Political Calculations
Unexpectedly Intriguing!
April 20, 2018

How can you get cars to slow down in areas where there can be a lot of pedestrian traffic?

A depressingly common solution to that problem involves installing the unpopular and costly trappings of the modern surveillance state, where sensor-laden intersection safety systems have been installed to "enhance" pedestrian safety and, more often than not, to enhance the revenue collections of the local jurisdictions that install them at a cost of tens of thousands for each pedestrian walkway where they might place them.

Or worse, by the low-tech solution of installing speed bumps at a cost of several thousand each, which are proving to turn out to not be good for the condition of vehicle suspensions, people's health or even the environment.

What if the same improvements in pedestrian safety can be achieved for just a few hundred dollars for a new and creatively applied coat of paint for the pedestrian walkways? At least, that's the intriguing potential being suggested from the experience of Ísafjörður, Iceland, which used optical illusions painted on the roadway to get local drivers to slow down as they approached pedestrian crossings.

There's nothing wrong with low-tech and low-cost when it's done right!


April 19, 2018

The U.S. government's 2017 fiscal year officially ended on 30 September 2017. At that time, we knew that the total public debt outstanding of the U.S. government increased by $671.5 billion from the end of the previous fiscal year, rising from $19,573 billion (or $19.6 trillion) to $20,245 billion (or $20.2 trillion) during FY2017.

But what we didn't know was exactly how much the U.S. government owed to many of its major creditors, particularly foreign interests, where we have had to wait for subsequent revisions to find out! A little over six months later, those revisions are now in the rear view mirror, where the following chart shows who the U.S. government's major creditors were at the end of FY 2017:

FY 2017: To Whom Does the U.S. Government Owe Money?

According to the U.S. Treasury Department, the U.S. government spent some $665.7 billion more than it collected in taxes during its 2017 fiscal year. The difference between this figure and the $671.5 billion that the total national debt actually rose can be attributed to the government's net borrowing to fund things like Federal Direct Student Loans, which collectively account for nearly $1.1 trillion of the government's $20.2 trillion debt, or 5.4% of the total public debt outstanding.

Put differently, the U.S. national debt would be 5.4% less at roughly $19.1 trillion if not for the federal government's takeover of the student loan industry from the private sector in March 2010. Since that time, approximately $1 of every $10 that the U.S. government has borrowed has been for the purpose of funding its student loan program.

Overall, 69% of the U.S. government's total public debt outstanding is held by U.S. individuals and institutions, while 31% is held by foreign entities. China has resumed its position as the top foreign holder of U.S. government-issued debt, with directly accounting for 6.8% between institutions on the Chinese mainland and Hong Kong, taking over from Japan, whose share of U.S. government-issued debt holdings has dropped to 5.4%.

Beyond that, about 2.1% of the U.S. national debt is held by institutions in Belgium and Ireland, largely as a consequence of these nations' roles as international banking centers, where their holdings often represent those of other nations, particularly China in recent years. The United Kingdom, with 1.2% of the U.S. total public debt outstanding, falls into this category as well.

The largest single institution holding U.S. government-issued debt is Social Security's Old Age and Survivors Insurance Trust Fund, which is considered to be an "Intragovernmental" holder of the U.S. national debt, and which holds 13.9% of the nation's total public debt outstanding. The share of the national debt held by Social Security's main trust fund is expected to fall as that government agency cashes out its holdings to pay promised levels of Social Security benefits, where its account is expected to be fully depleted in just 17 years. Under current law, after Social Security's trust fund runs out of money in 2034, all Social Security benefits would be reduced by 23% according to the agency's projections.

The largest single "private" institution that has loaned money to the U.S. government is the U.S. Federal Reserve, which accounts for nearly one out of every eight dollars borrowed by the U.S. government. It lent nearly all of that total since 2008, mainly through the various quantitative easing programs it operated from 2009 through 2015 in its attempt to stimulate the U.S. economy enough to keep it from falling back into recession. In September 2017, the Fed announced that it would begin reducing its holdings of U.S. government-issued debt.

