FedUpUSA

Archive for July 21st, 2011

Somehow, in all the confusion, the endangered species known as the American “consumer” missed the economic recovery. The reason, as Bloomberg writes, is that consumers are increasingly “using credit cards to pay for basic necessities as income gains fail to keep pace with rising food and fuel prices.” The data comes from credit card transaction processor First Data which reported that the dollar volume of charged purchases rose 10.7% in June (a 6.8% increase in the number of transactions). “The difference probably represents the increasing cost of gasoline, said Silvio Tavares, senior vice president at First Data, the largest credit card processor. “Consumers, particularly in the lower-income end, are being forced to use their credit cards for everyday spending like gas and food,” said Tavares, who’s based in Atlanta. “That’s because there’s been no other positive catalyst, like an increase in wages, to offset higher prices. It’s a cash-flow problem.” Alas, it gets worse. As Bank of America’s Joshua Dennerlein reports today, the end of the year will see 3.7 million Americans stop  receiving jobless benefits. “This will act as a hit to consumption in  the first quarter of 2012.” This number is completely independent of any possible new legislation to extended jobless benefits for new  unemployed labor pool entrants, as it merely affects those about to hit  the 99 week cliff. Unfortunately even more “growth” over the next 6-9  months will have to come from the Fed and the only thing it knows how to do: print, print, print.

And while this is not good news to the 44 million Americans on foodstamps, or the ever greater number of Americans who not only can not live paycheck to paychek but have to borrow from the future to fund today’s staples purchases, knowing full well they can at best pay the minimum monthly amount but never the total due (just like the US government), at least the velocity of money should be rising due to the increased use of leverage by the middle class. Just as the Fed wanted.

Rising costs of food and gasoline are leaving Americans less money to spend discretionary items, slowing the pace of the recovery, Tavares said. Household spending accounts for about 70 percent of the world’s largest economy.

The swings in purchases of fuel and food have been “dramatic,” Tavares said. The volume of gasoline purchases placed on credit cards jumped 39 percent last month from a year earlier, compared with a 21 percent increase in June 2010, he said. Food shopping increased 5 percent after falling 7 percent last year.

The value of an average transaction on credit cards outpaced the gain for debit cards, showing consumers are increasingly relying on borrowing to pay for gasoline and other necessities, Tavares said.

Who says moral hazard is limited to the kleptocratic oligarchy. It has now shifted to Joe Sixpack. Oh yes: look for all those bank reported credit card delinquency terms to soar in a month or two, assuming they actually reporting anything close to reality, instead of, like Bank of America, lying outright about everything).

The use of credit cards is a “smoking gun” that indicates some consumers, including the long-term unemployed who have lost jobless benefits, are resorting to other sources of cash flow just to “get by,” said David Rosenberg, chief economist at Gluskin Sheff & Associates Inc. in Toronto.

“People on the margin are putting necessities on their credit cards and this is a trend that’s very consistent with what lower-end retailers have been saying about their paycheck cycles,” Rosenberg said.

The impact is especially difficult on discount retail stores like Wal Mart and Family Dollar:

Core customers of Bentonville, Arkansas-based Wal-Mart Stores Inc. (WMT) are “cash strapped,” William Simon, U.S. stores chief, said at a June 15 conference hosted by William Blair & Co. “The paycheck cycle is severe.”

Similarly, customers of Matthews, North Carolina-based Family Dollar Stores Inc. (FDO) are living “paycheck-to-paycheck,” so when gas or food prices go up, “they don’t have the cushion that many others might have,” Chairman and Chief Executive Howard Levine said on a June 29 conference call.

There may be a silver lining:

A possible bright spot is that inflation may moderate as prices of commodities stabilize, Fed Chairman Ben S. Bernanke said July 13 in his semi-annual testimony to Congress. As of July 19, the average price of a gallon of unleaded gas had dropped 7.6 percent from May 4, when it reached an almost three- year high.

Perhaps. However, with Europe launching indirect QE via its own version of QE-cum-TARP earlier today, we predict that the only direction for all commodities going forward (ignore any short-term blips coming out of Congress-based newsflow), will be up.

And now for the really bad news from Bank of America:

Labor market slack remains high. The number of unemployed workers collecting unemployment insurance benefits through their state funded programs fell by 50,000 to 3.698 million. Meanwhile the number of unemployed workers collecting benefits from the federally funded programs declined by 133,000 to 3.698 million. Overall, there are more than 7.3 million unemployed workers relying on unemployment insurance checks for financial support. At the end of this year the federally funded benefits are set to expire so 3.698 million consumers will lose their weekly benefit checks. This will act as a hit to consumption in the first quarter of 2012.

