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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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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It is amazing that we even have to debate the issue of employment.  Our economy cannot function and provide the middle class a thriving environment without jobs.  This should be obvious yet the Wall Street crowd is feeling comfortable even though the public is still dealing with double-digit unemployment (we’ve lost jobs for 24 straight months and would have to go back to the Great Depression to find a similar streak).  In fact, the largest state economy in our nation that of California with an economy of over $1.8 trillion managed to average out an underemployment rate of 21.1 percent for all of 2009:

Source:  BLS

This chart is downright troubling.  Who would have thought that Michigan and California would lead the way in 2009 with underemployment rates over 21 percent?  Michigan has had issues for many years and their economy pulls in a GDP of $380 billion.  But California being the biggest economic state in our country with a GDP of $1.8 trillion should make you pause before you think we are somehow in recovery mode.  And from the looks of it, California with their historical housing bubble looks to have years of financial trouble to work through.  These issues are large and we haven’t even begun examining their state budget issues that are projected to come in at $21 billion.

Having a job is the cornerstone of our economy and also our vibrant middle class.  This has been the case for multiple decades and actually has been part of our identity since the disastrous years of the Great Depression.  Having a job is a pact with our country and Wall Street has taken this for granted in the last thirty years.  Slowly we moved from an economy that valued work to a casino like economy that funneled money into Wall Street and whatever demand came after the spending of the corporatocracy was given as crumbs to the public.

This notion of “jobless recovery” is such an oxymoron.  How can we have a recovery while losing 8 million jobs?  Just because bank bonuses are back to record breaking levels does not mean a recovery is in place.  Statistically we can massage the numbers however we like.  And what else would you expect?  We pumped $14 trillion in bailouts, backstops, and gifts to bankers so of course something was bound to happen.  Even a mountain can move with enough force.  Yet where are the jobs?

We should examine job gains after previous recessions to see the erosion of our middle class base:

Source:  NBER

The above chart marks the month ending of all recessions since 1945 and how long it took to have a net positive month in job gains.  For the most part, jobs were added fairly quickly and in many cases the month right after the official end of the recession.  But starting in 2001 we start noticing this shift to the jobless recovery era.  Now why did this occur?  Well for previous recessions the business cycle was easy to follow and track.  The economy pulled back and so did employment.  But once the economy got back on track demand followed and so did employment.   But since the banking oligarchs have taken over our economy, a gain in the economic indicators does not mean additional employment.  Since we now are largely importers we can buy cheap goods but have dismantled our goods producing base.   Ask yourself this, where did banks make their profits in 2009?  It definitely wasn’t because employment boomed.  Demand has been mute.  So where did it come from?  The profits came from gambling on exotic financial instruments all over the world with taxpayer money.  In other words, the recent stock market rally is artificial and no longer represents the economic reality for most Americans.

Another key indicator to look at is long-term unemployment:

It is amazing that the largest group of unemployed Americans falls under the long-term unemployed category.  Over 6,130,000 Americans fall in this group.  These are people that have been out of work for at least 27 weeks and will most likely, need to find a job in a different industry.  We’ve discussed this in previous posts that the groups that took the biggest hits in this recession are manufacturing and construction.  The financial industry has contracted as well but nothing compared to what other sectors have.  The above chart should be indicative of where we are.  This recession may be over in terms of GDP increasing but remove the bailouts and the stimulus and you get a deep economic mess.  Plus, we have yet to add any net jobs.  Think about this, we’ve added some $14 trillion in bailouts and backstops and we have yet to add a net job in the economy.  Is this really the reflection of a healthy economy?

The middle class since the 1970s has seen their savings dwindle, their work week increase while their pay lags, and the cost of necessities like housing and healthcare zoom past any income gains.  Even with two income households many Americans are simply trying to make ends meet.  Even those who are doing well, those making enough to be hit with the Alternative Minimum Tax (AMT) are feeling the pinch as well.  Because in reality, the last decade has been a gift to the top 1 percent of the nation.  Think about how taxes play out.  Many of these people live off capital gains that are taxed at 15 percent while even a physician working 70 hours a week will need to pay the top federal tax bracket of someone actually working.  In other words, our system values people who put their money into the casino as opposed to working.

How else can we explain the cheerful smiles of Wall Street traders while the nationwide underemployment rate is up over 17 percent?  How else can we explain the giddiness of bankers counting their bonuses while home values are still in the dumps for most Americans?  The continuous chants of “jobs lag the stock market” are absolutely tiresome and in fact, wrong.  The current system is only waiting like a beggar hoping Wall Street creates enough demand so most Americans can get a piece of the action.  We already saw what this creates with the housing bubble.  You can enjoy the ride for a few years but you’ll be kicked out once the fun is over.  While the public gets kabuki theater programs like HAMP bankers get bailed out 100 cents on the dollar like Goldman Sachs did through the AIG gift exchange.  In other words, this bailout isn’t for you and it certainly isn’t about creating jobs.

