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The end of debt-based affluence: welcome to The Last Christmas in America (TLCIA).

Almost 35 years ago, as unemployment rose toward 10%, the January 1975 cover of Ramparts  magazine blared: The End of Affluence: The Last Christmas in America.(TLCIA)

The article wasn’t referring to the religious celebration; it was referring to the postwar concept of Christmas as the frenzied, exhausting  year-end pinnacle of our one true secular faith, Consumption, a final orgy of   buying and binging.

It is instructive to recall how the Federal government responded  to unemployment, high inflation and rising  budget deficits in the early 1970s: it began fudging numbers, manipulating data to mask the politically inconvenient realities of rising inflation, unemployment and deficits by playing switcheroo with Social Security Trust Funds, inflation data, etc.–games it continues to play in 2011 to cloak reality from the media-numbed public.

The market was not so easily fooled. The Bear market, reflecting the “real”  recession, lasted 16 years, from 1967 to 1982. Now statistics are echoing that last great recession: rising prices for essentials, systemically high unemployment and stagnant wages while the corporate media and the organs of statistical manipulation (a.k.a. the sprawling, putrid public-private cesspool of the Ministry of Propaganda) trumpet “the return of growth” and skyrocketing corporate profits.

(Today’s propaganda:housing starts blip up due to statistical noise, and though starts are less than half pre-recession levels, this is heralded as “evidence” that “strong growth is back.”)

The difference between the postwar boom of 1946 and the boom that followed 1982 is the last boom was based on the explosive expansion of debt.People didn’t save and invest in productive assets; they went into debt to consume more and to become a “bigger” persona via the miracle of credit.

I often use this chart to make this point: if credit had expanded along with GDP, then we’d be considerably less indebted.  Instead, it required a vast expansion of debt–some $30 trillion more than the rise in GDP–to fuel the 1982-2000 boom.

A funny thing happens when you depend on expanding debt to fund your consumption:eventually the cost of servicing your rising debt reaches the limit of your income, and you can’t borrow any more, unless interest rates decline so you can leverage your income into higher debt.

Here’s a chart of household debt: that little reversal in debt expansion sent the economy into a tailspin.

Lowering interest rates extends the era of debt-based consumption, but it only puts off the inevitable crash when the ability to borrow runs out. Eventually the cost of servicing this lower-interest debt absorbs all your disposable income, and the borrowing skids to an abrupt stop.

Two other bad things can make this dominance of debt servicing worse:your income can decline, and the value of your assets can decline.  In this unfortunate situation, you’re ability to service your existing debts is crimped by a loss of disposable income, and you’re paying for assets whose worth has fallen below the  debt taken on to buy the assets.

Income has declined significantly in the wake of the 2008 crisis/recession:

And here’s the key asset of the middle class, housing:

This double-whammy of lower income and lower asset valuations is exactly where we are now.This is why the Fed’s campaign to lower interest rates to zero and make it easy to borrow more have been as successful as pushing on a string; the economy is choking on over-indebtedness and overleveraging of stagnating income. There is no escape from this vortex except refusing more debt and writing off existing debt, wiping it off the balance sheets as an asset, driving lenders, banks and those holding debt as assets into insolvency.

As we saw yesterday, the velocityof money–that is, money actually being borrowed and spent or invested in the real economy–has plummeted to zero.

We all know the 16-year recession/malaise back in 1967-1982 had a “happy ending”:  huge new oil fields were discovered in Alaska, the North Sea, West Africa and elsewhere, ushering in a renewed era of cheap, abundant petroleum. President Reagan “saved” Social Security for a generation by raising contributions paid by employer and employees, and he heralded a “lower taxes, higher permanent deficits” ideology that is now accepted as the norm: deficits don’t matter, even when they reach the trillions, because our good friends the Gulf Oil Exporters and Asian exporters will buy all our debt forever, keeping interest low forever.

(And if they drop the ball, then the Federal Reserve will print money and buy the Treasury bonds. Sweet! We don’t need any external buyers, just the  Federal Reserve.)

Then the U.S. created and launched two revolutionary technologies which both created new wealth around the globe: the personal computer (microprocessor and cheap RAM) and the Internet (TCP/IP, Ethernet, and the commercialization of Tim Berners-Lee’s World Wide Web with free browsers) spawning the generation-long boom of the 1980s and 90s.

Beneath the surface of this innovation-driven boom, however, the real engine of growth was debt and the financialization and globalization of the economy.

