The big economies cannot avoid a soft default as they face their debt reckoning: U.S. and other central banks battle it out for artificially low interest rates on unsupportable levels of debt.
Would you lend money to someone that you knew would never pay you back? The answer is, probably not unless you are okay with burning through hard earned cash. The global central banks unfortunately have entered into terminal velocity when it comes to debt support. The U.S. carries a stunning $17.51 trillion in total public debt. This is bigger than the annual GDP of the largest economy in the world but this pattern is not only in the domain of the U.S. Other central banks like the Bank of Japan and European Central Bank have also entered a mode where digital money printing is the only way out. Everyone does realize that this $17.51 trillion is never going to be paid back right? The Fed needs to push rates low in whatever method it can because the interest payments on the total outstanding debt would crush our economy alone. The Fed is mainly looking out for this when it comes to facing the debt reckoning and why we are witnessing inflation in debt based items like housing and higher education. It should be clear that many large economies are simply in a soft default already. In other words, they can only pay their debt by financial chicanery.
The perpetually depressed American consumer: Stock market high and bounce in real estate does not assist in boosting consumer confidence. 57 percent of Americans think economic outlook is getting worse.
Looking at the stock market and real estate prices would lead you to believe that the economy is recovering at a healthy clip. The underlying conditions of the economy may benefit the financial and real estate sectors (both live off each other) yet for most American families conditions are not rosy. In fact consumer confidence since 2000 has never recovered fully. Two mega-bubbles will do that to you. It could be that people were irrationally exuberant in 2000 but wasn’t the housing mania of 2005 through 2007 also exuberant? The big difference of course is that the housing bubble was largely masking the decline of the middle class while in 2000 wages were reaching their inflation adjusted peak via actual employment income. So Americans had a right to feel giddy at this point since their income reached a “true” high. It is no surprise that many Americans have little faith in their political system run by millionaires that simply bend to every whim of lobbyist and powerful corporations. Is it then a surprise that the latest Gallup poll shows that 57 percent of Americans feel that economic conditions are worsening? What is going on if peak stock values and a boom in real estate values no longer bolster the confidence of the American consumer?
The dual income conundrum – Americans need to work two jobs to make up for stagnant wages and the sinister impact of a middle class being eaten away by inflation.
In the United States the dual income household is the status quo. In the late 1960s dual income households were not common. Today however two income households are the majority largely because many Americans require two incomes just to stay afloat. This has been labeled as the “two income trap” and in many ways, it is more like the two income illusion. You would think that by adding two incomes you would be doubling your purchasing power but since the 1970s male wages have collapsed while more women entered the workforce. When household incomes combine these figures the collapse in income doesn’t look so dramatic but it is. The added wage of another worker simply masks the impact inflation is having. It is a new reality for many families struggling to enter the middle class. Inflation has a powerful eroding impact on your purchasing power. If your income is stagnant and housing prices just went up by 10 percent that means more of your disposable income is going to be eaten up by this sector. If tuition is outpacing wage growth that means many people are going to finance higher education by going deep into debt. With the dual income household situation in the US, one plus one doesn’t necessarily equal two. In many case the illusion is that one plus one equals one.
Never leave home generation: Household formation goes negative year-over-year at steepest rate since recession ended in 2009.
Young Americans have taken on the brunt of this Great Recession. Since the recession ended, young Americans continue to be saddled with tremendous amounts of student debt. With a weak blue collar sector, going to college may seem like the only viable road into the middle class. Yet one thing is certain and that is, the current younger generation in the United States is either unable or unwilling to form new households. I would go with the former rather than the latter since Americans are fiercely individualistic and staying with mom and dad late into your twenties and well into your thirties does not have a mass appeal. Yet through the fog of debt based euphoria, the economy appears to be recovering for a small segment of the population. Real estate is up largely on the backs of investors leveraging easy money from uncle Fed. The latest figures show that household formation is contracting at the fastest rate since the recession officially ended in 2009. What is going on? Isn’t the stock market recovery an accurate barometer of the health of the real economy? Real estate values going up only mean that you have fast money pushing out regular buyers and also, making rents more expensive for a generation that is already having a tough time moving out on their own.
The death of retail: What do RadioShack and J.C. Penney say about the future consumer economy? Low wage retail work to take a hit.
RadioShack recently announced that it will be closing 1,100 of its 5,000 stores. Holiday sales were dismal and shares were pummeled dropping by 24 percent. The problem of course is that these 1,100 store closures will result in many Americans out of jobs in one of the biggest employment sectors in the country, retail. Yet this one company is indicative of a much larger trend in consumer buying. People are choosing to opt to buy from other avenues especially online via big giants like Amazon. However you do not need a large workforce when you have incredibly efficient supply chains as Amazon has in place. This will only create a greater divide on inequality in our nation since blue collar work has been gutted and even low wage labor is taking a hit. For example, Amazon generates about $600,000 in sales per employee. That is very hard to compete against. Even J.C. Penney’s recent run up in stock value does not reflect a longer term decent. At one point a few years ago J.C. Penney was trading at $41.55 a share while today it trades at $8.30 (an 80 percent drop). In a consumer addicted economy like the U.S. seeing retail take a hit signifies some bigger changes to our workforce. It also makes you wonder who will be buying all this stuff if more people are out of work or living day to day on smaller paychecks.
Household debt first increase in 4 years largely driven by massive increases in student debt. Auto loans showed increase volume in sub-prime loans.
In a recent post we discussed how personal income growth is having tough go at the current economy. However, with incomes largely stuck in the quicksand of a mediocre economy for the working class, we see that the elixir of spending is back at the table again. Debt spending is making up for the lack of income growth. Unfortunately major consumer debt growth with no subsequent increase in income is a recipe for disaster in the long-run. Yet people live for the short-run like a sprinter so the party goes on. That is why the recent Fed report on household and consumer debt is important because it shows a first quarterly increase in debt in four years. While this may be good for a consumer based economy it merely masks the underlying issues with income growth. Also, the media is running with the “consumer is back” meme yet a large reason why debt increased like it did was because of incredible jumps in student loan debt. We also saw that auto loans increased dramatically and our friend the sub-prime loan is now creeping back into the industry. I make no qualms that our economy is fully fueled by easy debt. Since the recession ended in 2009 much of the access to debt has been given to large banks and Wall Street finance. This has done a miraculous job boosting the stock market to record highs and also allowing for investors to crowd out households in the single family home market. It appears now, at an apex in the stock market that consumers are getting a bit of the nectar of easy debt.
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.