There is this argument about global bubbles.  Gold bubbles, a China bubble, another stock market bubble.  But take China for example.  Even though they are spending enormous amounts of money they have pumped billions into infrastructure projects that are at least building up their economy and putting people to work.  Engineering analysts for the U.S. estimate that we have about $2 trillion in infrastructure upgrade projects that we have delayed or simply ignored.  Why not take some of that $14 trillion and put it to at least reinforcing that core of our economic structure?  I’m not talking about building strip malls and dumping more money into the commercial real estate pit.  How about reinforcing our highways, bridges, universities, and other key components that make our economy strong and envied around the world?  If we are going to spend at least spend in the right place.

Yet the irony of this is the Wall Street system still believes in a “free market” world yet they’ve never even lived in anything resembling a free market.  Their idea of financial innovation is setting up credit cards with 79.9 percent interest rates and creating mortgages that harm your financial health when you’re not looking.

People are focusing on places like Greece, no doubt a big problem but California has an economy that is 13 percent of U.S. GDP!  Michigan has a bigger GDP than Greece ($357 billion) yet so much attention is being given to this issue.  Our nation’s number one GDP state has an underemployment rate of 21 percent and is on the precipice of financial insolvency.  Not only California, but other states.  In fact, many have been borrowing for their unemployment insurance funds trying to keep those long-term unemployed from going into despair:

Source: Propublica

Four enormous GDP states in California, Texas, Florida, and New York have bankrupt unemployment insurance funds and are now borrowing from the federal government who is also broke (not broke enough to bailout Wall Street however).  How anyone can look at the above and claim we are in recovery is really beyond me.

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If we look at where the jobs losses are coming, we will see that manufacturing has taken another major hit in this contraction:

Every industry has seen significant job cuts.  It is interesting to look at the financial sector and see how well it has done in comparison to other sectors.  No wonder why Wall Street since March of 2009 has been on a historic rally.  Fascinating how in the last few days when mention of breaking up the too big to fail banks was brought about that we had our first major correction in nearly a year.  Could it be that the only way banks are making money in this current economy is by gambling in the stock market?  Absolutely.  In fact, most of their profits aren’t coming from making loans to average Americans but by trading and acting like pseudo-hedge funds except the banks are using taxpayer money as their safety net.  If you truly believe in capitalism then you understand that too big to fail should not even exist.  Creative destruction is part of a capitalistic system.  Right now banks are operating in a system that offers them different rules from typical Americans who are seeing their jobs disappear.  It is a two-tiered system.

It may also be the case that the system is learning to make do with part-time employment:

You rarely here that employment is a lagging indicator from reputable sources because of the cynical nature of this old economic mantra.  This line is as old as saying real estate prices never go down.  Sure, in previous recessions you would see the economy bounce right back up after a correction but this isn’t one of those typical recessions.  This is a generational correction and old rules of economics don’t play anymore.  Temporary help hiring has increased but the system isn’t hiring any full-time workers either on a net-basis.  In other words, we are still losing full-time jobs.  Businesses have learned to tweak their employment base to a much finer degree so the need for full-time workers with all additional benefits and compensation may not make financial sense.  In the end it is the average American that is thrown under the bus.

Our employment base has also shifted to a major focus on service orientation.  If we rewind to the 1940s and 1950s a large part of our economy revolved around manufacturing.  This isn’t to say that having a large manufacturing base is necessarily good or bad but a large part of Americans had a job that was stable and also provided an income that would make it easy to pursue the American dream.  What did this mean?  Being able to buy a home and support a family without going into massive debt that would put you at risk for bankruptcy and foreclosure down the road.  The rise of the two income household is a positive but it is also an economic necessity for many.  The typical American household brings in $52,000 per year.  Considering this is the median for a household, you can see how quickly losing one job can send a family into a financial tailspin.

And if we look at the top jobs in our country, we realize that we have replaced manufacturing with a near obsession with service oriented jobs:

Source:  BLS

I find it amazing that the two biggest occupations include retail salespersons and cashiers.  If you consider that a family might have one worker in each of these fields, they wouldn’t even come close to meeting the median annual household income of $52,000.  And go down the list.  The vast majority of the jobs above pay slightly above the federal poverty level if someone were to have a family.  It is no wonder that many households went into debt using toxic credit cards that change fees at the drop of a hat.  I find it amazing how quickly some people are to judge these people for financially mismanaging their budgets but at the same time, remain silent on the financial shenanigans of the banking sector that is largely responsible for this financial mess.  The cognitive dissonance is palatable but it is clear that the vast majority of Americans see this distinction and are lashing out at Wall Street and rightfully so.