Prepare for the hockey stick economic growth predictions to be brutalized over the next few months as more and more realize that H1 of 2012 is going to be the ugliest period since the beginning of the depression. It also means that the Fed will have no choice but to further devalue the dollar. What that means for various asset classes should be all too clear by now.

Zero Hedge

Inflation is theft in more ways than one: it also steals our liberty.

We know two things: 1) the official policy of the Federal Reserve is to engineer and maintain inflation and 2) inflation is theft. As I have recounted here many times, in nominal terms, it looks like average wages (earned income) in the U.S. have been rising smartly for decades. But measured in purchasing power, i.e. adjusted for inflation, earned income has declined for most workers, especially in the past three years.

Measured in purchasing power, i.e. the number of gallons of gasoline or loaves of bread an average worker could buy with one hour of labor, American workers have experienced  a steady decline in the value of their labor for the past 40 years.

There are times that one has to wonder out loud exactly who’s passing envelopes full of $100 bills around to State Attorneys general – or whether what’s being passed is threats instead.

(Reuters) – State attorneys general are negotiating to give major banks wide immunity over irregularities in handling foreclosures, even as evidence has emerged that banks are continuing to file questionable documents.

A coalition of all 50 states’ attorneys general has been negotiating settlements with five of the biggest U.S. banks that would include payment of up to $25 billion in penalties and commitments to follow new rules. In exchange, the banks would get immunity from civil lawsuits by the states, as well as similar guarantees by the Justice Department and Department of Housing and Urban Development, which have participated in the talks.

So now perjury is ok?  Oh, and not just past perjury either: According to Reuters robosigning is still going on!

It takes a special set of brass balls to get caught submitting bogus documents in a courtroom thousands of times, negotiate for some way to not get bent over the table (and perhaps imprisoned!) for doing it, and while negotiating some sort of settlement continuing to do the same thing that got you in trouble in the first place!

We’ve seen this in the defense and drug industry in the past, but this is particularly outrageous for the simple reason that it touches nearly everyone, and is so “in your face.”

I am not arguing that there should be “free houses” handed out.  But at the same time you cannot allow banks – or anyone else – to make a mockery of the justice system.  This pattern of behavior is extremely dangerous, for it risks the people deciding that the law no longer has meaning at once that happens all pretense of civil order is lost.

The four horsemen of the middle class apocalypse – what does it say that we as a nation bailed out the financially wealthy too big to fail banks yet failed to bail out the middle class?

What made the U.S. the envy of the world was the belief that if you worked hard enough and had the right kind of grit and intelligence that you would be able to enjoy the fruits of your labor.  This is what built the solid middle class after World War II.  The majority of people finally had the chance to purchase a home without going into dramatic debt, to send a child to a quality public schools, and for the most part enjoy in the rising quality of life for most Americans.  The last category has been lost in the last few decades.  While incomes for the bottom 80 percent of Americans have gone stagnant income growth for those in the top 1 percent has skyrocketed.  The tools and amount of capital needed to prosper are largely out of the reach of the middle class and only the modern day oligarchy can afford to send their kids to $50,000 a year private schools without sweating it.  Does the public have at the top of their priority list a desire to keep the middle class solvent?  We bailed out the too big to fail banks under the premise that they were instrumental for our economy but the same has not been offered to the middle class.  Why is that?

Horseman #1 – Rising healthcare costs

Source:  Kaiser Family

The cost of healthcare is far outstripping the rate of overall inflation.  This is not exactly a recipe for success with 75 million baby boomers entering retirement.  The fact that we spend more per capita on human wellbeing than any nation in the world yet produce poorer results than other industrialized nations should tell us something about our system.  The rhetoric coming from D.C. and Wall Street is troubling because it once again only protects the small group of people that have amassed most of the wealth in the country.  The rest of America is left to fend for itself or continue to payout larger and larger premiums with really no equal rise in quality.

The per capita annual income in the United States is $25,000.  How much can someone at this level afford in terms of health coverage?  Not much to be honest.  According to a recent Census study the number of Americans without health insurance is up to over 45,000,000+.  I’m certain that number is now higher given that the study was conducted at the beginning of the recession.

