Yes, the American Economy Is in a Funk — But Not for the Reasons You Think

http://freakonomics.com/podcast/american-growth/

The American economy in the past 5-10 years has been in funk. Most would assume that this funk is a result of things like our debt to China, NAFTA, big government, taxes, the trade deficit, and the large wealth gap. The thing is though, that our country is going though a bit of a slowing of innovation. Sure there have been incredible advancements in technology, these advancements cannot compare to the first two industrial revolutions that this country have experienced. The second industrial revolution which began in the mid-late 19th century was so great that the standard of living only took 30 years to double as opposed to 350 years in the 14th century. The third industrial revolution began in the 1960's with the invention of the computer and has continued until today. All the advancements since then have been great, but not great enough to really push the economy forward the way in which it has been in the past.

The Bull Is Still Running. So Why Are Investors Tiptoeing?

The current Bull market (going on seven years) in the United States continues to progress, in that prices are rising, but all while this is happening investors are being hesitant when it comes to where to invest.  The market has been trending to support emerging industries and small-company stocks as of late because prices across the board have been continuing to rise.  This is happening because a lot of emerging industries and small-company stocks benefit from the raise in prices due to not being involved with foreign buyers that would adversely effect their position.  This situation is causing investors to feel hesitant with buying stock in traditional big name, "blue-chip" stocks and encourages them to invest in riskier small-company stocks.  A lot of this macro-economic activity can be mapped to the importance of keeping interest rates low.  This current market position proves the overall importance and effect that interest rates can have on the economy as a whole.

I gained this insight from Paul J. Lim at the New York Times from his article titled "The Bull Is Still Running. So Why Are Investors Tiptoeing?"

http://www.nytimes.com/2016/09/11/your-money/the-bull-is-still-running-so-why-are-investors-tiptoeing.html?ref=business&_r=0

Why So Few Economists Are Prepared to Say Recession Risks Are Fading

Though the economy has been doing well over the past months, when asked to asses the odds of a recession in the next year, economists have placed the odds at about one in five.

The graph above shows the average probability of the U.S. economy entering recession in the coming year.

Why so high? Many are very unsure about how the upcoming election will affect the economy. Forecasters must assess the policies projected by the candidates, but also keep in mind the potential for a divided Congress that could stymie either candidate. Although this election in particular is concerning to economists, the issue is not limited to just this election.

There is an unusual tendency of recession to happen in close proximity to presidential elections. According to Kevin Hassett and Joseph Sullivan, the U.S. enters recessions about twice as frequently in the year after a presidential election compared with all other years. The National Bureau of Economic Research estimated that 41% of (or five of the last 11) recessions since 1854, have fallen in that time window. This is the cause of most of the uncertainty for the upcoming election.

The graph above shows the election risks, predicted by economists, on the economy for this upcoming election. 

Overall, no one really knows what is going to happen. History could repeat itself, or the economy could stay perfectly fine; however, the reason behind this elections uncertainty is reasonable.

To read more on the upcoming recession risks click here.

Payroll taxes becoming more expensive than income taxes

Payroll taxes, which fund Social Security and Medicare, is estimated to be more than income taxes in about 62.3% of households in America according to the Tax Policy Center.  According to them the less you make the more likely you are to be in this group, this is because a lot of upper and middle class people are getting tax breaks on households.  Therefore their income taxes are very low or even basically non existent, but with your pay checks from work both you and your employer are required to put money towards Social Security.  For example those who are in the middle class and make around $50,000 in income, will pay around $7,650 in taxes a year, and in this next year it is estimated that 44% of the country will end up with no household income tax, therefore their payroll tax being their only expense left

http://money.cnn.com/2016/09/06/pf/taxes/income-taxes-payroll-taxes/index.html?iid=SF_LN

Why the federal government should stop spending billions on private sports stadiums

It seems as though tax dollars have been used to build sports stadiums for ages, and indeed they have.  The first team to introduce the concept was the 1953 Boston Braves moved to Milwaukee in order to build a stadium that was not privately funded.  Since then, more and more stadiums have been build using tax dollars, but is it worth it?

