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Archive for the ‘Wages’ Category

Egan-Jones Rings The Bell (Again)

And here we go again…

Egan-Jones Ratings Co. cut the U.S. credit rating one step to AA, the second downgrade in nine months and two levels below its highest grade, with a negative outlook citing the nation’s increasing debt burden.

U.S. debt has increased to 100 percent of gross domestic product, while debt climbed 23.6 percent from 2008 to 2010, the credit-rating firm said in a statement today. Egan-Jones lowered the U.S. grade to AA+ in a July. Treasuries have gained 4.6 percent since the company first lowered the U.S. rating, according to Bank of America Merrill Lynch index data.

The downgrade was based on “the increasing debt load coupled with the fact that there has been no tangible progress in addressing the country’s growing debt to GDP” ratio, Sean Egan, president of Egan-Jones in Haverford, Pennsylvania, said today in a telephone interview. “Unfortunately, the debt is growing fairly rapidly while the GDP is not.”

The market ignored it.

The reason there has been no tangible progress on the nation’s debt-to-GDP ratio is found in the fact that about one out of every 10 dollars spent in the economy (that is, GDP) is money borrowed by the federal government and then spent.  This creates an artificial level of demand in the economy and allows the government to claim that “we’re growing!”

But we in fact are not.  In point of fact all we’re doing is inflating the debt bubble, just as we have for 30 years.

This chart is, very simply, the change in total systemic debt (from the Fed Z1) compared against the change in GDP.  We get both numbers quarterly; one from the Fed and the other from the BEA.

Since all money is debt in modern monetary systems each new dollar spent into the economy must come with a debit somewhere (that is, it is someone’s obligation.)  This means that we can very easily measure the total amount of monetary inflation — or deflation — by simply comparing those two figures.

The “fear factor” for Bernanke and Congress is that the deceptive practices of the last 30 years will be discovered for what they are.  The so-called “prosperity” since 1980 has mostly been a scam — it has been nothing more than monetary inflation coupled with frauds that allowed people to borrow money they couldn’t pay.  Under this cover all manner of sin was committed; two bubbles (Internet and Housing) along with the theft of every single dime paid into Social Security and Medicare.

It is not “deflation” to take that monstrous bubble from 1981 forward and let the air out of it.  That would be nothing more than restoring balance, but it would not come “nicely.”

So instead we have pretended.  To be blunt, we all lied.  To ourselves, to each other, and the government lied to all of us.  We see articles telling us that we “can’t” make “irresponsible cuts” to government spending but what was irresponsible was promising to spend money we didn’t have in the first place.

There is no cheap, easy or clean way out of this box.  We will have to, at some point, accept the monetary, fiscal and economic contraction that must come to restore balance.

There are only two ways to do so:

• Tell the truth.  Some political party, whether the two major ones out there now or a third party, must get in front of this and start hammering the above graph until people “get it.”  It’s not hard to figure out really — gasoline prices anyone?  Medical care?  College education?  Stocks?  Just look — there it is.  This means cutting the size of government to what we are willing to fund in the present tense with taxes.  Everything else goes away.  And yes, this means both material tax increases (e.g. recission of all of the Bush tax cuts) and really large spending cuts (like in half — across the board.)
• Continue to lie.  We won’t get away with it for much longer.  Neither will anyone else.  Spain is in real trouble on this account as is Portugal.  The lies are politically expedient but that’s all they are.  They’re not fundable; if The Fed continues to play its QE and “twist” games all that will happen is that the monetary debasement will show up in essential commodities.  When a material percentage of the population can no longer afford to eat and the government is unable to continue to ratchet up the entitlements the game ends in violence and destruction.

The second choice is a bad one, but it’s the choice we make every single day we refuse to confront these realities and hold the politicians’ feet to the fire.  Those who are currently in office should be held to account for their lies, their thivery and their willful blindness.  All three have been equal components of the mess we’re in today.

Not only did politicians steal through the making of promises they couldn’t keep and monetary debasement but they willfully looked the other way while banking interests effectively counterfeited the currency and by doing so blew enormous bubbles in stock, commodity and housing markets.  They all lied too about the quality of the debt instruments they were issuing to back this monetary expansion and they knew it.

