If we want to understand the credit card industry we first should take a look at the most popular cards out on the market:

Source:  Creditcards.com

In total there are 631 million credit cards in circulation from Visa, MasterCard, Discover, and American Express.  Now given that we only have 308 million people in the U.S. many under the age of 16, many people have multiple credit cards.  It doesn’t seem odd for people to spend and buy with basically creating debt with each purchase.  The above chart also shows the amount of debit cards out in circulation.  In fact, making debit cards virtually identical to credit cards has created a psychological notion that debit and credit are interchangeable.  They are not.  This is obvious but do anything enough times and you can easily convince yourself of anything including believing the idea that debt equals wealth.  Debit cards access money you have while credit cards mortgage your future for a current item.

Americans are carrying an enormous amount of credit card debt.  The massive spike in credit card debt started 40 years ago when the middle class started losing ground.  You can almost mark the exact date when we started using credit to make up for the lost wage growth:

Since the early 1970s Nixon shock, Americans started losing their manufacturing base but also their ability to maintain competitive wages.  In 1968 Americans carried $1.3 billion in revolving credit.  By 2008 that number was up to $975 billion.  Nonstop growth for nearly 40 years.  Yet for the first time in over a generation this amount has fallen by a large number.  Today, $864 billion in revolving debt is outstanding.  Since the peak in 2008 we have seen consumer credit contract by a stunning $111 billion.  For a consumption driven economy this does not bode well for economic growth since many Americans are finding it harder to spend in such a weak employment market.

As the U.S. Treasury and Federal Reserve they have artificially pushed interest rates to historical lows, but banks have decided to keep credit card rates at extremely high rates:

Source:  Creditcards.com

How is it that the biggest beneficiaries from the Wall Street and banking bailouts are now able to charge such an outrageous margin on credit cards?  These are the banks that received taxpayer assistance supposedly to create more access of credit for middle class Americans.  We certainly are not seeing that.  And who are the biggest credit card issuers?

U.S. general purpose credit card market share in 2008 based on outstandings
(Note: 2007 ranking in parentheses)
1. JPMorgan Chase – 21.22% (17.74%)
2. Bank of America – 19.25% (19.36%)
3. Citi – 12.35% (13.03%)
4. American Express – 10.19% (11.40%)
5. Capital One – 6.95% (6.95%)
6. Discover – 5.75% (5.65%)
7. Wells Fargo – 4.21% (3.07%)
8. HSBC – 3.47% (3.65%)
9. U.S. Bank – 2.14% (1.84%)
10. USAA Savings – 2.02% (2.01%)

Source:  Creditcards.com

The top four issuers corner a large portion of the market and are some of the biggest bailout recipients.  The economy for most Americans still hasn’t recovered.  Credit card defaults are simply a reflection of this reality.  The fact that revolving credit has contracted so sharply in the face of $13 trillion in bank bailouts and support is only demonstrating that banks are unable to lend out money to consumers who can actually pay the money back.  Banks also need the money to combat their weaker Swiss Cheese like balance sheet.

Most Americans can’t envision a marketplace with no credit cards.  Many are now having to adjust to the new economic realities in the economy.  Yet the fact that less revolving credit is in the market tells us consumers are pulling back on using their credit cards or banks are simply issuing less credit.  In the end, middle class Americans simply cannot spend like they once did.  Many are now realizing that they will have to save to purchase items and that isn’t necessarily bad.  But with stagnant wages many are finding it hard to save and with no credit card access, dealing with realities that haven’t hit this country for a generation seems as surreal as believing that plastic is money.

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If you want to see how quickly credit is contracting take a look at this:

The chart above merely highlights what you already know. Banks no longer trust the average American.  While they based all their bailouts on the idea that taxpayer money was needed to keep banks lending this has been a lie.  In fact, banks need the money to plug the hole that their toxic assets are burning on their balance sheets.  You can also look at the amount of credit card offers you are getting in the mail to gauge how quickly the market has changed.  No longer do banks want to give credit out (that is, unless it is government backed like mortgages which they are all the more willing to lend out).

The U.S. has over 8,000 banks with the large concentration of assets in 10 banks.  These banks continue to use bailout funds to plug the problems from the boom years.  But this is not in the best interest of average Americans.  If Wall Street and politicians were honest, the bailouts would have been labeled as a massive charity to the elite of the country who made disastrous bets over the past decade.  The public takes the lumps while Wall Street actually gets richer.  While banks don’t want to reel in their spendthrift ways, Americans are pulling back:

Americans are now having to save more and more of their money as is expected in a tough economy.  Yet banks are back to gambling in the stock market while shutting down lending to consumers.  Banks are playing the poor me card by arguing that with too much tight regulation, they can’t make loans because they are worried about future balance sheet problems.  Thanks for telling us after you took the public money under false pretenses!  But this is all a political ploy to steal from the working class.  With so many people just unable to even service the debt and rising bankruptcies, banks are now going after good customers who pay their bills on time each month just because they are running out of “options.”  Don’t be fooled.  They are reaping billion dollar profits because they are using excuses to squeeze the golden goose dry.  How about we allow the typical American to borrow at the subsidized low rate from the Federal Reserve directly?  Why in the world do we need banks to operate as loan sharks in between?  What we need is to transform the banking industry into a utility model.  A model designed to serve the people, not the banks.  After all, why should they get the privilege of borrowing at criminally low rates while everyone else has to pay the interest and subsidize their gambling adventure?