The three authors of "Why the federal government should stop spending billions on private sports stadiums" certainly do not think that federal financing is a good idea.  Based on their statistics that found the overall federal subsidies given toward the stadiums as well as the total revenue lost on using tax exempt muninciple bonds for the building.  Their evidence shows that there is indeed little reason to federally fund stadiums.

In addition to finding the funding on the stadiums, the authors looked into the local economic effects in areas where stadiums were built.  They found little to no evidence showing that stadiums helped economic developement, income growth, or job creation.

https://www.brookings.edu/research/why-the-federal-government-should-stop-spending-billions-on-private-sports-stadiums/#revenue-loss

Thinking Aloud

U.S. Federal Reserve: birds of a feather

The Federal Reserve is the United States central bank. It has four fields of operations:

• "Conducting the nation's monetary policy by influencing money and credit conditions in the economy in pursuit of full employment and stable prices.
• Supervising and regulating banks and other important financial institutions to ensure the safety and soundness of the nation's banking and financial system and to protect the credit rights of consumers.
• Maintaining the stability of the financial system and containing systemic risk that may arise in financial markets.
• Providing certain financial services to the U.S. government, U.S. financial institutions, and foreign official institutions, and playing a major role in operating and overseeing the nation's payments systems." (The Fed) 

In Jackson Hole, Wyoming, Fed Chair Janet Yellen delivered a speech regarding Federal Reserve's Monetary Policy. In the speech she refers to the fact that the federal funds rate has strengthened in the recent months (1). Why does it matter if the federal funds rate is increased or decreased? The simple explanation is the Fed is trying to maintain a healthy economy. If the economy is stagnant the Fed might opt to lower interest rates in facilitating in making money more available to firms, home buyers, businesses and consumers. If the economy is augmenting then the Fed will elect to raise interest rates to slow the economy's progression. So the question is what does Janet Yellen's statement emphasize? The implications of her statement highlights whether the Fed will have the flexibility in the future in regards to their policy management. "While the published pace of economic growth has been pretty anemic so far this year, the labor market has remained healthy and job creation has averaged a respectable 190,000 in the past three months" (1). The Fed expects a moderate rise in the future ensure a strong labor market and a steady rise in inflation. This economic outlook means the Fed has a case for a rise in interest rates. The Fed knows that every economic cycle there are down turns, but a continuos nuetral rate of interest will render the Feds policy flexibility useless. The economy following the financial crisis has never fully recovered growing in a positive direction, sabotaging investment. So, it forces government investment. But the cautionary tale is the Fed must go about policy flexibility lightly so it can have options when it operates and keeping its mandates.

Article: U.S. Federal Reserve: birds of a feather_Thinking Aloud

Digging Into China’s Growing Mountain of Debt

There has been growing concerns from investors about China's growing debt. In the article, George Soros states that there seems to be resemblance to the conditions that lead up to the financial crisis in the US in 2008. According to him, " it's similarly fueled by credit growth and an eventually unsustainable extension of credit."

However , Jing Sun, the author of the article  suggests that there are some major differences between the conditions that the US faced and current conditions faced by China. One of the conditions is that the household debt in China is far below the levels that the US faced before the crisis.Also, the household savings in China are twice as large compared to the debt.
Another major different pointed out is that Chinese residential properties are usually purchased with significant down payments. China's high savings rate and low leverage makes it very unlikely for a financial crisis to be caused by households.

Moreover, Chinese banks get 70 percent of their money from deposits while the US in 2008 was dependent on short time money market funding. There is no denying to the fact that Chinese economy is facing many challenges including the slower growth rate and shadow banking but the chances of a financial crisis are low.

http://www.bloomberg.com/news/articles/2016-08-28/digging-into-china-s-growing-mountain-of-debt

Kenya will implement an interest rate cap on September 14

On September 14, a law in Kenya will cap commercial bank's interest rates at 14.5%, 4 points above the central bank's interest rate (10.5%).  This law will also enforce banks to pay depositors no less than 70% of the central-bank rate.  This means that the banks are being asked to lend to private businesses the same amount as lending to the government. 

