Thursday, March 29, 2012

Canada's MP Pension Plan: Standing Out in a Time of Austerity

Now that the Conservatives have decided to raise the age that the sweaty masses can start collecting their Old Age Security benefits to 67, I thought that it was time to do a quick posting on MP pensions.  I have sourced the data for this posting from the Canadian Taxpayers' Federation publication "The CTF Report on MP Pensions: A Taxpayers' Indictment".

Let's look at a bit of background information first.  Canada's MPs (both present and retired) can start collecting their pensions  at age 55 if they have served at least six years; twelve years younger than the proposed changes to OAS.  MP pension benefits are calculated using the average of the MPs best five years of salary multiplied by the product of the number of total years of service and 3 percent to a maximum of 75 percent of their total salary.  The Prime Minister is entitled to extra goodies; upon reaching the age of 65, former Prime Ministers receive a special allowance worth two-thirds of their extra salary (currently $157,731) which currently works out to $104,665 annually.  Please note that these pensions are fully indexed to the Consumer Price Index, something that the rest of us can only dream about.  As well, MPs that have served non-consecutive terms (i.e. Stephen Harper, Bob Rae etcetera) can buy back in by contributing for the missed years.

Here is a sampling of the pension benefits for some of Canada's highest profile and longest serving MPs of all parties keeping in mind that the median household income for Canadian families was $68,410 in 2009:

Note that the 2015 and 2019 pension benefits assume that the MP will serve until either 2015 or 2019.  The minimum of six years of service means that first term MPs like Elizabeth May will not qualify for their pension until she has put in six years of service in 2017, thus, the data field for her is blank in 2015.  I do find it rather appalling that after serving only six years, a very young backbench hair-comber like Mr. Genest-Jourdain can collect $40,033 annually for the rest of his life after he reaches age 55.

Canadian taxpayers are a generous lot when it comes to helping out those who represent them.  In 2009 - 2010, Canadian taxpayers contributed a total of $102.7 million or $248,668 toward the pensions for each of Canada's 413 MPs and Senators.  Canadian taxpayers contributed $23.30 for every dollar that MPs contributed to their pension and MPs currently receive $10.64 in pension benefits for every dollar that they contribute.  Sweet deal if you can get it!

What is interesting to note is that by law, the Canada Revenue Agency mandates that no registered pension can exceed an accrual of 2 percent of salary for each year worked.  Canada's MP pension plan exceeds this, ranging from 3 to 6 percent.  Using a legal loophole that splits the pension into two parts, the Members of Parliament Retiring Account and the Members of Parliament Retirement Compensation Arrangements Account, allows our illustrious MPs to skirt the law.  Sneaky, eh?

With the Harper government preaching austerity, it will be interesting to see if they make meaningful changes to their own pension plans to set the tone for our future prosperity.  At the very least, Mr. Flaherty and his fellow MPs should move the age at which the MP pensions kick in to 65 as a goodwill gesture to generous Canadian taxpayers.  I wouldn't count on it but it's a nice thought.


In his 2012 Budget, Mr. Flaherty made some rather vague changes to Canada's MP pension plan by pledging to raise MP's contributions to match taxpayers' contributions beginning in the next Parliament.  That rather nebulous change will still allow MPs to retire at age 55 after just six years of service; from my chart above, you can see that near-rookie MPs will still collect over $40,000 per year for the rest of their lives with minimal service at an age that is 12 years younger than when Canadians can collect OAS.

Wednesday, March 28, 2012

Canada's Debt and Deficit History

March 2016

For an updated version of this posting, please click here.

With the Harper Government about to unveil their latest budget, I wanted to look back at a bit of history.  As I did in the case of Ontario, this posting will examine the recent fiscal history of Canada to see how we ended up in a situation where Finance Minister Jim Flaherty is being forced to take measures that will finally reign in the federal government's overspending habits.  As was the case in yesterday's posting, I am sourcing my data from a TD Bank publication.

