Relevant and even prescient commentary on news, politics and the economy.

GDP and Mortgage Interest

As a supplement to the GDP report, the Bureau of Economic Analysis provides an estimate of aggregate mortgage interest and the effective rate of interest on mortgage debt outstanding. It should come as no surprise that the effective interest rate is increasing.


Click on graph for larger image.

After twenty years of declining rates, the effective rate has risen modestly since early 2004.

What is surprising is the estimated large increase in mortgage debt in Q1 2006. The actual number will be reported in the FED’s Flow of Funds report, due on June 8th, but it appears total mortgage debt increased about $300 Billion in Q1, or at about a 13% annual rate.

In Q4 2005, mortgage debt increased 13.2% (annual rate), down from 14.9% in the third quarter. The large increase in mortgage debt is surprising because mortgage refinance activity has fallen steadily according to the Mortgage Bankers Association, and home sales have decreased in Q1. Perhaps this increase is due to homeowners using their Home Equity lines (included in the mortgage data).

It is also no surprise that mortgage interest, as a percent of Disposable Personal Income (DPI), has risen sharply in recent years.

This calculation is similar to the FED’s Financial Obligations Ratio (FOR) except this is only for the mortgage interest payment. The current ratio is near the all time high that preceded the previous housing bust. This time the ratio will probably go higher since rates are increasing and there are a substantial number of ARMs that will adjust over the next couple of years.

This data shows that homeowners are still using their homes as ATMs. As Paul Volcker said last year:

“Homeownership has become a vehicle for borrowing and leveraging as much as a source of financial security.”

Best to all, CR Calculated Risk

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Social Security 2006 Trustees Report

It has finally been released and its highlights include:

The 2006 Social Security Trustees Report shows little change in the projected financial status of the Social Security program over last year. The Trustees Report projects that the Social Security Trust Funds will be exhausted in 2040 – one year sooner than last year’s projection. And, as they have done for more than a decade, the Trustees recommend that projected trust fund deficits be addressed in a timely way to allow for gradual changes and advance notice to workers.

In the 2006 Annual Report to Congress, the Trustees announced:
• The projected point at which tax revenues will fall below program costs comes in 2017 – the same as the estimate in last year’s report.
• The projected point at which the Trust Funds will be exhausted comes in 2040 – one year earlier than the projection in last year’s report.
• The projected actuarial deficit over the 75-year long-range period is 2.02 percent of taxable payroll – up .09 percent from last year’s report.
• Over the 75-year period, the Trust Funds require additional revenue equivalent to $4.6 trillion in today’s dollars to pay all scheduled benefits. This unfunded obligation is $600 billion higher than the amount estimated last year.

I suspect some folks who are much smarter than me will be checking this report out thoroughly for the reasons for this modest change in the Trust Fund’s solvency – just as I suspect there will be lots of other folks pouring over this report to cherry pick some incredible dishonest and/or stupid spin. Stay tuned!

Update: Contrast the rather decent CNN story to the doom and gloom report from AP & MSNBC:

The trust fund for Social Security will be depleted in 2040 … While the depletion of the reserves built up over past years is projected to occur in just 12 years for Medicare and 34 years for Social Security, both programs will face financing issues much sooner at the point that the amount paid out each year exceeds the amount the government collects to fund them.

The assets in the Social Security Trust Fund will continue to grow for the next 15 years or so and will peak around $8 trillion. In the meantime, the General Fund is currently over $8 trillion in debt – with that debt growing by $0.6 trillion a year. And AP says the Social Security Trust Fund has a deteriorating financial condition? Karl Rove must be pleased!

Update II: Kevin Drum has been reviewing the assumptions in the 2006 report v. the 2005 report:

There were two big changes in SSA’s actuarial assumptions. On the plus side, they finally increased their projection of long-term productivity growth a bit, from 1.6% to 1.7%. On the negative side, they reduced their projection of long term real interest rates from 3.0% to 2.9%. The overall impact was to make the solvency of the trust fund look a bit worse than last year. Demographic projections were brighter than last year: the trustees now predict a higher fertility rate but not much change in death rates. Immigration assumptions, which are probably overly conservative, didn’t change. Disability rates were projected a bit higher.

Faster projected population growth and higher productivity growth along with a lower real interest rate? Someone call Dean Baker, Brad DeLong, or Paul Krugman!

And in honor of the immigration debate – let’s call Jeremy Siegel (via Mark Thoma):

What can fix this problem? Productivity is one possibility. But even if productivity grows at 3.5% a year, it only buys a couple more years. What about immigration? How many people will the U.S. need to keep the retirement age at 62? About half a billion, according to my calculation. This is a lot of people … If we rely just on ourselves, people will have to work 12 years longer. But if we embed in global economy, we can sell assets to the developing world, and they can ship us goods. That is our best hope, and if we do that our retirement age will stabilize at 68.

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Gasoline Prices: Russert Tries Demand & Supply

Arianna Huffington should consider John Derbyshire to do her Russert Watch:

Watching Meet the Press roundtable on the gas price kerfuffle. Russert, challenging Energy Secretary Sam Bodman: “Oil demand is up. Supply is down. So why are prices rising?” Er………..

