FedUpUSA

Archive for February 9th, 2010

Banking and Housing Payments Devoured the Middle Class Income – 1 out of 10 Americans on Food Stamps and how the Fed Slowly Devalued the Dollars in your Wallet.

Posted by mybudget360

It is a challenge to say that things are getting better when every month that goes by more Americans are losing their jobs or needing to apply for food assistance.  In the latest data for food assistance through SNAP we find that 200,000 more Americans were added to the program.  That now brings the total number of Americans on food assistance to 38,183,000.  1 out of 10 Americans are receiving food assistance.  For 2009 this cost the government $50 billion, up from $34 billion in 2008 and $30 billion in 2007.  It should be no surprise then that average Americans are questioning the viability of a middle class in the upcoming decade.

But even when we look at the balance sheet of the government, things are still not improving:

Source:  U.S. Treasury

Take a look at the amount of revenue (taxes) the government brought in for the month of December.  $218 billion was taken in.  But look at data from December of 2008.  The government at the peak of the crisis brought in $237 billion.  So this December was even worse than the one ending 2008.  How is this a sign of recovery?  You would assume that receipts would be going up if things were in fact getting better.  All we see is the spending side of the equation going up and the only sector in the economy turning a solid profit is the banking sector that is now running a new form of corporatocracy.  It would be one thing if we were adding jobs each and every month but even the massive amounts of bailouts have yet to yield any visible help for average Americans.

In the past few decades Americans have seen more and more of their income being eaten up by the housing sector of the economy:

This latest decade saw a much larger share of income going to housing than any in the past.  Unlike stocks, every American needs to live somewhere and will need to either pay a mortgage if they own or pay rent.  The banking sector found a method of siphoning off wealth from the biggest asset Americans hold.  We have seen this occur slowly over the decades:

1950

Median household income:        $3,319

Median home price:                       $7,354

Home price / income = Percent of 221

1960

Median household income:        $5,620

Median home price:                       $11,900

Home price / income = 211 percent

Running those numbers today, we find that nationwide the cost of a home eats up more and more income:

Median Household income:       $52,029

Median U.S. home price:             $172,600

Home price / income = 331 percent

The above data is pulled from years of Census data but shows clearly that housing has eaten more and more into the income of average Americans.  In a purely fiat money system, banks can create money out of thin air.  The Federal Reserve has done this through the monetization of debt.  Now think about this, if a participating member bank borrows say $1 million from the Fed it can then turn around and lend the money out through loans up to $9 million courtesy of fractional reserve banking.  With current interest rates, if it borrows from the Fed at near zero even a 5 percent return on bread and butter mortgages would yield $450,000 a year for doing absolutely nothing but being a middleman.  And some banks have gone ahead and issued credit cards with 79.9 percent rates.  When Bear Stearns and Lehman Brothers failed their leverage was even higher at 20 and even 30 to 1.  The other investment banks are near those levels even today yet with full government support.

So why bring this up?  In the United States debt is treated as money.  In fact, without debt we wouldn’t have money.  I think this is lost on many.  When someone goes to a bank and takes out a mortgage with virtually no money down, all of a sudden a liability and asset of a few hundred thousand is created out of financial alchemy.  So when this housing bubble burst trillions of dollars evaporated from the system but it was nothing more than erasing previous debt that really had no actual backing.

So if the Fed can create money out of thin air through their banking web why is the economy still faltering?  In boom and bust cycles we see a love and revulsion towards debt.  Banks can be willing to lend out money but you can’t force average Americans to borrow.  This past decade we saw the absolute disregard for prudent debt lending and now, many Americans are averse to taking out loans.  In fact, now that banks are actually checking and verifying incomes it turns out that many middle class Americans really don’t qualify for additional debt.

This brings us to our next chart looking at household debt:

Even after the stock market recovery, it is estimated that average Americans have seen their household net worth decline by $11 trillion since the peak of this bubble.  Yet take a look at the chart above.  Household debt still remains near the peak.  And keep in mind that real estate was the biggest item of net worth for Americans and this has fallen by roughly $6 trillion.  Yet the loans remain the same.  And that is largely a reason for the flood of foreclosures and bankruptcies.  While banks still have mortgages valued at peak levels the actual market value is much less.  The U.S. Treasury and Federal Reserve made a troubling bet during the early days of the crisis that things would correct quickly.  Actually, I tend to believe that the Fed knew all along that when push came to shove, the entire banking sector would be bailed out by the U.S. taxpayer since the Fed is simply the lender of first and last resort for member banks.