I know there are plenty of people who think this game can go on for many more years or even decades.  I disagree.  So did all of the Simpson-Bowles conferees.  Their expectations for the”wall” ranged from 2-4 years out — a year ago.  Mathematically I don’t see how we get out of the 201x years; from a realistic market perspective you’ll never get close to the corner.

The fault is ours folks — not just the politicians.  We get the government we deserve, as it’s the government we vote for.

For every day we refuse to rise and act the damage we must accept to restore balance grows worse.  In 2000 I estimated we had to accept a 10% contraction in the size of the government and that GDP would likely have to fall around 5-10%.  In 2007 I said it was 20% on the size of government.

Today it is nearly 50%.

Soon, it simply won’t matter as the choice will be made for us.

If you choose not to decide you still have made a choice!

The Market-Ticker

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The creeping cost of consumer inflation brought to you by a lower US dollar – Americans squeezed as inflation filters into the cost of daily life.  The uncertain employment market of low wage work.

There are unintended consequences when policy aims at depreciating a currency in favor of bolstering an ailing banking system.  The Federal Reserve has been on a multi-decade mission to lower the value of the US dollar.  The primary purpose of this mission is to inflate banks into solvency as they try to work their way out of the massive financial crisis.  The amount of troubled real estate loans is still impressive when we look at the temporary sanctuary being provided by the Federal Reserve on their overloaded balance sheet.  This luxury is not afforded to your common household and consequently many Americans are now facing higher and higher costs in items like energy even though demand is slightly lower.  This occurs for a variety of reasons but a main driver is the declining purchasing power of the US dollar.  This permeates over into the employment market that is largely being driven by lower wage positions.  Inflation is creeping back into the economy.

Consumer inflation now edging back up

Since our economy is fantastically debt based and debt is the medium of exchange, more debt is likely to produce higher prices given the same amount of goods.  Typically this equation is leveled at the money supply but our system is one in which debt rules supreme.  While households are in the painful process of deleveraging, debt has increased overall because of banking bailouts but also government spending.  For this, we are seeing consumer inflation pickup:

The inflation rate has been moving up since the crisis hit a trough in 2009.  Americans are facing higher prices in a variety of sectors including healthcare, energy, food, and higher education. Ironically inflation is hitting in many of the cornerstones of what was once thought to be part of a middle class lifestyle.  The recent push in prices has largely come from the higher prices in energy:

Total energy costs are up 7 percent over the last 12 months while wages have gone stagnant.  Gasoline has seen the largest push up in the last year moving up by 12.6 percent.  Looking at food, the total cost of food has gone up by 3.9 percent over the last 12 months.  Of course much of this is synergistic with the rise in energy given that food is transported and also produced with high levels of energy usage.  The interesting point here is that energy usage overall has not necessarily surged in the US to justify this movement.  This is largely being driven by an overall depreciation in the US dollar:

The US dollar has lost over 50 percent of its purchasing power since the 1980s.  It is no coincidence that global goods like food and energy are now more expensive.  This is problematic since Americans are seeing little growth in their wages.  The stagnant wage dilemma has been in effect for well over a decade now.

Impact of low wage employment

Just take a look at some of the top employment sectors in our economy:

The top three employment fields in our country are:

1.  Office and administrative support work

2.  Sales & Related

3.  Food preparation and serving related

Read the rest at My Budget 360

The Stupid, it burns!

Personal income increased $28.2 billion, or 0.2 percent, and disposable personal income (DPI) increased $18.9 billion, or 0.2 percent, in February, according to the Bureau of Economic Analysis. Personal consumption expenditures (PCE) increased $86.0 billion, or 0.8 percent.  In January, personal income increased $26.5 billion, or 0.2 percent, DPI increased $5.0 billion, or less than 0.1 percent, and PCE increased $40.9 billion, or 0.4 percent, based on revised estimates.

Real disposable income decreased 0.1 percent in February, compared with a decrease of 0.2 percent in January.  Real PCE increased 0.5 percent, compared with an increase of 0.2 percent.

Got it?

Real disposable income went down as the cost of living (necessities) went up faster than incomes.  But spending increased faster, which means we’re spending more than we make — again.

We are again into the space where people are clawing at the edge of the cliff trying to avoid disaster.  It’s not going to work any better than it has in the past.

The result was a drop in the “savings” rate to 3.7% from 4.3% last month, both well below the “reasonable” 5% rate.  And this is not actual savings (capital formation) either since debt pay-downs are included in “savings.”  In point of fact we have not de-levered to a material degree at all and now it appears that the consumer is getting dangerously close to the “drowning, actively and now” zone, likely driven to a large degree by gas prices.

