Personal income faces first year-over-year drop since recession ended: As incomes collapse, spending via consumer credit begins to increase.
There is little doubt that our economy runs on access to debt. Not a tiny bit of debt. But Himalayan mountains of debt. The banking crisis was pitched to the public as one of liquidity but in reality, it was one of solvency. The difference? One is a temporary inability to repay debts while the other is a complete mathematical inability to support current debts based on income. The Fed has done everything to increase access to debt to member banks to re-inflate their balance sheets. Those that think inflation is non-existent need only look at housing values, college tuition, and healthcare costs and see how realistic that is based on their income growth. This leads us to our current article in terms of personal income. The latest reading shows that personal income had its first year-over-year drop since the recession ended. This further underscores the massive disconnect between the stock market and regular American households. A large part of boosting corporate profits involved slashing wages, benefits, and households making due with less. This has increased the wealth and income inequality in our nation as the stock market reaches a new apex. What is troubling is that now that banks are flooded with easy access to credit, they are starting to lend to cash strapped households in a fashion similar to our last credit bubble.
Comparing the inflated cost of living today from 1950 to 2014: How declining purchasing power has hurt the middle class since 1950.
Inflation has a subtle eroding effect that impacts entire economies. In the United States, we have been fortunate to have relatively stable rates of inflation for two generations. Even in times of high inflation like the 1970s, people were able to adjust unlike places that experience uncontrolled inflation like Argentina is currently facing. Also, wages rose in tandem which helped buffer the pain of higher costs. Today however, inflation has eroded the purchasing power of the middle class. Only when we look at longer periods of time do we see the large impact inflation has on our ability to buy real goods and services. People found a piece comparing 1938 and 2013 prices on various goods and items to be enlightening. Since our middle class did not fully emerge until the end of World War II, it might be useful to compare the price of items back from 1950 to where things stand today. Has inflation had a big impact on our purchasing power since 1950?
Why the stock market is a sham for regular investors – Based on historical price to earnings ratios the stock market is overvalued by fifty percent. Only half of Americans own any stocks.
The stock market is largely seen as a barometer of economic health to the US economy. Turn on any business program and they report market prices as if reporting on it being a sunny or cloudy day. The financial markets are fully juiced on our current debt based system. Unfortunately it is taking more debt to get minimal returns and the reality is the juicing of the market is simply causing more wealth inequality in our nation. Financial institutions have first dibs on the easy access of debt provided by the Federal Reserve. This is why the housing market is now largely dominated by investors and banks cutting out regular home buyers. Young Americans are competing for positions in the low wage environment that is subsequently created. Yet the stock market is largely a sham for most Americans. Most do not have access to high frequency trading techniques that favor quick trades over buying and holding and corporate profits are up largely up on the slashing of wages and benefits. When we look at historical price-to-earnings ratios, we find that stocks are currently overvalued by at least 50 percent.
When the housing market is owned by Fed banks: Federal Reserve went from holding zero in mortgage-backed securities to over $1.5 trillion.
There are significant consequences with the Fed continuing on course with Quantitative Easing. On paper, it may seem that all is fine on the home front. However, many regular Americans are finding it harder to purchase a home in spite of a low interest rate environment. The Fed has created perverse incentives where big banks are leveraging low rates to invest in single family homes. This used to be a staple of asset growth for Americans but that is now waning. American households are cash strapped and having a lower rate does very little if incomes are not growing. Yet banks suddenly have a giant interest in being involved in the housing market. Why stop at being satisfied with an inflated stock market? The ability to access debt has been key to the re-inflation of this bubble. If you look at the mortgage-backed securities (MBS) market you will clearly see that the Fed is now the major player in this segment of the market.
The global debt reckoning – Total global debt at $230 trillion. Total world debt over 300 percent annual GDP. There is no escape from a reckoning with debt markets.
Total global debt crossed a troubling event horizon by going past the $200 trillion mark last year. Given the latest figures we are likely well above a total global debt of $230 trillion based on a comprehensive study done by ING last year. The banking sector rummages for every possible way of accessing debt. Global central banks from the Fed to the ECB to the Bank of Japan are now fully engaged in a digital printing end game. It isn’t so much the startling debt figures that are presented but the GDP that is actually backing up this insurmountable level of debt. The latest data shows that total world debt is running above 313 percent of annual GDP. To put this into perspective the US meltdown occurred when household debt reached about 120 percent total debt to annual GDP. The only way to keep payments current is with a low rate environment. There is no choice. So central banks will do everything they can to print this debt into oblivion. In many ways this is a reason that we have seen a rush into assets from commodities, real estate, art, Bitcoins, and anything that isn’t just a bunch of 1s and 0s on a central bank computer easily changed by the whims of politicians and those connected to them.
The shackles of consumer credit in a low rate environment – Banks would rather leverage low rates from the Fed than lend money to cash strapped American households. 15 percent average rate on credit cards and typical savings account rate near 0 percent.
In a world where debt equals the ability to purchase large items, access to debt is king. For this reason banks are the new modern day oligarchy since they have a nearly unlimited line of credit with the Federal Reserve. The public during the credit bubble days had access to nearly unlimited debt via mortgages, home equity loans, auto debt, credit card debt, and student debt. Since the credit bubble burst, access to credit has been severely limited to the public. It is interesting to note that credit card debt, the lubricant of our consumer economy is lower today than it was in 2009. Some $56 billion has been taken away from the credit card market for American consumers. Banks have the ability to loan but choose to speculate in real estate investments since many households simply do not have the incomes to back up large purchases. Part of being addicted to debt is that the withdrawal is painful yet banks have not faced any retrenchment while the public has been forced to adapt to credit austerity.
How crony capitalism is harming the economic prosperity of young Americans: College tuition up 1,140 percent since 1978 and wages are stagnant.
When you live life as a hammer, everything must appear like a nail. So when our economy is run and operated by the financial industry, everything must appear like a casino just asking for it in terms of speculation. Such is the state of affairs in a crony capitalistic system. The term gets thrown around but in reality, we do have a system that is punishing the working and middle class in favor of a small connected financially elite. The financial sector in our economy is so powerful, that the biggest financial meltdown in our generation resulted in nothing more than a hand slap and not one heartbeat was skipped on those big banking bonuses. In the meantime the middle class continues to shrink and young Americans are swimming in oceans of student debt. Many are graduating into a tough economy where the market is flooded with low wage jobs. Is this crony financial system benefitting young Americans?