Very short lesson on what might happen in a few hours in the US Treasury market if a debt deal is not made (or even if one IS made)...

The Federal government borrows money by issuing US Treasury notes/bills---basically IOU's. I am going to use a very simple example to show how the market for US Treasuries may be affected by the failure to raise the debt limit. Keep in mind these numbers are NOT reflective of true market prices. The math is easier for me that way...

If the govt wants to borrow money they issue one of these Treasury Notes/Bills.  Assume the face value of this Treasury is $1,000 and the current market price for this Treasury is $900 (remember, this does NOT reflect the REAL market AT ALL!).  You buy this bond for $900, so the government in essence has borrowed $900 to spend on whatever they want to spend it on. When you redeem it at maturity you earn $100 over what you paid for it.  Your effective interest rate then was 11.11% ($100/$900 x 100). 

Now, assume the debt limit is not raised and there is perception/eat that the US govt will default on its debt obligations. What is going to happen to the price of US Treasurys now and in the future? We should expect the price to DECREASE as the Demand for them DECREASES. 

Now, for the govt to attract borrowers they will have to LOWER the price of the Treasury to entice people to buy one.  Assume the price is now $800 for a $1,000 Treasury.  So, now the effective interest rate is 25% ($200/$800 X 100)!!

This is what it means when you hear that the borrowing costs for the US government might increase if a deal is not reached.  They will have to accept LESS for each bond issued and pay MORE when they are redeemed.

I hope this helps when the stuff hits the fan in a few hours. The first thing that will be affected will be the price of US Treasuries in the market. 

Note: The demand may fall as I described for US Treasuries BUT the Supply of Treasuries already in circulation could (will ) increase as investors dump them. If the supply increases it has the same effect as demand decreasing, hence the same downward pressure on the price and effect on borrowing costs...

My explanation as to why Social Security Checks WILL go out regardless of what happens with the debt limit. Man, we are gullible!!.

When you (and all other workers subjected to payroll taxes) work, 12.40% of whatever you earn goes to the Social Security Trust Fund (you pay 6.2% and your employer pays 6.2%). For years this amount has exceeded what was needed to pay retirees Social Security checks. The difference in what was brought in and paid out was the then "borrowed" by Congress to spend on wars, bridges, tax breaks, whatever...The S.S. Trust Fund took US Treasury Bonds ("IOU's) in exchange for loaning the surplus money to Congress. This is known as an "Intergovernmental Transfer"--government borrowing from itself. The Trust fund has lots of these bonds, roughly $2.5 Trillion (yes, that is right) worth. They can redeem them as needed.

Assume the debt limit of $14.3 Trillion is met with no extension.  There have been threats that granny may not receive her Social Security check next month.  Let me show you how this is not possible, unless political leaders "choose" (not forced) to do so.

This $2.5T owed to the SS Trust fund is part of the $14.3T national debt accumulated by Congress. If a deal is not reached, EXCLUSIVE of any decision about what to spend or not spend on out of the Federal budget this is what the SS Trust fund can do.

Little less than $60 Billion is paid out in Social Security checks each month.  The SS Trust fund CAN "cash in" $60 Billion of the $2.5T in bonds they hold. The US Treasury is required to take those bonds and credit the SS Trust fund with the proceeds.  The Trust Fund can now cut checks and granny can go to the bingo parlor with no worries...Because the those bonds have been paid off and they were a part of the $14.3T national debt, the national debt DECREASES by $60 Billion BELOW the debt limit.  Now, Congress can borrow $60 billion MORE to meet other obligations and NOT be over the legal debt limit...Rinse and repeat next month...

This is not a long term solution.  The first question that comes to mind is WHERE did the US Treasury get the money (or electronic credits) to pay off the bonds?  Well, they printed/pressed a button.  Inflationary, you say? Perhaps, but inflation is not the biggest problem we face right now.  (Yes, this is kicking a can down the road, but just a DIFFERENT can...)...

The Federal budget problems have to be addressed, but they don't have to be at granny's expense. 

So, when you hear a politician or a talking head on TV tell you Social Security checks won't go out, they are either not informed or they assume you are not and will believe anything...Don't let it be the latter...

Please read this editorial by Thomas Saving that I base this blog entry on...He is not responsible for any of my misinterpretations of his work... :)

Nice graphics showing the difference in employment levels between Texas and California AND the price of moving trucks/vans between the two states..The signs are everywhere...

 

Source: Carpe Diem

 I don't know the number of jobs Texas has "stolen" from California, but I am sure there has been somewhat of a zero-sum result in net gain/loss in jobs between the two states.  One underlying market sign as to what may be happening is the self-moving truck/van market.  From the two graphics I clipped today (July 24th) from the U-Haul website shows a dramatic difference in price depending on which way you are going. There may be other reasons for the difference in price, but I surmise migration for employment opportunities is a major reason...It could NOT possibly be for the social programs Texas has...