So this leaves Americans contenting with debt amounts that no longer reflect the value of their underlying asset.  Yet the banking sector is now fully supported by the taxpayer.  So with the current system in place, if banks do fail taxpayers are on the hook.  The Fed has setup the perfect trap for middle class Americans.  If average Americans decide to walk away from their underwater mortgages then the bill will be paid by taxpayers.  After all, we are already told that the too big to fail by definition won’t fail.  And the other option is to continue paying a mortgage on a home that is no longer worth its value.  Many Americans simply cannot afford to do this.  Do you notice how in no scenario the banks lose?  This is another characteristic of the corporatocracy.  And the FDIC which insures bank deposits is essentially insolvent:

And the FDIC backs $13 trillion in total assets with a fund that is insolvent!  Now that is maximum leverage.

Over the past decade as the financial sector gained more and more power many Americans saw more and more money go to their housing payment.  The housing bubble was merely the end product of the banking sector through Wall Street flooding the system with debt.  If we live in a world where only one house is on the block and you have $1,000 and I have $1,000 and we both want the house the maximum we can pay for the home is $1,000 given our resources.  But enter a bank that is willing to create debt of $10,000 in the form of a mortgage and say we are obsessed with the house; it is very likely we would be willing to pay $11,000 for the home.  Is the home really worth $10,000 more?  Of course not.  But our $1,000 just got a lot less valuable.  And this is the crux of a fiat money system.  The government can force it as legal tender but if the value continues to erode people will begin questioning the system.  It is only valuable to the point that people have faith in it.  And right now many Americans are losing faith in the system.

The Devaluation and Fight for Survival of the American Middle Class – How Three Decades has Shifted the Concentration of Financial Wealth to the top 1 Percent.

Posted by mybudget360

The American middle class ideal is lionized around the world.  It is the core of what has made this country great.  The land of opportunity and endless wealth so long as people worked hard enough.  It was an implicit contract workers made with this country.  Well that vision is now quickly coming under attack by the corporate structure with banks being the main culprits leading the American middle class to the edge of financial ruin.  The average American is looking at their current economy and wondering what ever happened to the security that was once provided to the “greatest generation” era.  The Wall Street crowd after devouring their bailouts is telling Americans that this is simply how the market corrects.  Yet at the same time, they are offering record bonuses to their elite.  The same banking crowd that led this country to the financial edge is now rewarding itself with massive bonuses (taxpayer funded) while jobs are being lost and no industry is emerging to provide work to the middle class.  As tough as it may be for many to swallow we are in a class warfare struggle.  That is why you are seeing populist rage growing in both of our entrenchment political parties.

If you are wondering why those on Wall Street have a hop to their step, it is because the stock market wealth is concentrated in the hands of very few:

The top 1 percent control 42 percent of financial wealth in the United States.  Now think about that fact.  Let us assume you have saved diligently for a few years into your 401k.  Before the crisis hit, you had amassed $100,000 (much higher than the median amount for Americans but we’ll just use this to highlight our point).  At the low, that $100,000 was probably down to $50,000 even being diversified.  With the major run up, the amount might now be back to $75,000 to $80,000.  Has the life of the average American really changed?  This money is actually retirement funds and this amount is not going to make a big difference in the way people live on a day to day basis.  Yet those in the top 1 percent with the current shift have seen billions go their way and this does make a big difference since many draw off capital gains on a yearly basis.

The 401k structure is problematic in many ways.  It is a method to lure in money from people to give them a taste of the Wall Street money machine.  Most of these funds are designed for retirement.  And with massive baby boomers retiring in the next few years, billions of dollars in funds will be sold into the market (which ironically will add pressure on prices because of demographic shifts).  This will push prices down right when people will start drawing from their nest egg.  The notion that you can garner 7 percent each year into infinity is a fallacy that has been exposed in this market crash.

