Too big to fail or ignore: How the US went from over 13,000 banks in 1987 to 6,000 today. $7.4 trillion in deposits backed by $32 billion dollars.
Remember when too big to fail brought our economy to a grinding halt? Of course you do because this is a recent financial event with dramatic ramifications. In the time since the buffet of bailouts was rolled out you might be surprised that the too big to fail banks have only grown even larger and if they were too big to fail before, what happens when they become even bigger? Some walk around in a financially comfortable delusion about our current system even though we all realize that we will never payback our $16 trillion in national debt. You also have a banking system backing $7.4 trillion in insured deposits with $32 billion (that is, 0.43 percent). Yet in our current system the Fed is digitally inflating away our currency and limiting available banking options. Are we simply ignoring the too big to fail?
The bailout of the wealthy: stock market sham, income inequality, and crushed consumer sentiment. Peak debt, peak Dow, peak inequality.
In the midst of the stock market reaching record levels the Federal Reserve has increased its balance sheet to well over $3.2 trillion. The Fed continues to be the primary buyer of mortgage backed securities. This strategy has caused a flood of easy money from big banks into residential real estate as funds start chasing yield from under every rock. Yet the results are rather clear that this new stock market high has done very little to improve the lot of most Americans. Sure, we have a peak Dow but we also have peak food stamp usage, peak student debt, peak federal debt, and peak inequality. This is probably making many people rethink their notion of what constitutes a recovery. The bailouts have been incredibly expensive but the clear winners have been a very small fraction of Americans. The bailouts are also ongoing. While some of the bailouts have trickled down to some Americans most of the gains have been concentrated to a very small number of people.
Who’s afraid of a little bit of inflation? How low interest rates hide the real price of housing, college tuition, and cars.
Inflation is like the proverbial story of a frog in hot water. Drop a frog in boiling water, it jumps right out. Drop a frog in regular water but slowly raise the heat, and it will slowly boil into oblivion. Inflation has a subtle way of destroying purchasing power. Unless incomes are rising, which they are not, any minor price change is going to have a solid impact on buying power. Americans have been feeling this declining standard of living for more than a decade now. Yet the change has come at a subtle pace where few have reacted to it. For example, college tuition has soared in the last decade. Since incomes have not kept pace, many have gone into debt (from about $200 billion in 2000 to now being over $1 trillion today). Another big issue is with the rising costs of healthcare especially with many baby boomers now drawing on the medical system in the US. Anyone that has looked at going to college today or has required medical care will tell you that inflation is very much real in our economy. So who’s afraid of a little bit of inflation?
The long slog ahead for jobs: We are 9.45 million jobs short of where we should be and are unlikely to reach normal levels of employment before 2019.
Employment is the most important indicator of a healthy economy. The recession has left a deep scar and has set us back into a lost decade. Primarily for this reason many Americans are having a hard time jumping on this recovery that officially will reach a four year anniversary this summer. The long term projections for employment have picked up but the recession hit at such a profound level that it jolted the trajectory of job growth for an entire decade. Estimates put a return to “normal” employment deep into 2019 assuming no other major events happen. That is unlikely given our massive debt and the major demographic shifts that we are now experiencing. Over 47 million Americans now rely on monthly food stamps simply to get by. Our economy still faces major challenges but the most important one is putting Americans to work and having an economy that creates enough jobs for population growth.
European economy struggles under debt and staggering unemployment: EU unemployment at record while nations pile into massive levels of debt. Inflation censorship.
The European Union is the largest economy in the world combining the collective buying and selling power of multiple countries. If you’re biggest customer is having troubles, it is expected that the world would be concerned. Not so with the stock market. The EU is currently sitting at a high in respect to their unemployment rate and nations continue to be weighed down by enormous levels of debt. This is what is crushing Spain, Italy, and Greece. Yet there seems to be some underlying euphoria in all of it. Similar to our US market, the stock markets simply do not reflect the underlying fundamentals in these regions. This is why at the same time the Dow reached a peak, we reached a peak in food stamp usage. The EU is still facing deep economic issues but the markets do not seem to care. Probably because only a small portion of the population is even participating in the markets.
An economy of peak food stamp usage, peak Dow, and peak Debt: What does it say about our economy that at the same time the Dow Jones hits a peak, we have the highest percentage of Americans on food stamps?