Cost to rent a U-Haul Truck to move from Texas to California:

Cost to rent a U-Haul Truck to move from California to Texas:

Well, if they are just going to snipe at each other, I guess it is up to me to actually explain one of the most important parts of Social Security and Medicare reform...

One of the proposals to slow down the rate of spending, and technically not "cut" benefits, on the two major entitlement programs (Social Security and Medicare) is to go to an alternative measure of prices that reflects substitutes and presumably closer reflects the rise in the cost of living. Exciting, isn't it? Maybe not, but it is a major component to entitlement reform AND almost no one talks about it or explains it.  Here is my superfluous effort...

When the time rolls around for Congress to adjust the amounts (also known as "Indexing")senior citizens receive for Social Security and Medicare benefits, they use the Consumer Price Index(CPI)---a measure of a fixed basket of typical goods and services that the average person might purchase on a daily, weekly, monthly or yearly basis.  If in a time period the market basket costs, say, $100 and in a subsequent time period the SAME basket costs $110, then is can be said prices overall have increased 10%. Congress then can increase the benefits received by senior citizens 10%.

The problem in this measure of prices is the word "fixed".  In the real world, if the price of a good increases consumers seek, and often find, less expensive alternatives. The CPI does not reflect this. In effect the CPI may overstate inflation. Hence, in our example above, if a consumer chooses a less expensive alternative not in the fixed basket then inflation may have increased only to, say, 8%.

Under this new measure, the senior citizen receives an 8% increase in benefits as opposed to 10%.  Voila, proposed spending is reduced by 2 percentage points (or 20%!)...

Hope this helps in seeing the "policy forest" for the "political trees"...

What do the Legislative and Executive Branches of government have in common with the show "Hoarders"? I kinda think everything at this point....

If you have not seen the show "Hoarders" it is about people who have a pathological need to accumulate stuff/junk/trash.  They are unable to give or throw ANYTHING away.  Their houses are crammed full of possessions, including trash. They KNOW they have a problem but they cannot even part with a 2 year old pizza box. 

This is how I see Congress and the discussion on the debt limit and its impact on the Federal budget.  They are hoarders of the things tax money can buy, no matter how ineffective (insert your own despised program here) or counter-productive (ethanol mandate). They know they need to let go of some of the junk, but mentally unable to do so.

Using the Hoarders analogy, this is how I see it:

1. Those on the extreme left want to increase the size of the house (more taxes) so they can hoard more stuff (more government spending) and ignore the illness ("There will always be someone around to pay for this...Right???")
2. Those on the extreme right want to burn the house down--that will teach em'--problem solved ("Oh, wait, I just burned down my own house")
3. Those in the middle want to keep the house (it is a pretty good house---built by some very smart people) but address the problem and pare down the junk (decrease spending) to create more order and functionality. But in order to do that, we might have to buy some boxes and/or shelves to get ourselves organized (raise revenue). ("Don't worry, Be Happy")

As you watch the events unfolding in the next couple of weeks, keep these 3 profiles in mind. Don't you think they peg the political players and their cohorts pretty well?

This reminds me, I have to clean out the garage...and go to Home Depot to buy another useless tool....and Of COURSE, I have to put it on my credit card...

Homeowners---WHY are we ENTITLED to the Home Mortgage Interest Deduction? I really want to know...

Here goes...I live in a house. I got a loan to buy my house. I pay 12 monthly payments to my bank in a calendar years time. Four things are a part of each payment--(1) the principal on my loan, (2) the interest I pay for my loan, (3) property taxes that go to various local governments and (4) payment for homeowners insurance.

The principal is the amount of my loan I actually pay-off on the loan over the year. The bank keeps the interest. The bank submits the money withheld for taxes to the respective local government entities. The banks sends the money collected from me to the insurance company that insures my home.

When I do my Federal income taxes and determine I can itemize deductions (as opposed to taking the "standard deduction"--that is another lesson), I deduct from my taxable income the amount I already paid in taxes to the local governments. This keeps me from being taxed twice on the same income. I get this and it makes total sense.

I can also deduct the INTEREST I paid on my loan that I accrued during the year. This reduces my income that is subject to Federal taxation, hence I pay  less in Federal taxes.  I clearly see how this benefits me. But, WHY am I ENTITLED to this deduction? I know the political reason for this ENTITLEMENT: It is to encourage people to buy homes (voters), perhaps more home than they can afford (that is ANOTHER issue); home builders and real estate agents use it as a selling tool (interest groups, political donors); and doggone it, I have become so use to it I feel ENTITLED to it (voter, again).