Even after all the correction in the market American households still carry an inordinate amount of debt:

A giant portion of income simply goes to pay off debt.  A large part of the debt is interest or money the banks can suck out of the neck of middle class Americans.  Banks live off this margin.  Take for example a $100,000 30 year fixed rate mortgage at 6 percent:

Principal:             $100,000

Total Interest:   $115,838

In the end, you are paying more than the initial cost and all that interest goes to who?  What purpose does it serve?  Banks are delusional and want the public to believe in the propaganda that they need to charge a higher rate because of “risk” in the loan.  Are they kidding?  We already know that they are being supported by the entire Federal Reserve and U.S. Treasury.  They can make the most insane kind of bets and ultimately the taxpayer will eat the bill.  And keep in mind many of these banks are borrowing at low levels from the Federal Reserve.  Why not allow the public to keep some of that interest?  How is this bad?  If banks were lending their own money it would be a different story but they are not.  They are creating a dishonest narrative and most Americans are not buying it because they operate in reality and not some parallel universe where you can create something out of nothing.

Just think of the billions charged in overdraft fees.  This is criminal.  Why not just default debit cards to stop once the account is dry?  Instead they want people that charge a $2 burger a $39 over draft “convenience fee” for this nonsense.  Are you kidding?  Most people don’t want this.  They find out the hard way and now billions have left the wallet of consumers for this nice little loan shark fee.  $39 can buy you lunch for a few days so this is nothing to laugh at when 38,000,000 Americans find themselves on food assistance.  The bulk of the billions are paid by the poor.  Good job banks for helping your fellow Americans.  Yet banks are leeches sucking the productive life blood out of the economy with gimmicks like this.  Time to break the banks up and turn them into utilities.

Take for example JP Morgan.  They announced a Q4 profit of $3.28 billion.  Where did they make their money?

“(Huff Po) JPMorgan’s biggest trouble spots were in consumer banking and credit card lending. The bank’s retail financial services division, which includes its mortgage operations, lost $399 million. That was worse than the final quarter in 2008, when credit markets had essentially shut down because of the collapse of banks including Lehman Brothers.

The company reported increases in mortgages that were charged off, or classified as uncollectible, including prime mortgages, the highest quality home loans. It also reported an increase in home equity loan charge-offs.”

Wait.  So mortgages are being charged off as foreclosures remain high.  And this has spread to so-called prime mortgages as the unemployment and underemployment rate remains at 17.9 percent.  So let us write off mortgages to average Americans.  Where in the world did they get those billions?  Maybe they made good money in their credit card unit:

“The credit-card lending division lost $306 million during the final three months of 2009. Results would’ve been worse had the bank not had a payment holiday in the period.”

More losses here?  So we’ve ruled out credit cards and mortgages which have become the life blood for Americans.  We’re running out of places to look for where they can make a $3 billion profit:

“Despite the ongoing problems with consumer banking, JPMorgan is still performing well because of its robust investment banking unit. As long as stock and bond markets continue to improve, the bank will be able to churn out profits and reward its employees handsomely.

JPMorgan’s investment bank earned $1.9 billion during the fourth quarter, while its asset management division generated $424 million in net income.

Fees from financing debt and stock offerings continued to surge in the fourth quarter. Debt financing fees jumped 58 percent to $732 million from the same quarter a year earlier, while stock financing fees climbed 66 percent to $549 million.”

And there you have it.  We are financing Wall Street’s wonderful gambling casino once again while the traditional banking model has collapsed.  How this isn’t the number one priority for the government and the people to fix is simply astounding.  How we have had no serious financial reform after 26 months of the Great Recession boggles the mind.

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And if we look at the details of the jobs report, it turns out that 17.9 percent of Americans are either unemployed or underemployed or flat out have stopped looking for work:

Source:  BLS

This wasn’t the only spin going on in the media.  Before the jobs report came out there was a preemptive flow of information trying to justify the job cuts by blaming it on the weather.  Yes, now instead of blaming the financial catastrophe on the actual perpetrators in Wall Street who systematically looted the American system and turned our economy into a giant casino that they leeched onto, we are now to believe people are losing their jobs because of the weather:

“(CNSnews) Ahead of Friday’s announcement, Goldman Sachs predicted that the storm might skew the job loss number by as much as 100,000 – a prediction that was embraced by officials in the Obama administration.

“The blizzards that affected much of the country during the last month are likely to distort the statistics,” Larry Summers, director of the White House’s National Economic Council, said in an interview with CNBC. “So it’s going to be very important … to look past whatever the next figures are to gauge the underlying trends.”

If the storm caused a skewing of job loss numbers I wonder how many job losses can be linked to Goldman Sachs and their casino style gambling in the derivatives markets and mortgage backed securities?  Then again, people should be happy that the unemployment rate remained steady at 9.7 percent even though more Americans are working part-time with no benefits and many others have simply fallen off the payrolls.  This is supposedly the new American dream for the middle class through the eyes of Wall Street who are selling capitalism but living in a world of corporate handout socialism.

There is a new show called Undercover Boss where a CEO goes undercover to work in the trenches with the proletariat.  As it turns out, the middle class is being worked to death and as we all know, the CEO can’t even do the job most workers do on a daily basis.  Even Henry Ford understood the interworking of the cars he was putting out.  In the end the CEO reveals his identity and gives a nice little handout to the worker and all is well in TV land.  The check is a token of what CEOs actually make.  This is the ultimate reflection of our trickle down economy where those at the top act like sociopaths and rulers of the universe but when it comes to doing the daily tasks of their company, they have no clue.  This is the de facto rule running on Wall Street.  In fact, CEO pay has grown outrageously over the past few decades as the middle class has gotten poorer:

Source:  American Progress

In reality, part-time employment has spread even to poor CEOs making 300 to 400 times the average American worker salary.  Poor CEOs and Wall Street executives need time off to enjoy their tax payer funded yachts and all expense hedonism trips to the Caribbean.  They would like to convince each other that the money they have is all through their will power and market prowess but in reality it is nothing more than being part of a corporatocracy and buying out the government with an army of lobbyist and insiders.  You have to be a self indulgent narcissist to take the economy to the brink of financial destruction in the case of many Wall Street firms and still reward yourself with outrageous bailouts.  The fact that average Americans are still not protesting in mass about this tells me that many actually believe what Wall Street is saying.  You see this when many would rather blame the working class for the ills of today than focus their energy where it really needs to go.

