The Middle Class Two Income Trap – Two Breadwinners plus Extra Money to support the Banking Industry. How Middle Class Americans are losing Ground by Supporting the Financial Sector.
If it isn’t enough that average Americans are contending with the rising cost of healthcare, education, and daily necessities like food now additional funds are going directly to the banking sector to keep them propped up like a money loving puppet. Since the Great Depression the rise of the middle class has been the envy of many people around the globe. The ability for hard working Americans to have access to an economy that supported them so long as they worked hard and followed an implicit guarantee with their nation. With this implicit guarantee it was assumed that the government would also protect people to a certain degree especially when it came to their financial well being. This did not assure a winning portfolio but it did mean we wouldn’t turn our stock market into a giant game of casino where the connected had a loaded deck. Much of the strong regulatory arm that came from the Great Depression was because of the speculative gambling during the Roaring 1920s. Yet as time went on slowly Wall Street took these structures away and now we are finding ourselves once again with the middle class largely at risk in the United States. It isn’t by accident we are in the situation we are in today.
The first important thing to understand is that yes, the income of middle class families has gone up since the 1950s but a large part of this was the rise of the two income households with women entering the workforce:
The above chart is disturbing in many ways because it bucks the nearly 50 year long-term trend of employment. Now, even with two income households many with rising job losses are finding they now have to make it with one income while inflation has eroded their buying power over the decades. In this recession 3 out of 4 job losses have been men. If you have any doubt regarding the insidious nature of inflation I put together a chart looking at various costs over the last few decades:
Part of this is due to the Federal Reserve and U.S. Treasury trashing the U.S. dollar over the decades. For example, in 1950 it took the median household income (which was largely a one income household) about 2 times the annual household income to purchase the median priced home. In 2008, it took the median household income (now largely a two income household) four times annual earnings to purchase the median priced home. In fact, the two income household has hidden a large part of how much the middle class has fallen behind in this country. Now with this recession, the deep cracks are now being exposed in the system.
Income inequality has also risen in this country and a large part of it is due to the financial sector. 1 percent of our population control 42 percent of all financial wealth. In fact, in the last decade the only segment of our population that has seen any sizeable gains in true wealth is the top 1 percent. Every other category has seen a loss of housing net worth, wage stagnation, and higher costs for daily items that consume a larger part of their budget. Just take a look at the chart below showing this change:
Source: CNN
The above is looking at a one income household in 1973 versus the two income household in the 2000s. It is interesting to note that in the 1970s Nixon took the dollar into a purely fiat system and since that time, the dollar has lost much of its actual value. This would be expected. The Federal Reserve with its banking lieutenants has been able to put our country so deep into debt that realistically we are in a position of never paying back all our outstanding obligations. The only way out is via inflation and with a fiat system that is the path we are heading down. This is important because when you look at the charts above prices rise for various reasons and inflation is a hidden tax. No need for higher taxes to bailout the banking sector when you can just destroy the purchasing power of middle class Americans by monetizing enormous amounts of debt as we have done.
That is why in the next decade, Americans are now working for someone else beyond their immediate household. A large chunk of their money is now going to the banking sector. This can be in absurd payments to credit card companies, loss of purchasing power because of the Fed, or other hidden methods of taxing the public. We are really at a crossroads for the middle class. If we dissect the data further we realize that even though things cost more, much of it has been financed through debt:
Ironically the family in the early 1970s had more discretionary income than the family in the early 2000s even with a dual income. Yet if you look around, it isn’t immediately apparent because of the massive debt bubble financed by the banking sector. Sure people bought bigger homes and newer cars but all this was under a phony veneer of success and was financed with debt. All of it was built around a mountain of debt. Yet here is where the big divide hits. Middle class families are now losing their homes through foreclosure. Many are having their cars repossessed because they can’t make their payments. Bankruptcy filings are soaring because people cannot service their debt. So middle class Americans are paying the price with the rules that are setup. Yet banks are not. They are sucking the American taxpayer for all their horrible bets and are not dealing with the ramifications of their actions. In other words, the bill is going to the middle class as the middle class is dealing with their own bad decisions. This is part of the system built around the corporatacracy model of government. Losses are socialized while gains are privatized.
And don’t kid yourself, this entire game was financed on debt:
And the small group of banks at the top now control a large portion of all FDIC backed assets in our country:
Source: FDIC, Bank Financial Statements
Forget about the Republican or Democrat parties, we are being governed by the financial sector of this economy. It is amazing how hard it is to get sensible legislation even after this great calamity. To prove this point, in California an insurance company announced they are hiking healthcare premiums by 30 percent in the midst of this recession even though they pulled in billions in profits. The government will sit back and let the middle class get fleeced because they are part of the problem. They speak a good game but are bought by the industry. Prove us wrong if this isn’t the case. Enough talk, time for action. From now on we need to focus on who is delivering results. If you can, take you money out of the big banks and put them in local regional banks. Let your local representatives know that their number one priority should be focusing on protecting our struggling middle class. Time to get some real reform or we really risk losing our middle class.
