The United States of Debt Addiction: Our reliance on debt has created an entire economy fortified in the fires of moral hazard and fiscally dangerous leverage.
16 point 7 trillion dollars. That is our current national debt. 12 point 8 trillion dollars. That is the amount households carry in mortgage and consumer debt. We are now addicted to debt to lubricate the wheels of our financial system. There is nothing wrong with debt per se, but it is safe to say that too much debt relative to how much revenue is being produced is a sign of economic problems. At the core of our current financial mess is how we use debt as a parachute for any problem. We’ve been masking the shrinking of the middle class by allowing households to take on too much debt for a couple of decades. The results were not positive. Too this degree, we have now created a massive moral hazard economy where savings are punished into oblivion. There is very little incentive to put your money in a bank account yielding zero percent interest when real inflation is eating away at your money like a hungry wolf. So what do people do? Well many simply cannot save and therefore choose to go into debt to finance cars, housing, and education with very little down. Where does this debt addiction lead us?
Young riding out recession by going into debt for college: Millennial unemployment jumps by two percent.
As the animal spirits of the economy rage wild, there are still difficult challenges ahead for younger Americans. While the stock market is up highlighting corporate euphoria, many companies are doing this with 4 million fewer workers. So the economic recovery is not evenly distributed and they rarely are. Yet younger Americans are still facing tough challenges ahead. One major trend has to do with many people going back to college. While education is positive, the costs are becoming incredibly high and many simply cannot afford it. This is why total student debt outstanding is now over $1 trillion. Why is this so important? Well for one, we are seeing data showing that recent graduates, those in the last decade, are not yielding solid gains from their ventures into college. With 4,000 colleges in the US, many are subpar and many are designed as vehicles to extract student loans. How is this economy treating younger Americans?
Are we reaching a tipping point in the stock market? 4 million fewer jobs from peak but corporate profits at record levels. Consumer confidence dips yet stocks keep moving up.
As the Dow flirted with 14,000 and the S&P 500 hit 1,500 the typical American is losing their confidence and also reflects a stock market that diverges from the interests of the Americans worker. Given that many of the S&P 500 companies earn a sizable portion of their profits abroad, it is hard to see a direct correlation to the health of the American worker. In fact, the middle class continues to face a difficult future. It was interesting to see consumer confidence fall while stock prices move up. But what we do see is a growing class of Americans stuck in poverty. The startling high number of Americans on food stamps does not seem to be inching lower (we are over 47 million). Yet corporate profits are at record levels. Goldman Sachs for example earned $2.8 billion in the fourth quarter of 2012. How is it feasible that stocks continue to move higher while real wealth gains to working and middle class Americans seem stagnant?
Inflation unchained: US dollar down 23 percent from 2000, Tuition up 72 percent, and home values up 44 percent. Incomes adjusting for inflation are back to 1990s levels.
It is hard to believe that people in the US are still denying the obvious impact of inflation. The slow erosion of purchasing power has occurred for many decades now. What people tend to forget in a completely fiat based system is that the Fed can print as much money as it likes. And they have in digital format but also monetizing debt via mortgage backed security purchases. When the crisis hit in 2007 debt was being destroyed via foreclosures and bankruptcies. Debt in a fiat system is money. That is why the Federal Reserve injected trillions back into the system to revive it. Yet this money did not trickle down to most people. However, today, we are seeing where debt is present prices will soar. Just look at student debt and housing prices again. How is it that college costs and housing prices are moving back up a nice pace when actual household wages are stagnant? Because inflation is hitting the system and more debt is accessible to these sectors.