The Financial Riddler 3-26-24
This one is so easy, even I got it right.
A note on subscribing to Economics Matters’ newsletters and podcasts. Please tell everyone you know they can receive a free lifetime subscription to Economics Matters by just emailing me at kotlikoff@gmail.com. Bless you if you are supporting my efforts to spread economics knowledge. If you haven’t already, please consider contributing here. This entails subscribing. If you do so and Substack auto renews you, just email me if you wish to revert back to a free subscription. I’ll reinstate your free lifetime subscription. best and thanks for spreading word about Economics Matters to everyone you know. My best, Larry
Data centers now consume 2% of global electricity demand. What share will they consume in 2030?
a. 50%
b. 33%
c. 10%
d. 4%
e. 2%
And the answer is …
The answer, care of Motley Fool, is 10%. That’s a massive increase, if it’s for real. Over the years, I’ve developed a healthy skepticism for this publications’ forecasts, which always come with stock tips. Does the magazine benefit? Don’t know. Anyway, the article’s headline states, Artificial intelligence (AI) is a multi-trillion-dollar megatrend. According to an estimate by PwC, AI has the potential to provide a $15.7 trillion boost to the global economy by the end of this decade. That's more than the current economic output of India and China combined. This, itself, doesn’t pass the sniff test. According to the IMF, the current combined output of India and China is $22 trillion. But let’s assume The Fool has this right. It suggests that AI, which is driving this growth, is a climate killer. Could be. But the growth in electricity demand may also accelerate development of safe nuclear reactors, geothermal energy use, fusion, hydrogen, and geothermal. My friend, John Mauldin, has an interesting discussion of AI’s power needs in his recent newsletter. He also asks whether the recent AI.com-driven growth in the value of the stock market is another dot.com bubble.
Joe, age 30, has a $75K job in Spokane, Washington. A New York company is offering him $120K. Both jobs have 401(k) plans, but the Spokane job comes with twice the employer match — 6 percent, not 3 percent. Joe is single and is intent on staying that way. He’s renting a two bedroom in Spokane for $1,500 a month. In New York, he’d pay $3,500. Joe has $50K in the bank and no other assets. He intends to start investing in TIPS and other safe securities and expects to earn 2 percent above inflation. Joe’s setting his planning horizon at age 100 for the simple reason that he might live that long. As Joe tells his cat, You can’t count on dying on time. Suppose Joe moves to New York — for good. How much higher is his sustainable/affordable annual living standard in New York compared with staying in Spokane assuming wages in both jobs stay even with inflation and that, either way, Joe retires and takes Social Security at 62? Annual living standard means Joe’s annual discretionary spending — what he gets to spend in today’s dollars each year taking into account his need to pay taxes and cover is rent.
a. 15.3 percent higher
b. 7.7 percent higher
c. 1.9 percent higher
d. 5.3 percent lower
e. 8.2 percent lower
f. 23.0 percent lower
And the answer is …
MaxiFi Planner, my company’s economics-based lifetime financial planning tool, calculated the answer in seconds. It did take me 15 minutes to input and double check the two profiles — staying in Spokane and moving to New Year. MaxiFi’s ensures that Joe’s path of annual taxes are consistent with his path of annual spending, saving, and assets, which determine his path of annual taxes, which determine his path of annual spending, saving, and assets, which … . This is all to say that your own incredibly complex personal financial planning questions can be correctly answered instantly. Ask your financial advisor to answer to this question. Unless they are using MaxiFi, their answer and MaxiFi’s answer will be miles apart. Unfortunately, there aren’t two correct answers to any personal finance question. There is the right answer and there are wrong answers.
The right answer is 23.0 percent lower! Paying NY State income taxes is a killer on its own and certainly compared to staying in Spokane. Washington State doesn’t have an income tax. The other killer is paying $24K more, for the next 70 years, in rent in New York. If Joe moves to New York, he’ll have $3.8 million in lifetime resources — the present value of Joe’s human wealth plus the present value of his future earnings, plus his $50K in assets, plus his $92K in employer retirement contributions, plus Joe’s $573K in present value future Social Security benefits. But 35 percent of this will be spent on taxes (federal, state, FICA, and Medicare Part B premiums) and 43 percent on rent. In fact, Joe’s New York annual rent is almost twice Joe’s annual discretionary spending! Yes, Joe could find a roommate or downsize to a one bedroom or live with a long commute. He can make it work. The question is whether he should. That’s why running the numbers correctly makes all the difference.
Are there more $100 bills than $1 bills in circulation?
a. Yes
b. No
And the answer is …
The answer, which Apollo’s Chief Economist, Torsten Slok reported in his blog, is yes. There are about 35 percent more $100 bills.
Is currency a smaller component of the U.S. money supply today than it was in 1960?
a. Yes
b. No
c. The same
And the answer is …
The answer is roughly the same. According to St. Louis Fed data, the amount of currency in circulation is currently $2 trillion, whereas the M2 money supply (currency plus checking, saving, CDs, plus other short-term saving vehicles) is $21 trillion. In 1960, currency in circulation was $32 billion and M2 was $304 billion.
Suppose Joe in question 3 earns only 1 percent less on his assets because he invests with an advisor who take a 1 percentage point fee for “assisting” Joe in doing something he can do for free — buying inflation-indexed bonds at treasurydirect.gov. How much will his annual discretionary spending fall assuming he stays in Spokane?
a. 19 percent
b. 13 percent
c. 7 percent
d. 4 percent
e. 1 percent
And the answer is …
The answer is 7 percent. Joe doesn’t need an investment advisor. But other people do. So, no suggestion here that using an advisor is necessarily a mistake. Some can be worth their weight in gold. Personally, my wife and I use an advisor — Fred Lane who has appeared on my podcast — to manage some equity investments.
How fast as wages growing these days? (Torsten alerted me to a new study by the NY Fed on this question.)
a. 10 percent
b. 7 percent
d. 5 percent
e. 3 percent
f. 0 percent
And the answer is …
The answer is 5 percent. Take a look at the Fed chart below. The Fed may decide that this means inflation will rise again and start running at 5 percent. That would be silly since nominal wage growth needs to outpace inflation for real wages to grow. In recent decades, real wage rates — earnings per hour — have grown at roughly 1 percent. So the Fed may be thinking that inflation is heading back up to 4 percent — two times its 2 percent target. This could spell tightening — also Torsten’s concern. Yet, this too may be Fed mis-think. Nothing in economics says real wages can’t grow at 2 percent for a year or two or even, on average, for decades. By rights, real wages should be a lot higher since they were, accounting for labor force composition changes, essentially flat for the three years after COVID hit. In short, they have considerable catching up to do. This may be what we are seeing.
