Interest on the United States Debt - An Unsustainable Scenario

While everyone is gaga about the pending debt deal that is proposing to cut a couple of trillion dollars in spending over the next 10 years, I would not get too excited about the long-term impact of such a deal.  Sure it's a deal that prevented those in D.C. from having to actually haul out the rulers and unzip, but it is a poor one as far as American taxpayers should be concerned.  That pesky interest on the $14.343 trillion current debt is what makes the deal far less than a good one.

Here's a look at the interest payments on the federal debt over the past 9 months and annually all the way back to 1988 from the Treasury Direct website:

Notice how in the first 9 months of fiscal 2011 we've already exceeded the amount of interest owing for the entire 2009 fiscal year.  America is already at the fifth highest amount of annual interest on the debt and we're only nine months into the fiscal year.  Back in 2008, interest on the debt reached its record level of $451 billion, a record that is most likely going to fall in fiscal 2011.  What is even more frightening is that the interest record will be broken in a year where interest rates are at generational lows as you'll see in a moment.  

Here's a look at the current interest rates on the debt for both marketable and non-marketable federal debt securities for the month of June 2011 with a comparison to the rates from a year earlier:

Now, let's look back 10 years to June 2001 and see what interest rates on the federal debt looked like back then:

Notice that the rates for the previous year (June 2000) were even higher?  The total interest-bearing debt rate of 6.261 percent from June 2010 is over twice that of the current rate of 2.957 percent for the month of June 2011.

Here's a graph showing the yield on the 10 year United States government bond going all the way back to 1971:

Notice how the rate outside of the spikes in the early 1980s seems to hover around the 6 percent mark?  Scary, huh?  Notice that current 10 year interest rates really are at multigenerational lows?

The $300 billion in annual spending cuts most recently proposed will not even meet the budgetary needs to fund interest payments on the current federal debt.  This is even further complicated by the fact that the debt ceiling will be allowed to rise by another $2 trillion give or take a few hundred billion dollars.  If interest rates rose to the levels experienced back in 2001 as well they might should the market start demanding a risk premium as the federal debt rises higher and higher, annual interest payments on the new debt ceiling amount of $16 trillion would hit a stratospheric $960 billion more or less.  In fact, in this case, compounding will only make matters worse as the interest owing is added to the debt.  To put this $960 billion number into perspective, the Congressional Budget Office estimated at the end of fiscal 2010 that total Medicare and Medicaid outlays for fiscal 2010 reached $723 billion and Social Security benefits reached $696 billion.

If the debt situation is allowed to spiral to this level and interest rates rise to historic norms, the perfect fiscal storm will be entrenched and the Great American Dream will pretty much be over for Main Street.

Perhaps a bad deal from Washington is just that, a bad deal and nothing more.  But, with all the partisan hoopla that built up over the past weeks, perhaps D.C.er's think that the unwashed masses outside the Beltway will be happy with just about anything.

America's Pension Nightmare - Making a bad situation even worse

While the mainstream media and more than a few of us living our lives outside of that particular sphere, myself included, are all wrapped up in the bipartisan debt talks flustercuck in Washington, surprisingly, there is other news out there that is also of interest to those of us who follow government debt issues closely.  Unfortunately, this news is not particularly good over the long term.

Mebane Faber, with Cambria Investments in California, released a research paper entitled "What if 8% is Really 0%" in the Quantitative Research Monthly report in June 2011.  This paper outlines the issue of pension under-funding, an issue that will be of greater and greater concern as the years pass since a massive number of baby boomers will be retiring over the next 20 years and for some reason will be expecting to collect a regular "paycheque".  I'll outline some of the key points in Mr. Faber's paper; while the data is specific to the United States and particularly state level pensions, keep in mind that under-funded pensions are a very common occurrence in Canada and the United Kingdom as well.

Mr. Faber opens by explaining the title of his paper.  Pensions have historically used a projected rate of return of 8 percent; this rate is used for all public government and corporate pension plans.  The magical 8 percent number is used because, over the past 25 years, public pension funds have averaged this rate of return so it seemed that it might be a reasonable assumption moving forward.  However, if the 8 percent rate of return (ROR) is not met, the gap between the growth of the pension and the liabilities (the monthly payout to pensioners) of the pension grow enormously over the long periods of time involved in pension investing.  As it stands today, the gap between the projected size of the pension and its projected payout (the funding ratio which is calculated as total pension plan assets divided by total liabilities discounted back to the present) has declined to 80 percent on average for American private and public pensions.

Let's put the 80 percent funding rate into perspective.  In 1999, an aggregate of all state pension plans in the United States had a funding rate of 102 percent.  This has declined to 84 percent by 2008 with some states (Illinois) reporting a funding rate of only 54 percent.  In addition, 21 states had funding rates of less than 80 percent with an overall gap of $460 billion on assets of $2.31 trillion in 2008.