How bad the economic impact is depends on how the businesses react.   Kenyan economist, Anzetse Were, thinks businesses will find other sources of credit.  A solution is for people to start tipping more.  The Chief Executive of Kenyan Bankers Association thinks that while most banks will have to fire employees, close branches, and lend less, some will try to increase their use of technology to cut their costs. 

This article explains that compared to economies without interest rate caps, African economies with caps have a lower ratio of credit to GDP.  A few consequences of interest-rate caps is that the credit will flow to more dependable borrowers instead of "needy but risky" businesses.  However, the cause of high interest rates is because the government is "splurging" money, not because of the banks' behaviors. So, the people who will benefit the most will be the people who passed this law.  (Campaigning in Kenya is expensive, so cheaper loans would mean cheaper campaigning.)
 

I think it is unfortunate that the law is restricting what the banks can do because of the faults in the government's spending.   It is especially unfortunate because this law will really only benefit the wealthiest people (the people who passed the law). 


http://www.economist.com/news/finance-and-economics/21706515-curbing-lending-rates-makes-good-politics-bad-economics-ceiling-whacks

Helicopter money: central banks' last resort

Central Banks have begun increasing talks about using the "helicopter money" concept as a last resort to promote economic growth. Senior figures such as Kathy Jones, chief fixed income strategist at Charles Schwab, have been talking about the approach being the last resort for desperate economies. With economic growth being described as "fragile" by the IMF, the old metaphor of helicopter money is gaining in popularity. The motivation behind the concept is simple: Americans will spend the money. Consumption makes up the vast majority of US economic activity and the spending will, as a consequence, give the economy a bump in the right direction.

These talks illustrate the desperation of Central Banks to promote economic growth. Most experts say Japan, who has been using negative interest rates to stimulate spending, will be the most likely to consider using helicopter money.

"Helicopter Ben" Bernanke certainly sees the merits of the approach. He debates that helicopter money from a central bank is a better option than Congress increasing spending or creating a tax cut- both of which increase the risk of driving up the national debt and making it harder to pay off that debt in the long run.

There are still hurdles which need to be overcome is helicopter money is actually ever to be used, though. Deciding how much money and how it's implemented are problematic topics.

http://money.cnn.com/2016/04/26/news/economy/central-banks-helicopter-money/?iid=EL

The FED is likely to keep the interest rate below 1% through 2020

The Fed has kept interest rates very low over the last 7 years. In this time period interest rates have not been higher than 0.18%. Private equity giant KKR believes nothing is changing any time soon, in fact they say that it will be multiple years before we see interest rates higher than 1%. Henry H. McVey, KKR's head of global macro and asset allocation reports that: "Not surprisingly, given all these types of remarks as well as sluggish growth, the fed funds rate is now below 1% and we think it could trend below 1% until at least 2020."

This contradicts statements that the Federal Open Market Committee have made. The Federal Open Market Committee estimated in June that the policy rate would be 2.4% in 2018, growing to 3% in the long run. Based on these values, it becomes increasingly difficult to achieve expected returns from the 60/40 equity/bond strategy that so many financial institutions use. Pension funds and domestic stocks will also struggle to meet expected return. Investors will need to look elsewhere. KKR recommends a five-pronged approach "yield and growth; avoiding investments tied to Chinese growth and focusing instead on its exports; focusing on large U.S. domestically focused companies; providing liquidity to nonbank lending operations; and increasing exposure to complex stories, including earnings misses, restructurings, and/or corporate repositionings."

http://www.cnbc.com/2016/09/08/private-equity-giant-kkr-says-the-fed-to-keep-funds-rate-below-1-percent-through-at-least-2020.html