Scary defense spending trend

US defense spending doubled between 2001 and 2010 as shown in this chart.  It looks like an exponential trend.

Here's the same data with an exponential trendline fitted:

It looks like a good fit.  The data can be found here.

An argument for building a new long range bomber

is here:  Long Range Strike.  The core of the piece is this:

the United States has little choice but to invest in the US Air Force's new long-range penetrating stealth bomber programme until it reaches fruition. Right now, the USAF plans to buy only 80 to 100 of the LRS-B aircraft but analysts and retired officials say that number may not be sufficient... Lt Gen David Deptula, the USAF's former intelligence chief and Rebecca Grant, a noted air power expert, both say more are needed--155 to 200 jets.


This would cost hundreds of billions of dollars. I don't see a need for a manned long range bomber when a remotely piloted aircraft is possible. Targets could be designated from space.

Mortality

This chart from the CDC shows the annual age adjusted death rate.

The downward trend is good.

The CDC comments that
"The risk of dying decreased for all age groups but was greater for younger age groups with a 94 percent reduction in death rates at 1–4 years compared with a 38 percent decline at 85 years or more."

So put another way the improvement was much greater for young people than the extremely old.

Another CDC comment said that
"Heart disease, cancer, and stroke were among the five leading causes every year between 1935 and 2010."

That gives the impression that not a lot of progress is being made in treating these three causes of death.

Disposable income and sales trends

After plummeting during the recession, retail sales resumed their rate of climb.

A chart that shows just the retail sales gives an idea of how important food services (restaurants) are in the above chart:

Finally, a chart of disposable personal income:

It looks like disposable personal income isn't rising as quickly as retail sales; suggesting that debt is making up the difference.

Fiscal cliff spending cuts in a nutshell

The cliff is "across-the-board cuts of $1.2 trillion in both defense and non-defense programs, starting in 2013."
 Key parts of the cuts include

-" caps on new, Congress-approved spending on defense programs will be reduced from 10 percent in 2013 to 8.5 percent in 2021, with savings of $454 billion."

-"Caps on Congress-approved spending on non-defense programs would be reduced from 7.8 percent in 2013 to 5.5 percent in 2021, with savings of $294 billion."

-"Medicare spending would be reduced by 2 percent a year, with savings of $123 billion."

-"The CBO estimates that the savings would reduce interest payments on the national debt by $169 billion."

Those are big numbers but are spread out over eight years, leaving room for Congress to change a lot of these cuts.  The key is that " both defense and non-defense cuts would total $54.7 billion in 2013".  In other words the actual 2013 cliff is only $55 billion.  That's a drop in the bucket of the total US economy.  Fiscal stimulus and loose monetary policy have barely managed to keep GDP increasing.   It's time to focus on eliminating budget deficits.  Particularly since much of US defense spending is for weapons programs that are chronically behind schedule, over budget, and fail to meet requirements.  Killing the F-35 JSF program would lead to a lot of savings right away and would have little impact on the quality of our air forces.

Australian banking fiasco

In Auditor gave Banksia accounts a tick the Sydney Morning Herald reports that

"Auditors gave Banksia Securities a clean bill of health less than four weeks before its collapse last night, its latest accounts show. The non-bank lender's fall into receivers' hands has left thousands of investors in limbo over the fate of about $660 million in investments."

This banking collapse is a matter of national concern, as the SMH reports:

"Premier Ted Baillieu received a briefing from the receivers today and said the government was concerned about the impact of Banksia’s collapse on regions.
‘‘The financial position of Banksia and the regulation of this corporation is a matter for the Commonwealth and ASIC,’’ Mr Baillieu said."

The auditors clearly missed something important in their report.

Monetary base a poor indicator

as the chart shows a sharp spike during the 2008 financial crisis, this indicator wasn't showing the true state of affairs until it was revalued sharply upward

One wonders if there any more spikes lurking...

Bank failure trend

The number of bank failures peaked some time ago and likely won't spike again anytime soon.