First, let's look at Canada's political history, listing Prime Ministers and their political party affiliation:

1980 to 1984 - Pierre Trudeau (Liberal)
1984 to 1984 - John Turner (Liberal)
1984 to 1993 - Brian Mulroney (Progressive Conservative)
1993 to 2003 - Jean Chretien (Liberal)
2003 to 2006 - Paul Martin (Liberal)
2006 to 2011 - Stephen Harper (Conservative - minority)
2011 to present - Stephen Harper (Conservative - majority)

Let's open by looking at a chart showing Canada's fiscal history since 1986 - 1987:

Out of the past 27 fiscal years, Canada has run a surplus for only 11 years or 41 percent of the time, with all of them but two under the leadership of Paul Martin as either Minister of Finance or Prime Minister.  Canada's best fiscal year was in 2000 - 2001 when the federal government ran a $19.891 billion surplus (those were the days!) and its worst fiscal year was in fiscal 2009 - 2010 when the federal government ran a $55.598 billion deficit, erasing all of the gains that had been made between fiscal 2001 - 2002 and 2007 - 2008 in one fell swoop.

Now, let's look at a graph showing how Canada's surplus/deficit history looks in graphical form, showing quite quickly how much of the time our federal government has spent living well beyond its means:

In this last graph, we'll see how Canada's net federal debt has grown since 1986: 

At first glance you'll notice a relatively rapid rise in the level of Canada's federal debt between 1986 and 1997, followed by a gradual decline which is then followed by a rise after 2008, similar to what was experienced in the late 1980s and early 1990s.  In the past two and a half decades, the debt has grown from $281.8 billion to $641.8 billion in fiscal 2011 - 2012, an increase of $360 billion or 127.8percent.  During the Martin era, the debt actually dropped from a peak of $609 billion in fiscal 1996 - 1997 to a low of $516.3 billion in fiscal 2007 - 2008, a drop of $92.7 billion or 15.2 percent.  However, under the guidance of Mr. Flaherty (and yes, I know that we needed some stimulus and tens of thousands of Economic Action Plan signs and television commercials to prevent an even deeper recession), the debt has grown by $116.6 billion or 22.2 percent in just four fiscal years.  That is quite clearly an unsustainable growth level and is particularly alarming given the world's current economic picture.

Unfortunately for Canada's economy, over the past six months, the news out of Europe has not been particularly uplifting.  The Eurozone is Canada's second most important trading partner after the United States, accounting for 10.5 percent of Canada's external trade, with Canadian exports to Europe reaching €20.1 billion in 2010.  This trade is dominated by high-value goods including machinery, chemicals and transport equipment, the type of exports that keep many Canadians working.  Since it appears that the Eurozone economy is flirting with recession, this will have a direct impact on Canada's economic growth and ultimately on Ottawa's corporate and personal tax revenue.

Let me sidetrack for one moment to put Canada's current situation into perspective based on something that Mr. Harper said when he was a Reform MP.  He was addressing the issue of Alberta Premier Ralph Klein's attempts to balance the province's budget and reduce debt.  Here is the quote:

"Although I can't speak of the details because it is not my area of expertise, what Mr. Klein is doing in Alberta is, in principle, what governments need to do.  He is taking a look at a situation that is unsustainable financially and he is taking the steps necessary through expenditure reductions to eliminate that financial uncertainty on a permanent basis within the life of a single Parliament.  That is the only way it ever gets done.  Any politician who says he is going to do it over two Parliaments is never going to do it.  That's the golden rule.  That's something that you can learn from Ralph Klein." (my bold)

Apparently, that's a lesson that has gone unlearned in the past four Conservative budgets.  I guess history can rewrite itself given enough time.

