Quantitative addiction and the allure of low interest rates – US paid $454 billion in interest payments alone in 2011. Equity in real estate for households cut in half.
Today I was looking at the total public debt outstanding and the current figure seems surreal. The total public debt outstanding is now up to $16.27 trillion. We’ve been on this path for many decades of spending more than we earn but the problem is we are reaching a peak debt situation. It is hard to say how much debt is too much debt for a country but a generally agreed upon figure is when the debt goes above 100 percent of annual GDP then issues begin to arise. The US fortunately is able to get incredibly low interest rates on world markets by a variety of methods including having the Fed use quantitative easing techniques. Given the size of our debt, low interest rates are sold as an aid to US households but the reality is that a more important reason is to keep payments on interest lower. What are the consequences of too much debt?
Recession probabilities – For the 50 million Americans in poverty the probability of a recession is 100 percent. Growing economic divide for working class.
The probabilities of the US slipping into another official recession are growing. Don’t tell this to the 50 million people that are reportedly at the poverty level according to a new US Census report. This trend isn’t something new and it certainly is not going to be resolved overnight. We have nearly 47 million Americans receiving food stamps so the probability of slipping into another recession should not come as a shock. The fiscal cliff is not a surprise. We’ve known that unsustainable debt growth would ultimately lead to a day of reckoning. There are now rumors that a patch work for one year is going to be applied to kick the can down deeper into the future. Look at how well this approach is working in Europe. The core problem of this debt crisis has yet to be resolved. Let us examine the recession probability further.
The rise of college students applying for food stamps – Mixing of college debt, part-time work, and food stamps. Working 40 hours a week at a minimum wage job does not cover basic costs for a college education.
The drawn out election campaign has now come to an end and very little substantive action is likely to be taken to assist the middle class. Even more disturbing is how little attention was given to the growing number of poor Americans. Almost 47,000,000 million Americans are now on food stamps, a record both in nominal terms and also as a percentage of the population. Aligning with this record figure in food assistance is also the large burden of attending college. A telling trend has emerged where many college students are now applying and using food stamps to get by. At one point in the not so distant past, it was possible to take on a part-time job and attend college while coming out with little debt (or no debt). That balance is now largely gone with stagnant wages and college tuition inflation soaring through the roof. What does it say that many of our young Americans need to take on food stamps just to get through college?
A nation in the pangs of deleveraging – The long-term trend of a declining dollar and a collapsing middle class.
As Americans go out to vote many go blissfully unaware of the reality that our total public debt is now above $16.2 trillion. If your only source of information was the mainstream press this fact rarely came up in any debates or journalistic investigations. The discussion of stagnant household income never even came up in any of the important debates. It was all simply accepted that the decrease in the standard of living was somehow a normal part of the process. The squeeze in the middle is so extreme that we have dollar stores symbolically cropping up in places like the Silicon Valley and Beverly Hills. Rich and poor but very little left for the middle. While momentum continues to ebb the economy forward we are entering what you can describe as stagnation. An economy limping along while American households slowly undergo a painful process of deleveraging.
Dollar stores in million dollar neighborhoods. 99 Cents Store looking at Beverly Hills location in rise of the low-wage and high-wage economy. 1 out of 4 working Americans in low-wage work.
Whenever a jobs report comes out I always ask what kind of jobs are being added. There is a wide gap between skilled and unskilled labor building in this economy. Those without the skills for select fields are being left behind to pickup jobs in the growing low-wage service sector. It used to be the case that blue collar work with one paycheck was enough to pursue the American Dream. That is definitely no longer the case. We have 50 percent of college graduates under 25 working in jobs that do not require a college degree or are simply unemployed. What we are seeing is a persistent trend that is creating a low-wage economy. The system is learning how to work around this ongoing trend. We now have a solid expansion of dollar stores catering to low income Americans. Dollar stores are also popping up in unlikely locations. That business is booming with 1 out of 7 Americans now receiving food assistance. The US has a large portion of our population working in low-wage jobs.
European Union reaches highest unemployment rate since crisis started – Spain hits 25 percent unemployment rate for first time. The missing EU crisis headlines.
During the height of the US Great Depression, the unemployment rate stood at 25 percent. This was a devastating experience for our economy and shifted policies and geopolitics for decades to come. So when you have the European Union, the world’s largest trading bloc with two countries experiencing unemployment rates of 25 percent people should be paying more attention. The unemployment rate in Spain for the first time hit the 25 percent mark last month. The figures are more troubling when you dig deeper into the data. Greece is also facing tough economic times. At the core of the crisis is the subject matter of too much debt. Spain is pulling back from a busted housing bubble and Greece is dealing with massive debt-to-GDP ratios. We trade heavily with the EU so what happens in Europe is bound to have an impact in the US. Is the crisis in Europe solved?
A debt inspired milestone – US Public Debt to GDP ratio over 102 percent. In the early 1980s public debt grew at one point by 20 percent. We hit that point in the 2000s yet GDP did not come along.
What is the significance of having too much debt? Does it even matter? It seems that politicians understand something must be done but while the bickering occurs, the status quo remains. We recently surpassed a milestone when it comes to our debt. Total US Public Debt to GDP now stands at over 100 percent. That is, we have a larger public debt than what we produce per year as an entire nation. The last time this occurred was during World War II. Europe is dealing with massive debt as well and many countries within the union are in depressions like Spain and Greece. There now seems to be a marginal impact on the real economy with every increase in the public debt. There isn’t a fast rule of thumb as to what is the maximum level of debt but going over 100 percent of our GDP is not exactly a good starting point.