The question of whether more banks should have failed but haven't due to regulator forbearance is an interesting one.

Italian earthquake conviction a travesty

It has been widely reported that Italian scientists convicted for not warning about deadly 2009 quake.

This Italian court ruling that scientists are guilty of manslaughter is the height of Kafka-esque absurdity. If this is the way the zeitgeist in Europe is going then things are worse there than generally thought.  The lack of understanding or disregard of how science works is deeply disturbing.

If scientists are prosecuted to distract the public from economic and political problems, then technological progress will disappear. 

An analogous case would be if meteorologists were to be prosecuted for uncertainty in forecasts regarding a hurricane or a blizzard.  It just does not make any sense.

Avoiding economic traps

Economist Edward Hugh notes in In Search Of Lost Demand that

"There are countries which are not so heavily in debt, and which do have a large growth capacity and a huge quantity of so called “pent up” demand - the so called Emerging Economies...these economies are still only around 40% of global GDP, so it is demand in 40% which is having to pull the other 60% with it. The interesting part is that in the space of a decade these economies have surged from 20% to 40% of the total. If the same trend continues by 2020 they could easily constitute 60%. Then things could be different, since we could have 40% of the total living from exporting to the other, faster growing, 60%. But we aren’t there yet"

Can the emerging economies avoid the traps that have entangled the developed world? As an example there's the liquidity trap that the Bank of Japan finds itself grappling with.  It's a long range question, but worth considering given that macroeconomic policies have played a large role in guiding the developed countries into the mess they are in now. 

Economic policymakers seem to act as if exponential trends will continue indefinitely. Yet it is well documented that there are limits to growth. Policymakers in the emerging economies would do well to learn lessons from the mistakes that have been made that led to the current global crisis.

Exponential trend breakdown: a novel analytical tool

Economic policymakers seem to act as if exponential trends will continue indefinitely.  Yet it is well documented that there are limits to growth.  Mark at Illusion of Prosperity has done an excellent job of identifying trend failures in measures of economic activity.   Good examples can be found at the following links:

Industrial Production

Epic Exponential Trend Failure of the Day

40.7 Million Missing Jobs

I ran a search on the terms "exponential trend failure" over at the RePec database (Research Papers in Economics) and came up with no relevant results.  Mark could package up all of his analysis into a paper and it would be legitimately be a novel analysis.

I also ran a search in Google Books for the terms (exponential "trend failure" economics) and the only thing that came up was the blog Illusion of Prosperity. Mark is on to something.

Prelude to the fall

The following is a section from a Wikipedia article titled Crisis of the Third Century.  I have highlighted in bold certain statements that highlight economic consequences of this breakdown leading up to the final fall of the Roman Empire.  Think of it as an illustration of possible future consequences of an economic crash.

With the onset of the Crisis of the Third Century, however, this vast internal trade network broke down. The widespread civil unrest made it no longer safe for merchants to travel as they once had, and the financial crisis that struck made exchange very difficult with the debased currency. This produced profound changes that, in many ways, would foreshadow the very decentralized economic character of the coming Middle Ages.
Large landowners, no longer able to successfully export their crops over long distances, began producing food for subsistence and local barter. Rather than import manufactured goods from the empire's great urban areas, they began to manufacture many goods locally, often on their own estates, thus beginning the self-sufficient "house economy" that would become commonplace in later centuries, reaching its final form in the Middle Ages' manorialism. The common free people of the Roman cities, meanwhile, began to move out into the countryside in search of food and better protection.
Made desperate by economic necessity, many of these former city dwellers, as well as many small farmers, were forced to give up hard-earned basic civil rights in order to receive protection from large land-holders. In doing so, they became a half-free class of Roman citizen known as coloni. They were tied to the land, and in later Imperial law their status was made hereditary. This provided an early model for serfdom, the origins of medieval feudal society and of the medieval peasantry.
Even the Roman cities themselves began to change in character. The large, open cities of classical antiquity slowly gave way to the smaller, walled cities that were common in the Middle Ages. These changes were not restricted to the third century, but took place slowly over a long period, and were punctuated with many temporary reversals. However, in spite of extensive reforms by later emperors, the Roman trade network was never able to fully recover to what it had been during the Pax Romana (27 B.C.—A.D. 180) of the first century A.D.
While Imperial revenues fell, Imperial expenses rose sharply. More soldiers, greater proportions of cavalry, and the ruinous expense of walling in cities all added to the toll. Goods and services previously paid for by the government were now demanded in addition to monetary taxes. The steady exodus of both rich and poor from the cities and now-unremunerative professions forced Diocletian to use compulsion; most trades were made hereditary, and workers could not legally leave their jobs or travel elsewhere to seek better-paying ones.

