If Income has not recovered will the ‘recovery’ recover?

Jeff Rosenberg of BlackRock writes in their October Fixed Income Market Strategy :

Figure 3 highlights the longer term measurement of median family income from the census bureau updated to the end of 2012. Incomes have continued to fall since the onset of the crisis. Figure 3 also highlights the latest figures on income growth from the monthly employment situation report. This captures monthly wage trends and similarly highlights the collapse in income growth following the crisis.

That lack of income growing faster than prices are going up holds back consumers ability to spend.

[emphasis added]


Rosenberg’s point of income as a key to growth –I won’t refer to it as sustainable growth– hints that the United States recovery is demand constrained. Stagnant income absent access to credit entails depressed consumption as those in the upper percentile have little reason to spend hence no flow of funds trickling down. In addition, in the case of the masses one has to believe that in a cycle of household deleveraging and bank balance sheet repair that access to credit will not return unless it is extended by banks and non bank financials to the same households that embraced it over the past generation in order to maintain consumption –conspicuous or otherwise. Think of the analogy of banks: they can survive for a long time if they are insolvent but will dissolve if illiquid hence the emphasis on liquidity coverage ratios (LCR) in the Basel III framework. This analogy holds true for households.

There is a paper written by Perry Mehrling and published in 2000 titled Minsky and Modern Finance: The case of Long Term Capital management in which the Bernard College professor writes about Minsky’s prescient insights about the world we live in today long before that world existed based solely on the nascent financial society pre Fischer Black et al:

When Minsky wrote that capitalism is essentially a financial system, it was before the advent of modern finance, before financial deregulation and the mutual fund revolution, before the breakdown of Bretton Woods and the subsequent rise of global currency markets, before the Eurodollar market, before junk bonds, and before securitization. He was writing, in fact, before practically all the developments that have rendered his statement merely a truism now at the end of the twentieth century, which is not to suggest that he ahead to what would happen, since he didn’t. When he wrote that capitalism is essentially a financial system, he was referring to the capitalism of his own time, a capitalism that, by modern standards, was remarkably undeveloped financially. What then does he mean by “essentially financial”?[1]

Minsky means that in a capitalist economy every economic unit — every firm, household, government, even every nation — is, in essential respects, like a bank facing the problem of daily balancing cash inflow against cash outflow. For him, the key problem an economic unit faces is not the familiar economists’s problem of maximizing profit or utility subject to a budget constraint. More fundamental is the problem posed by the “survival constraint” that requires that cash outflow not exceed cash inflow.

To meet this constraint minute by minute, day by day, week in and week out, requires individual agents continually to have in mind the balance between their cash commitments and their cash flows, but it requires more than that. Because cash flows inevitably fall short from time to time, individuals require access to a reliable source of refinance that allows them to meet current cash flow needs by pledging expected future cash flows.

[emphasis added]

To read Mehrling’s full paper go here. The takeaway entails a lack of economic stability and growth; my personal bias also sees the underlying fault line in our economic system entailing a lack of resilience. We are a long way from Adam Smith’s ideal of perfect competition under conditions of perfect liberty; that world does not exist.


[1] For a fuller treatment of Minsky’s theories in the context of his life and time, see Mehrling [1999]. For an account of the broader American tradition of monetary thought to which Minsky belongs, see Mehrling [1997]

For the interested reader

Mehrling [1999] is “The Vision of Hyman P. Minsky.” Journal of Econoic Behavior and Organization, 39 (1999), pp. 129-158

Mehrling [1997] is The Money Interest and the Public Interest: American Monetary Thought, 1920-1970. Cambridge: Harvard University Press, 1997.


Rosenberg, Jeff. BlackRock, “Fool Me Once.” Last modified October 03, 2013. Accessed October 24, 2013. https://www2.blackrock.com/us/financial-professionals/market-insight/fixed-income-monthly.