And when we say Wall Street, we mean the financial sector.  Keep in mind that what I would view as core capitalistic companies like Google or Apple actually provide a service and added value products and these companies aren’t even asking for a government handout.  In fact, they are adding real wealth back into the economy instead of siphoning it off.  How many companies failed trying to be like Google or Apple?  Remember the search engine Alta Vista?  It once reigned supreme and is no longer here.  Companies come and go and that is part of our system.  The idea that banking is somehow immune to this is troubling.  And that is exactly what we did.  Well, not exactly “we” per se because the vast majority of American don’t support the bailouts but this is what was done by those representing us.  What we have now is a full functioning corporatocracy.  The recent Supreme Court ruling allowing corporations to contribute to candidates unlimited sums of money only cements this structure further.

If we look at the S&P 500 and compare it to companies back in the 1950s, approximately 50 companies still remain on the top 500 list.  Many have failed or dropped out or have simply been surpassed by companies that are fairly new (i.e., Google, Apple, Microsoft, etc).  This is the beauty of our system.  Ideally we wouldn’t favor one industry over another.  Yet our slow process into favoring the banking sector is disturbing because we are allowing the financial sector to govern our country.  And clearly we are seeing that what is best for Wall Street isn’t best for Main Street.  Even Henry Ford despised Wall Street and it should be clear to most Americans why.  Wall Street has its place but when it starts becoming a revolving door to D.C. and has Congress on speed-dial we have bigger issues.

44 states recorded increases in their unemployment rates last month.  And what is even more troubling is the length of time people are remaining unemployed:

Nearly 6 million Americans have been unemployed for over 27 weeks, the highest number we have ever seen on a percentage basis.  But on the other side of the coin, we have seen part-time employment for economic reasons spike to over 9 million during this recession.  This group is made up of people looking for full-time work but only being able to find part-time employment.  Add these two together and you start getting a sense of where our economy is heading if things don’t change.  Japan during their lost decade(s) followed a similar path to the one we are going down.  They bailed out their banking sector allowing zombie banks to remain and slowly over a grueling generation, one-third of their population was classified as part-time workers.  Japan also had major fiscal programs but nothing has helped.  Just look at the Nikkei average over this time:

The Nikkei is down 71 percent over 20+years.  So the banks are still there in spirit but what about the overall economy?  Japan has been lagging over the past two decades and bailing out the banks had a lot to do with this.  It is no coincidence that their part-time employment sector makes up one-third of their employment base.

And tying this all together including with the commercial real estate bust, we see that demand for commercial space is absolutely at the bottom:

Source:  Atlanta Fed

And why would you expect this number to be anything else?  Banks needed more and more demand even if the market didn’t demand it so they could keep on expanding and making further and further bad bets.  What did they care?  Ultimately they were bailed out by the taxpayers and government.  Yet we are now seeing deep anger in our country because nothing infuriates a society more than having a large unemployed population especially when aid was given to the banking sector that actually created this employment disaster in the first place.  Apparently Americans are still hungry for change.

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This must put the recent stock market rally into perspective.  The average American is still trying to negotiate the new economic landscape while the select few are able to increase their wealth at the expense of the many.  Let us look at bankruptcy filings per year:

Now you might be wondering why there was a big jump in 2005 in the midst of the “growing” economy.  In 2005 new rules and regulations were coming into effect that would make future bankruptcy filings more onerous and had clauses to gouge average Americans.  So many rushed to file before means testing and other criteria came into effect.  So this recent jump is more significant since it comes in light of the new tougher standards to file.  But the economy is aching and average Americans are trying all they can to get by, tougher rules or not.  How much money can you squeeze out of a family that just lost their job?

This enormous jump in bankruptcies came in a year that the stock market rallied by over 60 percent from the March lows in 2009.  Apparently, this stock market rally did very little to assist many average Americans in their economic struggles.  As you would expect this crisis is causing many people to file and not what you may expect.  Average Americans from all levels are having troubles servicing their mounting debt:

“(WSJ) during this recession, the housing crisis and high unemployment rate have prompted more people to file for bankruptcy who may never have considered the option before, experts said. Filings from 2008 showed more people with high income and high education levels resorting to bankruptcy petitions, according to an annual survey of consumer-bankruptcy filers’ demographics by the Institute for Financial Literacy, a nonprofit that provides bankruptcy-related counseling and education services. Those demographic trends appeared to continue last year.

Mr. Mann said he believes bankruptcies reached their peak sometime last year, but bankruptcy attorneys from across the country said there was no sign that business was slowing. The 113,274 filings in December alone were a third higher than the same month a year earlier.

“I can’t see over the top of the files on my desk,” said Cathleen Moran, a bankruptcy attorney at Moran Law Group in Mountain View, Calif., likening it to the rush of clients before the revised law went into effect. In a three-month period before those rules changed in 2005, her firm filed five times as many cases as usual.