Now let's add the 8 percent rate of return into the equation.  Considering the extended period of low interest rates and volatile stock market returns, if we use a more reasonable rate of return such as that on "risk-free" government bonds (he said with tongue planted firmly in cheek), the average funding ratio for all public pension funds drops from a scary 83 percent to a sleep losing 45 percent.  Using this risk-free rate of return, the 50 United States state pension funds that have $1.94 trillion in assets and $5.17 trillion in liabilities  end up with a funding ratio of only 38 percent and unfunded pension liabilities of $3.23 trillion.  To put this $3.23 trillion figure into perspective, the publicly traded debt of the states is currently $0.94 trillion.  This will force state governments to raise addition funds through the issuance of additional debt at the same time as the federal government is gorging itself on an already strained bond market.

Let's step back and take a look at that 8 percent number again.  Since the Fed, in its great wisdom, has seen fit to maintain a very long period of historically low interest rates, pension fund managers have been forced to look far and wide for investments that will give them a return that keeps their funding gap to a minimum.  This was an easy task 25 years ago; long, risk-free government bond rates averaged 10 percent and the P/E ratio for most American stocks was less than 10.  Things are now substantially different.  Long bonds are yielding 4 percent on a good day and the P/E ratio for American stocks is over 20.  This makes reaching that magic 8 percent number very, very difficult and pension managers are actually having to work for a living.  This low rate of return on long bonds has forced pensions into investing in more and more risky products.  As Canadians, we need look no further than to watch the changing portfolio of the Canadian Pension Plan Investment Board (CPPIB) as shown here:

Note the increase in equity holdings as a percentage of the total Canada Pension Plan portfolio.  Also note the massive hit that the portfolio took in 2009 when the market tanked.  That's Canadian's future pension income that is being invested in increasingly risky products despite the Investment Board's protestations to the contrary.

Pension managers are now using a 60% equity/40% bond mix as a benchmark for pension management. If this is the case, stocks must return 11 percent so that the low yielding bond returns are averaged up to the magic 8 percent return.  While this sounds easy, over the past ten years, the stock market has proven to be increasingly volatile making an 11 percent rate of return anything but a sure thing.  As well, by investing in equities, as noted above for the CPPIB, pension principal is no longer guaranteed and accumulated funds can disappear as if by magic.

Mr. Faber goes on to look at the example of Japan.  Japan has experienced a very lengthy period of very low (think nearly zero) interest rates and a stagnant stock market.  Here is a graph showing what has happened to the Nikkei 225 since 1984 showing how hard it is to guarantee a reasonable rate of return from Japanese equities and how easy it is to pick a loser:

Here is a graph showing what has happened to Japan's 10 year bond rate since 1987:

Pretty hard to get a reasonable return on a Japan 10 year bond too, isn't it?  We have to keep in mind that Japan's economy has been subject to the world's longest quantitative easing experiment by the Bank of Japan and one need look no further than these two charts to see how well it has worked for the country.  One would think that Mr. Bernanke would have taken notice before imposing QE1 and QE2 (and possibly QE3) but, apparently not.

To scare you even more, here is a table showing the rates of return historically by decade for both the United States and Japan:

Japan's rate of return on all investments for the past 20 years has been rather negligible at best and negative at worst.  Overall, a buy and hold philosophy yielded a massive 1.42 percent rate of return and an equity investment philosophy would have lost 4.62 percent compared to a rather paltry gain of 4.36 percent on 10 year bonds.  While Japan's economic situation does seem to be atypical, we must remember that in the early 1980's it appeared that the Japanese economy had nowhere to go but up, up, up.  It was the economic superpower of the world.  Does any of this sound familiar?  Just in case you don’t think that it can happen in the United States, here’s a link to a 2010 paper by James Bullard, President and CEO of the St. Louis Federal Reserve, in which he discusses the probability of a Japanese-style deflationary scenario for the United States.  Here’s a quote from “The Seven Faces of “The Peril”:

“I emphasize two main conclusions: (1) The FOMC”s extended period language may be increasing the probability of a Japanese-style outcome for the U.S., and (2) on balance, the U.S. quantitative easing program offers the best tool to avoid such an outcome.”

Apparently, he hasn’t looked at these charts either!

With the ongoing debt talks, it is readily apparent that the United States Social Security program may simply not exist in its current form for those of us who will be retiring in the next two decades.  While that is terribly unsettling, it is even more unsettling to think that our privately and publicly funded pension plans might not be there for us either.  To complicate matters even further, Americans are constitutionally obliged to cover these pension shortfalls one of two ways; through cutbacks in service or through increases in taxes.  Oh brother, we just can’t win for losing.

