The Rainy Day Fund is Empty

The US economy has boomed for 11 years. The gains from that boom have been squandered, and we are not prepared for hard times. 

The Rainy Day fund is empty

March 2009, Dow 6,469

On March 9, 2009 the Dow hit 6,469. The US unemployment rate reached 10% in 2009.

In February 2020, last month, the Dow almost reached 30,000. Every dollar invested in US stocks in 2009 became more than five dollars (including dividends) by 2020. The jobs market has also boomed; today's 3.5% unemployment rate is the near the historic lows since World War II.

The US has followed the grasshopper path

During these boom times, did we stock up on reserves and build up a massive rainy day fund? No, exactly the opposite has occurred. By virtually every measure we are much less prepared for crisis than we were in 2007.

The following table compares key macro variables today with those from mid-2007. Each area is then discussed further below.

We are woefully unprepared to combat economic weakness. You, as an individual, can do little to alter the societal preparation, but you can take care of yourself and your family.

March 2020July 2007
3 month treasury-bill rate0.72%5.03%
Number of Fed cuts to zero320
US Deficit/GDP5.61%1.11%
US Debt/GDP108%62%
Corporate debt$5 trillion$2 trillion
US State & local pension % funded52%67%
State Pension funding gap$4 trillion$1.6 trillion

Monetary policy

Janet Yellen states that the Fed needs 12-20 'bullets' to fight recession. Each bullet being 0.25% or 25 basis points cut in short-term interest rates. In 2007, just before the housing crisis, the Fed had exactly 20 bullets.

Q: How many of the 20 bullets did the Fed use in the 2007-09 crisis?
A: All 20.

Today the Fed has just three interest rate bullets between current rates and 0%. With little room cut rates, the Fed will print money at an historic pace until they are cut off by the market (see the mother of all monetary bubbles).

Fiscal Policy

The US government has been spending money without restraint. Incredible, historic, monumental fiscal irresponsibility by the US government. The future will be worse. See ("US deficits can become huge").

Corporate Debt

Companies have used the boom times to increase debt levels and buy back stock. These are exactly the wrong actions. The total amount of corporate debt has more than doubled since 2007. Furthermore, the quality of that corporate debt has degraded.

Corporate Debt is swelling and turning to Junk 

Pension Plans

Corporate and government pension plans are massively underfunded. Currently, state and local governments claim that they are short $4 trillion on their funds.

Pension plans are broke and unrealistic

The worse news is that the $4 trillion is far short of reality. Pension plans assume that they are going to earn 7% per year on their investments. That is very unlikely with super low interest rates.

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