It is a dichotomy that speaks to the current state of our economy. Food stamp usage has peaked at the very same time that the Dow Jones Industrial Average is setting new highs. Of course, the Dow is setting new nominal highs but still has a way to go to catch up to the eroding effects of inflation. You have to really ask how is it possible that at a time where so much financial wealth is available that so many people, over 47 million people in our country, are relying on food assistance just to get by. Where is all the wealth going? The financial system has been propped up with trillions of dollars of bailouts and loan programs and has allowed the same kind of speculation that caused our serial bubbles to once again emerge. Many people are speculating in places like Las Vegas and Arizona and crowding out your typical family simply looking to buy a simple home or find a rental. The fact that we are facing a peak in food stamp usage and seeing a new high with the Dow is very telling in the sense that it shows that we are truly becoming a society with a smaller middle class.
Inflation eats away the new peak in stock market: Dow is down 11 percent since 2000 adjusting for inflation. Looking at the stock market and the impact of inflation.
The Dow has now reached a new peak. The media is prancing up and down like a giddy school girl as if this had a significant impact on the bottom line for most Americans. Don’t let the details out that many companies have increased their bottom line by squeezing wages and cutting worker benefits. Yet the mainstream press can’t even get one thing straight with inflation. The Dow is actually down 11 percent from where it was in 2000 adjusting for inflation. After all, a dollar is only worth as much as it can purchase in the economy. The US dollar has been hit over this period as well. Real household wages are back to levels last seen in the mid-1990s. So the Dow “peak” is really more symbolic and many Americans realize this. Let us take a look at where the stock market stands today through the lens of inflation.
Debt based delusion: Fed spending far outstripping revenues, balance of trade, and business inventories decline.
One clear symbol of our new Gilded Age is that of the peaking DOW while food stamp usage is at a peak as well. Even though the DOW is only a reflection of a handful of companies, the media focuses on this as if it were a barometer of the real economy. It isn’t. Household net worth has fallen by 30 to 40 percent since the recession hit. But isn’t the DOW at a peak? Yes. But the stock market is only a minor part of the portfolio of most Americans. Also, most Americans derive their wealth from real estate which ironically is now being inflated not by families with growing incomes, but by big banks that are accessing cheap money/debt from the Fed and buying up available properties and crowding out average Americans. The net impact is higher rents and low supply. In other words we are inflating another financial bubble that is going to harm your typical American. Over half of Americans don’t even have a retirement plan in place. The government is blowing through money it doesn’t even have. Let us examine the current state of affairs.
The Sequestered Gilded Age: Top 20 percent of households control over 90 percent of all stocks and financial wealth: Bottom 40 percent of all households have an average net worth of -$10,600.
Income inequality is now at levels last seen in the United States during the Gilded Age. This was a time of incredible opulence for the few while the many struggled to get by. There is even a story of a Mrs. Stuyvesant Fish throwing a dinner party to honor her dog that arrived wearing a $15,000 diamond necklace. A very stark contrast to how most lived. In 1890 11 million of the 12 million families earned less than $1,200 per year. Of this group the average annual income was $380, well below the poverty line. While we think we are far removed from a time of such dramatic contrast, we now have a country where the stock market is reaching a peak, yet truly the benefits go to a small number of Americans. The top 1 percent controls 42 percent of all financial wealth (the top 20 percent control roughly 90 percent of all stock ownership and financial wealth). The bottom 80 percent of Americans control less than 10 percent of all stocks owned. People seemed shocked to find out that the average per capita wage in the US is $26,000. Is this kind of wealth inequality beneficial to our country?
New model of retirement, aka working forever. Americans woefully underprepared to face retirement and half of households have zero retirement plan.
Most Americans are incredibly unprepared when it comes to retirement. The goal posts keep shifting. Now for full retirement under Social Security people will need to retire at 67 versus 65. What is rarely discussed is that rising Medicare premiums are being taken out of monthly payments so the amount being received is already shrinking while the cost of living is going up. One startling piece of information that came out this year was that half of Americans are one tiny emergency away from being flat out broke. No wonder why we have a record 47.6 million Americans now on food stamps. When pensions were phased out starting in the 1980s many thought that the 401k or IRA would be the new way to save. Hey, Americans will stuff their money into the stock market casino and after 30 years, they would have a million dollar nest egg thanks to compounding. How did that work out? Let us take a look at where things stand today.