So, those of you in my position too, other than it allows us to pay less in taxes, WHY are we ENTITLED to this subsidy/tax break? How can it be justified? Has this subsidy become so ingrained that we feel ENTITLED to it?  Remember, your justification may also be use by someone defending their Subsidy/tax break.

If you did not notice, I believe this has become an ENTITLEMENT for the upper middle class to upper class (especially) of taxpayers.  I have done nothing to receive this subsidy, other than qualify for a loan.

Where am I going wrong?? Respectful in tone responses welcome...

Here are some noted Conservative (right of center) Economists supporting an increase in the Debt Limit. Who am I to disagree?

Some noted Conservative (just right of center, mostly) chime in on whether to raise the debt limit or not. Who am I to argue? A one minute video below illustrates the problem in a concise way. (HT: Modeled Behavior)

Gary Becker: “That Congress will have to raise the debt limit this summer is a no-brainer since revenues are not anywhere near large enough to cover government spending. Without a boost in the ceiling, the federal government will be unable to pay its bills, including pay to federal employees.”

Keith Hennessey: “Congress must raise the debt limit. Not doing so would eventually lead to defaulting on Treasury bonds, a potentially catastrophic event.”

Douglas Holtz-Eakin  – “Yes, Congress should raise the debt limit. Being a good steward of the U.S. credit rating means that it has to pay Obama’s credit-card bill. And it should do so as quickly as possible — on the day it returns from recess.”

Glenn Hubbard: “The debt ceiling must be raised – not doing so is irresponsible”

Richard Posner: “No doubt before the political and economic damage becomes too severe, the Republican radicals in the House of Representatives will relent and the ceiling on borrowing will be raised. Before that happens interest rates may rise, and stay higher, because of doubts about the basic competence of American government. Those doubts, plus the higher interest rates they engender, may deepen the current economic downturn, which in turn will reduce tax collections, increase transfer payments, and in both respects increase the federal deficit… Why Republicans prefer flirting with failing to raise the debt ceiling by the August 2 deadline to accepting the deal tentatively worked out between President Obama and Speaker Bohner…is a deep mystery.”

Are you on vacation? Check this graphic to see where you are mentally...

Source: Chartporn

The Federal Reserve does not cause inflation, Costco does! Something that makes you go "Hmmmm"....

A study (HERE) shows that where merchandise discounter Costco opens a store, the average price of groceries INCREASES at grocery stores in the surrounding community(s).

""The study, which is titled Competing with Costco and Sam's Club: Wharehouse Club Entry and Grocery Prices, looked at what effect the opening of a Costco had on grocery prices in nearby supermarkets. The authors found that on average customers who continued to shop at the supermarkets near a Costco tended to spend 3% more on groceries than they did before the bulk retailer opened. The Costco Inflation effect was generally larger in smaller towns...."" (article HERE)

This is at odds with with known research regarding the opening of a Walmart and the effect on area prices.  The study did not look at Sam's Clubs, perhaps because Sam Clubs seem to generally open up near Walmarts, whereas Costco is a stand alone business.  One of the possible explanations is that Costco attracts the "value" shopper, the Kroger,Tom Thumbs, and Albertsons of the world concentrate on the less price sensitive shopper (fancy way of saying someone willing and able to pay more for the same good/service)...

""Instead, Courtemanche says he thinks Costco tends to drive the cost conscience customers out of the local supermarkets. The remaining customers are willing to pay more. Store managers figure that out and raise prices...""

As someone who goes to Walmart (or a Costco if one was nearby)  as a LAST resort, I identify with this reason.  Perhaps that means I have too much discretionary income for my own good. 

Look at the whole article HERE for other possible reasons. If you are interested in business or consumer behavior this is worth a read. I see an opportunity to discuss elasticity of demand.

Is my restaurant doing better or worse because of infrastructure projects underway in the name of "Fiscal Stimulus"?---Well, let me tell you a story...

I own a restaurant on the outskirts of town. It is located off a highway beside an overpass that has easy on and off ramps. In good years, I had a staff of 20, but now I have 10 because of the recession. Assume the economy (and my business) has bottomed out and is not going to get worse.  The overpass and the ramps have been classified as shovel ready projects and are to receive stimulus funds because there are not in good repair. 

Construction begins. It is going to take 6 months to complete the work.  The site requires 50 construction workers. On any given day 25 of the workers come to my restaurant to eat lunch. This is 25 NEW customers that I did not have before the construction started.

Do I need to hire another waitperson or cook to serve these new customers? While I ponder that question, I notice that I have 30 fewer non-construction work related customers.  Some of these are my friends! I call a couple of them up and they tell me the construction makes it inconvenient for them to get to my place of business, so they are trying some of the other restaurants in town.

I am WORSE off then before! I now have to lay-off a worker. What is this worker to do? The construction business seems to be good, but they are a waitperson and do not have construction skills.

