Slightly Positive News

It's been almost two years since we've checked in. Let's see how the real yield rate (rate adjusted for inflation) of our various Treasury bills are doing.

This is actually ... slightly good news. The real yield rate has gone positive, but not by much. This means the world is no longer willing to effectively pay us to hold their money. Good for the world!

But it still wouldn't cost us much. If we were to borrow a modest $1 billion via a five-year Treasury, it would cost us $1 million a year to finance.

Take a look at the 30-year. Since the new year, the highest we've gone is 0.76 per cent -- less than 1%.

We're at a weird point in terms of the economy and employment. The Dow is above 17,000 and the S&P is above 2000, both all the times (though I don't know if that's true if you adjust for inflation -- it should be close). And unemployment is 5.6%, which is below what Romney promised it would be were he elected president. But we're not seeing any increase in median household income -- though those numbers are typically delayed by a year. And inflation remains below 2%.

So we still have room for demand, which we can finance cheaply. An additional demand for labor will result in increased wages, which is nice is you work for a living.

As the economy slogs forward, states and municipalities should see their coffers filling up and will start hiring again. This acts as a virtuous cycle -- more people working means fewer people taking unemployment benefits and paying taxes instead.

(The federal government should see increased tax payments as well, though what they'll end up doing with it is not clear. Are there areas where the Republicans in Congress and Obama could agree to increase spending?)

But -- at a minimum, we've killed the self-reinforcing aspects of a recession. Governments at all levels trimmed employment over the past several years, which made the recession worse. We're back on the right track, and we're making progress -- slowly.

And the 20-Year Treasury Goes Negative

Below is the inflation-adjusted Treasury yields, courtesy of the Treasury Department.

The world would like to lend us money, and is willing to pay us for the privilege. We should take it.

Wars and the Deficit

The Iraq and Afghanistan conflicts, taken together, will be the most expensive wars in US history – totaling somewhere between $4 to $6 trillion. This includes long-term medical care and disability compensation for service members, veterans and families, military replenishment and social and economic costs. The largest portion of that bill is yet to be paid. Since 2001, the US has expanded the quality, quantity, availability and eligibility of benefits for military personnel and veterans. This has led to unprecedented growth in the Department of Veterans Affairs and the Department of Defense budgets. These benefits will increase further over the next 40 years. Additional funds are committed to replacing large quantities of basic equipment used in the wars and to support ongoing diplomatic presence and military assistance in the Iraq and Afghanistan region. 

The Financial Legacy of Iraq and Afghanistan: How Wartime Spending Decisions Will Constrain Future National Security Budgets, by Linda Blime.

Current US debt:  $16 - 17 trillion dollars.

Could America Become Cyprus?

One of the problem with Cyprus is that its banking sector is just too big. GDP is variously reported as rangin from $20 billion to $23 billion, with total deposits being anywhere from 240% of GDP all the way up to 500%. What this means is that Cyprus just isn't big enough to bail out the financial sector.

So what about us? The 2012 GDP was estimated to be about $15.8 trillion. And deposits? A bit under $11 trillion, if this web site is to be trusted. So we're at roughly 70% of GDP.

We have a different problem, with too many deposits being concentrated among the top four banks. Here's a list of the top twenty.

Rank	Total Deposits	Bank Name
1	$1,246,327,000,000	JPMorgan Chase Bank
2	$1,117,622,296,000	Bank of America
3	$994,439,000,000	Wells Fargo Bank
4	$941,185,000,000	Citibank
5	$253,686,214,000	U.S. Bank
6	$239,447,000,000	The Bank of New York Mellon
7	$216,743,265,000	PNC Bank
8	$191,737,996,000	Capital One
9	$169,790,817,000	TD Bank
10	$168,552,949,000	State Street Bank and Trust Company
11	$136,567,968,000	Branch Banking and Trust Company
12	$133,278,697,000	SunTrust Bank
13	$127,864,714,000	HSBC Bank USA
14	$117,448,587,000	FIA Card Services
15	$96,588,183,000	Regions Bank
16	$93,278,271,000	Fifth Third Bank
17	$83,134,216,000	The Northern Trust Company
18	$80,349,888,000	RBS Citizens
19	$79,442,000,000	Charles Schwab Bank
20	$75,097,058,000	Union Bank

Each of JPMorgan and Bank of America have more than 10% of the total deposit base, and Wells Fargo and Citibank aren't far behind. Then there's a $700 billion drop down to U.S. Bank, and a tapering off from there.

To put this into perspective, if the roughly $4 trillion -- roughy 40% of all deposits -- held by the top four banks were transferred to banks no bigger than U.S. Bank, you would need at least sixteen of them, of four per bank.

The Greatest Retirement Crisis in the History of the World

From noted pinko rag Forbes:

We are on the precipice of the greatest retirement crisis in the history of the world. In the decades to come, we will witness millions of elderly Americans, the Baby Boomers and others, slipping into poverty. Too frail to work, too poor to retire will become the “new normal” for many elderly Americans.