Who is to blame for America's foreclosure crisis? Only the Fed knows for sure

Everyone's pals at the St. Louis Fed have done it again.  In the July issue of the The Regional Economist, they published an article entitled "The Foreclosure Crisis in 2008: Predatory Lending or Household Overreaching" by William Emmons (a Fed economist) along with Kathy Fogel, Wayne Lee, Liping Ma, Deena Rorie and Timothy Yeager of the Sam M. Walton College of Business at the University of Arkansas. This article attempts to answer the seemingly age-old question; was the increase in the number of foreclosures and the resulting collapse in housing prices due to stupid consumers or stupid lending practices by banks?  As a rather voracious reader of newspapers from around the world and the comments from readers that follow articles that discuss the collapsing housing markets in the United Kingdom, the United States and Eurozone countries, I see a strong divide between those who believe that consumers are to blame for their own poor decisions and those who believe that the banks in these countries did what they could to dupe unsophisticated consumers into overleveraging themselves.  Fortunately for all of us, the St. Louis Fed is doing the heavy lifting and will answer the question for us and point the fickle finger of blame at the party that created the Great Recession.  Thank goodness for all that!  Please remember, that this data and its accompanying conclusions apply only to foreclosures that occurred in 2008, however, as I’ll note later, I think that the conclusions still apply.

Let's open this posting with a quote from the article:

"The answer (to fixing blame for the foreclosure crisis) is difficult to ascertain because it ultimately depends on the intentions of the borrower and the lender. After the fact, a lender would hardly admit to deceiving a borrower, and the borrower would be more than willing to place at least some of the blame for the foreclosure on the lender."

The authors then go on to state that:

"...certainly, both predatory lending and household overreaching occurred during the subprime housing bubble. But it is important to identify the primary reason for the foreclosure crisis because the policy implications are vastly different..."

If it was over-borrowing by households that created the foreclosure crisis, then it is quite possible that another round of house price appreciation like that experienced in the early- to mid-2000s could result in another housing price bubble that would, once again, result in borrowers mortgaging themselves for more than they can afford.  The solution to this problem would require central bank intervention to recognize and prevent the development of real estate asset bubbles among others.  While the sentiment of this solution seems nice, in fact, the easy money policies of the Fed's zero interest rate policy was at least partly to blame for the formation of more than one asset bubble over the past decade (i.e. tech stocks, housing and now probably commodities); one would think that the central bankers would learn from past mistakes but apparently, things aren't quite as simple as that in the rarified air of the Federal Reserve.

On the other hand, if the foreclosure crisis was created by the predatory lending practices of the banking establishment, consumer protection laws like those found in the Dodd-Frank law would act to prevent Wall Street banks from making millions of risky loans that consumers had no possibility of repaying so that Wall Streeters can pack their bank accounts with millions of dollars in bonuses and salaries.

In order to understand the impact of both over-borrowing and predatory lending, Emmons et al used two sources of data.  The first is the RealtyTrac database that compiles nationwide data on all homes in foreclosure.  The second is the Acxiom database which compiles nationwide data on millions of United States households every quarter and divides these households based on income, demography and consumption.  The Acxiom database divides the population into "Life Stage Segments" as described here.  Each household is segmented into one of 70 segments within 21 life stage groups based on specific consumer behaviour and demographic composition.  For example, there are five main PersonicX Earnings Lifestages including Youth, Career Builder, Earning Years, Late Career and Retirement.  Each of these Lifestages is then subdivided into one of 21 Lifestage Groups.  The authors of the study combined the RealtyTrac and Acxiom databases and the resulting combined database had 40 million records with 200,000 foreclosures for the third quarter of 2008 alone.  The authors also noted that since they really had no idea what motivated households to borrow for their mortgages, they would make one of two assumptions:

1.) Households with low income and educational levels would be most vulnerable to predatory lending practices since they likely had a poorer understanding of the mortgage contract that they were signing.

2.) Households with high educational and income levels were more likely to have high economic aspirations relative to their net worth and income and would be more likely to overreach when borrowing to purchase a home.

Now, on to the conclusions of the study.

1.) Value of foreclosed homes:  The authors found that defaulted homes, on average, were more expensive than those owned by households not in default.  The median market value of homes in foreclosure was $242,400 compared to $199,129 for those homes not in foreclosure.  Homes in foreclosure had a median age of 30 years compared to 34 years for those not in foreclosure.  As well, homes in foreclosure had a median size of 1526 square feet, substantially smaller when compared to 1907 square feet for those not in foreclosure.  The median loan-to-value ratio for foreclosed homes was 96 percent compared to 65 percent for homes not in foreclosure. My suspicion is that the loan-to-value ratio for foreclosed homes today would be far worse than 96 percent with millions of homeowners currently underwater as shown here.