Ms. Moran’s clients in 2008 typically were people who earned between $40,000 and $80,000. That changed last year when a rash of people who earned $100,000 to $300,000 began filing as well, she said.”

So of course, those that are in the trenches continue to see problems in the economy.  The 10 percent headline unemployment rate is misleading.  If we look at the underemployment and unemployment rate we find that 27 million Americans are without work or are working part-time hoping for full-time work.  And with this recession, it is looking like more and more of those jobs are not coming back:

As the unemployment situation struggles to improve, we may be seeing a permanent shift in the economy where high part-time employment is simply part of our economy.  Now this is only more reason to believe bankruptcies will remain elevated since debt is the major reason for bankruptcies.  Or better put, the ability to service the debt.  And as many bankruptcy attorneys are finding out many people with once high incomes may have had to take cuts in their wages while their debt is still elevated to the halcyon days of the bubble.  This brings us to a new austerity in the country that is probably something we have yet to go through since the post-World War II era.

Now if we look at the pool of those that are at risk for bankruptcy, we still see that many average Americans are still in massive amounts of debt:

Household debt obligations as a percent of personal income is still higher than it was in 2000 at the start of the bubble.  What that means is we can expect more de-leveraging of debt that people cannot pay with current incomes.  That is why there is little reason to believe foreclosures will slow down significantly in 2010 and also, bankruptcies will remain elevated.  It is also the case that credit card companies are putting on the clamps on households that are struggling even though credit card companies have received enormous amounts of bailouts.  It is a misnomer to label them “credit card companies” since the too big to fail banks issue the largest amount of credit cards.  This again shows how the corporatocracy is able to wield excellent profits while the economy is really struggling.

People forget that no one wants to file bankruptcy just as much as someone wants to go through foreclosure.  These are financial decisions made in stressful situations.  No one wakes up and says, “today seems like a good day to go into bankruptcy.”  Many bankruptcies hit even in the best of times as the chart above highlights.  Yet the double-edged sword of debt is that it maximizes pain in the bad times just as it amplifies bets in the good times.  A household that cannot pay their debts won’t.  It is that simple.  The rise in bankruptcies only reflects what we all know and that is the economy for the average American is still in tough shape.

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It is hard to believe in this recovery because the bailout has gone to the financial sector and is reflected in hyper-inflated equity prices.  As obvious as it seems, some people don’t make the connection that an unemployed American is a weaker consumer.  Consumption as we all know is two-thirds of our economy.  Therefore you would assume that investors would make this connection but that is not the case.  The banks being the few with any sort of heavy government money, instead of lending to Americans, are once again gambling in the stock market casino.  What a sad testimony to our crony capitalistic system that banks instead of believing in the average American, are deciding to double down on Wall Street and trying to recoup their 2008 losses.  This on the pretense that banks needed money to get lending going again.

One thing that is clear is the employment situation is in a major funk.  10 states now have underemployment rates of over 20 percent.  We are talking about Great Depression statistics here:

The above data is pulled from the Bureau of Labor and Statistics and is an average from the fourth quarter of 2008 to the end of the third quarter in 2009.  In other words, the data above is optimistic and doesn’t use the latest data that is even higher.  For example, California recently reported their U-6 rate is now up to 22 percent.  Michigan?  Their U-6 is now closer to 25 percent.  There is nothing remotely close to a recovery in the data above.

This recovery is unlike your daddy’s recovery because multinational companies can leverage cheap labor and a pathetically weak dollar to increase business overseas.  In past recessions when we actually had a manufacturing base, once the recession started ebbing you started to see domestic production pick up thus bringing people back to work:

The pattern is unmistakable.  After every recession since the 1940s, manufacturing jobs contracted throughout the recession only to pickup after the recession ended.  This trend started getting weaker in the 1970s.  Even in the early 1990s recession, manufacturing jobs picked up slightly throughout the decade.  Now, in the 2001 recession manufacturing has been plummeting and has completely broken the trend.  In fact, we now have the same number of people working in manufacturing as we did back in 1940.  One slight difference.  The U.S. had 132 million people in 1940 and now we have 307 million.  We have nearly 2.5 times the population and the same amount of people working in manufacturing.

The U.S. Treasury and Federal Reserve would want to convince you that a declining dollar is good for you.  This might be the case if you weren’t paid in U.S. dollars and most Americans buy imported goods that will become more expensive eventually.  After all, it isn’t like we are making the stuff anymore as the above charts show.  It is a myth that the Fed tries to sell.  If a weak currency is a good thing, Zimbabwe would be the world financial center.  Or consider the fact that we import most of our oil.  There isn’t much we can do about that.  Even with demand waning domestically, oil is now approaching $80 a barrel.  We can thank our central bankers for attempting to destroy the U.S. dollar.