Wall Street loves this economic crisis.  They receive trillions in bailouts yet convince the public that what is occurring today is merely the “market” correcting itself.  So as most Americans have more and more troubles keeping up with their daily bills, companies are squeezing every little excess from those currently working.  Those that have jobs out of fear will work harder and probably demand less merit increases in the current economy.  After all, the head guy is only making 300 times what you make even though he can’t even understand the main function of the organization.  So what if the low level guy is selling toxic crap to some homeless person with no income and giving him access to a $500,000 loan.  These Wall Street tycoons are big picture thinkers and can’t be worried with the day to day operations of the proletariat unless it means turning it into a caricature for mass viewing and quick TIVO access.

You don’t think productivity actually increased?  Take a look at this:

Source:  BLS

This recession has been fantastic for productivity.  Just look at the above chart.  American workers have been doing their part during this recession.  After all, now you can hire a cadre of “contract” workers and not have to pay them one cent in healthcare support or even contribute to their pension.  Once the job is done you can kick them to the curb.  After all, this is capitalism so long as those at the top have managed to setup sweetheart deals and golden parachutes.  This is how the top 1 percent makes sure their hold on 40 percent of the nation’s wealth isn’t damaged.  And if you think financial institutions deserve this bailout money and their outrageous bonuses then companies like Circuit City or Mervyns would still be around today if that model applied across the board.  But this doesn’t apply to the general economy.  This applies to Wall Street and somehow the absurdity of it all still goes on.  The worst financial crisis since the Great Depression and not one solid reform has been enacted.  26 months of job losses and nothing.  Who is running the show?

The rise of the part-time work force is nothing new as we become more and more like Japan.  Japan bailed out their financial institutions after their failed stock market and real estate bubbles popped and today, their working class is made up of one-third part-time workers:

“(LA Times) In the world’s second-largest economy, the global financial crisis has forced part-time workers such as Kudo to face a harsh new reality.

Over the last few years, temporary employees have gone from being a rarity in Japan to accounting for one-third of the workforce of 67 million. They enjoy far fewer protections than full-time workers — placing their necks squarely on the layoff chopping block.

By March, the government predicts, 85,000 part-timers will fall prey to haken-giri, or temporary-worker cutbacks — a relatively small number compared with U.S. layoffs but high for a nation where job security has long been a staple.

On Wednesday, embattled Prime Minister Taro Aso made the plight of part-timers a major piece of a proposed stimulus package. Aso pledged to create 1.6 million jobs, partly by turning part-time jobs into full-time ones.”

Japan’s headline unemployment rate is 4.9 percent.  Just like our headline unemployment rate, the devil is really in the details.  If we continue on this path part-time work may be all that is left.

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What constitutes “middle class” in the United States?  If we go by the median household income the figure is roughly $52,000 per year.  Some 57 million households live on $52,000 or less per year.  This is based on 2008 Census data so it is very likely that figure is down to $50,000.  In fact, 38 million households are receiving food assistance so some are below the poverty line.

Let us look at how much income is used up by breaking down a few hypothetical budgets:

Source:  U.S. Department of Commerce

The biggest line item for most American families is housing.  When housing prices expanded into a massive bubble, more Americans to keep up with the middle class ideal took on more and more mortgage debt.  But without growing incomes they were seeing more of their money being funneled into servicing the mortgage debt.  With the advent of interest only and negative amortization loans, the process of building equity never took place and in some cases actually grew the initial mortgage balance.  Instead of saving, many middle class families saw their net worth retreat backwards.  This was one really new facet in this current economic crisis.  Traditional mortgages were once seen as a forced savings account because every month a portion of the principal was paid off.  Once you reached the later years of the mortgage, more and more went to paying off the mortgage.  That was not the case with some of the debt we saw in the last decade.

Part of the two income trap is hidden in more troubling ways.  Take for example automobile costs.  Most Americans with a two income household have two cars.  Let us assume that both cars were bought for $20,000 each and carry a $300 monthly payment.  So $600 a month right?  Wrong.  What about fuel?  Add $100 to $200 per month depending on how much you drive.  Car insurance?  This will be roughly $100 per month.  Car service?  Try another $50 to $100 per month.  So in total, many families are spending $600 to $900 per month on car costs.  And people aren’t taking much home after taxes:

So the take home pay for the middle class family is $3,400 if they live in California.  Subtract that $900 in auto costs and you are now down to $2,500.  In places like California where the median home price went up to $500,000 any middle class family stood no chance at buying a home.  Well, they were able to buy but holding on to the home was another story.  Yet people bought at these peak levels and that is why we are seeing such large number of foreclosures in the state but also in other states.  Even last month the number of foreclosure filings in California was near record levels.  The middle class is finding it tougher and tougher to keep their head above water.

Let us run the numbers if someone were to buy a home:

The latest home price for existing home sales in the U.S. is $164,700 for the median.  It is interesting to note that we are now back to January of 2009 levels and for 2009, prices did go up but went full circle back.  Let us assume this family uses a FHA backed loan and is only required to put 3.5% down:

Down payment:                               $5,764

Mortgage payment (PITI):           $1,098

So take that $2,500 left over and now subtract this amount.  $1,402 is what is left over.  This is the amount of money left over for food, healthcare (one illness and that is it with no insurance), and other daily good costs.  What about retirement savings?  That has to come from here as well.  The money can go quickly.  What about cells phones?  Utility bills?  Quickly that number dwindles.  And keep in mind this is household income.  As we now know many families are seeing one of their incomes disappearing and people are having a hard time finding work:

Source:  Itulip

When I look at the above chart it doesn’t take a rocket scientist to figure out that many people are still in the throngs of the recession.  The talk of recovery is muted by the reality of the numbers and all the average American will see is a recovery on Wall Street but in terms of their pocket book, little is funneling to them.  I’ve heard from people across the country looking for work and being unable to find anyone hiring.  And if they do find something, the wages are much less than what they once earned.  This isn’t reflected in the data.  How many people that are now marked as fully employed are in jobs that now pay less than what they once had?  That is why problems even in credit cards are filtering all the way to the bottom of the bank balance sheet.  People are relying on credit cards as their last lifeline and many banks are now shutting these off.