2.) Foreclosed Household Demographics: Households in foreclosure tended to be smaller (median size of 2.0 people compared to 3.0 people for homes not in foreclosure) with an average of 56.2 percent of foreclosure households being married compared to 70.8 percent of those not in foreclosure.  As well, 36.9 percent of households in foreclosure were owned by singles compared to 25.7 percent of households not in foreclosure.  Households in foreclosure also had a median length of residency that was substantially shorter than those not in foreclosure; 4.0 years compared to 9.0 years.  When the data is looked at as a whole, it appears to show that that households in foreclosure purchased their homes later in the bubble, paying far more for far less house and that they were at an earlier stage of their careers.  Interestingly enough, the data also shows that households in foreclosure had markedly less education with only 12 years of schooling compared to 16 years for households not in foreclosure.

By using the Acxiom PersonicX Life Stage Segments as noted above, the researchers were able to define more accurately the households that were responsible for a share of foreclosures that was out of proportion to what would be expected.  To observe which Life Stage Segments were responsible for a disproportionate share, the authors calculated the share of the total number of foreclosures for each Life Stage and then compared that to the share of the total number of households for each Life Stage.  For example, the Cash and Careers Group accounted for 5.52 percent of all households however, they accounted for 11.3 percent of all foreclosures.  The excess share of foreclosures is therefore 11.32 minus 5.52 which gives us an excess foreclosure rate of 5.78 percentage points.  For your information, on the following graph, the Group codes ending in B represent Baby Boomers, the Groups ending in X and Y represent Generations X and Y, the Group ending in M represents the Mature generation (50 and 60 year olds) and the Group ending S represents seniors.

Here is the graph showing the excess foreclosure percentages for some of the Life Stage Groups:

Let's look at the group that tended to overreach first.  Right away, it is apparent that the young, relatively affluent households of Generation X Cash and Careers Group (born in the mid-1960s to early 1970s) were responsible for an excessive number of foreclosures with 5.52 percentage points more foreclosures than their share of the population.  This group had the highest average household income ($59,500) and the highest number of years of education (14.8 years).  Next in line for an excessive number of foreclosures compared to their share of the population was the Generation Y Taking Hold Group of households with 3.66 percentage points more foreclosures than would be expected.  This group has an average age of 27.8 years, has the second highest average income ($55,500), third highest net worth (I'm assuming that's net worth prior to the foreclosure) and fifth highest education level (14.1 years).

Now let's look at the group that was most likely the victim of predatory lending practices because they had they either had lower educational levels or lower net worth and income.  The Generation Y Group Beginnings and Generation X Group Mixed Singles ranked in ninth or tenth place in income, education and net worth yet ranked seventh and eighth in terms of the number of foreclosures with 2.67 percentage points of excess foreclosures.  Note that these two less “sophisticated” groups accounted for an excess of only 2.67 percentage points compared to their better educated and affluent counterparts in the previous paragraph who were responsible for a combined 9.44 percentage point excess.

The researchers then looked at the geographic distribution of the foreclosures in the early stage of the Great Recession.  In general, the areas with the greatest price appreciation between 2000 and 2007 (think bubble) were in Florida and the Southwest and Northeast states.  Now let's look at a map that shows the concentration of foreclosures by state for the third quarter of 2008:

The concentration of foreclosures in Florida and the Southwest states tells us that these were likely a result of overreaching as households bid endlessly higher prices for their homes.  Note the disproportionately large number of foreclosures in the north-central states (Indiana, Michigan, Ohio and Illinois).  These states did not see massive price appreciation but the disproportionate number of foreclosures is likely due to the shuttering of the America’s manufacturing heartland.  When the foreclosure rates are compared to price appreciation at the state level, it is quite apparent that overreaching seems to be the cause of most of the foreclosures, that is, for those states that are outside of the states in the manufacturing heartland.  While I realize that this data is nearly three years old, it is interesting to see that the RealtyTrac foreclosure map still more or less shows foreclosure hotspots in the same bubblicious areas of the United States as were seen in the second half of 2008:

The researchers conclude that most of the foreclosures in the early part of the downturn were due to overreaching by young, affluent and highly educated households.  The existence of the housing bubble in certain parts of the United States followed by its collapse led to an elevated number of foreclosures.  It was in these areas that consumers tended to ignore the risk involved in purchasing a home because it appeared that prices would always rise.  Of course, the willingness of lenders to loan money to households that would clearly not be able to repay the debt in the future is at least part of the problem that is facing America's real estate market today and in the third quarter of 2008.  While the researchers for this paper seem to give them a pass, when one is dealing with tens of millions of mortgages, I would suspect that more than a few of them had a predatory aspect to them.