And forget about employment growth.  We have lost 8 million jobs since the recession started in December of 2007, 22 months ago.  We have lost an average of 360,000 jobs per month since the recession started.  Where are these jobs going to come from?  What is troubling is how many of these jobs are gone for good:

Long-term unemployment is now at a record high.  Many of these jobs are likely never coming back.  For example, think of the tens of thousands who worked in the housing industry as mortgage brokers, bankers, and construction workers that now are going to need to adjust to a new economy.  Or if you want a specific example, think of Winnebago:

Here is a company that manufactured the consumer happy motorist dream of RVs.  Yet it was built on the idea of cheap oil.  At one point, at the March low, this company was trading 90 percent off its recent highs.  The stock is still off by 65 percent even with the current stock market casino rally.  Do you think this demand is every coming back?  The average American is now looking for cheaper goods and sadly, much of that is imported.  Instead of traveling the roads on $1 a gallon oil many are looking to make food last until the end of the month.

The government is in cahoots with Wall Street and maybe they don’t care what the average American is going through.  Clearly on the jobs front little of the bailout money is making its way down.  If we consider 79.9 percent interest rates on credit cards as helping the consumer then we really have things backwards.
Welcome to the new kind of recovery where jobs are lost and incomes get sucked into a vortex.  But at least you can still afford cable and see that wonderful CNBC ticker go up as those on Wall Street gamble the bailout money away.

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In fact, let us put this on a graph.  Be warned, this is a financially scary graph but get used to it, since this is the future:

What a coincidence that in the 1970s when President Nixon took us off the gold standard, we suddenly started having epic swings in surplus and deficit spending.  Without any standard, the fiat money world allowed our government to spend as much as the world would allow us and gave incredible power to the U.S. Treasury and Federal Reserve to print money out of thin air.  The government is arrogant at best if it thinks it can print money and at same time, allow revenues to decline.  Any company operating like this would be bankrupt in a short time.  In our case, foreigners are starting to worry and are exiting dollar trades and pushing up commodities like gold.

I’m not a gold bug and I won’t recommend you go 100 percent in to gold.  But make no mistake, gold is a trade against the stability of the U.S. dollar and the trust people have in the U.S. Treasury and ultimately our government.  There is good reason to believe this is going to go on given the massive budget deficits we are now operating under.  Now we are hearing whispers of stimulus version 2.0 and the Treasury has already talked about secretly bailing out the commercial real estate market.

States unlike the federal government, have to balance their budgets.  And many states are facing epic problems:

Source:  Pew Center, Zero Hedge

The sizes of the budget gaps are simply incredible.  It is a basic arithmetic problem.  The recession has caused record unemployment and profits to fall in the real world.  Sure, Wall Street is seeing markets up by 60 percent but this is casino like profits.  In the real world, unemployment is up to 10.2 percent and in states like California, the underemployment rate is up to 22 percent.  This is depression like statistics.

Take a look at the chart above.  7 states have budget gaps of over 20 percent.  9 out of the 10 states researched by the Pew Center study have seen revenues fall by over 10 percent.  These are reflections of the Great Recession.  States like California, Arizona, Florida, and Nevada built entire economies on the decade long housing bubble.  Short of seeing another housing bubble, these states are going to be in an economic funk for over a decade.  Where is the revenue going to come from?  So far, the federal government has demonstrated that all they care about is protecting the profits of Wall Street.  Did your paycheck go up by 60 percent?  Is healthcare 60 percent cheaper?  Is education 60 percent more affordable?  The 60 percent rally is a joke.  It is based on hot money and as you might have noticed, the only folks pushing out record profits are the banks.  Other bread and butter companies are showing profits because of firing workers and restocking inventory.  Is that really something to jump in the air for?

Just run the score card.  Let us see how things have changed over a one year timeframe:

Every measure seems to be worse except the stock market.  The unemployment rate nearly doubled in the year, 7 million more Americans are on food stamps, and foreclosures are higher.  But things are getting better supposedly.

And the foreclosure rate isn’t abating:

From 1999 to 2007, the U.S. foreclosure rate was much higher than that of California.  But after that, California’s housing market completely imploded.  This wasn’t any accident.  Much of this was brought on by toxic mortgages like option ARMs that were nothing more than financial time bombs.  The chart above is troubling on many fronts because it shows no abatement to the ongoing foreclosure disaster.  Most can understand that until foreclosures trend lower, any talk of a real recovery is rather mute.
States, like average American households, are dealing with the realities of a shrinking balance sheet.  Or to be more precise, the revenue side of the equation is quickly shrinking while debts are still elevated to bubble levels.  That is why some $12 trillion has evaporated from the net worth of U.S. households.

