Spend or be financially doomed: Idolizing the gods of consumption and stoking the fires of debt based speculation. Has the Fed crossed the line of no return?
The Federal Reserve has created the perfect environment where savers are chastised and debt based spending is glorified. Our economic engine is powered by the fires of consumption. This has been true for many decades. What is different about our current space in time is the punishment savers are taking. Many banks through savings or even CDs offer rates that are hovering around the zero percent mark. Add in inflation of about three percent and you are actually losing money. The system is designed to punish any sort of conservative saving. The stock market continues to move up but it clear that most Americans simply do not have the funds to participate in this party. The current financial environment is really a perfect brew of punishing savers and encouraging debt based consumption. Will the elixir work this time around?
The facts behind the mountain of student debt: 13 percent of students owe more than $50,000 and nearly 4 percent owe more than $100,000. Student debt grew by 284 percent from 2004 to 2013.
Many Americans view a college education as a way to build a better life. College is seen as an avenue for better prosperity and the ability to pull yourself up beyond your current circumstances. In fact, after World War II programs like the G.I. Bill allowed many Americans the opportunity to pursue a college degree. In many cases, the United States at this time developed the largest middle class the world had come to know. This is still the case today but the economic trends show a shrinking middle class that is largely having a tough time competing in this quickly globalizing economy. One fact that stands out is that back in 2004, student debt was the smallest portion of all non-housing related debt in the US. Only a short nine years later, student debt is the largest portion of debt in non-housing related debt. What happened in this short period of time and what information can we pull from the mountains of student debt information?
Federal Reserve ZIRP has essentially destroyed household income growth: Households headed by those 45 to 54 see their real household income growth drop by 16 percent from 1999.
The Federal Reserve has pursued a zero interest rate policy as a mechanism for pulling the US out of the financial crisis. Interestingly enough low rates and heavy speculation were part of the cocktail that led us into the crisis in the first place. Ben Bernanke recently mentioned a bit of concern that speculation is once again entering the markets. The Fed of course is always cautious in their wording including saying things like sub-prime loans were no issue in 2007 right before the economy tanked. The Fed is truly in uncharted territory here with a balance sheet of $3.3 trillion and nationwide with incomes stagnating, the ZIRP move by the Fed isn’t exactly helping the middle class. A modest amount of inflation is disastrous when you are seeing your income stuck in neutral or seeing it move in reverse. Even older Americans are seeing tougher challenges (although young Americans have faced the brunt of this recession). What is the aftermath of ZIRP?
What does it mean to be retired in the United States? The age of disappearing pensions, dependence on Social Security, and stock market speculation.
A few days ago the stock market experienced a mini panic as someone hacked a reputable news source Twitter account and posted a sensational headline. The markets quickly reacted to this news. What was troubling is many algorithm-based trading systems are setup to scour internet information for these kinds of dramatic changes. Many of the quick trades hit with machines simply acting on their own programming within seconds. Of course the stock market came back up after the hack was mentioned but how in the world are regular Americans suppose to compete with this kind of stock market trading? First, most Americans have no investment in stocks. One in three Americans has no savings to speak of. In the early 1980s the idea was that Americans would move away from pensions and save into accounts like 401ks and little by little plug along so when retirement came, they would have a nice nest egg. 30 years later, this isn’t remotely the case. The plan has failed. For many, retirement is largely just a giant illusion. Many will be working well into their very last years. Pensions are becoming a massive anomaly. So what does it mean to be retired in the United States?
Feeling rich through debt: Modern banking has replaced real economic prosperity with massive levels of debt. Housing affordability reaches multi-decade highs while household incomes retreat to 1990s levels.
One of the biggest headlines right now is how the housing market is pulling the entire market up. Housing prices are soaring while the stock market is making record highs. Yet a large portion of the housing run-up is being caused by easy money that has been created by the Federal Reserve. Banks are out-bidding regular home buyers so it is dubious how much of this jump in prices is really helping households. Affordability is up because mortgage rates are incredibly and artificially low. Another bubble is brewing in this economic stew yet this time, it doesn’t seem like Americans are feeling all that richer since most of the new access to debt is being given to large banks that are outbidding regular home buyers. In some markets, investors are purchasing 50 percent of all homes. So what use is a low interest rate if investors are going to outbid you? The game is the same this time. Housing is the juice machine once again. Incomes adjusting for inflation are back to levels last seen in 1995 so the easiest way to make Americans feel wealthier is by increasing their access to debt.
Inflation in the most important things: Inflation hitting housing, tuition, and medical services. Is the Fed reinventing another debt based bubble?
Household income is a vital measure of the overall well-being for most Americans. This is why it is important to try to understand why overall household incomes are back to levels last seen in 1995. This is a critical barometer that measures the health of the US middle class. Yet we continually see the argument that inflation is a good thing and since the CPI is registering such a low level of inflation, that the Fed should have a free-ride when it comes to digitally printing our way out of the recession. Yet even a tiny level of inflation is going to hurt when wages are stagnant. That is our current predicament. The one area where Americans spend their most money, housing is becoming more expensive courtesy of the Fed. Inflation is around you if you actually pay attention.
The young, educated, and massively in debt college generation: Total student debt outstanding approaches $1.1 trillion. 65 percent of all outstanding student debt held by those 39 and younger.
It is interesting to hear older politicians take the podium and wax and wane poetically how young Americans are not working hard enough or need to take responsibility for their actions in the current economy. The reality of the situation is the recent recession has punished the young disproportionately. The young have seen their net worth crushed and job opportunities shrink in the current recession. Most of the student debt outstanding is in the hands of younger Americans simultaneously going up with rising college tuition. The price of going to college can no longer be support by merely working a minimum wage job. I’ve heard some out of touch politicians argue that instead of going into debt, current students should work instead of going into debt. Even with a minimum wage job someone would have to work 40 hours or more just to cover a regular state school tuition in most states in the country. The student debt problem is largely a young American issue.