Crossing the debt Rubicon. Does debt even matter? Over $5 trillion in Federal debt now held by international and foreign investors.
In most economic literature there seems to be a tipping point at which a nation enters a precarious state in which too much debt has been taken on. A typical point occurs when a country hits a point where annual GDP is surpassed by total outstanding debt. We recently crossed that threshold. Another long-term trend we are living with is depending on the lending and willingness of international investors to put their money into the US. Today over $5 trillion of Federal debt is now held by international investors. In essence, we need their money to keep going at our current rate. While the economic contraction has put the albatross of austerity on the necks of most households, banks and the government continue to spend as they once did. Speculation is rampant again. If you listen to some you would think that debt simply does not matter anymore. If that were the case, we wouldn’t be jumping from one crisis to another dealing with our level of obligations. At a certain point there is no more can kicking.
The difference between investing in the dollar store economy and living in it: 20 percent of Americans now receiving food stamps. Dollar stores become a growth industry and top one percent gobble up all income gains after recession.
Lost in the tireless cheerleading for the stock market which in reality, is largely a sophisticated sham for most Americans, we had a report from the Department of Agriculture that should put things into perspective. In the latest release of data for November 2012 (released in February 2013), the report noted that 141,067 Americans were added to the food stamp program known as SNAP. This is a massive increase at a time when the stock market is soaring to near record highs. For the record, the S&P 500 went up 0.28% for the month of November while we added a stunning 141,067 Americans in the same month to the food stamp program. This brings our current total to 47.69 million Americans that now rely on food stamps. To highlight our growing structural issues we now have a mind jarring 20 percent of our civilian non-institutional population on food stamps. What does this truly say about our economy?
The higher education racket gets long in the tooth: For-profits account for 47 percent of defaults but make up only 13 percent of total enrollments.
Bubbles do not burst in a nice orderly fashion. In fact, incredible graft enters the system where it becomes obvious to any bystander that the bubble is going to burst. This is the case for higher education. The US has over 4,000 colleges and universities, with many of them operating like glorified paper mills. Similar to the apex of the housing bubble where we heard about no income buyers qualifying for hundreds of thousands of dollars in mortgage loans, we now have many Americans diving into for-profit institutions that operate at the level of paper mills for tens of thousands of dollars of non-dischargeable student debt. Not only is the for-profit sector a sign of the worm turning for higher education, but many other institutions have jacked up prices to levels that are simply unjustified. This bubble is getting ripe for the picking.
Are stock investors coming back in at another debt induced peak? How regular stock investors are horrible at market timing.
The media is falling over itself with articles on how fantastic the stock market is. The fact that the S&P 500 is now up from the March 2009 lows by over 100 percent seems to put the financial crisis in the annals of history. Yet for most investors, the stock market is largely a casino. For example, if we take a look at the fundamentals we realize that much of the meteoric rise has come courtesy of big institutional funds trading on low volume. The retail investor has been largely absent because first, nearly one third of this nation has no actual savings. It is hard to save with no money. Next, you have the median household income at $50,000. With the rise in tuition, healthcare, and now housing values once again the cost of living is getting more expensive. But of course, just like at the peak of the tech boom, the average investor is now inching slowly back into the waters only to realize that much of what has occurred has been on the backs of giant piles of digital dollars printed by the Fed. Are investors making another investing mistake?
The coming pension crisis: States face a $3 trillion funding gap. Only about 10 percent of Americans now covered by pensions.
Many Americans look at the crisis in Greece and shake their heads wondering how it is possible for an entire country to derail the future of its younger generation. One big problem in Greece was massive government liabilities funding very generous pensions. Yet this came at an enormous cost. The US is facing a different crisis but the markets have already responded over the last few decades. In the early 1980s, roughly 60 percent of private sector workers had a pension. Today, it is down to 10 percent in the latest data and will likely continue to decrease. For young Americans entering the workforce, the self-funded 401k is likely the only path to having a nest egg and any sort of retirement. This is why so many people get angry when they hear about some in California that retire in their early 50s pulling in annual pensions of $100,000. Over 20 to 30 years this can range from $2 to $3 million of payouts. And we wonder why states face a $3+ trillion funding gap with pensions. Are we simply ignoring another looming crisis?
The relentless punishment of the American saver. Fed policy has encouraged spendthrift attitude and yield seeking behavior from Americans.
The Federal Reserve has actively pursued a policy that punishes American savers. The drive to push interest rates lower has inflated both the stock market and housing market once again. Yet little of this gain has trickled down into household income for Americans. The primary reason for this is that most Americans do not derive a significant portion of their wealth from stocks. In fact, a large portion of Americans are living paycheck to paycheck so if the Fed was really interested in boosting wages, they would have looked at income first instead of making it easier for banks to borrow money. Since 2008 savings rates at banks have been below one percent. In many banks, they have hovered slightly above 0 percent. Unfortunately the slow eroding power of inflation has eaten away at the purchasing power of Americans. For many, the choice has been to simply spend income as it comes in or try to chase yields in other markets. Ultimately the prudent saver has been punished.
The United States of Debt Addiction: Our reliance on debt has created an entire economy fortified in the fires of moral hazard and fiscally dangerous leverage.
16 point 7 trillion dollars. That is our current national debt. 12 point 8 trillion dollars. That is the amount households carry in mortgage and consumer debt. We are now addicted to debt to lubricate the wheels of our financial system. There is nothing wrong with debt per se, but it is safe to say that too much debt relative to how much revenue is being produced is a sign of economic problems. At the core of our current financial mess is how we use debt as a parachute for any problem. We’ve been masking the shrinking of the middle class by allowing households to take on too much debt for a couple of decades. The results were not positive. Too this degree, we have now created a massive moral hazard economy where savings are punished into oblivion. There is very little incentive to put your money in a bank account yielding zero percent interest when real inflation is eating away at your money like a hungry wolf. So what do people do? Well many simply cannot save and therefore choose to go into debt to finance cars, housing, and education with very little down. Where does this debt addiction lead us?