In conclusion, I'll close with the last paragraph of the article since it summarize the issue facing policymakers:

"If capitalist economies are subject to periodic asset price bubbles, Hyman Minsky (an economist who wrote that prolonged periods of economic stability lead to speculative lending) suggested that policymakers take steps to eliminate bubbles that threaten to become systemically important. This, of course, requires the ability to 1) recognize an asset bubble, 2) classify the bubble as a systemic risk to the economy and 3) curb the formation of the bubble either through monetary policy actions or through more-targeted interventions, such as higher bank capital requirements or more stringent mortgage underwriting criteria." (my bold)

As I said at the beginning, one would wonder just how long it will take the Federal Reserve to recognize that their policies are, at least in part, responsible for the formation of asset bubbles in the economy?  As well, giving a pass to the actions of their Wall Street banking buddies for their creative lending practices during the formation of the real estate bubble is hardly reasonable but I guess it is simpler to blame consumers for overreaching their credit than it is to blame your future employer. 

That said, it is at least interesting to see where the great minds at the Federal Reserve point their fickle finger of blame at when assessing America’s housing crisis.  Apparently, it’s all Main Street’s fault.  For shame, for shame!

Job Friction - Why Economists Employed at the Federal Reserve Think You're Unemployed

I regularly take a look through the websites of the twelve Federal Reserve Districts looking for speeches or publications made by Governors or other staff members.  Sometimes, going beyond what Mr. Bernanke has to say about various topics can be quite enlightening.

By way of introduction, for those of you that aren't aware, the Federal Reserve is composed of twelve Districts as shown on this map:

Each of the twelve Federal Reserve Banks is subdivided into twenty-four branches with each of the twelve Banks being responsible for the commercial banks within its geographic boundaries.  As shown on this link, each Federal Reserve Bank has its own directorship.  This list of directors also outlines the principal business affiliation of the director; if you take the time to run through the list, you'll see that it is a who's who of American business, banking and economics.  Who says that it doesn't pay to rise to the top of the heap?

Back to the subject of this posting.  In July 2011's "The Regional Economist" published by the St. Louis Federal Reserve, there is an article entitled "The Mismatch between Job Openings and Job Seekers".  In light of last month's dismal unemployment statistics, this article is of particular interest because it may explain part of the reason why American unemployment has remained stubbornly high during the so-called "recovery".  Apparently, this stubbornness even surprises Mr. Bernanke who was quite certain that his QE2 program would solve all of America's economic woes.

The authors of the article, Maria E. Canon and Mingyu Chen, open by noting that during the 2007 - 2009 recession, more than 89 million employees lost their jobs with the unemployment rate spiking to a high of 10.1 percent in October of 2009.  While the unemployment picture has improved slightly, the BLS data release last week shows that unemployment rose by 0.1 percent to 9.2 percent, a relatively insignificant improvement over its 27 year high back in October 2009.  Now, let's leave the "Mismatch" article for one moment and look at another St. Louis Fed article. 

According to an essay entitled "Many Moving Parts" in the 2010 Annual Report for the St. Louis Fed, the loss of 8 million jobs during the Great Recession has been a persistent phenomenon that just will not go away no matter how many times Mr. Bernanke tells us that it will.  The authors of the study, David Andolfatto and Marcella Williams, even go so far as to explain to the Great Unwashed Masses that unemployment is not really a measure of joblessness.  Here's their explanation verbatim:

"Contrary to common belief, unemployment is not technically a measure of joblessness. It is, instead, a measure of job search activity among the jobless. Millions of unemployed people find jobs every month, even in a deep recession. Millions of workers either lose or leave their jobs every month, too, even in a robust expansion. The large and simultaneous flow of workers into and out of employment suggests that the labor market plays an important role in reallocating human resources to their most productive uses through good times and bad.

The job search activity of unemployed workers is mirrored on the other side of the labor market with the recruiting efforts of firms that have unfilled job openings. It is a property of the labor market that job vacancies coexist with unemployed workers, a fact that suggests the presence of "frictions" in the process of matching workers to jobs."

Isn't this a fine example of "economist-speak"?  Try telling this to some poor schlub who has been out of work for nearly a year, "Hey buddy, you're not really jobless, you're just experiencing job friction!".  You say tomato, I say tomahto.  The Fed speaks nonsense.

The authors of the Mismatch essay go on to state that job vacancy and unemployment rates (remember, it's NOT joblessness!) tend to move in opposite directions over a given business cycle.  When times are good, companies create jobs and that makes it easy for unemployed workers to find a job.  In this particular cycle, the authors observe that, while job openings in the United States have increased recently (the article was written in April 2011), unemployment remains persistently high.  Realistically, they do note that given the severity of the Great Recession that "...it is likely to take years before the unemployment rate falls back to its pre-recession levels."  No sh!t Sherlock.