The October federal budget deficit is troubling.  Last October the government brought in $164 billion compared to $135 billion this October.   A 17 percent drop in revenues.  The federal government makes the state budget deficits look like child’s play.  At some point, the government is going to need to adjust the revenue side of the equation.  You can either raise revenues (taxes) or cut spending.  Since they are choosing to do none of the previous options, they are opting to devalue the U.S. dollar and putting all their faith in Wall Street and the banks to save us.

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All job cuts are not equal.  If we had to sum it up, paper pushing jobs in the financial sector seem more immune than good producing jobs.  Let us look at how the real employment situation is panning out:

government jobs

Since the start of the recession 22 months ago in December of 2007, the government has added 78,000 jobs employing some 22.44 million people.  It is interesting to look at local and state taxes that are being pummeled yet this sector is still up.  It would be one thing to create new jobs but looking at the chart above, jobs were never cut.  What did the government actually do?  States like California implemented furloughs and raised taxes in many cases.  Of course, the major issue in many states is the bloated pension system that puts an unsupportable burden on those who are actually still working.  I can understand that someone needs to live and support themselves in retirement.  But in California for example, you have many people receiving $100,000+ pensions and many only worked until their early 50s.  What is clear from the above is the government did not cut any jobs on a net basis.  So we can scratch this sector when looking at where the jobs were lost.

The next sector is the FIRE economy:

fire employment

Given the 8 million jobs officially lost in this recession, a mere 600,000 came from the finance, insurance, and real estate industries.  This is the sector that is largely responsible for the housing bubble and the entire finance mess yet it is not taking a major cut as it should.  Why?  The bailouts are targeted in protecting many of these Wall Street paper pushers.  In fact, you can see that in the last month it actually added jobs.  The 6.6 percent drop does not reflect the actual overall fall in employment.  Again, this sector is being supported by the trillions in taxpayer money.  So where are the job cuts really coming from?

Construction employment has taken it on the chin:

Construction employment is down by a stunning 20 percent since the start of the recession.  It is interesting that from the start of the recession, construction and the FIRE sector had roughly the same number of employees benefiting from the housing bubble but where the FIRE sector lost 600,000 jobs, the construction sector has seen 1,557,000 jobs cut, nearly 3 times the rate of the FIRE sector.  Apparently building a home is less valuable than writing a toxic mortgage.  Again, the government bailouts are protecting an over employed FIRE sector while throwing other sectors of the economy to the wolves. Keep in mind both of these sectors used the same underlying asset (real estate) to expand.  The housing bubble is now the U.S. Treasury and Federal Reserve bailout of the FIRE economy.

Durable goods manufacturing has also been slammed:

manufacturing jobs

Durable good manufacturing has fallen a stunning 18 percent since the recession started.  If we look at construction and durable goods, both sectors are experiencing depressions while the FIRE sector is experiencing a tiny recession.  And take this data point as a reference:

Durable goods and manufacturing:

December 2007 jobs:               8.728 million jobs

October 2009 jobs:                  7.121 million jobs

FIRE sector:

December 2007 jobs:               8.242 million jobs

October 2009 jobs:                  7.697 million jobs

This should tell you what is happening to many average Americans.  Only two years ago, the durable goods and manufacturing sector had 486,000 more jobs than the FIRE sector.  Now, the FIRE economy has done a role reversal and has 576,000 more jobs than the durable goods manufacturing sector!  Who are we really bailing out here?

Conclusion

Simply taking the employment report at face value is meaningless.  What is happening is the bailout structure is designed to prop up the primary industries that created the housing bubble.  Many of the FIRE jobs are over compensated Wall Street cronies who are using taxpayer dollars to gamble.  The real fact is many sectors of the American economy are in deep recession.  Unless you work for the government or the FIRE sector, chances are your industry is in a deep recession.  Then again, why else would the stock market be up by 60 percent since March?  It is easy to make money when you eliminate the biggest line item (employees) for short-term bottom line gains for those in the FIRE economy since your job is subsidized by the taxpayer.

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Let us first look at disposable income:

With over 70 years of data, disposable income has only gone negative on a year over year basis one other time and this was in the late 1940s.  This is really not a typical occurrence.  Yet when we deconstruct the GDP report and 3.5 percent growth, we realize that this equation:

GDP = private consumption + gross investment + government spending + (exports – imports)

A large part of that growth came from government spending.  The other growth came largely because of cash for clunkers with the auto sector contributing 1.6 percent of the 3.5 percent growth (typically about 0.1. or 0.2 percent).  In other words, there should be little shock that GDP was up.  Why not spend $2 trillion and make it go up by 7 percent?  Of course, any thoughtful analysis shows the error in this reasoning.  It is an adrenaline shot to the chest administered by the bailout syringe.  The U.S. Treasury and Federal Reserve are juicing the markets and hoping this recovery sticks.  The latest data relies on purely government back stops.  If we look at industrial production, things are still looking like a recession:

And much of the bounce is coming from restocking and refilling inventories to meet the current demand.  The real question is whether the demand will still be there without government spending.  That is yet to be seen.  In fact, there is already talks of a second stimulus and the government is still pumping money into the fragile housing sector trying to get Americans to buy homes yet again even though we just went through a decade long housing bubble.