It is never good when spending is rising faster than earnings folks.

The assumption that lower home prices improves the affordability of houses ignores two critical inputs: interest rates and income.

That the U.S. housing market is still in a post-bubble slump is no secret, as revealed by this chart courtesy of streettalklive.com: note that despite unprecedented intervention, including the complete socialization of the U.S. mortgage market (99% of all mortgages are guaranteed by the Federal government) and the socialization of subprime market for poor credit risks (3% down and easy credit from FHA), this chart punctures the happy-talk illusions of a rebound in housing.

Credit-asset class bubbles cannot be reinflated because they follow an S-curve.No matter how much taxpayer money the Federal government throws into the  housing market, it will not reinflate. The financialization (credit/leverage bubble) of housing  follows an S-curve as a system, and tweaking the parameters of the inputs (lowering interest rates, buying up toxic mortgages, etc.) doesn’t change the curve.

Hubris-soaked central Planners are incapable of understanding that their numerous policy interventions have essentially zero impact on the curve. But if you can’t believe systems don’t respond to frantic policy measures, then consider these factors:

1. Tens of millions of households are too poor to buy a home (the FDIC calculated 40% of the U.S. households have insufficient income and credit to buy a home)  without massive subsidies, and with no skin in the game their purchase is basically  a lease with an option to sell later for a private gain at the expense of the government.

if it doesn’t work out then it’s last one on, first one off: they default with little loss and possibly much to gain, i.e. two years living rent-free in a not-yet foreclosed house.

2. Tens of millions of other households are drowning in underwater mortgages they can afford to pay (barely) but that have crippled their net worth and borrowing power. They are out of the housing market except as potential defaulters.

3. Millions of other credit-worthy buyers have woken up to the fact that buying a house is a form of consumption and a risky “forced savings” investment, as property taxes spiral ever higher and prices continue sagging in many markets. The risk is high and the  potential gain is uncertain.

Those snapping up housing for cash are either buying to rent the homes or to speculate that a resurgent housing market will arise and they can “flip” for big profits. This segment simply isn’t large enough to soak up all the millions of homes languishing in the “shadow inventory” of homes  being held off the market in the vain hope prices will bubble higher.

The general idea of lower home prices is that once prices fall to some magic threshold, buyers will jump in and liquidate the inventory.  That notion makes two enormous assumptions:

Interest rates will stay near-zero when inflation is factored in

Household income will stop declining.

In other words, there are three inputs to housing affordability, and price is only one of them.Interest rates and disposable income are equally important. Note that income in all quintiles (the entire spectrum of income–high, middle  and low) has been declining since the housing bubble topped in 2007:

Official inflation has been running at around 3% a year, and many other measures suggest that number grossly understates reality by gaming the percentages of various inputs.

But taking the official 3% as a reasonable approximation, then buyers of 4% 30-year mortgages are earning a wafer-thin 1% in real return (4% – 3% = 1%) and they are taking a stupendous risk that inflation will remain well under 4% for the next three decades. Any surge in inflation and rates would destroy much of the value of their investment.

Let’s take two examples.Let’s say a house that sold for $400,000 at the top of the bubble is now selling for $250,000, $50,000 down (20%) with a $200,000 mortgage at 4%. let’s say the household earns $50,000, so the mortgage is exactly four times gross income. The interest on the mortgage is $8,000 annually (principal, property taxes, insurance etc. are added to make up the total mortgage payment).

Now let’s say the house declines in price to $225,000, so the down payment drops to $45,000 and the mortgage is $180,000. But let’s say investors are now demanding 3% above nominal inflation and mortgage rates are now at the historically moderate level of 6%. Meanwhile, the household income has slipped to $45,000 annually as bonuses and hours are trimmed and workers transition to lower paid positions.

The ratio of income to mortgage is still 4-to-1, but the annual interest payment is now $10,800, $2,800 higher–a 35% increase. By any measure, the house is less affordable despite declining $25,000 in price.

This is how affordability can decline even as home prices continue to slide.

