Jul 9 2012

A clash of generations – 1 out of 6 Americans receiving Social Security benefits. A larger share of workforce dominated by older Americans.

The bill is coming due.  A stunning 61,000,000+ Americans receive Social Security, Supplemental Security Income, or both.  Add another 46,000,000+ Americans on food assistance and you begin to see why we are running on borrowed time on a variety of fronts.  With Social Security, working Americans are taxed for current retirees.  This works when you have a large and young work base supporting a relatively small retired population.  That equation is not our current situation.  In 1960 you had nearly 5 workers for each beneficiary.  Today that number is down to 2.8 and will hit 1.9 in 2035.  For many young and less affluent Americans this is the time they will enter into retirement.  If we are having a hard time funding current programs what is going to change the math down the line?

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Jul 7 2012

The four horsemen of the sluggish economy – Total credit market debt above $55 trillion, few jobs for many unemployed, the student debt bubble, and long-term compression of wages.

The US economy is facing tremendous financial hurdles in the years to come.  The current market is being held together by a flood of debt that is masking underlying issues.  Total credit market debt is many times larger than our annual GDP.  Student loan debt continues to expand unabated even though the return-on-investment for many college degrees is not worth it.  We also have an interesting dynamic where we still do produce manufactured goods but require fewer and fewer workers to conduct these jobs.  These challenges will not go away when the last ballot is cast this November.  We also have big challenges of taking care of an older generation with a much less affluent and deeply in debt younger generation.

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Jul 5 2012

The dynamic central banking duo – ECB balance sheet up over €3.1 trillion mimicking Fed balance that is close to $3 trillion. Shuffling toxic assets into darkness.

You might have the vague memory that the European Central Bank reacted somewhat negatively to the Federal Reserve’s massive balance sheet expansion a few years ago.  The ECB was not following in the same path as that of the Fed.  Well fast forward to the current Euro crisis and the ECB now has a balance sheet that far surpasses that of the Fed.  You have the two largest central banks in the world with over $6 trillion in unaudited funds and surely a good portion of that is toxic assets.  This trajectory is unfortunately a natural consequence of our current banking system.  These central banks focus on protecting their big banking allies and the crisis is still going on.  Of course the working and middle class will be paying for this in a variety of ways for years to come.  Ask the 25 percent unemployed in Spain and Greece how well the economy is doing.  Ask young Americans how the economy is doing.

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Jul 3 2012

The great deleveraging – US households see access to debt diminish. Housing affordability and reversion to the home price to family income ratio.

Households in the US continue to face a painfully slow process of austerity via debt deleveraging.  In a debt based system like the one we live in access to debt is viewed by many as access to money.  That is, your ability to finance a car, home, vacation, or even a college education is largely contingent on your ability to access debt.  With the markets reaching a peak debt situation households have been in a major process of deleveraging since 2007.  In fact, household debt obligations are now back to levels last seen in the early 1990s and similar to levels of the mid-1980s.  Most of this debt removal has occurred via the painful process of millions of mortgage foreclosures.  Say someone bought a home and took on a $400,000 mortgage. The home is now worth $200,000 and unable to pay the bills, the home is taken back by the bank.  The bank instead of having a $400,000 “asset” now only has a $200,000 line item but more importantly, the home buyer is freed from the massive debt albatross.  Multiply this millions of times over and you get a clear sense of the deleveraging many Americans are undergoing.

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Jul 1 2012

The financial benefits of food stamps – Record $78 billion worth of food stamps issued in 2011. Select Wal-Mart stores pulled in 25 to 40 percent in revenues from food stamps according to a recent analysis.

When you think of food stamp usage you rarely think about big financial profits.  Yet some businesses are managing to get a big piece of the food stamp pie.  Last year alone the government spent a record $78 billion in food stamps.  This is a large amount of money and this is why you might notice more EBT signs if you ever pay attention when you are driving around.  The money when broken down by the 46 million Americans receiving this aid is not much but actually speaks to the underlying bifurcated nature of our economy.  Many are stuck below poverty status and many in the middle class simply struggle to get by.  The Congressional Budget Office projects that food stamp usage will be high deep into 2015.  Let us examine where this money is actually going.

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Jun 28 2012

The contagion of the European Union and banking debt – 20 European Banks have liabilities above 50 percent of their home country GDP. Why an EU FDIC is highly unlikely in the short-term.

The crisis in Europe is boiling over yet again.  The central connecting factor of all of this is too much debt relative to production.  Debt in itself is not a bad thing.  If you borrow modestly for a home and have sufficient income to cover your mortgage payment then this might actually be beneficial.  When things go haywire is when you leverage up.  You had people buying homes that were 10 to 12 times their annual income.  This however is a modest example compared to investment banks that were levered 30-to-1 and in some cases even higher.  The issue with the European Union is the lack of cohesion but also the amount of debt relative to their production.  True colors do not shine in boom times but do come out in crisis.  The issue at hand for the moment is that stronger more productive economies with moderate levels of debt will need to step in if they are to bailout the periphery where debt levels are extreme relative to the local country GDP.  Politically you can see how this is not going well.  In the US, even though the bailouts were geared heavily in favor of the banks, few doubt the power of the Fed in stepping in and bailing out a big bank in California all the way to New York.  This is not exactly the scenario playing out in Europe.

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Jun 26 2012

The burden of unsupportable debt. US debt-to-GDP growing at a pace rivaling certain European nations – The dramatic problems of peak debt in 2012.

What makes this global financial crisis unique is that it is based on unsustainable levels of debt.  In historical cases you would have sovereign nations defaulting on their debts but these were more isolated and clustered, not global issues.  Today virtually every large crisis that is hitting is occurring because of peak debt situations.  No one metric can tell you when a country will tip into crisis but there is definitely a combination of confidence breaking down and simply the inability to pay back said debt.  Many countries have hit this breaking point; Iceland, Ireland, Greece, and Spain.  Many other nations teeter closely on that thin line of solvency.  These breaking points do not just happen overnight.  They incubate and slowly expand until a pinnacle is achieved only to reach a point where action is necessary.  At this point in many cases it is too late.  That is why when we look at the debt to GDP ratios of countries we are quickly reminded that most are moving in the wrong direction.

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