But when the wheels fell off that debt-fueled boom in 2000, the U.S. did not create a new engine of wealth: it opted instead for a devilishly insidious simulacrum of wealth: debt which rose at an exponential rate throughout the economy.

Borrowed money and phony financial legerdemain (mortgage-backed securities, derivatives based on the MBS, etc. etc.) from 2000-2007 created what I have  termed a “bogus prosperity”: no actual new wealth was created, only a brief and doomed bubble of debt-based housing valuations was inflated which followed the classic model set down by the Tulip Craze in Holland hundreds of years ago: insane boom, crushing bust.

We have to revisit the early 1970s for a reality check.  In post-industrial America circa 1970, a huge surplus of food was grown by a mere 2%  of the workforce. The cornucopia of manufactured goods was produced by about 20% of  the workforce (hence the phrase “post-industrial”), and other than essential government services like the Armed Forces, police and the courts, the rest of society’s work was either service-oriented paper-pushing relating to affluence (insurance), do-good selfless work (Peace Corps, churches) or leisure-related: entertainment, films, travel, amusement parks, stereos, etc.

This was not all fantasy.A friend of mine supported an entire  house of hippies in  late-60s Pittsburgh on his union steelworker job, and had plenty of money left to save for his trip to San Francisco. (As I recall, the rent for the big old house was less than $200 per month.) Hippies were the first ardent dumpster-divers/scavengers, driven not by poverty but by the idea that since that our society generated so much waste and surplus, why bother working?

As noted here many times before, the purchasing power of American wage-earners reached a plateau around 1973 and has been declining ever since.

One key point which is usually overlooked when comparing “The Last Christmas in America” circa 1974 and TLCIA circa 2011: the wealth distribution in the U.S. was much flatter then.CEOs of financial institutions did not earn $10 million each; there were no hedge funds with chiefs pulling down $600 million each (yes, that was the average “compensation” for the top ten fund managers at the hedgies’ glorious peak), and even minimum wage ($1.60/hour in the late 60s, I know because my wage stub recorded it) bought far more goods (purchasing power) then than minimum wage does now.

Not only was gasoline cheap, but housing was far and away cheaper than it is today. Just about any G.I./Vet could buy a house with his/her V.A. benefits (3% down), and anyone else could scrimp and save for a few years and then buy a house for 2 or 3 times their annual wage at an interest rate around 6%.

Meanwhile, in TLCIA circa 2011, obscene “compensation packages” are defended as “free enterprise.” Well, what did we have in 1973? Unfree enterprise?Amidst all the ideologically convenient defenses of heavily skewed “compensation,” we have to admit that the dream of affluence combined with leisure was based on the presumption of society’s wealth being distributed somewhat evenly, not by a Communist central state but by the “free enterprise” system and modest common-sense government regulation  (limited work hours,  minimum wage, etc.) which protected employees from the excessive exploitation of the late 19th century and early 20th century Monopoly Capitalists.

That dream seemed at hand in 1970. Now, after “the limits to growth” were mocked by those expecting ever larger oil fields to provide endless abundant cheap oil, we find that Peak Oil was merely put off a generation; there have been no new discoveries of super-massive oil fields since the early 1970s, and the supposedly abundant alternative petroleum sources like shale oil are horrendously costly to exploit, for they require vast quantities of energy (mostly natural gas at the moment) to be consumed to extract the oil.

Now we face a future which might well be called the End of Work for up to a third of the current workforce.Since agriculture employs about 2% of the workforce, industrial/factory production about 11%, essential transportation and essential government each a bit more, we have to ask: in an economy in which 70% of GDP is consumer spending, how many jobs are actually essential? How much actual wealth is being created/produced in the U.S. and sold overseas? Is giving people with Medicare coverage handfuls of costly and often ineffective medications and endless MRI  tests actually creating wealth, or it mostly squandering it?

We might also ask: how much of the consumer economy is superfluous if wage-earners shift values and decide saving is more important than consuming? How many malls, storefronts, internet retailers, restaurants, fast-food joints, etc. can a newly-frugal economy support?  How many dog-walkers, derivative salespeople, nail shops, carpenters, financial planners, realtors, etc. does an economy need if the FIRE economy (finance, insurance and real estate) is shrinking?

Based on the tremendous size of the service economy, construction, finance and government, I have estimated that 30 million jobs out of the current 139 million-strong workforce are superfluous.  Many government positions are essential: police, meat inspectors, rangers, tax collectors, meter maids, etc., but as Mish so thoroughly illustrated in his detailed analysis of the California state budget ($120 billion or so), dozens of State agencies could be eliminated without any visible effect on the economy except to the wage-earners who lost their jobs.

