Why does the blue bar (recession) stop in '09? Won't it be fatter?

Mother Merrill

Ongoing write-downs for soured mortgage investments and other bad credit bets continued to plague Wall Street icon Merrill Lynch, leading to an almost $2 billion first-quarter ...

how much more.....

If you close your eyes long enough, you won't see the train and you will die suddenly and peacefully.

Everybody looked at this chart, I guess?

http://www.philadelphiafed.org/files/bos/bos0408chart.jpg

S.

O/T - Yipes.. Not good if true. Barry Ritholtz has an issue with the CPI revision process, thinks CPI inflation should be about 9%.

The Big Picture

Pre-Revision CPI: 9%

"I have been trying to wrap my head around how the US is enjoying such modest inflation,while Eurozone and Asia are both stricken with much more robust price rises.

As I was mulling this over, Martin Hutchinson reminded us that BLS changed its methodology this year for seasonal adjustments. Hmmm, I wonder if that had any impact?

"Before the adjustment for typical seasonal price fluctuations, the CPI increase was 0.9%. The Bureau of Labor Statistics, which compiles the index, has generally adjusted March numbers downward. In the decade 1998-2007, the average drop was 0.2 percentage points, and the maximum was 0.3. But this year it was 0.6 percentage points. The BLS changed its adjustment methodology in January 2008, but the process appears to have gone wrong.

If this year had followed the 10-year average, the monthly inflation would have been 0.7%, which annualises to an annual rate just below 9%. ..."

..."

CR, what happens if we get price inflation without wage inflation?

While CR knows I've the utmost respect for his work one small quibble that's more important than just semantics. We're not in a recession,yet, but it's quite likely started. We're in it when employment, indprod, consumption and GDP show negative growth of one form or another another. By my analysis based on FREDII data real retail sales was -2% YoY for example. The canary.
If you want to see how IDP, Real Sales, Inflation and Demand all tie together try this: http://tinyurl.com/68svpu
Growth in real wages + employment has turned sharply down. That's the guerrilla and he has many friends.
The point being, as many of you've said, the general outlook is weigh too sanguine. Well maybe not...sanguinary used to mean bloody and it's going to again. In the American and British senses !
PtM specifically to your point, Here, Here ! This has been a very weak recovery for jobs and we're just beginning to see the downturn..again IMHO. The URL will also take you to my latest employment charts but my guesstimate is that vs. breakeven growth we're 2 million jobs in the hole and never recovered from the bust. Now factor that in...believe the word might indeed be bloody. In the Brit sense.

Hi Seb,
Can you please post the report that contained the graph?
Regards

Whoops, found my own answer to price inflation without increasing wages.

Cost-push inflation - Wikipedia, the free encyclopedia

A close relative of stagflation. It only spirals into built-in inflation (increasing inflation expectations and wages)if the government increases the money supply (which they typically do to avoid a recession).

"buying patterns and psychology are going through a seismic shift. This morning the guys in my shop were talking about 'lay-a-way'. Anybody remember that? Remember when you had to have the money BEFORE you had the goods? Well, we're back there."

You're right, it's going to take a lot of adjustment to get people back there, including the under-35s. I haven't seen a layaway sign in 20 years. And remember Christmas Clubs in banks? Special account to save money through the year for Christmas presents? Haven't seen one of those for 30 years.

[Hmmm. 10 CR posts in a row. My "Tanta-senses" are tingling. ]

Andrew,
When the possibility of inflation without wage growth and falling currency first came to my attention I called it subflation:

Subflation: Substandard growth. Sub Rosa inflation statistics. Subconcious subliterate populace. Subsequently; subsistence wages.

Sebastian,

You did notice how the six month forecast shot up in mid-00 but was not followed by current activity until mid-01, and even then the current activity numbers never went up as much as forcasted by the six-month number.

So, again, how are we going to have a recovery?

This is a question I've spent some time pondering.

I don't think the recovery can be driven by consumers.

I think it will be driven by:

1) big government spending projects like those Hillary has proposed for green energy and rebuilding infrastructure; the "New New Deal."

2) a slow but sustained uptick in corporate spending, probably starting with tech, and driven by the next up cycle in corporat earnings and earnings visibility.

Timing?

It will take at least 3 years before #1 really kicks in.

I think it will be about the same for #2. This is one of the worse environments for corporate earnings that I've ever seen, especially for smaller domestic companies.

Even the most basic types of biz credit, such as inventory financing, are drying up or getting more expensive (e.g., Talbots). Suppliers are shutting off shipments to customers judged non-creditworthy (e.g., Linens and Things). Costs are exploding and most companies have no pricing power.