From all of this data, it is quite clear that, unless the Harper government changes its spending ways very, very soon, Canadian taxpayers could well find themselves stepping up to the plate and helping Ottawa fund its ever-rising and painful debt levels with higher taxes.  We could quite easily find ourselves in the same situation that we were in during the early part of the 1990s when interest rates peaked and our sovereign debt situation looked increasingly shaky.  Let's hope that our politicians in Ottawa exhibit behaviour that shows that they can be fiscally responsible for a change.  Perhaps this time, Mr. Harper will remember the importance of his "golden rule".

Tuesday, March 27, 2012

Ontario's Fiscal History - It Is NOT A Pretty Picture

June 2014

For an up-to-date version of Ontario's fiscal situation, please click on this link:

With Ontario's newly minted Premier standing on the doorstep of the Legislative Assembly of Ontario, I thought that it was time to take a look at Ontario's fiscal past to see just how prudent various governments of various political parties have been since 1986.

As a reminder, particularly for those of you who have either forgotten or never knew, here is an outline showing the terms, Premiers and political persuasions of those who have ruled Ontario as their fiefdom:

1985 - 1987  David Peterson - Liberal (minority)
1987 - 1990  David Peterson - Liberal
1990 - 1995  Bob Rae - NDP
1995 - 1999  Mike Harris - Progressive Conservative
1999 - 2003  Mike Harris - Progressive Conservative
2003 - 2007  Dalton McGuinty - Liberal
2007 - 2011  Dalton McGuinty - Liberal
2011 - present  Dalton McGuinty - Liberal (minority)

Now, let's look at some fiscal history for the province, sourced from the TD Bank as shown on this chart:

Now let's look at some graphical representations of the data starting with the surplus/deficit picture for each year:

You'll notice that out of the 27 fiscal years represented (excluding projections), that the budget has been in surplus for only eight years or 29.6 percent of the time.  As well, over the multi-decade sampling, deficits have outweighed surpluses to the point that the various governments have accrued an additional $146.894 billion in deficit spending.

Now let's look at the growth in net debt:

Since the turn of the century, the debt has grown from $132.5 billion in fiscal 2000 - 2001 to an estimated $260.4 billion in 2012 - 2013, a 96.5 percent increase.  The compound annual growth rate of the debt over that 13 year period is 5.33 percent, well above the inflation rate as shown on this chart:

Lastly, let's look at the change in the debt-to-GDP ratio:

It's really only been since fiscal 2008 - 2009 that the debt-to-GDP level has risen markedly unless we look back to the days before Mike Harris and his highly unpopular and painful austerity cutbacks in the mid-1990s.  Since 2008 - 2009, the debt-to-GDP ratio has risen from 28.9 percent to an estimated 39.5 percent in 2012 - 2013, a rise of 37 percent.  While this debt-to-GDP level seems low when we compare it to what we have seen in the Eurozone over the past year, we have to remember one thing; provincial and state governments have much lower tolerances for debt accrual than federal governments, largely because their ability to tax is limited.  Bond ratings agencies and bond markets have already expressed concerns about Ontario's debt level with Moody's already threatening a debt downgrade back in December 2011. 

Let's hope that Ontario's newly minted Premier takes the role as fiscal caretaker of Ontario's future seriously and ends the government's spend and tax philosophy before austerity is forced upon them.  Ontario's fiscal history has been far from a pretty one over the past twenty-five years and now, Ontarian's are being forced to pay for the mistakes of past governments.  With a long history of deficit spending, the odds of returning to fiscal balance are slim to nil, particularly when interest rates on the outstanding debt rise back to historical levels.  The bigger the hole that's been dug, the harder it is to get out of it.

Monday, March 26, 2012

Canada's NDP MPs and Their Hair

What is it with NDP MPs and their hair?

Here's a look at two Opposition MPs styling their hair while House of Commons business goes on around them:

That's Djaouida Sellah, MP for Saint-Bruno - Saint Hubert in Quebec styling her coiffure while the business of the nation goes on uninterrupted.

Here's the second offender:

That's Quebec NDP MP Jonathan Genest-Jourdain who represents the people Manicouagan....and his hairstylist.