What was once thought of as middle class security is now heavily at risk:

-Secure job   [no longer]

-Steady home values [no longer]

-Access to affordable education [costs are outpacing inflation]

-Healthcare costs are skyrocketing with an aging population [just look at your insurance premiums]

The middle class is really coming under an onslaught of issues.  What we do in terms of financial reform and also, how we view our compact with our nation are going to be really important going forward.  But if the only sure thing is protecting banks from failure, then we are seeing the fruits of that decision playing out.

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Let us first look at a Gallup poll registering underemployment:

Source:  Gallup

Now the Bureau of Labor and Statistics usually measures the above through their U-6 rate.  This rate measures those that are working part-time but would like to have a full-time job.  There is something psychological about this that makes it seem a lot better than full unemployment but the repercussions on the working class is deep and profound nearly as deep as full unemployment.  First, if you are working part-time you have less money to spend and this showed up in the survey clearly:

Source:  Gallup

This is important in understanding that even with a 6 percent growth rate in GDP last quarter that many people still feel this recession deep in their pocketbooks.  In addition, that latest GDP number is based on companies cutting their top line item, employees and also inventory restocking.  But these are usually one time measures.  What we want to be seeing is GDP growth because of additional consumption and growth through hiring.  That is the real nature of a healthy expanding economy.  Cutting and firing middle class workers isn’t exactly the recipe for a longer-term recovery.

Americans are having to do more with less and are facing new measures of austerity.  Many are adapting and many are simply unable to cope with the radical changes taking place.  Even in the past decade, many Americans came to rely on credit cards and home equity as some kind of embedded ATM for most households.  For over a decade this seemed to be the case.  Even many that relied on this deep down realized that something just wasn’t right when home prices kept going up by double-digits while their salaries remained stagnant.  Any lack of wage growth was made up by additional borrowing.  Banks were willing to lend out this money.  But now that the bubble has burst, Americans are filing for bankruptcies in record numbers, losing jobs, and losing their homes through foreclosure.  At the same time, the banking industry has kept their practices going thanks to taxpayer bailouts.  The middle class is bailing out the same industry that was largely at the center of this financial crisis and their practices still largely remain the same.

This struggle to maintain the middle class is going to be the story of the next decade.  But beyond that headline, we now have over 38,000,000 Americans receiving food assistance in this country:

Source:  SNAP

The most prosperous nation in this world has over 12 percent of its population receiving food assistance.  It is tough to see fellow Americans in such difficult times.  You can see on the chart above how quickly the rate has risen in this recession.  Clearly in every recession the rate will go up but in this recession the number has struck many more Americans.  In fact, the length of unemployment is a large reason for this as people eat into emergency funds.  Beyond that, we now have the largest percentage and number of Americans working part-time in history:

Source:  Itulip

In fact, the large number of underemployed has been a shadow to how deep this crisis really is.  For example, the headline unemployment rate nationwide is 9.7 percent.  That seems bad but nothing historical.  But just look above and add in that underemployment rate.  In reality, we can understand why middle class Americans are struggling so much with daily financial life.  Think of someone that lost their job and is now working at Wal-Mart as a greeter.  Sure they aren’t part of that 9.7 percent but they probably would think so:

“(The Atlantic) Over lunch I spoke with one attendee, Gus Poulos, a Vietnam-era veteran who had begun his career as a refrigeration mechanic before going to night school and becoming an accountant. He is trim and powerfully built, and looks much younger than his 59 years. For seven years, until he was laid off in December 2008, he was a senior financial analyst for a local hospital.

Poulos said that his frustration had built and built over the past year. “You apply for so many jobs and just never hear anything,” he told me. “You’re one of my few interviews. I’m just glad to have an interview with anybody, even a magazine.” Poulos said he was an optimist by nature, and had always believed that with preparation and hard work, he could overcome whatever life threw at him. But sometime in the past year, he’d lost that sense, and at times he felt aimless and adrift. “That’s never been who I am,” he said. “But now, it’s who I am.”

Recently he’d gotten a part-time job as a cashier at Walmart, for $8.50 an hour. “They say, ‘Do you want it?’ And in my head, I thought, ‘No.’ And I raised my hand and said, ‘Yes.’” Poulos and his wife met when they were both working as supermarket cashiers, four decades earlier—it had been one of his first jobs. “Now, here I am again.”

We are in a deep struggle and fight to preserve the middle class of this country.  What has made this country strong has been a compact between the government and the citizenship between work and some semblance of financial protection.  Yet right now with the banking system in power, it is all about that bottom line and they have no idea what is happening in Main Street USA.  They are happy with GDP going up by 6 percent even though this was based on restocking lost supply and firing workers.  But how is this really good for the middle class?

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I think most Americans have noticed new methods of austerity all around them.  For example, I’m sure many of you have seen the Wal-Mart ad that talks about taking lunch to work.  They even break down the numbers to show you how much your budget will save by doing this.  Contrast that ad with this one below talking about taking a home equity loan while having a couple in a speed boat cruising in the background:

Source:  YouTube uploaded on June, 2007

When you contrast the two messages, one of easy money and endless excess and the new ads talking about brown bagging your lunch to work, we realize that average Americans are finding it much harder to saddle on more debt.  Some might try to recall the last decade as a wonderful time but the economic data shows otherwise.  Much of the spending and consumerism was built around easy access to debt.  People weren’t buying new automobiles with cash, they were financing it with 5 or even 7 year loans.  Want a new surround sound system but are low on cash?  No problem, just take on an extra credit card and charge it up.  Now, the ads highlight a very different economic climate.