Data Sources

U.S. Treasury. The Debt To the Penny and Who Holds It. [Online Application]. 30 September 2017.

Federal Reserve Statistical Release. H.4.1. Factors Affecting Reserve Balances. Release Date: 28 September 2017. [Online Document].

U.S. Treasury. Major Foreign Holders of Treasury Securities. Accessed 18 April 2018.

U.S. Treasury. Monthly Treasury Statement of Receipts and Outlays of the United States Government for Fiscal Year 2017 Through September 30, 2017. [PDF Document].


April 18, 2018

The risk of a national recession beginning in the United States anytime in the next twelve months, or specifically between 13 April 2018 and 13 April 2019, has ticked up toward 0.6% from our previous reading of just above 0.5% a month ago.

U.S. Recession Probability Track Starting 2 January 2014, Ending 13 April 2018

As expected, that uptick is primarily the result of the Federal Reserve's most recent quarter-point rate hike, which was announced on 21 March 2018, where the target range for the Federal Funds Rate now stands between 1.50% and 1.75%. At the same time, the U.S. Treasury yield curve has largely remained steady since our last update, where the spread, or difference, between the yields of the constant maturity 10-Year Treasury and the 3-Month Treasury is within 1/100th of a percentage point of what it was a month ago.

The story is a bit different as you move up the Treasury yield curve, where the spread between the 10-Year and the 2-Year Treasuries has narrowed to reach its smallest difference in nearly a decade, which is raising red flags in some quarters on Wall Street. By contrast, our recession probability analysis is based on Jonathan Wright's 2006 paper describing a recession forecasting method using the level of the effective Federal Funds Rate and the spread between the yields of the 10-Year and 3-Month Constant Maturity U.S. Treasuries, which should be less susceptible to false alarms.

Looking forward, if you use the latest data for the treasury yields and the Federal Funds Rate in our recession odds reckoning tool, you'll find that your results will differ from the data we've presented in the chart above. That is because the chart follows Wright's methodology in using the one-quarter average for the yields and rates data used in its calculations, where the tool's results based on the most recently available data can be taken as an indication of the direction that the recession probability track is most likely heading when compared with the information provided by our recession probability track chart.

Doing that exercise today indicates that the recession risk remains very low, but is likely to continue ticking slightly upward, particular since the U.S. Federal Reserve appears set to continue hiking short term interest rates in the U.S. The following data summarizes the probabilities for when and by how much investors expect the Fed will raise its Federal Funds Rate.

Probabilities for Target Federal Funds Rate at Selected Upcoming Fed Meeting Dates (CME FedWatch on 13 April 2018)
FOMC Meeting Date Current
150-175 bps 175-200 bps 200-225 bps 225-250 bps 250-275 bps 275-300 bps
13-Jun-2018 (2018-Q2) 0.0% 99.5% 0.5% 0.0% 0.0% 0.0%
26-Sep-2018 (2018-Q3) 0.0% 29.6% 66.0% 4.4% 0.0% 0.0%
19-Dec-2018 (2018-Q4) 0.0% 15.8% 47.9% 31.8% 4.4% 0.0%

At present, we see that investors currently expect the Fed to hike the Federal Funds Rate by a quarter-point twice more in 2018, once at its June 2018 meeting and again after its September 2018 meeting. At present, investors do not expect a fourth rate hike in 2018.

Previously on Political Calculations


April 17, 2018

April 17th is U.S. Income Tax Day in 2018 and what better way could there be to mark the occasion that all Americans dread almost more than any other than to provide another income tax form to fill out?

But don't worry - it won't mean having to pay any more income taxes this year. Instead, our tool below will figure out how much you would have had to pay if you were filing to pay your income taxes for 1913. The year for which the Internal Revenue Service first issued its Form 1040.

We modeled our tool after the first page of the original Form 1040, which back then, consisted of just four pages: the summary sheet modeled below (Page 1), the Gross Income calculation sheet (Page 2), the General Deductions sheet (Page 3) and finally, one page of Instructions (Page 4). Yes, you read that right. Just one page of instructions!

