The Temple of Inflation – where does the typical Americans spend their money? A comparison between 1986 and today.
For most people that I know the mortgage and rent payment will eat up the largest portion of a monthly budget. This is the case for the vast majority of Americans as well. Housing is the biggest line item expense on the monthly budget. For the most part people tend to think that the Federal Reserve is fully focused on home owners but the reality is this is only an afterthought. The core focus of the Fed is to inflate the debt of the banks (massive amount) and the government away ($16 trillion and growing). Even a tiny bit of inflation is painful if household incomes are not going up. Household incomes adjusting for inflation are back to levels last seen in the mid-1990s. With the push for lower rates, rents have been going up consuming a larger part of a household’s budget. Even if overall inflation looks stable the big jumps in rents, health care costs, tuition, and food are hitting households very hard.
Deleveraging on good debt and ramping up on consumption debt – growth in auto loan debt, collection amounts, and revolving debt.
The grand US household deleveraging event continues as debt is paid off or more likely, wiped away via foreclosures and bankruptcies. What is hidden in the deleveraging trend is the growth of debt in certain spending categories. Keep in mind that not all debt is bad. For multiple decades the US had a cautious lending apparatus in housing with sizeable down payment requirements. With this came stable home prices and real equity build up for homeowners. However, in the 2000s the housing market was transformed into a casino and subsequently popped. The reason the deleveraging is still occurring is you have many households seeing mortgage debt wiped off the balance sheet and many paying it down. By far this is the biggest debt carried. However, we are seeing some segments like student debt explode and also revolving debt and auto loans picking back up. Deleveraging might be occurring in mortgage debt but re-leveraging in other forms of debt is also occurring.
Is College Worth the Price and Debt? Private student loans make up $150 billion of the $1 trillion in outstanding student debt. Private student loans grow hand and hand with for-profit institution growth.
Few will ever argue that getting an education is a worthy goal. College is seen as the gateway to a better life and mobility into the middle class. The middle class has been shrinking while the cost of attending college has skyrocketed. The cost to attend college has far outstripped any sensible economic measure and has climbed even faster than housing values during the peak days of the bubble. Is college worth the current cost? Many articles come out showing that college graduates earn more than non-college graduates. Yet this data rarely digs deep into the figures. What colleges did these graduates go to since the US now has over 4,000 institutions? How old are these graduates? These figures look at lifetime earnings so we are looking at a time when the US had a more vibrant economy and going to college was affordable. Let us examine if college is worth the current price.
Smoke and mirrors economy – 47 percent of the members in Congress are millionaires. 67 percent of Senators. Fed and Treasury money close to $7 trillion.
The Federal Reserve is really deep into uncharted territory. In no other time in history has the Fed been so intricately involved in the overall economy. The Fed balance sheet has expanded to an incredible level under very little scrutiny by the public or elected officials, many who have a vested interest in keeping the status quo. The banking system has been bailed out but the working and middle class still struggle. There is an interesting narrative going on in the press. Since Wall Street is on the mend and hefty banking bonuses are once again making the rounds, every corner of the country is now somehow celebrating in this same process, at least in theory. That is simply not the case in actuality. The system has been decoupled internally. Profits are made globally with local banking subsidies. The public is left holding the bag on massive speculation and is shifted out of any prosperity. It is odd what passes for good news. The fact that Congress acknowledges that they will deal with the fiscal challenges facing our nation is applauded even though this is their job and most are already millionaires. The Fed is still deeply intertwined in the current economy.
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?