The contagion of the European Union and banking debt – 20 European Banks have liabilities above 50 percent of their home country GDP. Why an EU FDIC is highly unlikely in the short-term.
The crisis in Europe is boiling over yet again. The central connecting factor of all of this is too much debt relative to production. Debt in itself is not a bad thing. If you borrow modestly for a home and have sufficient income to cover your mortgage payment then this might actually be beneficial. When things go haywire is when you leverage up. You had people buying homes that were 10 to 12 times their annual income. This however is a modest example compared to investment banks that were levered 30-to-1 and in some cases even higher. The issue with the European Union is the lack of cohesion but also the amount of debt relative to their production. True colors do not shine in boom times but do come out in crisis. The issue at hand for the moment is that stronger more productive economies with moderate levels of debt will need to step in if they are to bailout the periphery where debt levels are extreme relative to the local country GDP. Politically you can see how this is not going well. In the US, even though the bailouts were geared heavily in favor of the banks, few doubt the power of the Fed in stepping in and bailing out a big bank in California all the way to New York. This is not exactly the scenario playing out in Europe.
The burden of unsupportable debt. US debt-to-GDP growing at a pace rivaling certain European nations – The dramatic problems of peak debt in 2012.
What makes this global financial crisis unique is that it is based on unsustainable levels of debt. In historical cases you would have sovereign nations defaulting on their debts but these were more isolated and clustered, not global issues. Today virtually every large crisis that is hitting is occurring because of peak debt situations. No one metric can tell you when a country will tip into crisis but there is definitely a combination of confidence breaking down and simply the inability to pay back said debt. Many countries have hit this breaking point; Iceland, Ireland, Greece, and Spain. Many other nations teeter closely on that thin line of solvency. These breaking points do not just happen overnight. They incubate and slowly expand until a pinnacle is achieved only to reach a point where action is necessary. At this point in many cases it is too late. That is why when we look at the debt to GDP ratios of countries we are quickly reminded that most are moving in the wrong direction.
Starting life in the negative net worth column. What the Fed does not want you to know about American net worth figures.
The reports on American wealth from the Federal Reserve and U.S. Census did not get the press they deserved. You would think that an overall decline of 40 percent for household net worth would get the attention of the press but that might throw a wrench into the consumption machine that they are promoting. Up until the housing bubble burst, practically every other commercial was financed by real estate firms and banking institutions. Once that money dried up it was as if nothing happened. This ability to ignore crucial figures is partly to blame for our slowly evaporating middle class. It seems people are more comfortable losing this little by little versus questioning the bigger aspects of the system. The Fed and Census reports only go up to the end of 2010. Yet if we were to go further we would realize that the typical net worth of Americans has fallen even more while a very tiny minority has been increasing their wealth at a steady clip.
Financial panic button for younger Americans – The sandwich generation saw a 59 percent decline to their net worth as they deal with college aged students living at home and elderly parents.
Unfortunately more data pointing to the deterioration of the middle class came out this week regarding net worth figures. One of the more ominous data points regarded the sandwich generation of those taking care of college aged kids and parents. The net worth figures this time released by the US Census coincide with the information released by the Federal Reserve. In short, American balance sheets are in a deep panic. Over 90 percent of Americans have been crushed through this recession if we examine net worth data. They have seen their wealth decline from a net worth perspective but also their incomes have fallen. Not the ideal sort of combination for economic prosperity. The information released is troubling but beyond that, it must serve as a push for a panic button to fight for the middle class. Whether people acknowledge or not, the middle class is being lost day by day.
The broken tassel of American higher education – College debt defaults bring up questions about repayment structure. Is college even worth the current costs?
As hundreds of thousands of young American enter the employment market with newly minted degrees, the clock begins to tick on those heavy student loans. The majority of student loans do not enter repayment until six months after graduation. Yet we are facing tectonic shifts in higher education. The cost of going to college, seemingly the only path to what remains of the middle class, has far outstripped any sensible measure of inflation. As young graduates leave school many are saddled with tens of thousands of dollars in debt and the reality is, many are entering a lower wage workforce where pensions are a thing of the past, healthcare is largely shouldered by employees, and employment security is nearly nonexistent. Keep in mind this is the market for recently minted graduates which are a small segment of our US population. There are countless horror stories of student debt including debt collectors going after parents of a deceased son. Welcome to college circa 2012.
The global addiction of central banking stimulus – Contagion spreads to Spain as 10-year edges to 7 percent. Life in a perpetual quantitative easing world.
Financial markets around the world are now desperately dependent on central bank stimulus. The US recovery is largely dependent on the Federal Reserve funneling loans into the system via the quantitative easing process and other archaic forms of money development. It is interesting how the Greek stock market rallied this week merely on the notion that pro-bailout parties will be elected and thus allows even more debt to be injected into the system. Yet this does not solve the core problem that too much debt is swimming in the system. Central banks do not create any real tangible product in the economy. They have the incredible power to inject resources into banks and thus create “money” in the real economy. Yet this only happens if banks lend this out to consumers instead of using the funds to speculate in complicated global money making schemes. The whipsaw behavior of the market highlights the massive addiction to central banking stimulus we are in.
How to lose 40 percent of your net worth in 3 years – Americans see their net worth collapse during the recession. Federal Reserve survey highlights a case of austerity for the masses and social welfare for the politically connected.
Working and middle class families already feel the burden of a more limited financial middle in our economy. What was once taken for granted such as affordable quality college education, homes with moderate mortgages, and healthcare costs that didn’t put families on the verge of bankruptcy are now largely harder to come by. The Federal Reserve in their triennial Consumer Finance Survey (CFS) showed what most of us already know. The middle class has been crushed since this recession. The survey looks at data going back 18 months but the trend is unmistakable from 2007 to 2010. Middle class families were crushed as their number one asset in housing has plummeted while stocks which are largely consolidated in the top echelons of our wage earners had a stellar recovery since 2009. The median net worth of families fell a stunning 40 percent over this period.