FedUpUSA

Archive for April, 2011

The financial tipping point of peak debt – Total credit market debt owed increased from $28 trillion in 2001 to over $52 trillion in 2011. Household debt contracting while Fed juices up the banking sector with more debt.

At the dark heart of our financial dilemma is debt.  Too much debt was used to bolster households during the real estate bubble and now too much debt is being used by the government to bail out the financial sector.  Is there a tipping point in the amount of debt the American economy can shoulder?  I believe there is and looking at the data carefully we begin to see unusual patterns not seen in a generation.  The mosaic of tools used for this financial crisis would have worked if the problems we faced were merely issues of confidence.  Of course the problems were very real and dealt with more than just perception and instead of confronting the reality of an over leveraged debt addicted machine we have only stepped on the accelerator.  Yet this time instead of credit flowing to households for added game rooms or a trip to Hawaii credit is being extended to Wall Street courtesy of the Federal Reserve.  Total credit market debt owed jumped from $28 trillion in 2001 to over $52 trillion today.  During this time GDP went from $10 trillion to $14 trillion.  You do the math where the growth is occurring.

Peak debt

I find the above chart startling because it shows how heavily our society relies on debt.  Atlas can only support so much even in a myth.  There is no doubt that credit serves a very useful purpose in society.  Yet when debt begins to over shadow actual GDP or serves as a substitute for income, then we have a serious problem on our hands.  During the real estate bubble many families started to rely on their home equity as if it were normal for homes to throw off $50,000 or $100,000 a year in appreciation like some money tree.  Households enjoyed this because wages went stagnant and surely pulling money from a home is easier than saving money for a rainy day and living within a budget.  However all of it was a charade and American households are now paying the bill.

For the first time in record keeping history have we seen total household debt contract.  Yet think of how flawed our system was when we had American households in debt to $14 trillion while annual GDP was at $14 trillion.  Much of the debt was linked to homes, cars, and consumer spending that really didn’t create anything long term for our economy.  All the while banks were enjoying the system taking their cut at every turn.

The two previous charts tell you the actual story of where things now stand.  The American household has to deal with austerity and deep cuts while other parts of the economy are being bailed out with additional debt. As the easy access debt is withdrawn American households are now waking up from a slumber and realizing how much of their economy is now lost.  Much of this can be seen with the hidden tax of inflation:

Source:  dshort.com

It is helpful to keep in mind that the median household income since 2000 has not increased when looking at the above chart.  What you will find above is not surprising and most Americans need only look at their monthly expenses to see this reality.  The paycheck has shrunk like a cheap shirt thrown in the washer.  Energy has gone up by 115 percent since 2000 and the most visible translation of this is seen at the gas pump.  College tuition and fees have gone up 101 percent and since manufacturing jobs have been outsourced in droves, a college degree is necessary for solid middle class careers.

I found this chart fascinating in what awaits the new low wage capitalist world:

Source:  BLS

The BLS uses the U.S. as a baseline here at 100.  Manufacturing costs in the Euro Area are 34 percent higher than they are in the U.S.  But more critical is how cheap it is to manufacture in places like China for example.  It is 25 times cheaper to manufacture in China than it is in the U.S.  Yet this brings up a question that Americans will have to contend with for years to come.  Do people want to enter into a race to the bottom or actually play on an equal playing field where mercantilist and currency manipulation are not practiced?  I’m not even sure if Americans view this as the key issue.

The current rhetoric revolves around cutting government and not adding jobs.  I think the above chart should give pause to anyone that is part of the working or middle class.  Do you think bailed out banks have loyalty to you?  Just look at what they have done to average Americans that helped them survive the actual financial collapse.  They are kicking people out of homes in droves and raising fees on credit cards and slamming access to credit to small businesses.  A small business owner has a hard time competing with systems that play on a very different level than we do here in this country.  Banks are investing with your subsidized dollars abroad and blaming you for the current mess.  I think this is twisted and it is troubling Americans are not debating this more openly.

As I have mentioned the top 1 percent owns over 42 percent of all financial wealth in this country.  For this group the recovery is going well:

The stock market is up nearly 100 percent since the March 2009 lows.  Yet households are still mired in debt, wage growth is non-existent, and there is little sense of protection of a stable middle class in America anymore.  The market is still over burdened by too much debt and banks are still seeking out new and innovative ways to speculate and siphon out real wealth from the global economy.  It would be one thing if they did this with their own money but they are doing it with the aid of the Federal Reserve.  Make no mistake, the Fed has become a dumping ground for bad bets from banks over the last decade:

Now think if you had the power to move over your mortgage, credit card debt, student loans, and any other debt you had into a “bad bank” for the moment.  Not only can you move this debt, you now have access to loans at near zero percent and can invest anywhere you want.  Sounds like a good deal right?  Well this is essentially the deal the financial sector is getting and why the stock market has recently boomed.  Banks at their core should serve as the grease that makes the real economy go around.  Today they are the economy and the government for that matter and the fact that the total credit market debt owed is $52 trillion is simply stunning.

Have we reached peak debt?  The Fed doesn’t think so at least when it comes to the too big to fail banks but the American households looks like it has reached a tipping point.  If nothing is done in the next few years your children will wake up in a country with no middle class.

My Budget360

“I believe we no longer have free market capitalism and we no longer have a democracy,” says David Stockman, the blunt-talking former Michigan Congressman and Director of the OMB during the Reagan administration.

What now exists at the heart of the U.S. economy, Stockman argues, is “crony capitalism” – a system that benefits and even rigs the system in favor of America’s banks and bankers at the cost of average Americans. It’s a system built on the back of government-issued bailouts and free money. “The Fed is the great enabler” through its free money policies, which “generate results the market wouldn’t otherwise provide for,” he says.

For example, banks – which caused the 2008 economic and financial crisis – are enjoying profits once again as so-called “risk assets” reflate. Meanwhile, well-meaning members of the middle class intent on saving cash continue to get “savaged” (Stockman’s word) when they keep money in low-yielding savings accounts and rely on a dollar that continues to lose value.

When Bernanke & Co. allow banks to borrow money at no cost for so long it turns “capital markets into a rip-roaring casino that really is not productive for the real main street economy and is generating windfall gains for to a very limited number of people for no good purpose,” Stockman tells Dan Gross in the accompanying interview.

These policies are nothing new, Stockman says, but “crony capitalism” hit new levels of absurdity in the recent past with the bank bailouts and the auto bailouts.

How do we get back on track?

According to Stockman, the Fed should raise rates immediately and end the possibility of more bailouts.

Is he right?

Tech Ticker

Here’s the architect of gutting SB1259, which would have required that banks coming to foreclose prove they actually held the debt.

The original bill is here:

SB 1259 – Introduced Version – Arizona State Legislature via MyGov365.com

It was gutted and replaced with a completely unrelated bill after passing the Senate 28-2.

This is how you got screwed Arizona – through an in-your-face act of Monarchy by one Representative McLain, who arrogated the entirety of the Democratic process even within the committee she chairs to herself, and abused that authority to financially rape every Arizona homeowner who is facing foreclosure.  Vote?  What’s a Vote?  We don’t need any stinking votes!  McLain is the chair and she’s arrogated herself King!

You’re simply not going to believe the audacity displayed by this bag of venomous pus.

Only one question remains for Arizona residents: Are you going to sit for being screwed raw by this putrid viper or will you stand and do something about it?

The Market-Ticker

“It’s the DEBT, Stupid!”
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