I stopped by a local dollar store to pick up some items for the house and noticed that first, the parking lot was full.  A few years ago the parking lot was two-thirds empty.  This trend has been going on for about two years since the recession hit.  After entering the store I noticed that people for the most part were buying groceries.  Now this area is one that I wouldn’t consider poor but more along the lines of middle class.  Yet this is the new reality for the middle class.  There is no sharper contrast than seeing a women load her leased Mercedes full of dollar store groceries.  Austerity doesn’t happen overnight.

On Monday we received news that some of the most egregious practices from credit card companies will need to change now that legislation is in effect.  Yet credit card companies have already adapted by hiking up rates, charging annual fees on good customers, and other methods of front loading earning before the law came into effect.  So Americans who have relied so heavily on credit cards will now have to be extremely cautious when using these items of consumption.  Even the tried rule of paying off your balance every month may not save you from the annual fee that some companies are now imposing.

Casinos Lose Money for Second Time in History

In another clear example of changing habits of the American middle class, Casinos in Nevada lost money last year for only the second time in history:

“(Las Vegas Sun) CARSON CITY – For only the second time, Nevada casinos posted a loss – but this time it was the biggest.

The state Gaming Control Board today released its “Gaming Abstract” for fiscal year 2009, which ended June 30, showing a net loss of $6.7 billion among the 260 major casinos in Nevada.

Clubs along the Las Vegas Strip, which makes up 53 percent of the gambling revenue in Nevada, registered a $4.1 billion loss. The only bright spot, from a financial standpoint, was that people drank more. Sales of booze rose by 2.5 percent while revenue tied to casinos, rooms and food dropped. But 36 percent were recorded as “comp” drinks.

“It was a horrendous year,” said Bill Bible, president of the Nevada Resort Association, which represents several casinos on the Strip. He said many of the casinos had three and four waves of layoffs to cut cost during this national recession.”

I find it really telling that the only “bright spot” was that people drank more booze.  Self medication for the realities of the new economy.  Gambling whether it is in Las Vegas or through lottery tickets is a form of escapism.  I think many people in places like Las Vegas go to strike it big.  The irony of how the city has morphed is a large part of their revenues now come from other sources outside of gaming.  These include boutique stores and high end restaurants.  I was in Vegas only a few months ago and strolled down some of the shops and the higher end stores were very empty.  A few years back, these places were bustling with people.  It is a microcosm of the new austerity in our country.  Contrast the $100 t-shirts versus the Wal-Mart ad highlighting the benefits of taking your lunch to work at the cost of a few dollars per day.  Things are shifting out of a practical necessity.

And this isn’t simply a function of discretionary spending like trips and gambling.  Even in more practical aspects of daily life this is changing and evolving.

Fast-food Breakfast Slumps with Fewer Workers

You know things are tough when even low cost fast food is taking a hit:

“(WaPo) The nation’s high unemployment rate has thrown millions of people out of work, scared shoppers away from stores and threatened the economic recovery. Now it’s taking a bite out of breakfast.

Breakfast sales had grown at a ravenous pace during the boom years as busy workers scarfed down sausage biscuits on the way to the office, fueling a $57 billion business and accounting for as much as a quarter of sales at some fast-food chains. Chains opened earlier and expanded their morning menus to accommodate the traffic as lunch and dinner sales flatlined.

But as the jobless rate hit 26-year highs fewer people headed to work, and even those who did worried about their spending. So they poured bowls of cereal at home or simply slept in, putting breakfast on the back burner.

“Typically, if you’re unemployed, you’re not getting up at six and not going through the drive-thru,” said Jeffrey Bernstein, an analyst at Barclays Capital. “There is a direct correlation between unemployment and breakfast sales.”

It is hard to even comprehend that breakfast sales accounted for $57 billion in revenue.  However, with more people out of work many are skipping breakfast or eating at home.  On my early morning drives I will always see cars pulling up to McDonalds or Starbucks for that early morning purchase.  The lines seemed a lot shorter and looking at the data it is part of the new frugality that Americans are having to deal with:

Source:  Washington Post

And this recession is shaping how people view their future and what they expect out of it:

“(New York Times) See that,” she said, spotting a man dressed as the Statue of Liberty. Standing on a sidewalk, he waved at passing cars with a sign advertising a tax preparation business. “That will be me next week. Do you think this guy ever thought he’d be doing this?”

And yet, she would gladly do this. She would do nearly anything.

“There are no bad jobs now,” she says. “Any job is a good job.”

That person dressed up as the Statue of Liberty is a very common vision especially with tax season here.  2010 is a very different world from 2007.  I wonder what lady liberty would think about how we are spending our tax dollars in bailing out banks while average Americans are forced to tighten their belts?

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The first important thing to understand is that yes, the income of middle class families has gone up since the 1950s but a large part of this was the rise of the two income households with women entering the workforce:

The above chart is disturbing in many ways because it bucks the nearly 50 year long-term trend of employment.  Now, even with two income households many with rising job losses are finding they now have to make it with one income while inflation has eroded their buying power over the decades.  In this recession 3 out of 4 job losses have been men.  If you have any doubt regarding the insidious nature of inflation I put together a chart looking at various costs over the last few decades:

Part of this is due to the Federal Reserve and U.S. Treasury trashing the U.S. dollar over the decades.  For example, in 1950 it took the median household income (which was largely a one income household) about 2 times the annual household income to purchase the median priced home.  In 2008, it took the median household income (now largely a two income household) four times annual earnings to purchase the median priced home.  In fact, the two income household has hidden a large part of how much the middle class has fallen behind in this country.  Now with this recession, the deep cracks are now being exposed in the system.