Yet the average American is working less hours and earning less money:

This is a fundamental question here.  Most Americans don’t realize this but they are being taxed in numerous ways.  For one, the current bailouts and government spending is coming at the cost of a weaker and flailing dollar – you are being paid in a weaker currency:

Source:  Jesse’s Cafe

There is a cost for all this additional spending.  The only reason we have yet to see the higher cost hit the typical balance sheet is because there has been $12 trillion in household net worth balance sheet destruction.  This has occurred through the loss in real estate value and stock market value.  This is real wealth destruction.  Also, each bankruptcy and foreclosure in essence destroys the face value note and brings to reality a new cost.  In other words, a $500,000 mortgage that is now linked to a home that is worth $200,000 and is foreclosed and sold, will only produce a $200,000 mortgage (depending on down the payment).  So the system loses that $300,000 even if it was inflated values.  There is still unrealistic prices in the system especially in the $3 trillion commercial real estate sector.  That is why the Fed is reluctant to allow an audit of their books.

Americans haven’t yet felt the brunt of this but we are in a full-fledged disinflation period.  Rents are going down and this is the largest component of the CPI.  So those on fixed incomes are going to have to get by with less.  Just look at Social Security that suspended the COLA for the time being.  Have you looked at saving account interest rates?  Close to zero.  So the only game in town is basically the stock market (and commodities) if you want anything above 5 percent.  The risk-free days are over.  Even holding the U.S. dollar is now risky because of the massive spending.

If we look at the balance of trade, things have improved simply because Americans are spending more and our lower dollar has made our products a bit more competitive:

Make no mistake, the improvement above is largely due to less consumption.  So what will happen?  The U.S. Treasury and Federal Reserve want a systematic devaluation of the US dollar.  As the above chart points out, this is their current path.  They are satisfied that Wall Street is back to the good old days and the taxpayer is subsidizing their casino at the cost of the US dollar.  In their mind’s eye, they are looking for a decade long decline in the dollar followed by moderate to strong inflation.  When was the last time that you saw on the mainstream media the U.S. dollar debated?  In that way, we essentially inflate ourselves out of this bubble without the masses getting into a frenzy.  Even the banks are betting on this.

Wells Fargo is now talking about converting their option ARM loans into interest only loans:

“NEW YORK (Dow Jones)–Wells Fargo & Co.’s (WFC) strategy for modifying its billions in troubled Pick-A-Pay mortgages looks a lot like a game of kick-the-can-down-the-road.

Wells Fargo, the fourth-largest U.S. bank by assets, holds more than $107 billion in debt tied to option-adjustable rate mortgages, a quintessential loan product from the housing boom that allowed borrowers to make small monthly payments in return for increasing their mortgage balance. Now, many Pick-A-Pay borrowers own homes worth far less than they owe in mortgage debt, even as many of them can afford a full monthly payment that pays down principal.

To solve that conundrum, Wells Fargo is taking a gamble: The bank is issuing thousands of interest-only loans that will defer borrowers’ balances for as long as six to 10 years. Wells Fargo is wagering that an eventual rise in housing prices in the country’s worst-hit regions, along with a rise in consumers’ income, will eventually combine to cover the bank’s billions in underwater Pick-A-Pay debt.

“We’re banking on the fact the economy will improve and recover over time,” Michael Heid, co-president of Wells Fargo Home Mortgage, said in an interview.”

Wells Fargo is essentially betting on another housing bubble.  Think of an option ARM loan that is at $500,000 on a $250,000 home (58% of these loans are in California).  Wells Fargo is betting that the current borrower by 2019 or whatever date will then be in a home valued at $500,000 or more.  They are simply betting on another bubble spurred by the U.S. Treasury and Federal Reserve.  In Japan, real estate values remain depressed after 20 years.  This after trillions into their banking sector and trillions in fiscal stimulus (sound familiar?).

So going back to our initial question, if income is down where is the money coming from?  It isn’t coming from credit card companies because they are slashing limits and credit.  Right now it is coming from the government.  But it comes at the cost of breaking the dollar down.  Why else is gold now trading near $1,100?  The world won’t finance our spending spree forever.  Buying more cars and more homes is not a long lasting solution.  I doubt that has any long-term sustainability.  But the real question will come in 2010 with the stimulus running low.  Will the real economy make up for lost incomes?  Of course we need to create jobs and good paying positions for that but that has yet to be seen.  Until then, we are spending money we don’t have to buoy the economy.  Is that really good news?