Charles Hugh Smith – Of Two Minds

This recession has been unmercifully brutal on younger Americans.  Many are entering the most difficult employment market in generations with a flood of low wage jobs saddled with record levels of student debt.  Many have never even witnessed how it is to live in a bull stock market.    Of course this is assuming they had money to invest since 37 percent have no net worth or even worse, a negative net worth.  Even for the cautious minded, they are only able to garner a 0 percent savings rate as the Federal Reserve continues to implement a quantitative easing policy to rescue the banking sector.  The data on net worth for US households is disturbing since it highlights a deterioration of the middle class.  It is no surprise that this recession has caused many younger Americans to move back home with parents primarily because of the inability to find work and many that do find work find that it is part of the low wage growth sectors.

The young get dramatically poorer

This recession has been particularly tough for younger Americans.  Adjusting for inflation, those under 35 are worse off today financially than those in 1984:

From 1984 to 2009, the median net worth of younger households declined by 68%.  Older households did better seeing their net worth rise by 42%:

Source:  Pew   

The above is somewhat skewed however because it includes home equity.  The first chart we highlighted excludes home equity.  What this shows is that many younger Americans don’t own homes and for those that do, many have zero to negative equity.  So not only did they enter the worse employment market in a generation, they entered the worst housing market ever.  Yet excluding home equity for older Americans we see that they didn’t do as well either:

This is an interesting point to the 42 percent rise.  What we find is that excluding housing, many are doing worse off.  It just happens that they bought at the right time during a boom and even with the bust, they have netted out a gain.  Yet removing housing from the equation, net worth has fallen by 32 percent for those 65 and older as well.  What does this mean for the middle class?  What we can gather is that most Americans that bought in say the 1970s and 1980s (and even 1990s) still benefitted from the home equity they built over the years.  Younger Americans that likely bought in the 2000s have seen no equity gains and in fact, might have seen their equity disappear.

Read the rest at My Budget 360

Are you better off today than you were four years ago?  If not, then you are just like most other Americans.  According to a CBS News/New York Times poll that was released a few days ago, 80 percent of Americans say that their financial situation is not “better today” than it was four years ago.  But if you turn on the television and listen to what the “pundits” are saying, you would be tempted to think that we were in the midst of a robust economic recovery.  You would be tempted to think that the U.S. economy is in great shape and that we are heading for a really bright future.  But the fact that the stock market is soaring does not mean much to most Americans.  In fact, most Americans couldn’t care less that the Dow is well above 13,000 and that the NASDAQ is above 3,000.  What most Americans care about is having a job and being able to provide for their families.  If you haven’t paid the mortgage in three months or if you don’t have enough money to take your daughter to go see the doctor it really is not going to matter to you how well the boys and girls over on Wall Street are doing.  Right now most American families are doing worse than they were doing four years ago, and no amount of media hype is going to change that fact.

Yes, the stock market is doing really well for the moment, but the truth is that more than 50 percent of all stocks and bonds are owned by just 1 percent of the U.S. population.

Good for them.  It looks like the trillions of dollars that the Federal Reserve poured into the big Wall Street banks is really paying off nicely for the financial community.

Meanwhile, much of the rest of the country is deeply suffering.

It was recently reported that 1.5 million American families live on less than two dollars a day (before counting government benefits).

That is horrifying.

According to the U.S. Census Bureau, the percentage of Americans living in “extreme poverty” is now sitting at an all-time high.

All across this country poverty is exploding.  Food banks are experiencing more demand than ever before and those offering free healthcare are absolutely swamped.

And every single measure of government dependence has gone way up since Barack Obama entered the White House.

For example, since Barack Obama became president the number of Americans on food stamps has gone up by 45 percent.

Just think about that.

At this point the federal government is helping to feed an all-time record 46.5 million Americans every month.

Oh yeah, times are good.

According to the U.S. Census Bureau, 49 percent of all Americans live in a home that receives direct monetary benefits from the federal government.

That is much higher than it has been historically.

For example, back in 1983 less than a third of all Americans lived in a home that received direct monetary benefits from the federal government.

The big problem is that there are simply not enough jobs for everyone.

Listening to the media, you would be tempted to think that the U.S. economy is now pumping out huge numbers of good jobs.

But that is simply not the case.

Right now there are 5.6 million fewer jobs than there were when the last recession began back in late 2007.

So where are the millions of jobs you promised us Obama?

The federal government is trying to convince us that the unemployment rate is going down, but that is not really true.

