The chastisement of the American saver – Federal Reserve offers a higher interest rate to banking reserves than too big to fail banks offer American savers.
Americans are facing a banking system that is largely designed to go against their best economic interest. Even a decade ago people were able to find a savings account or a certificate of deposit that would keep up with the rate of inflation. Today, most typical savings accounts at too big to fail banks offer essentially a zero percent interest rate. Mattress savings. And the true rate of inflation on items like food, education, and fuel is far outpacing in household gains. This is the dilemma. If you put your money into the banking system you will surely lose because of the erosion of money thanks to our central banking policies. The Federal Reserve has purposely created a negative interest environment to get people to spend again and restart the economy. The unfortunate point is that banks have plenty of excess reserves thanks to trillions of dollars in bailouts yet fail to lend it out largely because the public is seeing household incomes shrink. The last decade growth was largely debt based. The banking system essentially is punishing the American saver with whatever little amount they try to sock away.
Middle class do worse in current economic recovery – median household income falls faster during recovery than during recession. S&P 500 up 77 percent in recovery while home values are neutral or down in many areas.
Some incredibly disturbing data was released this week showing the continuing crushing body blow to the American middle class. What was striking was that middle class incomes have fallen faster during the supposed recovery from June 2009 to June 2011 than they did in the actual recession from December 2007 to June 2009. Why? First, the recovery has largely occurred with the top one percent where much of their wealth is derived from the stock market. The market has rallied significantly from the lows in March of 2009. Yet the vast majority of Americans, those with any net worth, draw a large part of their true wealth from home equity. The housing market is still mired in problems and never experienced any sort of recovery and in fact, is aiming for a second leg down. Two charts highlight this dramatic predicament.
The wonder years – over 70 percent of GDP comes from personal consumption. For the past decade home equity and credit from other sources fueled growth because of falling household incomes. What happens when credit contracts and home equity evaporates?
In a debt based economy a credit crisis is similar to an uncontrollable virus spreading from house to house. The slow infection hibernated for decades until it went into a pandemic. It is troubling to see how the middle class is slowly being dismantled. However there is one silver lining of the home price correction. Americans spend most of their money on housing as we will highlight later in this article. The media never bothers showing a detailed budget to Americans since the average per capita income is $25,000 and they don’t want to scare off people from purchasing that new trinket. Over 70 percent of our annual GDP comes from personal consumption expenditures. We are a spending nation but for the last decade, much of that spending came from the phony equity brought on by the housing bubble. Inflated home values really only benefit the banks at this point in time. With smaller incomes Americans would receive an automatic boost if they spent less of their smaller paycheck on housing. With credit contracting and home prices moving lower, there is little reason to believe that we will suddenly see a resurgence of debt based spending.
How investment banks turned housing and student loans into a toxic and financial disaster – Middle class largest asset coopted by banking sector to raid and speculate on. Financial sector nearly 30 percent of all corporate profits in U.S. In the 1950s it was under 10 percent.
Most Americans pull their net worth from their investment in good old housing. It is the biggest purchase most will ever make. And because of this, after the Great Depression, housing was a boring yet stable investment class. It had to be. This is the cornerstone of wealth for most Americans. Banks used to do their due diligence by verifying income and typically having a say in their local communities. All that changed starting in the 1980s. The first foray into banking corruption in housing came with the S&L Crisis. Thrifts largely gave out money with unsustainable interest rate schemes and when the market imploded, the taxpayers had to step in to bail out the banks. Yet during the process, many Wall Street financial firms made out like bandits on junk bonds and other “financial innovation†which was nothing more than sugarcoated robbery. Then in the late 1990s the depression era Glass-Steagall act was repealed and all bets were off. In a debt based system, housing was the largest debt class for Americans and investment banks decided to turn it into one giant casino. This financialization of our country is at the core of the disappearing middle class. Financial firms are largely wards of the state and operate to suck out rents from the productive economy.