Income inequality has also risen in this country and a large part of it is due to the financial sector.  1 percent of our population control 42 percent of all financial wealth.  In fact, in the last decade the only segment of our population that has seen any sizeable gains in true wealth is the top 1 percent.  Every other category has seen a loss of housing net worth, wage stagnation, and higher costs for daily items that consume a larger part of their budget.  Just take a look at the chart below showing this change:

Source:  CNN

The above is looking at a one income household in 1973 versus the two income household in the 2000s.  It is interesting to note that in the 1970s Nixon took the dollar into a purely fiat system and since that time, the dollar has lost much of its actual value.  This would be expected.  The Federal Reserve with its banking lieutenants has been able to put our country so deep into debt that realistically we are in a position of never paying back all our outstanding obligations.  The only way out is via inflation and with a fiat system that is the path we are heading down.  This is important because when you look at the charts above prices rise for various reasons and inflation is a hidden tax.  No need for higher taxes to bailout the banking sector when you can just destroy the purchasing power of middle class Americans by monetizing enormous amounts of debt as we have done.

That is why in the next decade, Americans are now working for someone else beyond their immediate household.  A large chunk of their money is now going to the banking sector.  This can be in absurd payments to credit card companies, loss of purchasing power because of the Fed, or other hidden methods of taxing the public.  We are really at a crossroads for the middle class.  If we dissect the data further we realize that even though things cost more, much of it has been financed through debt:

Ironically the family in the early 1970s had more discretionary income than the family in the early 2000s even with a dual income.  Yet if you look around, it isn’t immediately apparent because of the massive debt bubble financed by the banking sector.  Sure people bought bigger homes and newer cars but all this was under a phony veneer of success and was financed with debt.  All of it was built around a mountain of debt.  Yet here is where the big divide hits.  Middle class families are now losing their homes through foreclosure.  Many are having their cars repossessed because they can’t make their payments.  Bankruptcy filings are soaring because people cannot service their debt.  So middle class Americans are paying the price with the rules that are setup.  Yet banks are not.  They are sucking the American taxpayer for all their horrible bets and are not dealing with the ramifications of their actions.  In other words, the bill is going to the middle class as the middle class is dealing with their own bad decisions.  This is part of the system built around the corporatacracy model of government.  Losses are socialized while gains are privatized.

And don’t kid yourself, this entire game was financed on debt:

And the small group of banks at the top now control a large portion of all FDIC backed assets in our country:

Source:  FDIC, Bank Financial Statements

Forget about the Republican or Democrat parties, we are being governed by the financial sector of this economy.  It is amazing how hard it is to get sensible legislation even after this great calamity.  To prove this point, in California an insurance company announced they are hiking healthcare premiums by 30 percent in the midst of this recession even though they pulled in billions in profits.  The government will sit back and let the middle class get fleeced because they are part of the problem.  They speak a good game but are bought by the industry.  Prove us wrong if this isn’t the case.  Enough talk, time for action.  From now on we need to focus on who is delivering results.  If you can, take you money out of the big banks and put them in local regional banks.  Let your local representatives know that their number one priority should be focusing on protecting our struggling middle class.  Time to get some real reform or we really risk losing our middle class.

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The global economy remains on unstable footing as we see debt problems slam the European markets with Greece in the current spotlight.  Yet the problem of debt is not unique to Greece itself and it is fascinating that the world is only focusing on one country.  The average American over the past four decades has taken on so much debt that household debt outstanding is now equivalent to the U.S. annual GDP.  The biggest amount of debt is with mortgage debt.  Yet with mortgage debt you are securing the mortgage to ideally a property that will reflect the amount of debt linked to the home.  Part of the housing bubble problem stems from the hyper inflated values of homes and now we are seeing the ramifications of this with millions of homes being foreclosed on.  But another large part of this bubble was around the usage of credit cards that hit their apex during this crisis:

For nearly four decades Americans’ love affair with credit cards grew unabated.  The amount of credit card debt outstanding hit an apex in 2007 at the height of the bubble reaching $975 billion in debt (to put this in perspective Greece’s GDP is $367 billion and their current deficit is 12.7 percent of economic output).  Unlike mortgage debt or even auto debt, there is nothing securing credit card debt.  This can be someone going to a club and buying $300 in drinks for friends or taking a trip to Antigua and spending thousands and charging it up on easy plastic.  It can also be in the form of consumer goods consumption like buying a new television set or additional appliances.  Yet for the first time since data on revolving debt has been kept we have now seen it contract on a yearly basis.  And part of this contraction stems from the Great Recession but also more people are paying down extremely expensive debt:

The above data comes from an interesting article from the St. Louis Federal Reserve.  The author William T. Gavin examines the low interest rate and its impact on consumers.  As his chart above highlights, even with the Federal Reserve lowering funds to record lows the average interest rate on credit cards has crept up even higher than in 2000 when the Fed funds rate was at 6.5 percent.  With interest rates on savings accounts so low, it is definitely appealing for many consumers to pay down high interest rate credit cards down since this is a guaranteed return of 13, 15, 20, and even 79 percent on some credit cards.  This low interest rate environment is creating some asymmetrical dynamics in the market.  While the above shows interest rates on credit cards as being high, rates on savings accounts are extremely low:

A 90 day certificate of deposit is currently yielding 0.19 percent, or slightly above the rate you would get by sticking your paycheck in the mattress of your bedroom.  So even as we see the amount of revolving debt outstanding decline, there is still $866 billion in credit card debt outstanding.  Credit card companies are losing money on charging off accounts as bankruptcies across the country rise.  Many times credit card companies are hiking up the fees whether they are annual payments or jacking up interest rates on even good paying customers.  In this environment it is rather clear that if you have high interest credit card debt, forget about the stock market and focus all your energy on paying down that high debt.