In section 5 of the report, the authors look at the concept of job vacancies and unemployment.  They note that it seems a bit off that job vacancies coexist with unemployment and wonder why it is that firms with job openings simply don't hire from the more than ample pool of the unemployed.  Well, duh!  Perhaps the fact that the manufacturing and construction sectors have been particularly hard hit makes it nearly impossible for those millions of unemployed auto workers and construction workers (among others) to find replacement work since both sectors are circling the white, porcelain bowl.  But, of course, economists have to coin a phrase for this concept; they term it "search frictions".  Since I am not a qualified economist, perhaps I'd be safest if I quoted the definition of "search friction" directly from their report:

"...First, jobs and workers each possess idiosyncratic characteristics that make some job-worker pairings more productive than others. Second, jobs and workers do not necessarily know beforehand where the best pairing is located. If this is true, then it follows that jobs and workers should expend time and resources to search out the best matches. A firm will generally not want to hire the first worker who comes through the door. Likewise, an unemployed worker may not want to accept the first available job offer. The same principles are at work in most matching markets, including, for example, the marriage market."

Even more amazingly, the authors note that job and unemployment both vary over a business cycle and in a predictable way.  Unemployment tends to be high when the job vacancy rate is low and vice versa.  Sounds like common sense to me but economists have devised a curve called the Beveridge Curve that defines this relationship between job openings and the unemployment rate.  Here's the Beveridge Curve for the United States over the past decade:

You will notice right away that something goes amiss at the right end of the curve.  The little red dots seem to fall off the nice, predictable curvy line!  It seems that the so-called science of employment economics isn't quite as predictable as economists would like to think!  The off-curve data points show that there is an increase in the number of job openings but that there has been no accompanying decline in the unemployment rate.  This seems to puzzle the Fed because they state that "...it is not immediately clear how monetary or fiscal policies might alleviate the problem.".  Finally, someone at the Federal Reserve admits that their policies have not and likely will not fix the employment part of the economy.  Perhaps predicting economic trends is rather like herding cats, it sounds plausible but, in reality, it simply doesn't work. 

Now, let's go back to the "Mismatch" article.  The authors of this article postulate that it is possible that the prolonged joblessness of this "recovery" may be due to one of two reasons:

1.) Skills mismatch: this is defined as a mismatch between the skills of those unemployed and the job vacancies that employers are looking to fill.

2.) Geographic mismatch: this is defined as differences in geographic preferences between where the jobs are and where the employees prefer to work.

Those reasons for the prolonged period of high unemployment sound plausible to me but, keep reading, the Fed disputes the contribution of both factors to the increased rate of unemployment and comes up with a third alternative.  

Let's look at skills mismatch first.  This graph shows the average monthly share of vacant jobs and share of employment lost by industry for the three year period between December 2007 and February 2011:

Note that 50 percent of all of the jobs lost over this time period were in the construction and manufacturing sectors of the economy whereas 90 percent of the job openings were in other industries.  If you happen to be in the health and education sectors of the economy, you are one of the lucky ones because 20 percent of all job openings over the three year period have occurred in this sector and there was an employment gain of 18 percent.  While that’s all milk and honey if you happen to be trained for either sector, it’s not so wonderful if you are not.  For the unemployed person who worked in the manufacturing sector, it makes sense that they are unlikely to get work in the health or education sectors since they simply are not qualified to do the work and this will result in an extended period of unemployment.  While this may sound like a reasonable hypothesis to most of us, the authors of the "Mismatch" article summarize the findings of another study that looked in detail at the skills mismatch as noted above and found that there was only a 10 percentage point increase in misallocated workers during the Great Recession.  The authors point out that only 0.4 to 0.7 percentage points of the total 5 percentage point increase in unemployment during the Great Recession can be attributed to the mismatch between the skill set of the unemployed and the skills required by the employer who has the job openings and therefore, the concept of skills mismatch is not to blame for the stubbornly high rate of unemployment.

Now let's look at geographic mismatch.  In the case of the geographic mismatch, from one study, it appears that negative equity in homes has reduced the ability of homeowners to move to a new location because they may have to sell their homes at a loss.  But, of course, other economists in yet another study state that the aforementioned research was flawed and that, in fact, negative equity does not reduce the mobility of homeowners and that geographic mismatch had little impact on the unemployment rate during the Great Recession.