Let's hope that this is something that the NDP's new leader, Thomas Mulcair, will put an end to.

Some MPs are now complaining that they don't know when the cameras in the House are actually focused on them.  Hey people, you're getting paid a minimum of $157,731 to actually spend a bit of your life representing the people who took the time to mark an "X" beside your name.  For most of you, this is far more than what you made while working in the "real world".  

Canada's MPs spend precious little time actually debating the legislation that will impact Canada for generations to come; the least that they could do is actually listen to what is being said when their fellow Members have the floor.   After all, that's just common courtesy, something that seems to be in short supply in the House of Commons.  Perhaps they all need to go back to Kindergarten and learn life's important lessons all over again.

Gasoline Prices in America: How Do They Compare?

Updated to September 14, 2012

In recent weeks, there has been a plethora of articles in the mainstream media about the rising price of gasoline and who is to blame.  Some fingers are pointing at President Obama, some at oil producing and refining companies and others at oil producing nations.  While gasoline prices in excess of $4 per gallon may seem excessive, by some measures, prices in North America are very reasonable.

Let's open by looking at what has happened to gasoline prices across the United States over the recent past with this graph from the U.S. Energy Information Administration:

Now, here's a chart showing the price of West Texas Intermediate since September 2009:

From several sources, I have gathered gasoline/petrol prices from several European nations, Canada and Australia, entered the data on this table and converted the price per litre to a price in U.S. dollars per U.S. gallon:

For consistency, I have used the following conversions:

1 U.S. gallon = 3.785 litres
1 USD = 1 CAD
1 AUD = 1.03 USD
1 Euro = 1.27 USD

You'll notice that the prices in European countries are generally at or close to twice the price that we find at our local station.  Even Canadians are paying roughly a dollar more per gallon for gasoline, largely because Canada's excise tax on a gallon of gasoline is higher than the United States as you'll see below.  

Here is a map showing the level of excise taxes on gasoline for each state from the American Petroleum Institute website:

On average, across the United States, in January 2012, consumers were paying 48.8 cents in combined local, state and federal taxes on a gallon of gasoline or the equivalent of 12.89 cents per litre.     

Here's a chart showing what Canadian consumers pay in fuel taxes for comparison:

Depending on the province of residence, gasoline taxes range from 24.439 cents per litre all the way up to 43.52 cents per litre.  On top of that, some cities impose additional taxation; Montreal consumers pay $45.395 cents per litre and Vancouver residents pay the highest gasoline taxes in the country at $45.868 cents per litre, nearly 4 times what American consumers pay.

Let's take a look at one European nation in a bit of detail.  The United Kingdom is sitting around its record petrol (as they call it) price of 140.2 pence per litre for unleaded gasoline and 144.1 pence per litre for diesel.  That works out to $2.23 per litre for gasoline and $2.30 per litre for diesel.  When converted to United States gallons, U.K. motorists are paying $8.44 for a gallon of gasoline or $8.83 for a gallon of diesel, twice the price that Americans are paying.    To add insult to injury, the U.K. government had scheduled a fuel duty rise in August; the fuel duty rose by 3.02 pence per litre to 60.97 pence per litre plus VAT (20 percent) for a total fuel duty of 73.16 pence per litre or $115.6 per litre or $4.48 per gallon.  Basically, U.K. consumers are paying as much in taxes per gallon of gasoline as Americans are paying for the product, taxes included.

From the chart, you can see that gasoline is even more expensive in Belgium, France and Greece and the high prices really hit their stride in The Netherlands where a gallon of gasoline will set drivers back $9.04.

Let's put all of these prices into perspective.  Let's take an average car like a Toyota Camry which has a 17 gallon (64 litres) fuel tank capacity.  In the United States, a dry fill will cost drivers $70.38 at a price of $4.14 per gallon.  That same fill costs Canadians $82.45 at $4.85 per gallon.  United Kingdom drivers will pay $143.48 and drivers in the Netherlands will pay a whopping $153.68, more than twice what American consumers will fork over.  Fortunately for Europeans, they have an excellent mass transit rail system.