If 20 million jobs disappear (7 million have already vanished since 2008), so do all the taxes  those wage-earners paid; if 5 million homes go through foreclosure, the inflated property taxes the owners once paid will disappear, too. Once businesses close, it’s not just wages which disappear: all the junk-fees governments levy disappear, too: the business taxes, the licensing fees, the permits, transaction fees, etc.

Does anyone think all these taxes and levies can fall and government employment will be funded by some other source?  Yes, the Federal government can borrow apparently limitless sums  at low interest rates; but soon, the surplus money which has piled up in exporters’ accounts will be gone, and the  endless borrowed trillions will actually start costing real money–money that will be diverted from government employment to pay the interest on all that wonderful debt everyone loved when they got a piece of it.

So how does a society deal with the End of Debt-Driven Consumerism, the End of Cheap Oil  and the End of Work when it also means The End of Affluence, even for many of those with jobs?  How does government deal with declining tax revenues and rising interest rates?

The death throes of the debt-based consumerist lifestyle are already visible beneath the glossy propaganda of “rising revenues this Christmas season.” Those revenues were obtained by selling goods at below cost, in the absurd hope that income-strapped, over-indebted consumers would make profitable “impulse buys.” As Mish has documented, the “impulse buys” are being returned even before Christmas to the tune of hundreds of millions of dollars.

The Fed is desperately attempting to re-inflate the debt bubble by lowering interest and mortgage rates and buying up all sorts of semi-toxic/impaired  debt. What the Fed dreads is the reality we all feel and see: fear of the future  due to diminished wealth and insecure incomes.If your assets have fallen in value,  you feel poorer because you are poorer. Borrowing more at any interest rate will not make anyone feel wealthier.

People who fear their income may plummet due to layoffs or their hours being cut are not in the euphoric mood to borrow more, and banks which cannot dare to lose more money loaning to people who will default have cut off credit to millions of  previously rabid consumers of debt.

Ask yourself this simple question: how much stuff could people buy if they could only spend surplus cash, after all their expenses and debt servicing payments were paid in full?

And let’s not forget that much of what is purchased in this consumerist frenzy is needless, superfluous crap.  My wife saves the most egregiously gift-buying-frenzy advertising circulars, and one from Bed, Bath & Beyond caught my eye.

There is no difference between this “1001 Best Gifts” from BB&B and a parody of consumerist excess.Hmm, how about an “executive standing valet” rack of wood and plastic for $99.99?

To make this poor-quality contraption, a forest somewhere in a Third-World kleptocracy  was cut down and precious, irreplaceable oil was burned shipping the lumber to China and from that factory to the U.S. across 6,000 miles of Pacific Ocean.

We know this spindly piece of garbage will break in a matter of days, weeks or maybe if the owner is especially careful, months; then the legs will break loose of the base, the towel bar will pull out, etc. and the “we cut down a priceless rain forest to make this” piece of human handiwork will be put on the curb where a diesel-burning garbage truck will haul it to the landfill along with all the spoiled food Americans throw out.

The 16-bottle wine cellar/cooler from China (labeled Cuisinart for your consuming pleasure) for $199.99 might come in handy storing something once it’s unplugged–but a cardboard box will probably do just as well.

I for one will not mourn the last debt-consumerist Christmas in America. Good riddance to the flaunting of borrowed money and the heedless, desperate purchase of valueless “goods” as gifts for an insolvent nation awash in too much of everything but common sense, integrity, gratitude, accountability and healthy living.

Charles Hugh Smith – Of Two Minds

Recent Gallup polls show that Three Years After Crisis, Little Sign of Economic Relief in U.S.

1. There has been no improvement in underemployment (counting part-time workers) from a year ago
2. Job creation has been in a narrow range since October 2010
3. Consumer spending has been stagnant since January 2009
4. Economic confidence is near the lows seen at the depth of the depression

click on any chart for sharper image

Economic Confidence: Back at Recessionary Levels

Americans’ confidence in the U.S. economy is now at its lowest point since February 2009 — near the conclusion of the recession that officially ended in June 2009. Gallup’s Economic Confidence Index was -52 in August, above its financial crisis lows, but much lower than the -21 to -35 range measured from June 2009 to June 2011.

Americans’ current level of economic confidence — which represents their views on the current state and future direction of the nation’s economy — is decidedly negative. Seventy-seven percent said the economy was getting worse in August, the highest — by far — since February 2009, the month in which Congress passed a $787 billion stimulus bill in hopes of lifting the U.S. economy out the depths of the recession.