We have been getting richer as a nation overall.  This is true.  But why is it so hard for average Americans to now get by with two incomes when one income seemed adequate 40 years ago?  The income gains have largely gone to the top 1 percent from 1979 to 2005:

Source:  Wikipedia

The above gains are inflation adjusted over three decades.  While income did increase across categories this distribution was not even.  It was largely shifted to the top of the pile.  Now it would be one thing if the top was being run by companies that actually provided jobs for a large part of America.  But it isn’t.  You have CEOs of Manhattan banks that are trading derivatives on toxic mortgages and betting up oil futures all so they can skim the system for money.  How has that added value to our country?  It hasn’t.  All it has done is transformed part of our economy into one subsidized taxpayer casino at the expense of the working middle class.

If you want to visualize this class division, it would roughly break down like this:

But even here, the top 1 percent isn’t even reflected.  Even working families with say a nurse and an engineer can bring in $100,000 to $150,000 a year.  But with things like the AMT even this tranche is feeling the burden.  The big transfer of wealth is going to the top 1 percent:

“(Wikipedia) As of 2005 there are approximately 146,000 (0.1%) households with incomes exceeding $1,500,000, while the top 0.01% or 11,000 households had incomes exceeding $5,500,000. The 400 highest tax payers in the nation had gross annual household incomes exceeding $87,000,000. Household incomes for this group have risen more dramatically than for any other. As a result the gap between those who make less than one and half million dollars annually (99.9% of households) and those who make more (0.1%) has been steadily increasing, prompting The New York Times to proclaim that the “Richest Are Leaving Even the Rich Far Behind.” Indeed the income disparities within the top 1.5% are quite drastic. While households in the top 1.5% of households had incomes exceeding $250,000, 443% above the national median, their incomes were still 2200% lower than those of the top .01% of households. One can therefore conclude that almost any household, even those with incomes of $250,000 annually are poor when compared to the top .1%, who in turn are poor compared to the top 0.000267%, the top 400 taxpaying households.”

So we see where the money is really going.  Even if we break down a family in California earning $100,000 you can see what was once considered rich is no longer the case:

And for those out in high cost states they will realize that a $350,000 home does not buy you much even after the tremendous crash in housing values.  The cost of healthcare is rising and college costs are going up so with one child, they will want to set aside some money if they want to see their child have a decent college education when they are ready to go.  And keep in mind that making $100,000 puts you in the top 17 percent of households in the U.S.:

So in reality, we should look at household that brings in $65,000 per year to get a more accurate feel of what the middle class is going through:

So after taxes, this family is taking home $4,240 a month.  With rising taxes, higher food costs, healthcare rising, and wages stagnant you can see how the middle class is falling behind on a daily basis.  We can further breakdown the class distribution as follows:

We do have class in our system and the biggest misnomer that has been perpetrated is that somehow, our goals are aligned with those of the banking Wall Street elite.  How much longer do people need to realize that both political parties seem to serve one master and it has an address on Wall Street?  The debates and battles seem to amount to this charade because once it comes time for policy, nothing gets done.  Even Elizabeth Warren who is fighting for basic consumer rights is finding it even hard to get through because of banking lobbyist:

“It is impossible to buy a toaster that has a one-in-five chance of bursting into flames and burning down your house. But it is possible to refinance an existing home with a mortgage that has the same one-in-five chance of putting the family out on the street — and the mortgage won’t even carry a disclosure of that fact to the homeowner.”

The battle has gotten intense.  Credit card companies have been doing criminal activities by jacking fees up and setting up traps for consumers before simple regulations come into effect.  Banks have pulled back on lending to average Americans while profits from stock speculation have soared.  They don’t call it speculation but label it as hedge funds, proprietary trading, or some other Orwellian language that hides the true nature of the system.

With the underemployment rate at over 17 percent and bankruptcies, foreclosures, and other financial distress rising for average Americans one small chunk of our population is benefitting on the backs of bailout funding.  This has been characterized as it “taking a plunder” to rip off the village:

So what you do is take from the public:

Source:  It Takes a Pillage

And give to the people that created this crisis:

I completely agree with Elizabeth Warren who is adamantly arguing that we are at a cross-road in terms of defending the middle class of this country.  Instead, Wall Street enjoys the fact that Americans are split down the middle on issues and fighting over petty things while trillions keep rolling into their coffers.  Time to wake up and see what is really happening to our nation.

