The day of reckoning for student debt has arrived and the bubble begins to deflate: JP Morgan exits the student debt market. Similar trends occurred with the subprime market in 2007.
The student debt bubble begins its inevitable decline from unparalleled heights. This week too big to fail bank JP Morgan issued a memorandum that it is exiting the student loan business. What is interesting in this move is that it is eerily similar to banking moves made back in 2007 as some banks started to back away from the subprime mortgage market. At that point, it was too late and the most toxic of the toxic loans were already collapsing ushering an era of over 5,000,000 foreclosures with another 2,000,000 likely to happen in the next few years. Student debt has surpassed the $1 trillion mark and delinquencies in student debt are now the highest of any debt class. With the announcement by JP Morgan, we are now getting a taste of what is to come. The day of reckoning for student debt has arrived.
To taper, or not to taper. Not the question if you are the Fed: Austerity intact while Fed balance sheet continues to expand.
The Federal Reserve has hinted at slowing down its Quantitative Easing machinery but that might face some challenges as the stock market experienced one of its worst months in over a year. This is not to say that the Fed should respond to the stock market when it sneezes but it makes it more unlikely that the Fed will adhere to its September taper announcement. Keep in mind that the entire QE strategy on the surface was to provide additional liquidity to US households. If that was the measure of success, QE has been a royal failure. As we will shortly see, credit to US households has not expanded in light of unprecedented Fed balance sheet growth. Money is being deployed but very ineffectually (if you are your regular US consumer). Funds are being diverted to large financial institutions while the public struggles with credit austerity.
Why are so many young Americans living at home? Record number of Americans living at home while student debt reaches another record.
While the unemployment rate continues to fall in large part because people are dropping out of the workforce, we reach another record which highlights a difficult economy for young people. A record number of young Americans now live at home. It would be one thing if this was being driven by a desire to stay at home but this is not the case. Economically younger Americans are simply having a tougher time starting their own households. Combine this with the record amount of student debt largely shouldered by young Americans and it is easy to understand why this trend is occurring. This living at home trend also helps to explain one of the reasons why homeownership has fallen overall. This is not a positive trend no matter how people try to spin it.
Long live the reemergence of the FIRE economy: Over the last decade GDP is up $5.2 trillion while the total credit market debt owed is up $24.5 trillion.
The current economy is juiced on the rivers of easy debt. An addiction that is only getting worse. Want to go to college? You’ll very likely go into deep student debt given the rise in college tuition. Want a home? Prices are soaring because of speculation but you’ll need a bigger mortgage to buy. Want a modest car? A basic new car that has four wheels will likely cost $20,000 after taxes after fees are included. Need gas for that car? The price of a gallon has quadrupled since 2000. Combine this with the reality that half of Americans are living paycheck to paycheck and you can understand why the debt markets continue to grow at an unrelenting pace. Here is some food for thought; in the last 10 years, GDP has gone up $5.2 trillion however, the total credit market has gone up by $24.5 trillion. An increasingly large part of our economic growth is coming from massive leverage. This is why the market sits fixated on the Fed’s next move regarding interest rates even though in context, rates are already tantalizingly low. The FIRE economy is driving a large portion of corporate profits yet most Americans are left in the cold winds of austerity.
Wealth distribution in US rivals a modern day Gilded Age: In 2013 wealth inequality at record levels. 72 percent of wealth in US held by 5 percent of the population.
Americans continue to live through a modern day Gilded Age. Wealth inequality is at its highest levels since the Great Depression, when names like Mellon and Morgan plastered the headlines. Yet this time around, the availability of debt provides the illusion that the playing field is even. Americans are massively in debt and when we look at actual wealth, we find that many have very little to their name. In fact, millions of young Americans are in a negative net worth situation thanks to their student debt. Wealth inequality has reached record levels because the system is now operating under a dysfunctional corporate and banking welfare structure. The public is forced to deal with compressed wages, weak benefits, and basically what we know as economic austerity. While this is happening, big banks use the Fed to their advantage and even when they lose, they win. This is how 72 percent of all the wealth in the US is held in the hands of 5 percent of the population (with 42 percent of this in the hands of 1 percent).
The epic crisis in retirement savings: Vast majority of Americans unprepared for retirement. Median retirement savings for those 25 to 34? Zero dollars.
If actions are a method of gauging interests Americans have little desire or ability to prepare for retirement. In fact, the amount of money saved for retirement is absolutely shocking on the low side. When you mention that the American per capita wage is $26,000 people seem shocked. This figure doesn’t coincide with the spend happy media’s perception of the American family. Even after the lows of the recession, much of the employment recovery has come via low wage jobs and cutting back pay. Saving money can only be accomplished if people have enough left over each month after necessities are taken care of. Many financial blogs seem to speak to a small portion of society and fully ignore the overarching data. For example, the median retirement savings amount for those 25 to 34 is $0. That is right, the majority of young Americans don’t even have a penny saved to their name. Do not think that as you move up the scale that things get all that better. We have an epic crisis when it comes to saving for retirement.
Let us count the ways of inflation: While the CPI understates inflation Americans are living out the days of a contracting standard of living.
Americans are experiencing the impacts of inflationary pressures on their pocketbooks. The Consumer Price Index (CPI) used by the Bureau of Labor and Statistics does a poor job of measuring inflation because it uses derivative measures to reflect the price of things we can readily get. The most obvious example is the measure used to value homes. The CPI missed the first housing bubble and is now missing the rampant rise in home prices again. Why? The CPI uses a measure called owners’ equivalent of rent (OER) which is a hypothetical measure of what you would get if you rented out your house. Yet as we know in many expensive markets, someone may rent a home for $1,500 but the full carrying cost of owning the place may be $2,000 or more even after tax advantages are considered. The bottom line is the Federal Reserve has pointed to the CPI as sufficient reason to continue using Quantitative Easing even though we are seeing large banks and hedge funds flooding the housing market. No inflation? Let us count the ways.