The corporate earnings cycle has to go through a creative destruction process that will take at least 2008-09 and cause hundreds of bankruptcies, defaults, dilutions and reorgs, especially among smaller and over-leveraged domestically focused companies.

What's worse, earnings visibility will be nil for a year or so. The lack of visibility will eventually cause a collapse in P/E ratios until clarity returns. Because so many analysts are too upbeat and missing reality, confidence in their calls (clarity) will be hard to rebuild.

No, they take 35K in salary and the rest as profits. Since FICA/Medicare isn't collected on profits is saves them 15%+.

To the extent that money lands in somebody's pockets, FICA/Medicare definitely is collected. I think you're talking about self-employment here.

Self-employed people owe FICA/Medicare at 15.3% on about the first $100,000 of net profit. There are no loopholes for the self-employed. Trust me, I pay it all every year.

CR, what happens if we get price inflation without wage inflation?
--Andrew | 04.17.08 - 11:38 am | #

Not CR but I can answer that - a lot less consumption (in actual goods consumed & services performed - not dollars).

Self-employed people owe FICA/Medicare at 15.3% on about the first $100,000 of net profit. There are no loopholes for the self-employed. Trust me, I pay it all every year.

Only if you're running as a sole proprietor, general partnership, or LLC.

If you've incorporated as an S-Corp the profits are free of FICA/Medicare taxes. Most small business owners will generally opt for the S-Corp.

But if you have higher incomes dividends from a C-Corp are also free from FICA/Medicare taxes. In that case you pay taxes twice (corporate and then personal) but if your personal tax rates are high enough it can make sense to leave a portion of profits in the C-Corp. By doing so you can defer taxes into the future when you are in a lower tax bracket.

C-Corps allow small business owners to "pick an income" which can help when kids are heading off to college and need financial aid.

take a look at small businesses for sale all over the country. It's the magic number $35,000.

The 35K number is chosen because it's the median wage in the US. The IRS has started to get pissy about people opting out of the Government's retirement plan. But, if you pay yourself 35K it's hard to argue that it isn't a "fair" wage.

Plus tax the rich, when you do that they have a habit of taking thier marbles and going home

Not if we start aggressively taxing the site values of their real estate holdings. By definition, THAT's not going ANYWHERE.

Obviously, there is less room to New Deal with a $10 trillion Fed debt.

Also, if the government is much larger (relative to GDP) than it was in the '30s it may be much less productive (or outright unproductive) to expand the government (anybody got statistics on this?).

In other words, you can only have so many New Deals, and then the government ends up running everything. And that doesn't seem to work out that well.

Also, there's a big difference between having a New Deal when the nominal GDP has shrunk 50% and a situation where it has yet to shrink at all.

Stacking New Deals on top of each other, I fear, will make the US an excessively inhospitable climate for business and send them scurrying to other shores (which they're already doing).

Life in the US was actually pretty darn good before the bubbles.

So maybe the problem is bubbles, as opposed to the lack of a complete socialist/fascist overhaul.

It's not a coincidence that the horrors of WWII were rooted in these very concepts.

Create a control center for an entire nation, and one day a petty self-centered sociopath will stumble into it.

here we have self-employed execs cheating the tax system and no one is ethically outraged.

In my case I am establishing a corporation to house the business activity of producing software.

This corporation is going to pay me fair market wages to run it, pay me fair market wages to create and market the product, but is going to retain profits from the product and pay them out as dividends.

What is ethically skeevy about this?

The wind-down of Iraq will produce a drag on GDP and also put pressure on unemployment as vets come home. The economic aftermath of wars are a bitch, especially when they are financed with borrowed money.

I'm hearing the opposite - that once the war is over the realization comes home of just how much equipment was trashed in Iraqistan... they won't bring a lot of it back - just leave it there as 'military aid'. Or scrap metal to cut up and send to Chindia.

There will be a helluva a rebuild/replace cycle coming out of this war... that is unless they abolish the military-industrial complex at the same time. That I doubt.

ac, while I don't disagree much with the overall tone of your anti-Gummint opinion

Not anti-Gummint so much as limiting the gummint to what it's is good at doing, instead of facilitating a power grab for beady-eyed politicians.

I was just reading the last few exchanges with interest...somehow, people will post that execs are evil for getting huge bonuses, and here we have self-employed execs cheating the tax system and no one is ethically outraged.

Oh, that's rich...

The Government talks out of both sides of their mouth. That big chunk of money (FICA) comming out of your paycheck every month isn't taxes it's the Government retirement plan. Sounds almost comforting. That money isn't spent it's put in the Social Security Trust Fund. It's being saved, just for you!

But, when the small business owner talks to the IRS it's a different story. If you don't pay yourself any wage and decide to opt out of future government benefits you aren't paying your fair share of taxes.

