Economy
List of Countries for Possible Downgrades
From “The Numbers” section of the latest edition of Bloomberg BusinessWeek:
Governments around the world haven been borrowing heavily in the past 10 years so much that the debt level has now more than doubled to $55 Trillion.
CNBC has published a list of The World’s Biggest Debtor Nations based on the total outstanding external debt as a percentage of GDP. Greece ranks ahead of the U.S. at number 16.
When will the Debt Rejection Syndrome End in the U.S.?
The current Fed Funds Rate is 0.25%. It been at this rate for many months now and the Fed plans to keep the rate at this level for an extended period of time. However despite this low rate bank lending has not increased. Both consumers and businesses are not borrowing due many reasons such as uncertainty about the future, lack of demand for products and services, lack of investment opportunities, etc.
Reuters reported the following last month:
“Despite a more stable financial system, banks are still not lending and the quality of loans on their books continues to get worse as the U.S. housing market remains in the doldrums, a top official at the Federal Reserve said on Wednesday.
“Access to credit also remains difficult, especially for households and small businesses that depend significantly on banks for financing,” said Jon Greenlee, Associate Director for Bank Supervision and Regulation at the Fed.
“Loan quality continues to deteriorate across a number of asset classes, and … has declined further as weakness in housing markets affects performance of residential mortgages and construction loans,” Greenlee said in prepared remarks to a Congressional Oversight Panel field hearing in Atlanta.” (emphasis added)
Consumers have cut down on spending in the past few months due to the recession and high unemployment. Just this month the Federal Reserve reported:
“Consumer credit decreased at an annual rate of 4-3/4 percent in the fourth quarter of 2009. Revolving credit decreased at an annual rate of 13 percent, and nonrevolving credit was unchanged on net. In December, consumer credit decreased at an annual rate of 3/4 percent.”
This is the 11th straight month that consumer credit has declined. Since the U.S. economy is still a consumption-driven economy as opposed to export-driven economy like that of Germany or Japan, the economic recovery will take a long time. Businesses are still in the process of repairing their broken balance-sheets. Hence they will not be able to stimulate the economy and replace the spendthrift millions of U.S. consumers.
The phenomenon of debt rejection can take some time to subside. According to the following chart it took 30 years for the US interest rates to recover to their 1920s level.
Click to Enlarge
Source:
The Age of Balance Sheet Recessions: What Post-2008 U.S., Europe and China Can Learn from Japan 1990-2005 by Richard C. Koo, Chief Economist, Nomura Research Institute
Tokyo, March 2009
A Review of Retirement Age in OECD Countries
Tomorrow civil service workers in Greece plan to go on strike protesting the government’s pension reforms. A recent article in the NY times discussed the current situation in Greece.
From a BBC article titled Greece plans to ban early retirement:
“Greece’s government intends to raise the national pension age and ban early retirement as it tries to tackle its huge budget deficit.
The socialist government said it wanted to increase the average retirement age from 61 to 63 by 2015.
The steps would be part of a series of austerity measures aimed at curbing the country’s deficit and national debt.
But the moves have angered many of the unions, which have scheduled strikes in protest.”
According to OECD data, the average legal retirement age in OECD countries is 64. However in Greece it is as low as just 58. This is another reason why Greece is in turmoil now and the government is raising the retirement age. Millions of Greek workers retire early and receive fat pensions.In some countries like Norway and Iceland the retirement age can be as high as 67. Recently Spain inceased the retirement age from 65 to 67.
The graph below shows the “labour force exit age – i.e., the actual average age when people stop working – is often higher or lower than the official retirement age” in OECD countries:
Click to enlarge
In Austria the average man exists the workforce at age 59 a full 6 years ahead of official retirement age.
Germany Tops the List of Global Trade Logistics Rankings
Germany tops the list of countries that were ranked based on the Logistics Performance Indicators (LPI) in a recent study titled “Connecting to Compete 2010: Trade Logistics in the Global Economy” by The World Bank. With Europe’s largest economy and centrally located Germany offers a sophisticated logistics network for companies to reach EU’s 500 million customers. Singapore is ranked number two on the list.
Graph
The U.S. is ranked at number 15. “In terms of how developing countries are doing per region, South Africa (28) is the top performer from Africa; China (27) from East Asia; Poland (30) from Central and Eastern Europe; Brazil (41) from Latin America; Lebanon (33) from the Middle East; and India (47) from South Asia.”Somalia, Eritrea and Sierra Leone are three of the worst countries in terms of logistics infrastructure.
36 Major Global Risks in 2010
The World Economic Forum yesterday released the Global Risks 2010, its annual report on the most important risks facing the global economy this year and beyond.
Graphic
This year’s report “highlights the impact of the fiscal crisis and the social and political implications of high unemployment rates in several major economies as key concerns. Notably, the current models for health, education and unemployment protection have been put under severe strain by the fiscal crisis, notwithstanding the longer-term implications of increasing life expectancy.”
More details can be found here.
Will the U.S. Social Security System Survive?
The private-sector job growth in the last decade was non-existent. I discussed this issue last August here. More recently Neil Irwin of Washington Post wrote about the lack of private-sector job growth in the last decade in a piece titled Aughts were a lost decade for U.S. economy, workers.
