The day the credit markets awake from a slumber – $1 trillion in consumer debt currently delinquent. Student debt continues to grow adding fuel to the higher education bubble.
With much of the attention being diverted to the cascading financial crisis in Europe something was missed in the United States. The incredibly important quarterly consumer credit report released by the Federal Reserve highlighted some disturbing trends. The first overall point is that the American consumer continues to deleverage. Yet with a system built on massive debt and consumption this can only mean a contraction. In the report however the total amount of student debt outstanding grew a whopping $30 billion in one quarter bringing the official total to $904 billion. This should tell you a few things about debt in the US. The first point is that debt backed by verifiable income is falling based on stagnant wages and debt based on easy financing (i.e., student debt) continues to expand. The report also showed that total household debt fell by $100 billion in the last quarter highlighting the continued austerity being experienced by many Americans.
The end game of global leveraged debt – double-digit percentage point market declines in Europe and Japan and the danger of refinancing debt with longer term debt.
There is a painful realization that shifting debt around like a game of musical chairs has little merit unless real production is achieved as an end result. May was a disappointing month for markets in general. While the S&P 500 certainly fell, markets in Japan and Europe took double-digit declines. The massive amount of leverage and debt is simply being shifted around via Long Term Refinancing Operations (LTROs) in Europe. The market has little faith in this since a day of reckoning is hard to avoid even though large financial institutions seem to think they can shift away risk via fancy algorithms. To the contrary, these formulas have perfected a system that is simply dismantling the US middle class. A financial crisis built on debt is trying to find a solution in higher levels of debt via these same institutions.
Saying goodbye to the middle class concept of retirement – many workers plan to work up until they are 80 well beyond the typical life expectancy of Americans. How long will $25,000 last in retirement?
The romantic concept of being able to retire on a sunny beach with endless drinks is a modern notion largely pushed by mainstream advertising. It is hard for many middle class Americans to imagine a world where retirement is a luxury for the very few. However that is the path we are now following. The ability to retire is being severely impaired for most Americans given their lack of savings but also the massive spending occurring by the government. Recently we have heard that Social Security is expected to run out of funding far quicker than was once expected. This information in itself is troubling but couple that with the incredibly low to non-existent savings rate for younger Americans and you realize the day of reckoning that is lining up. Even recent data has looked at pushing the retirement age from 65 to 80 for some workers which might be hard to do given it is beyond the normal life expectancy of most Americans. The new retirement model appears to be no retirement.
Educated and unemployed – majority of unemployed Americans attended some college. Top degrees in fields with little employment demand.
The higher education bubble is racing along to a tipping point especially when the value of a college education is now being questioned on multiple fronts. One of the more prominent arguments being thrown around is the return on investment or value of a college degree especially when the costs of attending a private institution reach upwards of $50,000 a year. The median household income in the US barely makes that amount to begin with. The issue stems with the number of Americans diving into ludicrous amounts of debt to finance their educational journey. Another recent revelation highlights another disturbing trend in that those with some college education dominate the ranks of the unemployed. In other words, those without a college degree have higher employment prospects in the current economy.
Using the young as a shield for hitting the deficit spending wall – the bill will come due for the young. Government spending prioritizes old American immediate needs and will send the bill to the young.
The level of government spending is mind boggling but has taken a backseat to the issues being experienced over in Europe. We are running trillion dollar deficits as if this was somehow customary in our history. For each dollar spent we are seeing less of a result in the real economy. Part of the issue with the stimulus funding mechanism is that it disproportionately favors the financial industry. The rhetoric being pushed out ignores the two-tier system in the US where older Americans have safety nets while the young are battling the fierce tiger of hungry capitalism. Money knows no boundaries and has no national ties. Just look at Facebook co-founder Eduardo Saverin renouncing his US citizenship in line with the IPO and his big payday. The 2012 elections should be centered on the health and future of our economy. Do we still feel that a middle class is central to the prosperity of the nation? The fact that so much money is being spent with so little results is troubling on many fronts.
Who will pay for the massive US public debt? 30 percent of those with incomes above $10 million audited.
Now that tax seasons is mostly finished for your average American and people can exhale and take a breather, some interesting data is released by the IRS. Audit data is fascinating because it highlights that in terms of those getting an audit, the more you make the more likely you are to be audited. It is useful to get a sense of how this plays out. The IRS is unlikely to audit the average American making $25,000 a year because in reality, the cost and return of going after this group is so minimal. As the famous bank robber Willie Sutton once replied to a reporter as to why he robbed banks, “because that’s where the money is.” The government is running lean and as many of you know, carrying over a $15 trillion in public debt is starting to become a burden. Debt ceiling talks are already out in the open as if we are already preemptively ready to spend more money we don’t have. Ultimately all Americans will need to shoulder some piece of this debt via cuts or tax increases and that is the painful reality.
The curious calculus of the US employment numbers – Decline of 2.4 million in extended and emergency unemployment benefits coincides with 2.2 million rise in disability benefits. Last time we had 8.1 percent unemployment rate we had 14,000,000 fewer Americans on food stamps.
The math on the employment situation in the US simply does not compute. Over the last few years, many have escaped the employment market by diving into massive student loan debt. This looks good for the employment figures since these people are not counted as part of the workforce. The headline unemployment rate of 8.1 percent does not jive with 1 out of 7 Americans on food stamps. The last time we had a headline unemployment rate close to 8.1 percent was back in February of 2009 and at that time, we had 32,000,000 Americans on food stamps or over 14,000,000 less! Digging around the data you begin to realize how much phony calculations are being used especially when talking about employment. There is an interesting figure that emerges from a recent surge in disability benefits.