Aug 4 2015

Comparing the cost of living between 1975 and 2015: You are being lied and fooled when it comes to inflation data and the cost of living.

Inflation is widely misunderstood by the public. Even economists tend to have a hard time coming to a general agreement to the true definition of inflation.  When you ask the person on the street what inflation is they usually respond by saying the “price of things going up” which is more of a consequence of inflation, rather than the cause.  Inflation is like a new car that lacks maintenance. At first, there is little notice of the issue but overtime major problems start occurring and eventually the car breaks down.  If you want to see inflation out of control just look at Venezuela right now where people are swarming stores for basic food items.  In the US inflation has occurred primarily because of the Federal Reserve’s banking policy.  Too much cash (or debt in this case) chasing the same amount of goods.  Only when we look at longer periods of time do we see the insidious nature of inflation.  Yet somehow, the data used to measure inflation misses much of what is happening because it uses derivative like measures.  For example, we use the owners’ equivalent of rent (OER) instead of the true monthly cost of owning a home.  Let us take a look at some data between 1975 and 2015.

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Jul 31 2015

The economy chugs along with consumers going into deep credit card debt: Credit card debt surges in top 25 US metro areas according to Equifax data.

Credit card debt is like crack for the American consumer.  A cheap alternative to pure spending cocaine but enough to keep you on the hamster wheel of consumption.  I recently discussed how credit card debt while remaining subdued since the Great Recession suddenly made a 180 degree turn.  Americans are spending money they don’t have on shiny plastic. Total outstanding credit card debt recently surged beyond the $900 billion mark.  That is a lot of consuming.  And with the average nationwide interest rate of 14% that means spending hamsters are probably dropping tens of billions on interest costs alone.  I found it interesting that I got a few e-mails proselytizing how great credit cards were after my last piece.  My reaction:  So you enjoy locking in future earnings for money you don’t have today?  Keep in mind people pray to the hedge fund gods for a 7% annual return.  Getting a 14% return is like finding El Dorado had a sister name AmEx.  It is amazing to get a 14% return (and with some cards, you are getting close to usury).  Equifax released credit card data on 25 US metro areas and the results are startling.

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Jul 28 2015

You Cannot Afford a $250,000 Home with a $50,000 Household Income!

People are still surprised why new home sales remain anemic and new home building is simply not materializing.  The latest Census data shows that the typical new home sold for $281,000.  At the same time we also realize that your typical U.S. household is making about $50,000 per year.  The reason home sales remain weak is because the vast majority of Americans simply cannot afford to purchase homes!  The minority category of Millennials that are doing well are coming from rich parents – the data backs this up.  You really don’t need a Ph.D. in Physics to figure this out but a household making $50,000 a year simply cannot afford a $281,000 home!  Let us be generous and look at the figures for a home costing $250,000.  We’ll provide you a full household budget so you can see the numbers at work.

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Jul 26 2015

Credit card debt makes up for lack of income growth: Credit card debt outstanding back up to $900 billion. Since 1980 household income up 300% while credit card debt up 1,760%.

The middle class started disappearing in earnest in the late 1970s.  Massive inflation started eating away at the standard of living for most Americans.  Yet much of this was covered up by access to debt.  Credit cards, creative mortgages, student loans, and auto debt all allowed Americans to continue acting as if prosperity was only an American Express card away.  Credit card debt outstanding is now back up to $900 billion, a number last seen during the Great Recession before the great deleveraging.  Americans have used debt as a means to cover up the reality that the middle class is disappearing.  Credit cards are probably the clearest example of spending money you don’t have.  Credit cards allow you to literally spend future earned money today.  We always hear that many pay their balance off each month.  Well the data shows something else.  There is $900 billion in credit card debt floating out in the system.

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Jul 22 2015

The financial gouging of the American college student: Tuition is up 300 percent from 1990 and total outstanding student debt has grown by over 1 trillion dollars since 2000.

Inflation is such an insidious standard of living destroyer.  Little by little those dollars in your wallet get worth less and you suddenly find yourself needing to go into large levels of debt to purchase cornerstones of the American Dream.  Going to college has been the dream for many Americans after the G.I. Bill was signed into law in 1944.  Even in the early part of our country, going to college was a privilege largely reserved for the elite and wealthy.  It wasn’t viewed as a public good until World War II.  The heyday of the US middle class was after World War II and slowly this has been chipped away starting in the 1970s.  As of today, going to college is fraught with so many financial landmines.  Working class areas are targeted by predatory for-profit colleges.  Many others go to quality schools but come out with too much debt relative to what they can earn in an environment littered by lower wage jobs.  This is the future of higher education.  But think of this jaw dropping stat: since 1990 tuition has gone up 300 percent.  You can rest assured wages have not kept up.

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Jul 18 2015

Millennials that are thriving in this economy are those with links to rich parents: The vast majority of other Millennials are mired in debt and unable to purchase homes.

Most young Americans are still living in an economy that feels like it is in a recession.  Yet there are Millennials that are doing well and are thriving in this economy.  How are they escaping mountains of student debt?  How are they gaining access to down payments to purchase more expensive homes?  The short answer is that they have rich parents.  This isn’t some Trumpism.  This is merely facts that are coming out of research from the Fed, Census, and Zillow.  For the vast majority of young Americans the last decade has been one of low wage labor and a market mired with very expensive colleges.  Despite the disappearing middle class many of those Millennials that are thriving are doing so thanks to familial wealth transfers.  We tend to romanticize the “self-made” person in the United States but it is increasingly becoming more difficult.  More wealth is accumulated in fewer hands and it is staying there.

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Jul 14 2015

The oncoming disaster in public pensions: The $4 trillion retirement savings deficit and the bill of payouts for pensioners.

Americans have done a very poor job saving for retirement.  In many cases, families simply have very little left over each month to save after monthly expenses chomp away at their net take home pay.  Pensions used to be common.  In 1975 you had 88 percent of private sector workers and 98 percent of state and local sector workers covered by defined benefit plans (that is a pension).  By 2011 only 1 in 5 private sector workers had access to a pension.  Public sector workers still have access to pensions for the large part but the math is not working out.  Glorious stock market gains have not made up for big pension shortfalls as retirees start pulling in payouts.  The numbers just don’t work.  Greece is an extreme example of public spending gone awry and pensions are a part of the math.  You have weak tax collection and massive payouts.  How does that math work?  It isn’t a question of pensions being bad but the underlying assumptions that are flawed.  If you want healthy pensions, expect to pay.  Yet people want it all with little coming in and politicians promise the world leaving future problems to predecessors to deal with.  In the US, many pensions are relying on future stock market gains that seem very optimistic to meet their liabilities.

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