Perry Mehrling, “Minsky and Modern Finance: The case of Long Term Capital Management,” The Journal of Portfolio Management, 26, no. 2 (2000): (81-88), http://economics.barnard.edu/sites/default/files/inline/minsky_and_modern_finance.pdf (accessed October 24, 2013).


Most Chinese growing old before China grows rich

I am not referring to the elites in the politburo of the CPC, the princelings, or those closely associated with the channels of power in the central kingdom. I am referring to the teeming masses who make the goods and provide the services that have made the aforementioned groups wealthy and powerful. For them, retirement isn’t what they expected it to be; the vast majority will grow old before their country grows rich enough to escape the middle-income trap and provide them the pension that they deserve after a life of toil and hardship.

In his always informative blog, chindia-alert.org, Chiahou Zhang (Charles Chang) links to yesterday’s Bloomberg Businessweek piece: Forget About Retiring, China’s economic Planners Say.

In it Dexter Roberts writes:

What if Chinese were required to work an extra five years, or even a decade, before retirement? There are growing calls among officials and academics in China to consider that controversial move as the country’s rapidly aging population puts new stress on its pension program. China must consider “deferred retirement,” said Hu Xiaoyi, a vice minister of human resources and social security, on Oct. 22, speaking to journalists at a seminar in Beijing.

This won’t be made easier if one considers that current projections of Chinese population aged 15 to 24 (based on the nations’ current one child policy staying in place) sees a drop off in that cohort as well as the working age population.



As I have stated previously (China won’t save the world) there are limits to China’s investment driven growth model although the amount of foreign exchange reserves and the surplus current account position permits the mandarins to pull the levers of fiscal stimulus again in order to spur growth.

Chinese GDP Growth Rate

Chinese GDP Growth Rate

But as Roberts hints the transition from being investment driven to consumption driven is not easy:

Meanwhile, as part of its desire to shift to a more consumption-driven economy, China is pushing an expansion of social welfare programs, expected to get a further boost at the upcoming Party Plenum meeting in November. Today, the proportion of China’s economy made up by domestic consumption is only around 35 percent, about half the level in the U.S. The logic of a stronger social safety net: Chinese who worry less about the future, including meeting the cost of health care and post-retirement living expenses, will spend more now.


Not Consumption Driven

Not Consumption Driven

How is this going to be done in a global economic system that does not sufficently vacuum the current account surpluses –particularly from China and Germany — when the goods producing nations are export driven with a household sector that consumes relatively little when compared to the Unites States. (Go here to understand the concept of surplus recycling).

Everything is interconnected. The recalcitrance of law makers in Washington adds to the confusion but also sets forward a more challenging path that will ensure greater hardship for the masses, be they in the savings prone east or the debt laden west.


Charts from Gary Shiling’s deck during the CFA Society Toronto 56th Annual Forecast Dinner on Tuesday, October 1, 2013.

Roberts, Dexter. “Forget About Retiring, China’s Economic Planners Say.” Bloomberg Businessweek, October 23, 2013. http://www.businessweek.com/articles/2013-10-23/forget-about-retiring-chinas-economic-planners-say(accessed October 24, 2013).

We care about consumption because it is ‘news’ – even when it really isn’t

Conspicuous consumption of valuable goods is a means of reputability to the gentleman of leisure. As wealth accumulates on his hands, his own unaided effort will not avail to sufficiently put his opulence in evidence by this method. The aid of friends and competitors is therefore brought in by resorting to the giving of valuable presents and expensive feasts and entertainments. Presents and feasts had probably another origin than that of naive ostentation, but they required their utility for this purpose very early, and they have retained that character to the present; so that their utility in this respect has now long been the substantial ground on which these usages rest.

Thorstein Veblen, The Theory of the Leisure Class: An Economic Study of Institutions, (Macmillan, 1899), 51-52.

Case in point: yesterday’s ‘news’ of a rapper/entertainer’s engagement to someone who does nothing  (below) centered around the cost and size of the engagement ring.