So, apparently it's back to the old drawing board.  The fine folks employed by the Fed have come up with yet another alternative explanation so they can justify their paycheques.  Perhaps because the number of job openings have increased by less than the increase in the number of unemployed workers, companies are spending more time being picky about who they hire because they think that there might just be a better candidate just dying to work for them.  According to this article in the Wall Street Journal, jobs that took two months to fill before the Great Recession are now taking up to 8 months to fill.  Apparently, companies simply aren't in a hurry to fill their vacancies perhaps because they are cautiously pessimistic about the strength of the “recovery”.  It sounds like a reasonable theory but I have a hard time imagining that this factor is responsible for the remainder of the 5 percentage point increase in unemployment that skills mismatch is not responsible for.  I'm sure that there is an economist somewhere out there who will put the boots to this theory but we’ll have to wait and see.

It's interesting to see how many theories there are regarding the stubbornly high American unemployment rate and how even the Federal Reserve, the guardian of the United States economy hasn't really got a clue about what is causing the problem or how to fix it.  Funny how the Fed really doesn’t even seem to understand the impact of its own policies, isn’t it?

But, on the upside of America's employment picture, apparently economists employed by the Federal Reserve, including the "Big Guy", can be wrong and still keep their jobs.  Way to go people!  Apparently, there's no job friction for economists.

America's Sovereign Debt Issue - Putting the $14.3 trillion debt into perspective

I realize that I've posted an item similar to this several months ago but I thought that, considering the activity in Washington over the past two weeks, it was time to revisit exactly how big the $14.3 trillion debt really is now that it's been page one news for weeks.  Most of us have some difficulty even imagining what a million dollars would look like but when a number, particularly one with a dollar sign in front of it, gets into the 14 digit range, we simply have no frame of reference that will tell us what it really means not to mention understanding just how critical the situation is.

Here's the most recent debt to the penny number from the United States Department of the Treasury Treasury Direct website:

Let me type that out: that's $14,342,953,885,641.98.  I find it fascinating how there are 14 digits ahead of the decimal point but that the Treasury still knows (or at least thinks that it knows) that they have to tack 98 cents onto the $14.3 trillion figure to maintain complete accuracy.  I guess a bean counter somewhere is trying their best to keep the ledger balanced.

Let's take a stack of $100 bills, the largest denomination that most of us usually deal with on a reasonably regular basis.  Each bill is 0.0043 inches thick, 2.61 inches wide and 6.14 inches long and weighs about 1 gram.  I'm going to focus on the thickness of each $100 bill.  It would take 232.6 $100 bills to give you a pile that is one inch thick and if you had a pile that thick, you'd be holding $23,256 in your hand.  Let's go back to the debt number; if we took the entire $14.343 trillion debt, converted it into $100 bills, the stack of bills would be 616,740,000 inches high or 51,395,000 feet high or 9734 miles high.  The one-way distance between New York City and Los Angeles is 2462 miles.  This means that the stack of $100 bills that make up the current sovereign federal debt of the United States would reach from New York City to Los Angeles 3.95 times, nearly 2 round trips.  If the $100 bills were laid end to end rather than on top of each other, they would reach 73.39 billion inches or 6.116 billion feet or 1.158 million miles.  That would take us around the earth at the equator 4.65 times.  That is truly a lot of paper.

Now, lets's see what $14.343 trillion will buy us.

1.) At a list price of $829 for a top-of-the-line 64 GB iPad 2 with Wi-Fi and 3G (my favourite toy), you could buy 1.73 billion units and supply every man, woman and child in the United States with 55 iPads. (using a population of 311,776,483 from the United States Census Bureau).  Perhaps then I wouldn't have to share mine with my wife!

2.) At a list price of $72,085, the $14.343 trillion could purchase 198,970,000 base model 2011 Cadillac Escalade Hybrid SUVs (note that I chose the hybrid model because we are all so environmentally conscious!), supplying each household in the United States with 1.77 Escalades.  If you prefer non-domestic vehicles, at a list price of $53,425, each household in the United States would have 2.4 2011 BMW 535i Sedans.

3.) Let's say you want to get away for the weekend.  How about a night in a deluxe one bedroom suite at the Four Seasons in Manhattan with a view of the city?  At $4750 per night, the $14.343 trillion would buy 9 nights accommodation for every man, woman and child in the United States with enough left over to pay for plane tickets and meals.

4.) At Best Buys regular everyday low price of $4299.98, the $14.343 trillion would buy 10 Panasonic Viera 65 inch Plasma HD televisions for every man, woman and child in the United States with enough left over to pay the sales taxes.  

I hope that these examples help all of us better understand the size of the issue facing us.  The very thought that Congress and the President are playing partisan politics around the issue of having to increase the soon-to-be-crippling debt level of the United States should frighten everyone around the world, especially since the United States is the nation driving the world's economy.  All we need to do is look back at 2008 to see what happened when the day of reckoning arrived for the mortgage backed securities market in the U.S. to see what impact one nation has on the world's economy.  While the Democrats and Republicans banter about cutting the deficit, you'll notice that discussions involving paying back the debt never seem to take place.  Apparently, those that we elect have no compunction about saddling our children, grandchildren and great-grandchildren with a burden that we cannot even imagine.