While no one likes to feel like someone is sticking their hands into your wallet/purse/pocket while you are filling your car with gasoline/petrol/diesel, it is quite apparent that at least some of the blame lies in two directions; greedy governments who want more than their share in gasoline taxes and the higher price of the raw commodity that is the source of gasoline and diesel.  It's harder to put a finger on who is to blame for that.

Data Sources:

Wednesday, March 21, 2012

The Dallas Fed and Too Big To Fail

The Federal Reserve Bank of Dallas recently released its 2011 Annual Report.  I'd like to focus on one part of the report, the opening Letter from the President of the Dallas FRB, Richard W. Fisher.  Mr. Fisher is well known as a dissenting voice among Federal Reserve Bank Presidents, a fact that will become very apparent as you read the passages that I have selected from his single page musings.

Mr. Fisher sets the tone in the first sentence of his letter:

If you are running one of the “too-big- to-fail” (TBTF) banks—alternatively known as “systemically important financial institutions,” or SIFIs—I doubt you are going to like what you read in this annual report essay written by Harvey Rosenblum, the head of the Dallas Fed’s Research Department, a highly regarded Federal Reserve veteran of 40 years and the former president of the National Association for Business Economics.”

In case you'd forgotten, it was these so-called indispensible banks and financial institutions that very nearly drove the American and world economy into a Depression.  It was because of this that Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act.  This Federal law created the Financial Stability Oversight Council (FSOC) to prevent such a bank-led collapse in the future by reducing America's dependence on overly large banks that cannot be allowed to fail for fear that the economy would implode.  The Act will basically create a new banking regulatory environment that enforces both accountability and transparency at the same time as consumers are protected from risky actions by the banking industry.  In a nutshell, the Dodd-Frank Act is a desperate attempt to put an end to the issues related to having financial institutions that are too big to fail for once and for all.

While the intentions of Dodd-Frank were good, Mr. Fisher notes that there has been an unintended consequence of Dodd-Frank.  Imagine that, an unintended consequence of a legislative act!  The Dallas FRB is concerned that Dodd-Frank has actually increased concentration in the banking industry.  For your illumination, here is a pie chart showing how the concentration in the U.S. banking industry has increased over the forty year period from 1970 to 2010:

In 1970, the top five banks controlled only 17 percent of the country's assets; by 2010, the top five banks controlled 52 percent of assets.  In Mr. Fisher's letter, he notes that the top 10 banks now control 61 percent of commercial banking assets, up from only 26 percent 20 years ago.  To put the size of these assets into perspective, the assets of the top 10 banks alone are equal to one half of the nation's GDP.  On top of the concentration of assets, the number of smaller institutions has dropped markedly from 12,500 in 1970 to 5,700 in 2010.  These smaller institutions which were generally well managed prior to and throughout the crisis, controlled 46 percent of banking assets in 1970; this fell to a meagre 16 percent in 2010.  Basically, this data is telling us that not only have banking assets been concentrated in the hands of fewer bigger banks but that the assets controlled by fewer smaller banks have decreased by a disproportionately large amount.

Mr. Fisher goes on to note:

"In addition to remaining a lingering threat to financial stability, these megabanks signifi- cantly hamper the Federal Reserve’s ability to properly conduct monetary policy. They were a primary culprit in magnifying the financial crisis, and their presence continues to play an important role in prolonging our economic malaise.”

There are good reasons why this recovery has remained frustratingly slow compared with periods following previous recessions, and I believe it has very little to do with the Federal Reserve. Since the onset of the Great Recession, we have undertaken a number of initiatives— some orthodox, some not—to revive and kick-start the economy. As I like to say, we’ve filled the tank with plenty of cheap, high-octane gasoline. But as any mechanic can tell you, it takes more than just gas to propel a car.