Job Creation: Improved From 2009-2010 Lows, but Far From Early 2008 Levels

The +13 Job Creation Index for August falls into the +10 to +15 range Gallup has measured since October 2010. The good news is that for nearly a year, Gallup has found consistently higher rates of net new job creation (the difference between hiring and letting go) than it did for the first two years after the global economic collapse. The not-so-good news is that the current rate of job creation is still just half of the +26 score Gallup found when it began tracking this metric in January 2008, when the nation was already technically in a recession.

Currently, 32% of workers say their employer is hiring and 19% say their employer is letting workers go, compared with 40% and 14%, respectively, in January 2008.

Underemployment and Employment: Stuck at Year-Ago Levels

Gallup found 18.5% of workers underemployed, including 9.1% unemployed, in August 2011. These figures are based on Gallup’s measure of employment, which is not seasonally adjusted. Both of the current figures are statistically similar to what they were a year ago, meaning the employment situation in the U.S. is no better now than it was at that time.

Consumer Spending: Nowhere Near 2008 Levels

Americans’ spending has remained essentially stagnant since it fell dramatically in January 2009. Spending in stores, restaurants, gas stations, and online has averaged $66 per day so far in 2011 — similar to the $65 is 2010 and $64 in 2009. This compares with an average of $96 per day in 2008. That year, Americans’ daily spending ranged from $81 to $114 per day in monthly averages. Since 2009, monthly spending averages have ranged between $58 and $75.

No Real Recovery

Clearly there has been no real recovery from the point of view of consumers. There was a financial recovery that is now crumbling, led by bank stocks.

BAC Bank of America

$BKX Banking Index

C Citigroup

Banks Stock fueled the decline in 2008 and have done so this year as well. There was never a recovery in the real economy and now bank stocks signal the financial recovery is over as well.

Mike  “Mish”  Shedlock

Global Economic Analysis

But, but, but….. as Professor Kack (or is that “Hack”) said, there’s no indication of inflation:

The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.5 percent in July on a seasonally adjusted basis, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index increased 3.6 percent before seasonal adjustment.

This is “no indication of trouble”, right?  1.005 ^ 12 = 6.2% annualized inflation.

Not a problem, right?

What’s been flying upward?  Gasoline, clothing, electricity and groceries.

You don’t need to buy any of those, right?  You can hide out in things that aren’t going up much, like commodities less food and energy?

Yeah, right.

Oh, and Bernanke?  He claims he wants to see 1-2% inflation despite clear language in The Federal Reserve Act that mandates stable prices.  Well, how’s he doing?

The Consumer Price Index for All Urban Consumers (CPI-U) increased 3.6 percent over the last 12 months to an index level of 225.922 (1982-84=100). For the month, the index increased 0.1 percent prior to seasonal adjustment.

The Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) increased 4.1 percent over the last 12 months to an index level of 222.686 (1982-84=100). For the month, the index increased 0.1 percent prior to seasonal adjustment.

Why did we have The Coinage Act of 1792 again?  Oh that might be so that the common man doesn’t get screwed, blued and tattooed by those who would otherwise intentionally destroy his saved capital.

It’s time to bring it back, including the penalty clause, with sentences to be carried out in public on The National Mall.

Does inflation even matter?  The growing secrecy of the CPI and how average Americans face budget squeezes through financial maneuvering and the chained CPI.

Things seem to be progressively getting worse for the middle class as most of the debt ceiling talks revolve on sticking it to working Americans as if they were financially able to handle any more austerity moving forward.  While the too big to fail banks swim around in pools of bailout money like Scrooge McDuck both sides seek to squeeze more pennies out of working class Americans.  One way that the middle class has been hammered over the past few decades comes from the way we measure inflation.  The CPI measure through the Bureau of Labor and Statistics does not even examine actual home ownership carrying costs and uses a very open method of calculating home costs by using an owner’s equivalent of rent.  This is why during the most obvious housing bubble in history home prices seemed to be increasing at a moderate pace according to the CPI while the more accurate Case Shiller Index was registering annual increases of 15 percent or more.  This is important because so much rides on accurately measuring inflation in our country and more is trying to be done to stifle information that reflects the real changes to our overall economy.

