Why inflation matters: How the Fed is creating real estate inflation and hiding behind inflation data to continue their expansionary ways. OER and Case Shiller divergence.
Inflation matters. It matters a lot. Contrary to what you may hear in the mainstream press the Federal Reserve has done everything to stoke the fires of inflation. The reasons for this include creating asset inflation that is understated in CPI data and also setting up a system where consumption is almost forced upon consumers. How so? With negative interest rates consumers are losing money by simply having their money in a savings account. Even a modest rate of inflation will erode purchasing power when banks are paying zero percent on your hard earned deposits. Yet this is all part of the design. Inflation matters because it does encourage spending. You want to spend today given that your current dollars will lose value tomorrow. The Fed likes inflation so much that it has reignited the housing market once again while it has expanded its balance sheet to over $3.3 trillion. Inflation absolutely matters.
Americans are slowly creeping back to their non-saving and debt based spending ways: Drop in the savings rate and shift in type of debts being taken.
The personal saving rate in the United States is on a multi-decade decline. Part of this has to do with Americans putting their money into alternative savings vehicles like 401ks and IRAs but a large part of this has to do with Americans simply not saving. Roughly one-third of US households have no savings to speak of. After the recession hit, the savings rate increased as Americans were forced to save money as access to credit halted and many started moving money away from stock invested vehicles. Yet this minor trend lasted only a few years. Americans are back to their debt spending ways but the type of debt that is being used has shifted. One of the big drivers of debt growth in our current economy is student debt. Credit card debt growth has slowed down but with the housing market turning around, more Americans are going into mortgage debt again. Are we setting up another debt crisis and are we forgetting the lessons of the 2000s?
Why do people feel poor even though the stock market is at a record high? The process of inflating asset bubbles and transferring wealth to targeted groups. S&P 500 up 145 percent from 2009 low.
The stock market provides a beautiful scent of success although most Americans will only catch a whiff of that aroma. The S&P 500 is now up 145 percent from the gloomy low reached in 2009. Even though this unrelenting trend upwards has added wealth to a few, the majority of Americans are still seeing the purchasing power of their dollars slowly erode. The one secure location for wealth in housing is now being usurped by Wall Street as investors begin to invest heavily in the rental real estate business. Speculation in the markets is once again booming. Japan had a mini-crash this week but the media cycle continues to pretend that printing your way into prosperity is somehow as easy as having central bankers pushing play on the iPod and expecting the hits to come one after another. The reason you likely do not feel the big gains of the recent run is because most of the gains have come from artificially low interest rates and companies slashing wages and squeezing profits out of current workers.
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?