If you enjoyed this post click here to subscribe to a complete feed and stay up to date with today’s challenging market!The Only Certain Bet in this Market is paying Down Debt. Credit Card Rates Rise as Other Interest Rates Drop. $866 Billion in Revolving Debt Still Remains.
The global economy remains on unstable footing as we see debt problems slam the European markets with Greece in the current spotlight. Yet the problem of debt is not unique to Greece itself and it is fascinating that the world is only focusing on one country. The average American over the past four decades has taken on so much debt that household debt outstanding is now equivalent to the U.S. annual GDP. The biggest amount of debt is with mortgage debt. Yet with mortgage debt you are securing the mortgage to ideally a property that will reflect the amount of debt linked to the home. Part of the housing bubble problem stems from the hyper inflated values of homes and now we are seeing the ramifications of this with millions of homes being foreclosed on. But another large part of this bubble was around the usage of credit cards that hit their apex during this crisis:
For nearly four decades Americans’ love affair with credit cards grew unabated. The amount of credit card debt outstanding hit an apex in 2007 at the height of the bubble reaching $975 billion in debt (to put this in perspective Greece’s GDP is $367 billion and their current deficit is 12.7 percent of economic output). Unlike mortgage debt or even auto debt, there is nothing securing credit card debt. This can be someone going to a club and buying $300 in drinks for friends or taking a trip to Antigua and spending thousands and charging it up on easy plastic. It can also be in the form of consumer goods consumption like buying a new television set or additional appliances. Yet for the first time since data on revolving debt has been kept we have now seen it contract on a yearly basis. And part of this contraction stems from the Great Recession but also more people are paying down extremely expensive debt:
The above data comes from an interesting article from the St. Louis Federal Reserve. The author William T. Gavin examines the low interest rate and its impact on consumers. As his chart above highlights, even with the Federal Reserve lowering funds to record lows the average interest rate on credit cards has crept up even higher than in 2000 when the Fed funds rate was at 6.5 percent. With interest rates on savings accounts so low, it is definitely appealing for many consumers to pay down high interest rate credit cards down since this is a guaranteed return of 13, 15, 20, and even 79 percent on some credit cards. This low interest rate environment is creating some asymmetrical dynamics in the market. While the above shows interest rates on credit cards as being high, rates on savings accounts are extremely low:
A 90 day certificate of deposit is currently yielding 0.19 percent, or slightly above the rate you would get by sticking your paycheck in the mattress of your bedroom. So even as we see the amount of revolving debt outstanding decline, there is still $866 billion in credit card debt outstanding. Credit card companies are losing money on charging off accounts as bankruptcies across the country rise. Many times credit card companies are hiking up the fees whether they are annual payments or jacking up interest rates on even good paying customers. In this environment it is rather clear that if you have high interest credit card debt, forget about the stock market and focus all your energy on paying down that high debt.
This interest rate spread on debt and savings is enormous. And as average Americans move their money to safer deposits as the stock market now reflects a speculative casino, many are wondering how they will do with such low rates:
In this current environment it would seem that the best course of action is paying down high interest debt and more importantly, not spending beyond what you can reasonably afford. Unfortunately many Americans are now realizing that they do not have access to the same lending window banks have with their central bank. The bailouts were largely a method of shoring up the troubled assets within banks, not a bailout to help the balance sheet of average Americans. If banks had any faith in their customers you would see lending pick up once again. But this Great Recession has created a smaller number of quality borrowers. Or to be more accurate, there weren’t many quality borrowers to begin with over the past decade but that didn’t stop banks from making loans earlier in the decade. Once banks gained consciousness they slammed shut the door and they went into survival mode primarily by focusing on government support to keep them solvent.
Banks have very little desire to loan money when they are dealing with large imbalances on their internal accounts:
You don’t need the above chart to tell you that credit has contracted massively during this grand economic calamity. Just look at the amount of credit card solicitation you now receive in the mail. Long gone are those zero percent offers for 12 months. You might get a six month balance transfer offer at zero percent but you will find out in the small print the enormous 5 percent fee for moving any amount over. Or you might soon come to realize that your annual fee free card now has a service fee. These are the ways banks are trying to go after additional revenue streams from their customers (or if you like, taxpayers that saved them from extinction).
Until our system is reformed, these are the rules we have been given. If you have outstanding credit card debt ($866 billion tells us many do) start paying it down. Forget about the stock market for the moment. The stock market is highly volatile and with no real reforms yet, we are in for another crisis in the short-term since the same games that got us here are once again being played out. By paying down your credit card debt you are assured a fixed return for a defined set of time. In this current market, that is as close as you will get to any sort of guarantee.