The lackluster nature of the recovery is certainly the byproduct of the debt-infused boom that preceded the Great Recession, as is the excessive uncertainty surrounding the actions—or rather, inactions—of our fiscal authorities in Washington. But to borrow an analogy Rosenblum crafted, if there is sludge on the crankshaft—in the form of losses and bad loans on the balance sheets of the TBTF banks—then the bank-capital linkage that greases the engine of monetary policy does not function properly to drive the real economy. No amount of liquidity provided by the Federal Reserve can change this."

This is a hard point to argue against.  From the FRED website, here is a look at the growth of M1:

Here is a look at the growth in M2:

M1 has grown by $850 billion or 62 percent since the beginning of 2008 and M2 has grown by $2.4 trillion or 32 percent.  The growth in both M1 and M2 is unprecedented in recent history and should have provided ample (some would say way too much) liquidity.  Apparently, the Fed is doing what it has done in the past, dumping vast volumes of cheap money into the economy to prod reluctant consumers and corporations to borrow.  As I’ve noted in previous postings, it simply has not worked this time.

So, what's the problem?  Those same TBTF banks that taxpayers bailed out still hold a massive quantity of toxic assets related to their "sins of the past" on their balance sheets.  As well, the seemingly never-ending collapse in the real estate market bubble has made reluctant borrowers out of consumers and reluctant lenders out of bankers.  As well, with Dodd-Frank being perpetually in limbo, banks both large and small are uncertain about their futures.

The issue of the TBTF banks is still problematic.  The author of the accompanying "Choosing the Road to Prosperity" report, Harvey Rosenblum, notes that the situation in 2008 did actually cause the failure of commercial banks holding nearly one-third of the assets in the banking system but that extraordinary intervention by the government (read, taxpayers) kept the banking system on life support.  Dodd-Frank will prevent those actions in the future.   He notes that the very concept of TBTF is contrary to the foundations of capitalism; it creates an unequal playing field where certain institutions are granted the right to make risky business decisions and ignore the risk of failure whereas smaller institutions are forced to make what may appear to be less rewarding business decisions simply because there is no rescue program in place since the economy won't miss them if they should disappear.  This completely removes the freedom of businesses to both succeed and fail based on their decisions.  In other words, the concept of moral hazard.

Here's what Mr. Fisher has to say in closing:

"The TBTF institutions that amplified and prolonged the recent financial crisis remain a hindrance to full economic recovery and to the very ideal of American capitalism. It is imperative that we end TBTF. In my view, downsizing the behemoths over time into institutions that can be prudently managed and regulated across borders is the appropriate policy response."

With the United States government facing an almost insurmountable debt mountain, the Federal Reserve having a massively bloated balance sheet and the TBTF banks still carrying untold trillions of dollars worth of toxic assets on their books, we may find out sooner rather than later how important Mr. Fisher's advice is.

Foreclosures In America - Is the Situation Improving?

CoreLogic recently released its National Foreclosure Report for January 2012.  This report provides data on delinquency rates, completed foreclosures and the foreclosure inventory each month.

In January of this year, CoreLogic reports that 1.4 million homes or 3.3 percent of the nation's inventory of all homes with a mortgage were in the foreclosure inventory (the stock of homes in the foreclosure process) compared to 1.5 million or 3.6 percent one year earlier.  This number is little changed from the previous month, December 2012, when 1.4 million or 3.4 percent of homes were in foreclosure.  Homes are placed into the foreclosure inventory when the mortgage issuer places the home into the foreclosure process after the mortgagee is seriously delinquent.  The property remains in the mortgage inventory until the foreclosure process is completed.  Of the top 100 real estate markets in the United States, 32 are showing an increase in the foreclosure rate in January 2012 when compared to data from a year earlier.

How many homeowners are delinquent on their mortgages?  Nationally, according to CoreLogic, 7.2 percent of borrowers were more than 90 days delinquent, the same level as was seen in December 2011 and down from the level of 7.8 percent experienced one year earlier.  For the 12 months ended January 2012, 860,128 foreclosures were completed.