OK – Rachel Sklar did a nice job echoing something CalculatedRisk observed:

Bodman says that oil prices are high because demand exceeds supply, explaining that there’s more demand than there is supplyBodman says that oil prices are high because demand exceeds supply, explaining that there’s more demand than there is supply

The MTP transcript has the words:

MR. RUSSERT: Mr. Secretary, if, if demand is up but supply is down, why are the profits so high?
MR. BODMAN: For that reason.
MR. RUSSERT: No, think about that.
MR. BODMAN: You know?
MR. RUSSERT: Play it out.
MR. BODMAN: Demand is up.
MR. RUSSERT: Correct.
MR. BODMAN: Right?
MR. RUSSERT: Right.
MR. BODMAN: So you’ve got more demand, you’re going to force price up.
You’ve got, you’ve got limited supply, and you’re going to have…
MR. RUSSERT: But that’s a decision by the oil companies.
MR. BODMAN: No, it is not. That is a decision—those are—oil is traded every minute of every day, and it’s traded basically 24-by-seven. And it’s, it is determined in marketplaces in New York and London and Tokyo, all over the world. That’s the, the—the oil companies do not determine the price of oil; the producers determine the price of oil.
MR. RUSSERT: They determine, they determine, help determine the price at the pump. And if the, if their profits are going up, they have made a decision to add on the cost at the pump at such a level to guarantee higher profits.

You might note that Derb did not quote Russert exactly – but his paraphrasing did capture Russert’s utter stupidity. The transcript, however, did not capture Bodman’s initial reaction – which was a blank stare, which was my initial reaction to Russert’s question. Russert, however, got Bodman back by showing what George Bush said on September 21, 2000 when Al Gore suggested tapping the strategic petroleum reserve:

Today, my opponent, in response to public outcry, proposed that our nation tap into the strategic petroleum reserve. That’s bad public policy. The strategic reserve is an insurance policy meant for a sudden disruption of our energy supply or for war. Strategic reserves should not be used as an attempt to drive down oil prices right before an election. It should not be used for short-term political gain at the cost of long-term national security.

Bodman’s reply?

MR. BODMAN: Tim, this, this president has been very consistent in his, in his application and management of the strategic reserve. We have not used the reserve for interruptions in supply. We have been asked by the Democrats when oil was $60 a barrel to remove oil from the reserve and put it into the marketplace in order to drive prices down. We declined to do that. Now we have oil at $75 a barrel. You know that the, the movement of prices is a function of the, the supply and demand as we’ve already talked about and it is not something that is, I think, going to be meaningfully affected by whatever happens to the strategic reserve. He has taken the position at this point in time to suspend the, the repurchase until the fall after we get through the driving season. So I, you know, it’s a, it’s a modest effort, it is a symbolic effort, but it is something that I think may help.
MR. RUSSERT: In all honesty, it’s a political effort before the midterm elections.
MR. BODMAN: I think it’s not. I wouldn’t call it a political effort. I would say that it’s an effort to, to affect the, the supply of gas, of oil in the, in the system and to, and to make a contribution to the reduction of price.

While Jim Cramer was consistently goofy, Daniel Yergen was consistently good. It’s a shame he had to share the hour with Russert and the rest of the guests.

The New York Times and James Hamilton both deserve praise for covering the political pandering of the gasoline tax cut/subsidy proposals. Dr. Hamilton and fiscal conservatives are both noting that these proposals will increase an already very large deficit, which means they are tax shifts – not cuts. Dr. Hamilton also suggests that the incidence of the tax cut will accrue to suppliers.

But even if the supply elasticity is not as low as Dr. Hamilton assumes, Brad DeLong might ask – why are we trying to encourage more consumption of oil? (for some reason, his permalink to Party of Stupidity Watch I goes to Party of Stupidity Watch II – but check out both). In an endorsement of the CAFÉ proposal, Kevin Drum suggests an answer to Brad’s question – the politicians are “Idiots”. Derb would add that certain members of the press are also idiots.

Update: Arnold Kling notes that the foreigner will receive a portion of the gasoline tax cut:

So…for every gallon of gas we consume at the market-clearing price, we will pay less in taxes, leaving more to go into Iran’s pockets. And if that does not help our friends overseas enough, we’ll raise taxes on our own oil companies, so they won’t drill so much. I wish we could suspend the Senate until September 30.

Update II: Thomas Nugent tries to make three points: (a) there is no gasoline crisis; (b) James Hamilton must have the incidence of the tax issue backwards; and (c) when Arnold Kling frets over the Iranians receiving the incidence of the tax cut – we are all Iranians:

A windfall profits tax? Oil corporations will pass this tax back to consumers, thus penalizing consumers … If consumers are indeed poorer over gas-price increases, then somebody else is richer – namely oil producers and refiners. In this sense, an increase in the gallon price is a simple wealth transfer between two economic entities, a transfer that has both short- and long-term effects.

What was Kevin’s term again?

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Working at Home – East of I-5

Do today’s marches in Los Angeles slightly inconvenience me? Perhaps – but I support today’s boycott even if I have to work at home for one day. If you are wondering where I live Mark Kleiman gives you a clue:

Note to my Westside friends: Yes, Highland Park is on the wrong side of Interstate 5. But no, you don’t need a visa.

I’m east of the I-5 and near Highland Park, which is an area that defines the great city of Los Angeles in many ways. When I first moved here from the west side, I was struck with the amount of what it appeared to be Mexican restaurants. But then someone told me that several of the residents trace their heritage back to El Salvador. In addition, we enjoy businesses run by Armenians and Filipinos.

One of the fake controversies generated by the harbingers of hate on the right is over the Spanish translation of the national anthem. A Digby reader gets this right:

Please tell us again why the Spanish translation of the National Anthem is making wingnut heads explode when they all but genuflect at the waving of the Confederate Rebel flag? Tell me please, which of these was meant to turn hearts to America, and which is meant to tear the country apart?

Speaking of wingnuts, Neil Boortz thinks Los Angeles is in Mexico. Fine Neil, you’ll need a visa to visit my American city as we in Los Angeles really don’t want Klan members in our homes.

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