The key is to look at the percentage of working age Americans that actually have jobs.  During the last recession that percentage fell dramatically as you can see from the chart below.  After every other recession since World War II the employment to population ratio has always bounced back.  But it has not happened this time.  Instead, the employment to population ratio has remained between 58 and 59 percent since the end of 2009….

We have not had a jobs recovery.  Hopefully we will have one before the next recession hits, but we are running out of time for that.

Tonight there are millions upon millions of hard working Americans that are staring at their television screens and wondering why they can’t find good jobs.  The pretty people on television are telling them that the employment situation is getting much better but they can’t find work no matter how hard they try.  It is a cruel joke on them.

When Barack Obama entered the White House, the number of “long-term unemployed workers” in the United States was approximately 2.6 million.  Today, that number is sitting at 5.6 million.

Thanks for the improvement Obama.

Meanwhile, the average duration of unemployment continues to hover near a record high.  Just look at the chart posted below.  Does this look like a “jobs recovery” to you?….

But of course Obama and those that support him want to make things sound like they are getting better.  They want people to run out and vote for him again in November.

If things are going well for you right now, be thankful, and also remember the millions upon millions of Americans out there that are deeply hurting in this economy.

If you gathered together all of the workers that are “officially” unemployed in the United States at this point into one nation, they would constitute the 68th largest country in the entire world.  It would be a nation larger than Greece or Portugal.

That is a lot of people.

Obama promised us that the Wall Street bailouts would make everything better.  He promised us that if we poured gigantic mountains of money into Wall Street that it would end up helping “Main Street”.

Well, the last time I looked Goldman Sachs was doing just fine.

So where is the help for Main Street?

In the United States today, the wealthiest one percent of all Americans have a greater net worth than the bottom 90 percent combined.

How much wealthier do they have to get before they start creating more jobs for the rest of us?

Obama (like most of our politicians) is a complete fraud when it comes to the economy.  He is all saddle and no horse.  He talks a good game but he doesn’t have any game.

As Wall Street has recovered, the rest of the country has actually been in decline.  Median household income in the United States is down 7.8 percent since December 2007 after adjusting for inflation.  Millions of American families are reaching the breaking point and millions of other families have already reached it.

Incomes have been declining but the cost of living has not.

For example, health insurance costs have risen by 23 percent since Barack Obama became president.

Has your paycheck increased by 23 percent?

The average price of a gallon of gasoline in the United States has increased by more than 90 percent since Barack Obama became president.

Has your paycheck increased by 90 percent?

Millions of American families have lost their homes while Obama has been president and millions more will soon lose their homes.  At this point there are more than 6 million mortgages in the United States that are overdue.

It is a horrible, horrible feeling to know that you can’t pay your mortgage and that you will soon lose your home and your family will be put out on the street.

None of us would ever want to end up in that situation.

And the housing market sure has not shown any signs of recovery under Barack Obama.

In January, U.S. home prices were the lowest that they have been in more than a decade.

Weren’t home prices and home sales supposed to be turning around by now?

Under Barack Obama, new home sales in the United States set a brand new all-time record low in 2009, they set a brand new all-time record low again in 2010, and they set a brand new all-time record low once again during 2011.

That trend is not going in the right direction.

Of course Barack Obama is not solely responsible for the performance of the U.S. economy.  Congress should share part of the blame as well, and the Federal Reserve is more responsible for our economic performance than anyone else is.

But one area where Barack Obama has had a huge impact is in the area of government spending.

While Barack Obama has been president, the U.S. national debt has risen from 10.6 trillion to 15.5 trillion.

Thanks Obama.

During the first three years of the Obama administration, the U.S. government has accumulated more debt than it did between 1776 and 1995.

So is Obama planning a change of course?

Of course not.

At this point, our national debt is increasing by about 150 million dollars every single hour.

So should we be thanking Obama for stealing 150 million dollars from our children and our grandchildren every hour?

Should we be thanking Obama for ruining our future?

I think not.

But you know what?

According to the CBS News/New York Times poll mentioned above, about half of America would actually vote for Obama if the next presidential election was held today.

That alone is a clear sign that this country is in a massive amount of trouble.

The truth is that the leaders we elect are an accurate reflection of who we are as a country.

And when you look at the collection of misfits in Washington D.C. right now, that does not say a lot about the character of this nation.

So where does America go from here?

That is up to you America.

The Economic Collapse