Horseman #2 – Cost of college

Source:  BusinessWeek

The rising cost of college and lack of income growth has pushed many students into massive amounts of debt.  Many older Americans like to talk about the days when they went to college and paid for their schooling with a part-time job.  No part-time job is going to pay for $50,000 a year in tuition (or even $20,000 at many public schools) when the average per capita income is $25,000:

Since 2000, in real terms college costs are now up by 23%

Since 2000, in real terms real pay for college graduates is down by 11%

This I find extremely troubling.  While the cost of going to college has risen by 23 percent over the last decade actual real pay for college graduates has fallen by 11 percent.  Can it be that higher education itself is in a bubble?  This is very likely.

Education is vital to having a vibrant and competitive middle class.  Yet Wall Street has allowed the banking system once again to turn this institution into a commodity meant to be traded and raided.  This is why we have many paper-mill institutions predatorily going after students and condemning them to lives of debt serfdom with a worthless piece of paper.  The working class is shrinking faster and faster as most of our manufacturing is outsourced so many are forced into becoming educated or face low pay service sector work.  In a debt based society many of these people simply go back to school thinking they will pick up a skill in a new “hot” job field.  Many simply come out with degrees and debt that put them into a deeper hole.  Many would have been better off going to a community college or trade school but many of these for-profit schools get to students first before they can go to these more affordable options (at least for now as states hemorrhage funding).

If we really value educating the population and having an intelligent middle class, then why allow this banking and government backed circus to continue?

Read the rest at My Budget 360

You have to wonder.

Two and a half years ago, with our country on the edge of a second Great Depression, we met with the president in the White House to discuss whether to move in those first months of his administration to legislate fundamental reform of the financial system—or wait until we had put the crisis behind us.

The president made two key decisions. First, he chose to move forward, knowing that the forces of opposition to reform would grow stronger as the memory of the crisis receded. And second, he asked us to write draft legislation rather than propose broad principles. The president did not want the new rules to end up being written by those who brought us to the edge of catastrophic financial failure.

Really?

So…. he asked you to help write it, yes?  And what did you do while at FRBNY [Federal Reserve Bank of New York]?

Besides cheating on your taxes, that is.

Well, it appears you sat there and allowed the playing of derivatives by firms who had no money, yet promised to pay.  They couldn’t, of course, and when that became apparent the entire world blew up.

But that wasn’t bad enough – oh no, you then had to rescue them.  And rescue you did – in fact, that was the gist of everything wasn’t it?

See, it wasn’t about the money per-se – it was about the lies.  Lies that still continue to this day.

Like, for instance, the lies that enabled the market to bottom in 2009.  Remember Kanjorski and his little committee meeting?  Either allow the banks to mark to whatever they think they can defend, whether it’s real or not, or we’ll force it with legislation.

Yeah, I remember that.

Then of course there’s the derivatives.  They’re still traded over the counter.  The so-called “clearing houses” do nothing to prove nightly margin, nor to prevent chain risk.  And yet those two things are the key items in how we found ourselves on the wrong side of that mess.  To be blunt, Brooksley was right (along with other few who said you, and the entire bankster business, were certifiably insane) and yet I haven’t heard an apology from you in that regard, nor one from Greenspan.  Why not?

Of course you continue to pat yourself on the back for things that are, well, not real.  Averting a second Great Depression?  More like covering one up that’s still going on.  After all, when you deficit spend 12% of GDP, well, GDP is 12% higher than it would otherwise be – plus the knock-on effects.  I don’t call that “avoidance”, I call it a scam because there is no credible plan available to stop that deficit spending.

But stop it will.  At roughly six times present GDP growth it will end soon too, and in a rather dramatic fashion.  We still can change to some extent exactly how it happens, but that optionality will not exist for long, and the Congress seems to be ignoring you these days Turbo – with good cause.

After all, it was Hanky Panky who promised us tanks in the streets just a couple of years ago, and then of course we got more of the same from you and Obama if we didn’t “help the banks.”  But the so-called recovery you claim is happening isn’t reflected in the employment numbers, nor in those for food stamps.  We have fixed nothing with trade balance, particularly with China, since both you and Obama have spent your time knob-jobbing the Communists instead of protecting American jobs and imposing sanity on a mercantilist regime.

As for Fannie and Freddie, you’d done nothing.  Those firms debt never had a guarantee – it’s right on the front of the page.  But you never met a billionaire you wouldn’t perform an obscene act upon, have you Turbo, and neither has your boss.

That’s ok Turbo.  This isn’t under your control nor Obama’s.  It’s under the control of immutable mathematical facts, and when they come to the fore, as they are over in Europe and soon will be here, the time for you to act in a reasonable and sound manner will have expired.

We’ll all be in much worse economic shape for it, but the good news is that you won’t be able to escape responsibility, nor will your boss.

This far into the term, you own it Timmy.

Bon appetit.