Charts:
Source: Washington Post
During the past decade, the US economy experienced a credit crisis and the collapse of the dot com bubble. Millions of workers lost their jobs as a result these events. The unemployment rate stood at 10% in December and there were 15.3 million Americans out of work. About one million Americans fell out of the civilian labor force in December as they were categorized as “long-term discouraged”. The actual rate as measured by U6 unemployment is nearly 17%.
One of the unintended consequences of high unemployment is the impact on the social security system. The program was established in 1935 by the Social Security Act under the Roosevelt Administration. It provides benefits to many retired individuals and families. In a pure capitalistic system, social security would not exist. But after seeing the social ills of the Great Depression the American society changed and hence the social security system was established to offer some form of social safety net to retired people, disabled people and others.
How is the Social Security System Financed?
Social Security is a pay-as-you earn system in which current workers pay taxes for paying benefits to current benefit recipients. In 2008, the Old-Age and Survivors Insurance and Disability Insurance Trust Funds collected $805.3 billion in revenues. 83% of this revenue came from payroll taxes, 2% from income taxes on social security benefit payments and the remaining in 14% from interest earned on the assets held by the funds. The trust fund primarily invests in government bonds. The chart below shows that the majority of the revenue collected goes toward benefit payments with just 5% going into the trust fund after the deduction of 1% for administrative expenses.
How will the high unemployment rate and low (or) no job growth affect social security?
The social system may not survive in its current form in the long run unless changes are made to the tax structure and the benefits payment structure. Otherwise the system may need a bailout of its own in the future. The following are some of the reasons I believe that the social security program is headed towards a crisis. Of course any positive change in the economy such as strong job growth and rising income levels will shore up the social security fund.
1. Increasing number of retired people depend on social security now more than ever before:
In 1962 social security accounted for just 30% of the aggregate income of retired folks. In 2007 it amounted to 36% of aggregate income. This shows that despite many decades of economic growth and the rise in equity markets, senior citizens depended more on social security in 2007 than before. With the fall in the balance of 401K and other retirement accounts, home values, negligent interest earned on bank deposits, etc. in the past few years, a higher number of retired people will depend on social security in the coming years.
To put this in perspective, in 2007 nearly 56 million people received benefit payments. It provided at least half the income of 64% of seniors. With the 78 million baby boomers, the number of retirees will double in less than 30 years from 2008.
2. Social Security Trust Fund size may diminish:
In 2008, the fund collected $805 B in revenues and the outgo was $625B. The trust held $2.4Trillion. With the rising number of benefit seekers and reduced number of workers contributing into the fund, the total trust assets would shrink at a faster rate over the years.
Another factor is many of the high-paying jobs that have been off-shored may never come back due to the cheap labor available overseas. Even when jobs are created here they may be filled with cheaper labor from foreign countries. These workers may not be paid as much as the prevailing market rate and hence they will contribute less to the social security fund. A case in point is the popular H1B visa program which allows foreign skilled workers into the country on a temporary basis. The cap of 65,000 for fiscal year 2010 has already been reached. Hundreds of thousands of foreign workers who work in the service sector also will contribute less to the fund. There is even the problem of some of these immigrants getting paid under the table thereby contributing nothing to the social security fund. Due to these reasons the trustees may have to sell assets to pay recipients.
An update:
Another factor that will negatively affect social security fund is that many of the unemployed workers will earn less than they did before when they re-enter the workforce. They will also contribute less to the social security fund. A New York Times article yesterday mentioned that unemployed workers may be forced to take on new jobs at reduced wages. The following quote from the article drives home the point:
“John Irons, research and policy director for the Economic Policy Institute in Washington, says that as millions of unemployed workers accept lower pay for new jobs, their collective wage cuts will likely stifle income growth for years.”
3. People live longer:
More people are living longer due to advances in medical technology. As they live longer they draw more benefits from social security.
4. Ratio of workers to recipients is getting low:
In 2008 the ratio of current workers to benefit recipients was at 3.2 to 1. By 2034, this ratio is projected to reach 2.1 to 1. This implies that just over 2 persons will be available to pay into the fund to help each recipient’s benefits. The 2009 Trustees Report projects that by 2016, when the ratio reaches 2.8 to 1, there will not be enough workers to pay recipients at the current tax rate.
Since the 1950s the ratio has been falling at an alarming rate.
Another way to analyze this point is review the Employment to Population ratio.
This ratio shows the number of employed individuals to the the total population. Calculated Risk put out a interesting chart showing the decline in this ratio. CR noted “The Employment-Population ratio continues to plunge, falling to 58.2% in December - the lowest level since 1983.”The Labor Force Participation Ratio fell to 64% in December. The total number of employed in the civilian labor force last month was 137M.
If trust funds were to be liquidated to pay for benefit recipients, there will be enough funds till 2037.
The long-run financial outlook for social security:
At the current benefit and tax rates the social security system is not sustainable over the long-term. By 2016, the program will pay out more in benefits than it collects.
“By 2037 the trust funds will be exhausted. At that point, payroll taxes and other income will flow into the fund but will be sufficient to pay only 76% of program costs. As reported in the 2009 Trustees Report, the shortfall over the next 75 years is 2.00% of taxable payroll.”
Source: Fast Facts & Figures About Social Security, 2009
From the above analysis it is clear that the Social Security system in this country needs to be completely restructured to match the current population, job growth and economic trends. It will take serious political will and input from all stakeholders in order to solve the issues surrounding this highly important benefit program offered by Uncle Sam.