We'll make it just a bit easier still. All you need to do is to enter the indicated data below (shown in boldface type, in the rows with a white background) below with your figures from this year, and we'll take care of the math, where we'll show those results in the rows with a gray background, where you won't have to worry about entering any values. If you are accessing this article on a site that republishes our RSS news feed, please click here to access a working version of the tool on our site.

IRS Form 1040, Circa 1913
Return of Net Income Received or Accrued During the Year Ended December 31, 191_
1. Gross Income (see page 2, line 12)
2. General Deductions (see page 3, line 7)
3. Net Income  
Deductions and exemptions allowed in computing income subject to the normal tax of 1 per cent.
4. Dividends and net earnings received or accrued, of corporations, etc., subject to like tax. (See page 2, line 11)
5. Amount of income on which the normal tax has been deducted and withheld at the source. (See page 2, line 9, column A)
6. Specific exemption of $3000 or $4000, as the case may be. (See Instructions 3 and 19)
Total deductions and exemptions (Items 4, 5, and 6)
7. Taxable Income on which the normal tax of 1 per cent is to be calculated. (See Instruction 3)
8. When the net income shown above on line 3 exceeds $20,000, the additional tax thereon must be calculated as per schedule below:
1 per cent on amount over $20,000 and not exceeding $50,000
2 per cent on amount over $50,000 and not exceeding $75,000
3 per cent on amount over $75,000 and not exceeding $100,000
4 per cent on amount over $100,000 and not exceeding $250,000
5 per cent on amount over $250,000 and not exceeding $500,000
6 per cent on amount over $500,000
Total additional or super tax
Total normal tax (1 per cent of amount entered on line 7)
Total tax liability

Excerpts from the Instructions

3. The normal tax of 1 per cent shall be assessed on the total net income less the specific exemption of $3,000 or $4,000 as the case may be. (For the year 1913, the specific exemption allowable is $2,500, or $3,333.33, as the case may be.) If, however, the normal tax has been deducted and withheld on any part of the income at the source, or if any part of the income is received as dividends upon the stock or from the net earnings of any corporation, etc., which is taxable upon its net income, such income shall be deducted from the individual's total net income for the purpose of calculating the amount of income on which the individual is liable for the normal tax of 1 per cent by virtue of this return.

19. An unmarried individual or a married individual not living with wife or husband shall be allowed an exemption of $3,000. When husband and wife live together they shall be allowed jointly a total exemption of only $4,000 on their aggregate income. They may make a joint return, both subscribing thereto, or if they have separate incomes, they may make separate returns; but in no case shall they jointly claim more than $4,000 exemption on their aggregate income.

Since 2018 is a year for tax cuts, you might consider clicking through to our bottom line tool that will estimate how much more of the money you earned in your paycheck that you will be allowed to keep through lower income withholding taxes!

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April 16, 2018

The second week of April 2018 proved to be just another in a series of noisy weeks in 2018 for the U.S. stock market. Geopolitics, trade and good old fashioned political noise filled the week that was for the S&P 500 (Index: INX), where the ultimate outcome for the week was for the index to close at 2,656.30, up by almost exactly 2% over the previous week's closing value of 2,604.47.

Alternative Futures - S&P 500 - 2018Q1 - Standard Model - Snapshot on 13 April 2018

On the whole, aside from the ongoing elevated noise level in the market, the week was unremarkable, as the S&P 500 closed each day within the range that we would expect knowing that investors were focused on the distant future quarter of 2019-Q1.

Speaking of noise, here is the list of news headlines from the second week of trading for April 2018.

Monday, 9 April 2018
Tuesday, 10 April 2018
Wednesday, 11 April 2018
Thursday, 12 April 2018
Friday, 13 April 2018

Writing at The Big Picture, Barry Ritholtz identified the positives and negatives for the U.S. economy and markets in Week 2 of April 2018. Noise made the list twice on the negative side of the week's ledger!

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