is alive today decided to fully address this unfunded liability through lump-sum payments from our own pocketbooks, so that all of us and all future generations could be secure in the knowledge that we and they would receive promised benefits in perpetuity. How much would we have to pay if we split the tab? Again, the math is painful. With a total population of 304 million, from infants to the elderly, the per-person payment to the federal treasury would come to $330,000. This comes to $1.3 million per family of four—over 25 times the average household’s income.

Clearly, once-and-for-all contributions would be an unbearable burden. Alternatively, we could address the entitlement shortfall through policy changes that would affect ourselves and future generations. For example, a permanent 68 percent increase in federal income tax revenue—from individual and corporate taxpayers—would suffice to fully fund our entitlement programs. Or we could instead divert 68 percent of current income-tax revenues from their intended uses to the entitlement system, which would accomplish the same thing.

Suppose we decided to tackle the issue solely on the spending side. It turns out that total discretionary spending in the federal budget, if maintained at its current share of GDP in perpetuity, is 3 percent larger than the entitlement shortfall. So all we would have to do to fully fund our nation’s entitlement programs would be to cut discretionary spending by 97 percent. But hold on. That discretionary spending includes defense and national security, education, the environment and many other areas, not just those controversial earmarks that make the evening news. All of them would have to be cut—almost eliminated, really—to tackle this problem through discretionary spending.

I hope that gives you some idea of just how large the problem is. And just to drive an important point home, these spending cuts or tax increases would need to be made immediately and maintained in perpetuity to solve the entitlement deficit problem. Discretionary spending would have to be reduced by 97 percent not only for our generation, but for our children and their children and every generation of children to come. And similarly on the taxation side, income tax revenue would have to rise 68 percent and remain that high forever. Remember, though, I said tax revenue, not tax rates. Who knows how much individual and corporate tax rates would have to change to increase revenue by 68 percent?

These programs are frauds. Can’t happen.

Judge Leslie Tchaikovsky, a local Federal bankruptcy judge, zaps lenders who were, in effect, basing their credit decisions on collateral value only (and apparently shopping for inflated appraisals, to boot). From Calculated Risk, “BK Judge Rules Stated Income HELOC Debt Dischargeable:”

This is a big deal, and will no doubt strike real fear in the hearts of stated-income lenders everywhere. Our own Uncle Festus sent me this decision, in which Judge Leslie Tchaikovsky ruled that a National City HELOC that had been “foreclosed out” would be discharged in the debtors’ Chapter 7 bankruptcy. Nat City had argued that the debt should be non-dischargeable because the debtors made material false representations (namely, lying about their income) on which Nat City relied when it made the loan. The court agreed that the debtors had in fact lied to the bank, but it held that the bank did not “reasonably rely” on the misrepresentations.

As Tanta points out, stated-income lenders expected the borrowers to lie, and assumed that the borrowers’ misrepresentations would allow them to escape liability for imprudent lending when the loan owners tried to put back the defaulted paper.

I certainly spend a fair quantity of bits criticizing conventional economics and economists. However, there are always exceptions who question authority and see what is really going on. Paul Kasriel of Northern Trust is notable, but here’s another, Richard Alford. He is interviewed by Institutional Risk Analytics.

If the US consumer were to go back to savings rates of the 1996 period, then you are talking about savings going from essentially zero today to approximately 8% of disposable income. Since US GDP is about 70% consumption, that implies a decline in demand of about 5 to 5.5%. That would be a very dramatic effect.

No kidding. Because of course the decline in demand would reduce employment, which would further reduce income in a vicious circle. That is why Ben is moving heaven and earth to avoid an increase in savings.

Politically and economically, there is no painless solution to the imbalances in the US. For US policymakers, it seems that even short-term pain is intolerable. Nobody in Washington wants to bite the bullet and explain the full dimension of the required change to the US electorate, so we muddle. Going back to the early 1990s, US politicians have bought support from the voters by keeping consumption on an ever rising trajectory. For at least 12 years, we’ve had debt induced increases in consumption and the political class optimized their behavior to maintaining that illusion of rising consumption even as the economic fundamentals worsened.
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The US population is not ready to hear that their real levels of income, assets prices and other indicia of national well being may be falling or relatively stagnant for the foreseeable future. This is just politically not acceptable. So our politicians will attempt to maintain the appearance of growth, but not address the underlying causes.