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Americans leveraged debt in this decade to make up for their lost purchasing power.  Access to debt is now being limited.  But let us first look at a crucial aspect of the typical household that seems to be missing from the mainstream financial press, household incomes:

This is the latest data we have and we should spend some time on the above chart.  20 percent of American households make more than $100,000 per year.  The median income is $52,029.  In other words over 56,500,000 households make due with $52,029 or less per year.  This is the average American consumer and also helps to explain why things are still in a troubled state.  I put together a budget before for someone making the median income and given the updated income figure, things haven’t changed much.

Keep in mind the above data reflects the 2008 year.  A troubled year no doubt, but we have yet to factor in the increased unemployment brought about in 2009.  This data will be reflected in September of 2010 and we already know that incomes are going to fall yet again.  With 27,000,000 Americans unemployed or underemployed, we know the recession is deep and pervasive.  But what is usually missed, is even the employed in those 56.5 million households are struggling with rising costs of healthcare and education.  Housing costs may be going down but not because of a healthy economy.  What we are seeing is debt destruction.

Now try to factor this out with a real world budget:

We’ll go with the state of Georgia just as an example.  After taxes the median household is netting roughly $3,200 per month.  In August, the median home price in the United States came in at $177,700.  Now run the numbers on a FHA insured loan here with a 3.5% down payment:

Home Price:                 $177,700

Down payment:            $6,219.50

30 Year Mortgage Amount:                  $171,480.50

PITI:               $1,235

We’ll leave aside the $8,000 tax credit for the moment.  So let us run a simulation on this budget since this on the face seems to workout:

Before you start picking the budget apart, keep in mind this is only a sample.  If you look around your own neighborhood, how many people do you see with two relatively new cars?  A flat screen TV?  Designer clothes?  The above budget doesn’t allow for that.  And that is why we are seeing bankruptcies also rising in the current environment.  The spending was done outside of the budget via credit cards and other forms of revolving and non-revolving debt.

Credit card companies are quickly jacking up fees, putting onerous terms, and decreasing credit available to a consumer that is losing income.  You can see how quickly things can get out of hand.  Take for example the budget above.  What happens if one spouse loses their job?  The net income will fall but expenses will stay the same most of the time.  Or what about a medical emergency?  One night in a hospital can wipe out one or two years of an emergency fund without insurance and millions fall in this category.  What if the car busts the transmission?  There goes $2,000.  Things can escalate quickly without access to the easy debt machine that hid a decade of lost income.

But a sector that did do well in this time is the financial sector:

Source:  New York Times

The financial sector has cannibalized a large part of our economy.  After decades of bubbles and mismanagement, what have they left the average American with aside of the mountains of debt?  We have $3.5 trillion in commercial real estate debt to contend with.  Household net worth in the U.S. has fallen by over $12 trillion since this crisis started.  It is hard to see what benefit the financial sector has brought to the typical American family.  It gave people the illusion of wealth through debt but as we are now seeing, is quickly taking it away via bankruptcies, foreclosures, and yanking credit cards away.  I agree that many Americans over spent and now many are paying the price.  But what price does Wall Street pay?  In fact, they are rewarded with bailouts.

The notion that things are getting better is hard to understand.  If we mean that things are better because Wall Street is up, then yes, things are better.  But jobs are still not on the horizon and most people associate employment with a healthy economy:

During this earning season what is rarely reported is that the jump in profits with many companies is coming from one time inventory replenishment and also, by cutting your largest cost.  Employees.  Look at the above chart.  For every job opening you have six people trying to fill it.  And job openings are below levels at the start of the decade and we have more people in raw numbers plus, we have the 27 million unemployed and underemployed Americans. Just to replenish the lost jobs since December of 2007 we would need to find 8 million jobs.  Even if we added 150,000 jobs per month starting in November (not happening) it would take us over 4 years just to get back to where we were at the start of the recession.

Even after all the debt destruction, household debt is still weighing like an albatross on the American household balance sheet:

The above chart is important because it shows the stickiness of debt.  That is, unemployment has been going up since December of 2007 but debt goes down slowly.  The amount of workers in the U.S. economy is seeing a sort of lost decade.  But look at the financial obligations above.  We are only back to 2005 levels.  The bubble started much further back.  Why is that?  As we now know, a foreclosure takes a very long time while being laid off can happen in one day.  Those mortgage payments keep coming in while the income from work is cut off.  It isn’t like the mortgage suddenly adjusts to reflect the real economy.  The obligation is still there.  So is the auto payment.  And the credit card bill and everything else.  So debt that was once seen as a supplement to income is now a massive drain on your monthly balance sheet.

Just looking at this data I’m not convinced of this job less recovery.  We are still losing jobs at a rate of 3 million per year.  In fact, just to keep at a normal pace we need to be creating 150,000 jobs per month.  Until we get there, the average American is going to feel this as the deep recession that it is.

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