That dire prediction, which I wrote two years ago, is already coming true. Our national demographics, coupled with indisputable glaringly insufficient retirement savings and human physiology, suggest that a catastrophic outcome for at least a significant percentage of our elderly population is inevitable. With the average 401(k) balance for 65 year olds estimated at $25,000 by independent experts – $100,000 if you believe the retirement planning industry - the decades many elders will spend in forced or elected “retirement” will be grim.  (Update: In response to readers’ questions about the lower number, Teresa Ghilarducci, a professor of economics at the New School for Social Research, estimates that 75% of Americans nearing retirement in 2010 had less than $30,000 in their retirement accounts.)

...

Americans today are aware that corporate pensions have been virtually eliminated and that the few remaining private, as well as the nation’s public pensions, are in jeopardy. Even if you are among the lucky few that have a pension, you cannot rest assured that it will be there for all the years you’ll need it. Whether you know it or not, someone is busy trying to figure how to screw you out of your pension.

Americans also know the great 401k experiment of the past 30 years has been a disaster. It is now apparent that 401ks will not provide the retirement security promised to workers. As a former mutual fund legal counsel, when I recall some of the outrageous sales materials the industry came up with to peddle funds to workers, particularly in the 1980s, it’s almost laughable—if the results weren’t so tragic.

All of which is why we need to increase Social Security benefits, starting now.

More on Social Security and 401(k)s

Ryan Cooper at Political Animal is another person who wants to increase Social Security benefits, and suggests a different way of financing them.

There is another source of funding we could tap for a Social Security increase before we talk about raiding other pots of money [such as Medicare, as per Josh Barro]: the 401k tax exemption. Originally this was supposed to usher in the neoliberal free market retirement utopia. It failed (instead we’ve created yet another set of rent-seeking parasites, this time in the form of objectively useless mutual funds).  

The 401k exemption costs somewhere around $200 billion per year (depending on the estimation), and it doesn’t work. That money could be plowed into Social Security right away, and if that’s still not enough to keep most seniors out of poverty, we can talk other funding sources. Because as [Duncan] Black says, lots of people are set to retire right now without nearly enough to make it. Regardless of whose fault that is, shall we let them starve? 

I say no.

Hmmm. As 401(k)s cap out at $17,000 (for 2012), I don't think they're the worse thing in the world. Basically, they offer a nice opportunity to the higher reaches of the middle as well as the upper class. But they offer no benefit to the median American household, which only made $50,500 (in 2011).

And 401(k)s also require some sophistication, especially around balancing the portfolio (and moving more and more to bonds as the investor ages). And most people, God love 'em, don't have it. So I wouldn't mind see this replaced by pensions (which we don't have anymore) or increased Social Security benefits.

Another big source for new Social Security funding would be to have FICA taxes apply to income, period. Not just earned income, but investment income as well. As we wrote a while back:

The magic words are “unearned income.” The 1% have pulled off a brilliant con over last 30 years, where they’ve been able to convince the government that unearned income – the kind that comes from capital gains, dividends and interest – should not be subject to the kind of taxation that the rest of us face. In terms of income tax, long term capital gains are taxed at 15%, far below the current maximum marginal rate of 35%. 

But it gets worse in terms of Social Security, because these things have ... never been taxed at all. 

In 2009, the IRS reported that there was nearly $7.7 trillion in income, $5.7 of which was salaries and wages. Now, just because something isn't salaries and wages does not necessarily mean it would qualify as "unearned income," but it does give us a sense of scale. If only half of it was -- $1 trillion -- then applying the 2009 employee Social Security rate of 6.2% would yield an additional $62 billion in revenue. 

And all of this increase would be on income -- literally -- that no one worked for.

$62 billion —which is just a guesstimate —is a lot less than the $200 billion Cooper's talking about. So maybe it's time to talk about scaling back the 401(k) — that's a conversation I'd be willing to have.

To put things into perspective, in January 2013, Social Security paid 46 million people $55 bilion dollars in old-age benefits. Annualized, this works out to be $660 billion a year. So what Cooper is talking about is a 30% increase in retirement benefits. As the average monthly benefit was $1200, we're talking about how giving old folk (on average) a whopping $1560 a month, or $18,720 a year.

So I think we're in agreement with Cooper on the amount, and now it's just a question of paying for it. Fortunately, we now have a couple of good ideas on the table.

Amen, Part 2

Josh Barro at Bloomberg:

Back in December, I wrote that applying chained CPI to Social Security is the wrong solution to our budget problems: It’s just a way of dressing up a cut to retirement benefits at a time when retirement insecurity is rising. Despite its problems, Social Security is the best-functioning component of the U.S.'s retirement-saving system. Instead of cutting, the federal government should be expanding its role in retirement saving.

I'm always struck when people talk about Social Security as "just" an insurance program, when it's in fact the most important retirement-saving vehicle. The chart below, adapted from a 2012 paper by Boston College Professor Alicia Munnell, shows the financial situation of a "typical" pre-retirement household. These are the mean holdings of a household in the middle net worth decile among households headed by people age 55 to 64. 

Source: Center for Retirement Research at Boston College 

Social Security is dominant: Forty-nine percent of this household’s wealth is in the form of the expectation of drawing government benefits in the future. The next largest slice, 23 percent, is accrued benefits in traditional pension plans. But that figure is skewed by a handful of workers who are lucky enough to participate in such plans; as of 2010, only 14 percent of U.S. workers were earning benefits in such a plan.

We're not psyched about how Barro wants to finance this (Medicare cuts), but at least he's identified an important issue.