Penile Length and the 2D:4D ratio - Answering the Age-old Question

In light of all the "discussions" being held in Washington over the debt limit and the accompanying metaphorical unzipping and measuring with a ruler, I thought that this posting was particularly pertinent for just such an occasion.  While I'm not in the habit of posting about genitalia, male or otherwise, I stumbled on this report (don't ask how or why) entitled "Second to fourth digit ratio: a predictor of adult penile length" from the Asian Journal of Andrology that seems to answer the age-old question that men (and more than a few women, I'm sure) have asked over the years - does the length of a man's fingers have anything to do with the length of his penis?  Oddly enough, the answer appears to be "yes" but perhaps not in the way you might think.

It seems that those very clever Koreans, who are now making quality cars that rival their Japanese and German counterparts, have figured out a way to determine which males are better endowed (not that it matters, right?) simply by looking at a man's hand.  In the study of 144 men aged 20 years and older who were hospitalized for urological surgery, researchers measured the lengths of their right-hand second and fourth digits prior to surgery.  Another investigator, who did not have access to the measurements of the patient's digits, measured the length of the subject’s flaccid and stretched penises.  Apparently, the researchers felt that the length of the stretched penis closely approximates the length of the patient's erection.  And yes, the men did give their permission prior to this rather intimate procedure.

The ratio of the length of the second digit to the length of the fourth digit (the 2D:4D ratio) varies between the sexes.  In women, the 2D:4D ratio is generally higher, often greater than one, meaning that the length of the index finger is generally close to or longer than the length of the ring finger.  In males, this is not always the case with many men having a ring finger that is longer than the index finger which results in a 2D:4D ratio that is less than one.  It is believed that the 2D:4D ratio is fixed while humans (and other vertebrates) are still in utero.  Other studies have proven that a high level of foetal testosterone is associated with a low 2D:4D ratio, in other words, the amount of testosterone in a human affects the development of our hands, particularly the lengths of our fingers.  Recent studies even show that the digit ratio of the right hand is even more susceptible to the activity of the hormone responsible for the development of male characteristics, androgen.  Just as the amount of prenatal testosterone is responsible for the development of variable finger lengths and in particular the 2D:4D ratio, it is also responsible for penile length.  For the researchers responsible for this study, this begged the question "Is penis length related to 2D:4D ratio?"

The penile measurements were undertaken while the patients were under anaesthesia.  The process of measuring was quite rigid (pardon the rather weak pun); measurements were taken immediately after the patient undressed to minimize the effect of temperature (think George Costanza and his "shrinkage" after swimming) and patients were lying down.  In order to reduce measurement errors, two measurements were performed and the mean was used.  Hopefully, researchers did not use a male ruler as we all know that 6 inches to a man is far different than 6 inches to a woman!  As well, the height and body mass index of each patient was recorded.

The researchers did find that the height of the patients correlated directly with the length of the flaccid penis only.  They found that the length of the stretched penis was not correlated with either height or body mass index but that the 2D:4D ratio was a significant predictor of the ultimate length of the stretched penis.  The short men of the world can now relax, particularly if their 2D:4D ratio is far less than one!

In their interpretation of these results, the researchers concluded that the patterns of digit formation may be related to the development of the penis.  During weeks 14 to 16 of a pregnancy, androgen levels peak and researchers have already ascertained that this high and individually variable level prenatal level of testosterone contributes to the development of both fingers and penises.  It appears that it is that exposure to variable levels of in utero testosterone that creates the relationship between the 2D:4D ratio and the length of a stretched penis.

In closing, I'd like to quote directly from the study with the hope of answering yet another penis question that you or your partner may or may not have had:

"Unlike digit ratio, studies have not found a relationship between penis size and race.  However, there is considerable evidence that normal stretched penile length varied between ethnic groups.  Among various ethnic groups, East Asians have slightly shorter stretched penile length when compared with other ethnic groups (Caucasian and African-American)....Furthermore, to date, there have been few studies that reveal why men who undergo a normal puberty have different penile lengths. Interestingly, one study in Bulgaria observed that the average penis is bigger at birth and also at the end of sexual maturation in rural populations compared with urban populations." (my bold)

Rural men of the world - rejoice!

I rather doubt that I'll post on penises again in the near future but I do hope that this posting has answered at least one or two age-old questions.  Perhaps this information would save both the Republicans and Democrats in Congress from actually having to unzip and expose their manliness before budgetary negotiations resume.

...and I'll bet there aren't too many men who have read this posting that haven't taken a look at their own index and ring fingers!  I wonder how many women will now be looking at a man’s hand with greater discernment in light of this research?