Job Loss Rates Across Post WW2 Recessions [Chart]

Posted by TraderMark

I’ve posted this chart sometime in 2009 but trying to find old data within some 6000 historical posts is proving to be increasingly difficult!  However, with the newest data provided Friday – even with the caveat that the government’s data is subject to being understated – we clearly see that “Houston, we have a problem.”  So rather than arguing with people about 25K jobs here, or 50K jobs there – this type of graphical representation shows just how distressed the labor market in America is.  At this point in the (cough) recovery we should be creating 300-400K jobs a month, not debating whether the government is understating the data at -20K versus -100K.  This is like arguing if the deck chairs are arranged nicely enough, as we just hit that North Atlantic iceburg…

[click to enlarge]

Source: Economix, NYT

At this point, in nearly every recession post WWII, except the one that began in 2001, we had fully recovered all jobs lost.  Now we are celebrating “flat lining” at a level of massive job deficit.  While the 2001-2003 job destruction took a long time to recover from, the job losses were a shadow of the current implosion.  This graph dovetails nicely with my prediction in 2008 that as we begin to talk up “the recovery”, the pundits will once again underestimate how big the issue is due to the structural problems in the country. [Dec 15, 2008: The Economic "Recovery"]  So many jobs were based on bubbles, while others (in large swathes) continue to be shed as cheaper labor does it overseas.  PIMCO now calls this the new normal… I did not have a cool name for it in 2008, but I described it:

We are right sizing industry after industry to what consumption SHOULD be, not what it WAS. What will that post super credit bubble world look like? What would a world of 1997 or 2002 level credit look like? Where do you think state, local, and federal taxes will be in 2 years? 5 years? 10? to pay for all we are promising? Is anyone paying attention to the structural global changes that are happening under the surface that are (mostly) unstoppable?

That said, just because this is a punishing era for American labor, does not mean capital (and thus stocks) cannot enjoy profits and the stock market can benefit.  [Jan 12, 2010: Jim Cramer is Right]  But let us stop the nonsense about Main Street = Wall Street.  The flattening of the globe, means continued global wage / labor arbitrage – especially among the middle and working class.  It’s the era of capital, not labor.  For Americans to compensate, deflationatiornay measures need to be allowed to happen in the country, to put costs back in line with incomes.  [Aug 18, 2009: Bloomberg Opinion - Deflation Theory is Lemon We've Been Sold]  Instead both the federal government and Federal Reserve are doing everything in their power, and layering countless more debt on our children to increase costs (prices).  Which is part of the reason we got here in the first place (massive credit expansion i.e. debt – was needed to keep up with the growing costs caused by “beneficial” inflation, as income increases for the middle class began to falter over a decade ago).  Indeed, inflation is the most regressive of all ‘taxes’.  Eventually the market will overwhelm these not so “invisible hands”, but in the meantime they continue to do incredible damage – all under misguided economic precepts that have become consensus.  The idea that layering on more debt for future generations so as to regressively tax the lower tranches of society today… and that’s a good thing… as economic gospel is beyond me, but I’m in a tiny minority.

So we’ll continue down the path of more paper printing prosperity [May 19, 2009: Paper Printing Prosperity Defined], holding our hands out to government to pay us [Jun 5, 2009: 1 in 6 Dollars of Income Now Via Government; Highest Since 1929] [Jul 30, 2009: Cash for Clunkers a Bit Hit, Government Asks "What Can we Buy You Next?"] because the costs of goods is not allowed to self correct to the new normal of wage pressures in Cramerica.  [Sep 4, 2009: Job Seekers Across America Willing to Take Substantial Pay Cuts] While focusing most of our job creation in all areas of government and pseudo government, (healthcare, education) because unlike private business – government can add costs that it does not need to pay for anytime soon with its unlimited debt creation.  Until one day we look in the mirror and see Greece.  (technically we are already there!)

Viva la jobless recovery of the ages. [Aug 14, 2009: No New Normal Say Some Economists, Prosperity Without Jobs?]    Since we are almost out of private workers to get rid of to maintain a functioning economy (still need our Walmarts, bars, and lawyers), and stimulus after stimulus is being issues yearly to protect those in the public (pseudo or otherwise) sector – more hemorrhaging of jobs seems almost inconceivable.   But at this point in the business cycle we should not even be having these sort of discussions… we should be asking if the US economy is going to create 300 or 400K jobs this month?  And I don’t mean census workers, or fake jobs created in the birth / death model (only to be revised away a year or more later).

Economic recovery?  Tracking quite nicely to my predictions in Dec 2008.