Inflation growing slowly if we exclude food and energy

I always find it amazing how some pundits like to remove food and energy from measuring the CPI yet so much spending goes into these two items.  This is also important since stagnant paychecks don’t go as far in covering these monthly budget needs.  As we go forward we start getting a more inaccurate perception of inflation.  For example, housing is the biggest item in the CPI because most Americans spend the largest amount of money on housing per month.  So with that said, you would expect an accurate reflection in the CPI for housing.  But if we look at the CPI housing measure versus the Case Shiller Index we realize a serious problem is occurring:

Read the rest at My Budget 360

The Federal Reserve has one clear mandate.  That mandate involves protecting the biggest investment and commercial banks on Wall Street at the expense of the American people.  This deflation of quality of life is being felt in the most clandestine and subtle ways like a shift in the wind.  The Federal Reserve through archaic money operations has bailed out the too big to fail and has passed on the bill to millions of Americans.  We are now seeing this through the rising cost of goods outside of housing.  As noted before manufacturers unable to charge Americans with an average annual income of $25,000 anymore on goods for fear of losing customers, many producers are simply shrinking the package of items hoping customers do not notice.  Aside from this hidden cost since the US dollar is being devalued by virtual money printing, the CPI which is heavily weighted by housing is also showing increases in inflation.  As expected it looks like the Fed is only concerned with protecting one sector of our economy.

The Federal Reserve causing another bubble?

The above chart shows the Federal Funds Rate and the current CPI year-over-year change.  The above chart highlights the minor bout of deflation we faced in 2009 after the 2007 and 2008 market collapse.  Yet the CPI is now steadily up but the Federal Funds Rate has been stuck at near zero since late 2008.  If you recall, the housing bubble was largely fueled by the Fed holding the funds rate too low for too long.  Why?  Former chief of the Fed Alan Greenspan was trying to re-inflate the economy after the technology bubble burst.  The result was the biggest housing bubble the world has ever witnessed.  There has never been a period in history where the entire globe from Sydney to Los Angeles to London all faced simultaneously rising housing bubbles.

The Fed currently has a negative real interest rate and their propaganda to the public is that they are trying to increase lending.  Yet as we have documented many times before banks are not lending to the average American or small businesses in any meaningful way.  The real reason the Fed is keeping rates at these low levels is to allow banks all the time in the world to inflate their toxic assets via a transfer of wealth from the public to the banking system.  Inflation does this through an insidious way.  The US dollar losing its purchasing power is making it harder and harder for Americans to achieve any semblance of the middle class lifestyle.  It is rather clear that the Fed and the banking system has no remorse for the middle class of America but current chair Ben Bernanke does not even care about the problems caused by these actions on a global scale:

“(Mercury News) China and other emerging markets have blamed the Fed’s strategy for sending waves of capital rushing to their shores, creating a threat of inflation. But Bernanke said the influx of capital appeared to be driven more by investors’ desire to get a higher return in emerging economies than by the Fed’s policies.

He admonished emerging nations to acknowledge that they have “a strong interest in a continued economic recovery in the advanced economies,” and said they should consider deploying their own tools to manage their economies and prevent overheating.”

This should make it clear who the Fed is really fighting for.  It is primarily concerned with protecting the banking system.  It is essentially playing chicken with the world banking system since the US dollar is still the biggest reserve currency.  Yet for how long?  Inflation in these countries cannot continue without domestic political ramifications.  Say China allows their currency to appreciate. What do you think that will do to the cost of goods Americans buy?  With stagnant wages is this going to help?  Of course not but the Federal Reserve is really looking at bailing out the massive debt of banks through a slow loss of the middle class.

MIT has a fascinating inflation tracking tool called The Billion Prices Project:

“The Billion Prices Project is an academic initiative that collects prices from hundreds of online retailers around the world on a daily basis to conduct economic research. We currently monitor daily price fluctuations of ~5 million items sold by ~300 online retailers in more than 70 countries.”

This is showing a much higher inflation rate:

Source:  MIT

Most of us already know this.  Outside of housing which many Americans only buy on a very infrequent basis (at least before the housing bubble) many key items are showing giant jumps in prices:

Food is heading up:

Energy is way up:

Medical care has only gone up:

In the end what most Americans are realizing with the above changes is that their paycheck is buying less and less each year.  The Federal Reserve is purposefully trying to create inflation not to help the public, but to bailout the decade long fiasco wrought by the investment banking sector.  Typical of the Fed the stock market has rallied 100 percent since the March 2009 low even though the vast majority of Americans cannot participate in the market (the average retirement account is $2,000).  Instead of lending banks are merely recycling money back into the Wall Street casino by chasing global bubbles.

Those who think inflation is the answer to this crisis need only look at countries that have suffered major bouts of inflation.

My Budget360