The big economies cannot avoid a soft default as they face their debt reckoning: U.S. and other central banks battle it out for artificially low interest rates on unsupportable levels of debt.
Would you lend money to someone that you knew would never pay you back? The answer is, probably not unless you are okay with burning through hard earned cash. The global central banks unfortunately have entered into terminal velocity when it comes to debt support. The U.S. carries a stunning $17.51 trillion in total public debt. This is bigger than the annual GDP of the largest economy in the world but this pattern is not only in the domain of the U.S. Other central banks like the Bank of Japan and European Central Bank have also entered a mode where digital money printing is the only way out. Everyone does realize that this $17.51 trillion is never going to be paid back right? The Fed needs to push rates low in whatever method it can because the interest payments on the total outstanding debt would crush our economy alone. The Fed is mainly looking out for this when it comes to facing the debt reckoning and why we are witnessing inflation in debt based items like housing and higher education. It should be clear that many large economies are simply in a soft default already. In other words, they can only pay their debt by financial chicanery.
The perpetually depressed American consumer: Stock market high and bounce in real estate does not assist in boosting consumer confidence. 57 percent of Americans think economic outlook is getting worse.
Looking at the stock market and real estate prices would lead you to believe that the economy is recovering at a healthy clip. The underlying conditions of the economy may benefit the financial and real estate sectors (both live off each other) yet for most American families conditions are not rosy. In fact consumer confidence since 2000 has never recovered fully. Two mega-bubbles will do that to you. It could be that people were irrationally exuberant in 2000 but wasn’t the housing mania of 2005 through 2007 also exuberant? The big difference of course is that the housing bubble was largely masking the decline of the middle class while in 2000 wages were reaching their inflation adjusted peak via actual employment income. So Americans had a right to feel giddy at this point since their income reached a “true†high. It is no surprise that many Americans have little faith in their political system run by millionaires that simply bend to every whim of lobbyist and powerful corporations. Is it then a surprise that the latest Gallup poll shows that 57 percent of Americans feel that economic conditions are worsening? What is going on if peak stock values and a boom in real estate values no longer bolster the confidence of the American consumer?
The dual income conundrum – Americans need to work two jobs to make up for stagnant wages and the sinister impact of a middle class being eaten away by inflation.
In the United States the dual income household is the status quo. In the late 1960s dual income households were not common. Today however two income households are the majority largely because many Americans require two incomes just to stay afloat. This has been labeled as the “two income trap†and in many ways, it is more like the two income illusion. You would think that by adding two incomes you would be doubling your purchasing power but since the 1970s male wages have collapsed while more women entered the workforce. When household incomes combine these figures the collapse in income doesn’t look so dramatic but it is. The added wage of another worker simply masks the impact inflation is having. It is a new reality for many families struggling to enter the middle class. Inflation has a powerful eroding impact on your purchasing power. If your income is stagnant and housing prices just went up by 10 percent that means more of your disposable income is going to be eaten up by this sector. If tuition is outpacing wage growth that means many people are going to finance higher education by going deep into debt. With the dual income household situation in the US, one plus one doesn’t necessarily equal two. In many case the illusion is that one plus one equals one.
Never leave home generation: Household formation goes negative year-over-year at steepest rate since recession ended in 2009.
Young Americans have taken on the brunt of this Great Recession. Since the recession ended, young Americans continue to be saddled with tremendous amounts of student debt. With a weak blue collar sector, going to college may seem like the only viable road into the middle class. Yet one thing is certain and that is, the current younger generation in the United States is either unable or unwilling to form new households. I would go with the former rather than the latter since Americans are fiercely individualistic and staying with mom and dad late into your twenties and well into your thirties does not have a mass appeal. Yet through the fog of debt based euphoria, the economy appears to be recovering for a small segment of the population. Real estate is up largely on the backs of investors leveraging easy money from uncle Fed. The latest figures show that household formation is contracting at the fastest rate since the recession officially ended in 2009. What is going on? Isn’t the stock market recovery an accurate barometer of the health of the real economy? Real estate values going up only mean that you have fast money pushing out regular buyers and also, making rents more expensive for a generation that is already having a tough time moving out on their own.