This interest rate spread on debt and savings is enormous.  And as average Americans move their money to safer deposits as the stock market now reflects a speculative casino, many are wondering how they will do with such low rates:

In this current environment it would seem that the best course of action is paying down high interest debt and more importantly, not spending beyond what you can reasonably afford.  Unfortunately many Americans are now realizing that they do not have access to the same lending window banks have with their central bank.  The bailouts were largely a method of shoring up the troubled assets within banks, not a bailout to help the balance sheet of average Americans.  If banks had any faith in their customers you would see lending pick up once again.  But this Great Recession has created a smaller number of quality borrowers.  Or to be more accurate, there weren’t many quality borrowers to begin with over the past decade but that didn’t stop banks from making loans earlier in the decade.  Once banks gained consciousness they slammed shut the door and they went into survival mode primarily by focusing on government support to keep them solvent.

Banks have very little desire to loan money when they are dealing with large imbalances on their internal accounts:

You don’t need the above chart to tell you that credit has contracted massively during this grand economic calamity.  Just look at the amount of credit card solicitation you now receive in the mail.  Long gone are those zero percent offers for 12 months.  You might get a six month balance transfer offer at zero percent but you will find out in the small print the enormous 5 percent fee for moving any amount over.  Or you might soon come to realize that your annual fee free card now has a service fee.  These are the ways banks are trying to go after additional revenue streams from their customers (or if you like, taxpayers that saved them from extinction).

Until our system is reformed, these are the rules we have been given.  If you have outstanding credit card debt ($866 billion tells us many do) start paying it down.  Forget about the stock market for the moment.  The stock market is highly volatile and with no real reforms yet, we are in for another crisis in the short-term since the same games that got us here are once again being played out.  By paying down your credit card debt you are assured a fixed return for a defined set of time.  In this current market, that is as close as you will get to any sort of guarantee.

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The banking industry and Wall Street is corroding the actual engine of our economy.  GDP is growing but when you pull back the data, much of the profit comes from the banking sector and debt payments.  Take for example the recent jobs report.  A revision was made to the January jobs report last week that added over 1,200,000 more Americans who have lost their job in the last year.  And this was somehow good news!  The unemployment rate which comes from a separate survey dropped to 9.7 percent because a large number of people dropped off the employment radar.  This is what goes for good news.  Also, we have the troubling amount of commercial real estate loans with a value of $3.5 trillion now defaulting at record levels.  Much of these loans are with too big to fail banks.  To be blunt, it is now our problem.  Let us go through the big risk transfers in this recession starting with jobs.

Risk One – Jobs

The above chart is one of the more important charts in measuring the actual unemployment problem.  Average Americans are struggling to find work and those that do have jobs are finding it harder to maintain their wages.  The unemployment rate is highly inaccurate in the short-term because of how it computes its rate.  Think of last month were the unemployment rate dropped from 10 percent to 9.7 percent yet a revision on another survey showed an additional loss of 1.2 million jobs over the past year.  This is straight out of 1984 economics.  And the problem with this risk transfer is that we’ve been discounting headline job losses for over a year:

Instead of having one month with 700,000+ job cuts, the new revised data tells us we had 4 months at this rate!  Even with the December data, instead of 85,000 jobs being lost we lost 150,000 jobs.  Take a look at the above chart and you’ll see how much we were underrating the actual employment situation of Americans.  This went on for over a year and here you have Wall Street betting stocks up on data that wasn’t even accurate.  Who needs jobs when you have the taxpayer funding your casino that doesn’t even rely on accurate data?  All you need to do is issue a revision a year later and say, “sorry, we just happened to find 1.2 million more actual jobs that were lost during this recession.”

Risk Two – Banking

The banking sector by far has pushed the biggest risk onto the taxpayer.  Wall Street and their new corporatacracy have created a system where gains are privatized and losses are socialized.  It is the worst system possible for the American public.  Have you noticed that since the massive bailouts, almost no kind of bad news phases the market?  We have headlines that show commercial real estate showing losses of trillions in value and the stock market keeps going up.  Foreclosures are occurring in the millions and people are losing their homes (foreclosures do cost banks money) but somehow banks keep turning profits.  From where?  They certainly aren’t lending the money to consumers:

And banks are certainly not making mortgages with their own money.  So where is the profit coming from?  Simple.  Any risk or loss has now been pushed to the taxpayer.  Why do you think banks are fine with people not paying their mortgage for months?  Because they can still claim the asset at a peak value thanks to the suspension of mark to market and then make the bulk of their profits betting on the absurd stock market rally from March of 2009 that has shown no connection to reality based fundamentals.  Here is the breakdown of the bailouts:

You would think that over $14 trillion in bailouts would create at least one net job but it hasn’t because much of the money has gone to transferring the wealth to Wall Street and the corporatacracy and shifting the risk to average Americans.  Is that the deal we were looking for?

Risk Three – Housing

Yet at the core of this crisis, is the real estate market.  Banks are now simply lending mortgages backed by the government serving as middlemen in the transaction:

The above chart should tell you everything you need to know about the current housing market.  Banks have no faith in the average American.  They are more than happy to lend out mortgages that are backed by the government (aka the taxpayers) and would rather hold onto their precious reserves to deal with the real problems in the market or make additional bets on Wall Street.  That wasn’t really the initial deal since they pleaded for funds to keep lending going but have now decided it is more profitable to gamble against the American public with their own money.  Take for example Goldman Sachs that created and bet against the same mortgage backed securities that it was pushing to clients.  When things went kaboom, it simply decided to get the American government to bail it out.  In other words, the market was trying to flush them out of the system because of their horrible structure yet their corporatacracy connections allowed them to survive and now thrive with the taxpayer as their funder.

Take a careful look at the chart above.  Since 1988 we have never seen this much government backed loans in the housing market.  Banks are not lending from their own money because they know what is going on:

Banks have held on tight to their excess (bailout) reserves.  Even with a 0.25 interest rate they have more incentive to hold onto this money then lend it out to the public.  The Federal Reserve can easily increase lending from member banks.  All it would need to do is drop the interest rate or even better, charge banks a fee (heck, banks charge a fee for everything to average Americans) and banks would start lending some of that money.  Yet referring back to risk #1 above, Americans are dealing with an economy with very few jobs and low hiring.  So who are they going to lend to?