The one issue that is not improving is the inventory of REO (real estate owned) properties.  These properties are owned by banks, government agencies or other lenders after the foreclosure process is completed and the lender legally repossesses the property.  In January, the inventory of REO assets grew faster than the rate at which these REO properties sold.  This is measured using the distressed clearing ratio which is calculated by dividing the number of REO sales by the number of completed foreclosures.  The higher the ratio (i.e. the closer the number is to 1.0), the faster the pace of REO sales is to the additions of newly completed foreclosures.  In January 2012, the distressed clearing ratio fell to 0.69 from 0.80 in the prior month.  This is not particularly a good sign; it means that the inventory of REO properties is not dropping as quickly as new properties are being added which could put downward pressure on prices in the future.

Let's look at which states have the largest number of foreclosures completed  in January 2012:

1.) California - 155,000
2.) Florida - 86,000
3.) Arizona - 65,000
4.) Michigan - 65,000
5.) Texas - 57,000

These five states account for 49.7 percent of the nation's completed foreclosures in the month.

Now let's look at the states that have the highest overall foreclosure rates for the month of January 2012:

1.) Florida - 11.8 percent
2.) New Jersey - 6.4 percent
3.) Illinois - 5.3 percent
4.) Nevada - 5.0 percent
5.) New York - 4.7 percent

Here are the five states with the highest overall 90 day plus delinquency rate recalling that the national average rate is 7.2 percent:

1.) Florida - 17.4 percent
2.) Nevada - 13.3 percent
3.) New Jersey - 10.7 percent
4.) Illinois - 9.2 percent
5.) Maryland - 8.1 percent

Lastly, here are the five major markets that have the highest 90 day plus delinquency rates noting the percentage point change from a year earlier:

1.) Orlando - Kissimmee - Sanford, FL - 18.2 percent (down 1.4 percentage points)
2.) Tampa - St. Petersburg - Clearwater, FL - 17.1 percent (down 0.1 percent points)
3.) Chicago - Joliet - Napierville, IL - 10.7 percent (up 0.3 percentage points)
4.) Nassau - Suffolk, NY - 10.4 percent (up 0.3 percentage points)
5.) Riverside - San Bernardino - Ontario, CA (down 3.9 percentage points)

From RealtyTrac, here is a map showing the foreclosure rate across the United States with the biggest problem areas in darkest red noting the sun'n'sand and de-industrialized heartland hotspots:

To put all of this data into perspective, let's go to the FRED website and look at a graph showing the delinquency rate on single-family residential mortgages back to 1990:

The vertical grey bars show recessions.  Notice that delinquency rates during the 2001 - 2002 recession barely increased, peaking at 2.41 percent in October of 2001.  Even after the more severe recession in the early 1990s, the delinquency rate only reached 3.42 percent.  This time really IS different.  According to the St. Louis Fed, here's what the delinquency rate looked like since the beginning of 2008:

Notice that the peak delinquency rate of 11.36 percent was reached in the first quarter of 2010.  While this rate has dropped very slightly, it seems to be entrenched above 10 percent and remains very close to the highest rate since 1990.

RealtyTrac projects that foreclosure activity is expected to increase by 15 percent in 2012 compared to 2011.  February's data shows that 21 states reported annual increases in foreclosure activity, a level not seen since November 2011.  While some measures are showing very modest improvements in some parts of the U.S. housing market, it is quite clear that the foreclosure problem is likely to be with us for some time to come.  Until the backlog of foreclosures and delinquencies are cleared up, the housing market will not and cannot recover.  

Sunday, March 18, 2012

Exponential Growth in the Adjusted Monetary Base: What Is It Telling Us?