Prices up, earnings down

According to the BLS release dated October 16,

CPI for all items increases 0.6% in September as gasoline prices rise

while at the same time 

Real average hourly earnings falls 0.3 percent in September.

The conclusion one can draw from this data would be that less goods and service were consumed in the month, or alternatively stated, that real PCE actually declined if consumers didn't take on additional debt.  In any case the American consumer is getting the screws tightened.

Cost of food near exponential trend

Here is a chart of the BLS CPI index for food only:

What's remarkable is how stable food prices were until the Nixon years and the subsequent skyrocketing of the index.  Dumping the Bretton Woods exchange system hasn't been good for the cost of food.  Oil prices seem not to have affected this metric as food prices kept rising during the long period of low oil prices in the 1980's and 1990's.

A better phrase for this sort of chart would be a "hockey stick".

Inspired by Illusion of Prosperity.

Global labor arbitrage

The Jakarta Post today reports that

Indonesia’s labor costs, however, are still lower than that of China and Thailand, but higher than Vietnam. 

 The Post further reports that

a sizeable amount of investment from Taiwanese firms will soon enter Indonesia, not only in the sectors where investment is already ubiquitous, such as textiles, garments and footwear, but also in the high-technology industry.

and that

Taiwan is the ninth-largest foreign investor in the country, driven by the existence of big firms like Acer, Chinatrust Bank, Evergreen Group, Pao-cheng Shoes Co. and President Food.

In a nutshell, jobs will be shifted to Indonesia from China due to changes in relative wages. This is the essence of the global manufacturing sector now.

Gold!

The US Treasury reported on May 31, 2011 that US gold holdings amounted to 261,498,899 troy ounces.

See Ron Paul Hearing to Investigate U.S. Gold Reserves | Coin News.

Per the Federal Reserve website this gold is valued at roughly $42 per ounce for reporting purposes:

FRB: U.S. Reserve Assets and Foreign Official Assets Held at Federal Reserve Banks--December 2008 

At $1770 per ounce(today's price roughly), US gold holdings would be worth $462.8 billion; however at the current "book value" of $42 an ounce used by the Federal Reserve the valuation would be only $11 billion.

Here's a 5 year price chart for gold (from goldprice.org):

The US should clearly raise its "book value" for its gold holdings to at least a three digit number; the current book number is absurdly low.

American aging

The Census projects that in 2050 the largest age cohort will be women 80 years and older:

The chart shows a reversion to a pyramidal structure with the exception of the massive cohort of 80+ male and female.  If you are 80 in 2050, that means you were born in 1970.  Looks like U2 and REM royalties will be rolling in for a long time to come...

Auto financing and consumer credit

Average financing for new cars:

It appears that $28,000 is roughly the effective credit limit in recent years.  Assuming an interest rate of 9.99% and a 72 month loan term the monthly payment works out to roughly $519.00.

Total consumer credit:

Auto financing is clearly a significant component of this metric.

US gasoline demand in decline

Gasoline consumption is still well  below the peak in 2007. 

Less driving and more fuel efficient vehicles on the road caused in part by sharply higher prices is the formula for what we are seeing in this metric.