But, that's peanuts to what the truly rich have bought themselves in terms of tax breaks.

J6P can put 14K max in a 401K plan per year but the truly rich get deferred compensation plans.

Deferred Compensation Plans

Small business owners pay taxes (at some level) on all profits every year. But, hedge funds incorporate off shore and can defer taxes forever.

A Hamptons for Hedge Funds - NY Times

Heck, look how the Kennedy's are set up. Their trust-funds are all held off-shore where earning grow tax free (kind of like a huge 401K). But, if you sue them (and win) you can end up bankrupting yourself (because of tax liabilities) if you attach to their trusts.

A guy I know runs a yard service. Followed his dad into it. He makes ~$5k a month. Doesn't pay taxes. My cousin can't get child support out of him.

A friend has a restaurant. Pay's another friend of mine there all in cash.

I know umpteen farmers who run a significant part of their payroll cash. Easier for them to get labor that way. They either sell part of their crop to middlemen or directly to small grocery stores. The other way is when their buyer DOES NOT 1099 them. They get the checks broken into less than 10k amounts and go cash them at different banks. I think they are crazy.

ac, I agree that Big Government is abusive, and the American people can not necessarily be trusted to vote or act intelligently as a group (cf. the past 8 years), but my problem is that I have no great faith in the short-term efficacies of the Invisible Hand or the Free Market Fairy.

I see countries like Canada, Sweden, Norway and Denmark operating at a higher level of efficiency and wonder what we can learn from them.

A guy I know runs a yard service. Followed his dad into it. He makes ~$5k a month. Doesn't pay taxes. My cousin can't get child support out of him.

I'm not saying that it doesn't happen.

But, the "war on drugs" and the "war on terror" have made that particular tax dodge much more risky. If you'll remember it was the large cash withdrawl that caused problems for a ex New York Governor with a desire to keep some transactions off-the-books.

And the 10K is a "hard" limit. Many banks have internal policies and will report transactions much smaller than that.

You don't think that drug dealers are sitting in rat-infested slums while driving blinged out used cars with 500K hidden under the mattress by choice?

rock on, ipodius! Beer?

And if you can't afford to pay for the service such that you are providing for decent wages for people MOW THE LAWN YOURSELF rather than wink and hand the guy an envelope with cash in it so he can underpay some brown people to mow your lawn. God this makes me mad!

Luckily your industry has been able to buy enough Congress critters so that your below-market-wage aliens can be above-board (H1B)!

But even better, no worries about them switching jobs. If you fire them they have to go back!

If you are self-employed and set up a Chapter-S corp, you can take profits sans FICA. But you have to be paying your self a "reasonable" salary. When I had this arrangement, I paid myself about 55% in salary, 45% in profits (which you pay tax on even if you don't withdraw the money from the business.)

I also had a SEP-IRA (different than Separate IRA), which the company pays into, up to 25% of salary.

Ipodius @ 1:35

You and I don't always see eye to eye, but on this one I've gotta say you hit the nail on the friggin' head.

I say turn 'em in. Having to explain to your wife why the IRS keeps 'phoning and finally comes to the door ain't exactly fun.

Kicker the answer is yes, you are avoid taxes, you are justifying your behavior, and you are full of s*it.

Oh, and of course the justification for capping FICA at the first 90K in salary is that there is a cap on Social Security Benefits.

So, the guy making 1M in salary per year gets hit with 1.5% in FICA taxes.

The trust fund baby living off of dividends and capital gains pays 0% in FICA taxes.

But the poor dual income middle class household pays 15%. Thank goodness half of it is hidden because the employer pays it!

But, we're not screwing the middle class with this tax. It's a benefit.

FICA is the most regressive part of the US tax system. The sooner it dies a horrid death the better.

More justification kicker...they do it so i'm entitled to cheat and lie, and then make things up so i don't have to admit to cheating and lying.

Like I said, it isn't my behavior. I don't need to justify anything.

I have to agree with Kicker here. I am scrupulous about reporting everything to the IRS, but what he's doing is legit.

When you have a Chapter S corp, you are both shareholder and employee, so there is a logic behind the tax structure. Say I owned a Chapter S corp I had built from scratch and hired someone else to do the work, I would still be entitled to the profits.

There is no simple formula on how to split it. I was told that as long as you give yourself more salary than profits, you probably won't get audited.

But if Kicker is paying himself 35k and taking 100k+ as profits, then he is taking a big risk. He won't be the one deciding what's reasonable.

But there isn't some clear black and white line of what is ethically right or wrong.

This is not like the guy making 5k/month under the table and not paying child support.

Using the tax code to your advantage is not unethical, any more than it's unethical to give someone with a mortgage a tax break.