It should be abundantly clear that risk has been shifted to the average American with no upside or even change on how we do business.  We are way beyond incremental change at this point.  So what can we do?  Break up the too big to fail banks.  Enough with the government backing every mortgage being pumped out.  How about we get better measures of employment?  These would be a few things that would mitigate the risk now placed on the shoulders of an already struggling middle class America.

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But even when we look at the balance sheet of the government, things are still not improving:

Source:  U.S. Treasury

Take a look at the amount of revenue (taxes) the government brought in for the month of December.  $218 billion was taken in.  But look at data from December of 2008.  The government at the peak of the crisis brought in $237 billion.  So this December was even worse than the one ending 2008.  How is this a sign of recovery?  You would assume that receipts would be going up if things were in fact getting better.  All we see is the spending side of the equation going up and the only sector in the economy turning a solid profit is the banking sector that is now running a new form of corporatocracy.  It would be one thing if we were adding jobs each and every month but even the massive amounts of bailouts have yet to yield any visible help for average Americans.

In the past few decades Americans have seen more and more of their income being eaten up by the housing sector of the economy:

This latest decade saw a much larger share of income going to housing than any in the past.  Unlike stocks, every American needs to live somewhere and will need to either pay a mortgage if they own or pay rent.  The banking sector found a method of siphoning off wealth from the biggest asset Americans hold.  We have seen this occur slowly over the decades:

1950

Median household income:        $3,319

Median home price:                       $7,354

Home price / income = Percent of 221

1960

Median household income:        $5,620

Median home price:                       $11,900

Home price / income = 211 percent

Running those numbers today, we find that nationwide the cost of a home eats up more and more income:

Median Household income:       $52,029

Median U.S. home price:             $172,600

Home price / income = 331 percent

The above data is pulled from years of Census data but shows clearly that housing has eaten more and more into the income of average Americans.  In a purely fiat money system, banks can create money out of thin air.  The Federal Reserve has done this through the monetization of debt.  Now think about this, if a participating member bank borrows say $1 million from the Fed it can then turn around and lend the money out through loans up to $9 million courtesy of fractional reserve banking.  With current interest rates, if it borrows from the Fed at near zero even a 5 percent return on bread and butter mortgages would yield $450,000 a year for doing absolutely nothing but being a middleman.  And some banks have gone ahead and issued credit cards with 79.9 percent rates.  When Bear Stearns and Lehman Brothers failed their leverage was even higher at 20 and even 30 to 1.  The other investment banks are near those levels even today yet with full government support.

So why bring this up?  In the United States debt is treated as money.  In fact, without debt we wouldn’t have money.  I think this is lost on many.  When someone goes to a bank and takes out a mortgage with virtually no money down, all of a sudden a liability and asset of a few hundred thousand is created out of financial alchemy.  So when this housing bubble burst trillions of dollars evaporated from the system but it was nothing more than erasing previous debt that really had no actual backing.

So if the Fed can create money out of thin air through their banking web why is the economy still faltering?  In boom and bust cycles we see a love and revulsion towards debt.  Banks can be willing to lend out money but you can’t force average Americans to borrow.  This past decade we saw the absolute disregard for prudent debt lending and now, many Americans are averse to taking out loans.  In fact, now that banks are actually checking and verifying incomes it turns out that many middle class Americans really don’t qualify for additional debt.

This brings us to our next chart looking at household debt:

Even after the stock market recovery, it is estimated that average Americans have seen their household net worth decline by $11 trillion since the peak of this bubble.  Yet take a look at the chart above.  Household debt still remains near the peak.  And keep in mind that real estate was the biggest item of net worth for Americans and this has fallen by roughly $6 trillion.  Yet the loans remain the same.  And that is largely a reason for the flood of foreclosures and bankruptcies.  While banks still have mortgages valued at peak levels the actual market value is much less.  The U.S. Treasury and Federal Reserve made a troubling bet during the early days of the crisis that things would correct quickly.  Actually, I tend to believe that the Fed knew all along that when push came to shove, the entire banking sector would be bailed out by the U.S. taxpayer since the Fed is simply the lender of first and last resort for member banks.

So this leaves Americans contenting with debt amounts that no longer reflect the value of their underlying asset.  Yet the banking sector is now fully supported by the taxpayer.  So with the current system in place, if banks do fail taxpayers are on the hook.  The Fed has setup the perfect trap for middle class Americans.  If average Americans decide to walk away from their underwater mortgages then the bill will be paid by taxpayers.  After all, we are already told that the too big to fail by definition won’t fail.  And the other option is to continue paying a mortgage on a home that is no longer worth its value.  Many Americans simply cannot afford to do this.  Do you notice how in no scenario the banks lose?  This is another characteristic of the corporatocracy.  And the FDIC which insures bank deposits is essentially insolvent:

And the FDIC backs $13 trillion in total assets with a fund that is insolvent!  Now that is maximum leverage.

Over the past decade as the financial sector gained more and more power many Americans saw more and more money go to their housing payment.  The housing bubble was merely the end product of the banking sector through Wall Street flooding the system with debt.  If we live in a world where only one house is on the block and you have $1,000 and I have $1,000 and we both want the house the maximum we can pay for the home is $1,000 given our resources.  But enter a bank that is willing to create debt of $10,000 in the form of a mortgage and say we are obsessed with the house; it is very likely we would be willing to pay $11,000 for the home.  Is the home really worth $10,000 more?  Of course not.  But our $1,000 just got a lot less valuable.  And this is the crux of a fiat money system.  The government can force it as legal tender but if the value continues to erode people will begin questioning the system.  It is only valuable to the point that people have faith in it.  And right now many Americans are losing faith in the system.

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