I wonder if my fellow restaurateurs in town have seen an uptick in business and are going to hire workers--maybe I can place the waitress I had to layoff. I call them up and I hear a common refrain---Yes! They all are seeing a few more customers (that may have eaten at my place if it were not for the construction) AND a few construction workers coming in after work to the various establishments. This is great for them but, they tell me, it is not enough for them to justify hiring additional staff (like the one I laid-off). They just work a little harder. Besides, they know when the overpass is finished in six months, my customers will return and the construction workers will go away.

They tell me the restaurant suppliers who deliver us our supplies are encountering the same conundrum. There is a short term increase in the demand for supplies, but why hire when they know they will have to lay-off in a few months as the infrastructure money runs out? Keep the profits and get more productivity out of existing workers. Those additional profits will come in handy when/if things go back to normal.

As a small business owner, this is what I learned: The additional outside money injected into my town left me at status quo (actually a little worse off). Increased the short-term profits for my fellow restaurant owners. Did not create any additional permanent new long term jobs in my community. YES, it did provide jobs additional construction jobs on a temporary basis, but it caused one of my employees to lose their job. 

Do I just not see "The Big Picture" Washington is painting for me??

This is a quasi-made up story, but I believe there is a lot of truth to it IF you take the position of a small business owner (allegedly the backbone of the economy).  Where I live (Dallas/Ft Worth), there is MAJOR road construction all around. I have avoided many businesses, large and small that I frequented before the traffic snarls. This has to hurt them in the short run, right??  Just look around when driving through the construction zone in your area. What do you notice??

I understand the long run benefits of upgrading infrastructure and I do see how some workers are better off, but the short term benefits appear to be marginal at best and perhaps negative, FROM MY PERSPECTIVE AS A SMALL BUSINESS OWNER.

My advice to politicians: Don't make spending on infrastructure the center-piece of promoting a recovery, especially the employment aspect of it--people will be disappointed with the results.  Focus on post-infrastructure policies you have in place (you have post infrastructure policies in place, don't you?) that will use this new and improved over-pass and  ramps to encourage/incentive OTHER businesses (preferably high value/high paying) to locate there permanently.  If you do this then I will hire more workers and perhaps expand my business because I know everyday I will have a sustained increase in customer traffic. That is what small businesses people want to see.

Where am I going wrong? Is Washington already doing this but not communicating it well or or am I not listening to them.--or a combination of the two...Respectful replies are encouraged...

Which food source emits the most earth destroying Carbon? Sorry, Mary, the lamb has to go...Nice chart not to be missed...



Source: Matthew Ygleasias

 Read all about it HERE...

Nice chart showing the foreign holders of our National Debt. "We're gonna need a bigger boat"---load of money to land this debt shark...

There are two parts to the National Debt. (1) Debt held by the "public"--me, you, businesses, investment firms, foreigners (foreign individuals, businesses, investment firms and governments). The chart below shows the major foreign holdings of US Treasurys (interest bearing IOU's, if you will). The sum total of debt held by the public is $9.644 Trillion, of which $4,489.1 Trillion is held by people/banks/governments outside the US. The remaining amount, $5,154.9 Trillion is held by US citizens/banks/corporations/investment firms.  The total National Debt is $14.2 Trillion. The additional $4,556 (or so) is considered "private" debt or "intergovernmental transfers".  This is the money shuffling game played by Congress---it represents money borrowed from a variety of Federal Trust Funds, i.e. Social Security, Medicare, and other Federal pension funds. Our portfolio of creditors is not very balanced--45.9% of our national debt is held by China and Japan and 47% of our total Public Debt is held by foreingers ($4,489/9,644 x 100).



Source: Economix



The Walmart-ization of America...Video of Walmarts US growth in 26 seconds...

The Walmart-ization of America...Walmarts US growth in 26 seconds...HT: Carpe Diem

Nice graphic summing up the National Debt---It was a group effort to get us into the mess. Seems like they could make a group effort to get us out of it...Just sayin'...

Nice graphic that  shows the growth of the National Debt over time AND whether a Republican or Democrat was President AND the majority party in the House and Senate at the time. This was a group effort to get us into this situation. Seems like they could make a group effort to get us out of it. Just sayin'...



Source: Ezra Klein (I corrected the "House Bar" colors. They were incorrect in the original Klein post. I could not match the pink exactly, but I think you can get the idea...)

It does not matter what the price of rice is in China. You still need chopsticks to eat it...Guess which country is a growing supplier of them?

Comparative advantage is a strange thing... A Georgia company is a leading exporter of chopsticks, of all things, to China...Nice example of a small business with an unromantic product filling a niche.  Read story HERE and/or watch video below...HT: Carpe Diem