Updated September 27th, 2012

As my regular readers know, I like graphs.  I guess it's the scientist in me.  To me, graphs are a very simple way of explaining things, particularly things that are transpiring in the economy, particularly when comparing the present to the past.  I source quite a number of my graphs from FRED, the  Federal Reserve Economic Data, a database which is maintained by the Federal Reserve Bank of St. Louis.  This database contains data on more than 41,000 time series on many aspects of the economy, some mainstream and some very rarely used.  FRED's data is gleaned from the Federal Reserve, the United States Census Bureau and the Bureau of Labor Statistics among other sources 

I was researching information from FRED for a future posting and stumbled on two graphs that I found, one of which is the one of the most shocking graphs that I have seen.  Before I show you the graph, let's me supply you with a bit of background information so that you can put what you are seeing into context.

Central bankers often use the term Adjusted Monetary Base (AMB).   The Adjusted Monetary Base is defined by the Federal Reserve as "...the sum of currency (including coin) in circulation outside Federal Reserve Banks and the U.S. Treasury, plus deposits held by depository institutions at Federal Reserve Banks.".  It is basically M0 which is the narrowest definition of money and is the ultimate source of the nation's money supply.

Now, here's the first of the promised graphs from FRED showing the growth in the Adjusted Monetary Base since the beginning of 2009:

Certainly, it looks like the AMB has grown; it started at $1.59 trillion in early 2009 and grew by $1.14 trillion or 71.7 percent to $2.73 trillion at the beginning of 2012.  That's a very steep growth curve but things get worse when we look at the next graph which shows the growth in the Adjusted Monetary Base back to 1920:

Over the past century and certainly since prior to the Great Depression, the Fed's Adjusted Monetary Base grew at a slow, steady rate with a slight increase in the growth rate during the period from 1990 to the beginning of the Great Recession.  In the 1960s, the AMB grew by 1 to 2 percent per year, in the 1970s by 6 to 8 percent per year, in the 1980s by 6 to 10 percent per year and in the 1990s by 5 to 10 percent per year.

Here's a graph showing the annual percentage growth in the Adjusted Monetary Base since 2000 noting that the data shows growth from January 1 of a given year to January 1 of the following year:

Notice the massive growth in the AMB in 2008; the Adjusted Monetary Base grew from  $851 billion to $1730 billion in just 12 months, a 103.2 percent increase.  In 2009, the AMB grew by 16.2 percent, nearly triple the average annual growth rate of the previous decade, in 2010 it grew by a very modest 2.3 percent but that changed in 2011 when the AMB grew by 28.7 percent or $591 billion from $2.057 trillion to $2.648 trillion, a growth rate that is roughly four times the average annual growth rate of the previous decade and the second highest annual growth rated since 1920 by a wide margin.

The expansion in the Adjusted Monetary Base since 2008 is unprecedented.  If we look at another crisis of confidence in the American economy, after the attacks of September 11th, 2001, the AMB grew by only 9.2 percent in 2001 (for the entire year) and 6.8 percent in 2002, growth rates that were on par with the previous two decades despite the severity of the crises.  

It is generally believed that rapid growth in the monetary base has preceded accelerated inflation in the United States and other countries.  The massive growth is related to the "printing" operations carried out by the Fed during the bailout/rescue operations of 2008 - 2009.  The increased "printing" operations in 2011 were most likely related to the Fed's quantitative easing and "Twist" programs, both of which have been only marginally successful considering the risk to the economy over the long-term. 

I have a couple of questions.  Is the current level of the Adjusted Monetary Base the new baseline for the economy?  If it is, what will happen if all of those electronic digits sloshing around in the system create inflationary pressures, asset bubbles or other unforeseen issues?  If this is not the "new norm", what effect will contracting this vast amount of money lurking within the system have on the economy?

As I've said before, economics is the furthest thing from a science.  The impact of monetary policy have far-reaching impacts that are totally unpredictable and which cannot be foreseen by those that we are "trusting" with our future.  For one, I find the massive and rapid expansion of the adjusted monetary base a very frightening issue.  Only time will tell if my feelings are justified.