FedUpUSA

College students who graduated during the recession are wondering if their degrees were worth the trouble. Thousands are not able to find work. Others are taking jobs like serving coffee. Here’s one young woman’s story.

When I was growing up, $50,000 sounded like a gigantic mountain of money to me.  And it was actually a very significant amount of money in those days.  But in 2010 it just does not go that far.  Today, the median household income in the United States for a year is approximately $50,000.  About half of all American households make more than that, and about half of all American households make less than that.  So if your family brings in $50,000 this year that would put you about right in the middle.  So can a family of four survive on $50,000 in America today?  The answer might surprise you.  Twenty years ago a middle class American family of four would have been doing quite well on $50,000 per year.  But things have changed.

You see, despite government efforts to manipulate the official inflation numbers, the price of everything just keeps going up.  The price of food slowly but surely keeps moving up each year.  The price of gas is far higher than it was 10 or 20 years ago.  Taxes just keep going up.  Utility bills just keep going up.  Each year middle class American families have found themselves increasingly squeezed as their expenses have risen much more rapidly than their incomes.  

So just how far will $50,000 go for a middle class American family of four today?  Well, $50,000 breaks down to about $4,000 a month.  So how far will $4,000 a month stretch for a family of four in today’s economy?….

First of all, the family of four needs some place to live.  Even though house prices have come down a bit recently, they are still quite expensive compared to a decade ago.  Let’s assume that our family of four has found a great deal and is only spending $1000 a month on rent or on a mortgage payment.  In many of the larger U.S. cities this is a completely unrealistic number, but let’s go with it for now.

Next, our family of four has to pay for power and water for their home.  This amount can vary dramatically depending on the climate, but let’s assume that the average utility bill is somewhere around $300 a month.

Our family is also going to need phone and Internet service.  Cell phone bills for a family of four can balloon to ridiculous proportions, but let’s assume that our family of four is extremely budget conscious and has found a package where they can get basic phone service, Internet and cable for $100 a month.  Most middle class American families spend far more than that.

Both parents are also going to need cars to get to work.  Let’s assume that both cars were purchased used, so the car payments will only total about $400 a month.  If the vehicles were purchased new this number could potentially be much higher.

If our family has two cars that means that they will also be paying for automobile insurance.  Let’s assume that they both have exemplary driving records and so they are only spending about $100 a month on car insurance.

Our hypothetical family of four is also going to need health insurance.  In the past, families could choose to go without health insurance (at least for a while), but now thanks to Barack Obama all American families will essentially be forced to purchase health insurance.  Health insurance premiums are absolutely skyrocketing, but let’s assume that our family has somehow been able to find an amazing deal where they only pay $500 a month for health insurance.

Our hypothetical family is also going to have to eat.  Let’s assume that our family clips coupons and cuts corners any way that it can and only spends about $50 for each member of the family on food and toiletries each week.  That works out to a total of $800 a month for the entire family.

Lastly, the parents are also going to need to buy gas to get to and from work each week.  Let’s assume that they don’t live too far from work and only need to fill up both cars about once per week.  That would give them a gasoline bill of about $50 a week or $200 a month.  Of course if either of them lived a good distance from work or if a lot of extra driving was required for other reasons this expense could be far, far higher.

So far our family has spent $3400 out of a total of $4000 for the month.  Not bad, eh?

Wrong.

We haven’t taken federal, state and local taxes out of the paycheck yet.  Depending on where our family lives, this will be at least $1000 a month. 

So now we are $400 in the hole.

But to this point we have assumed that our family does not have any credit card debt or student loan debt at all.  If they do, those payments will have to be made as well.

In addition, the budget above includes no money for clothing, no money for dining out, no money for additional entertainment, no money for medications, no money for pets, no money for hobbies, no money for life insurance, no money for vacations, no money for car repairs and maintenance, no money for child care, no money for birthday or holiday gifts and no money for retirement.

On top of all that, if our family of four has a catastrophic health expense that their health insurance won’t pay for (and health insurance companies try to weasel out of as many claims as they can), then our family of four is not just broke – they are totally bankrupt.

Are you starting to get the picture?

It is getting really, really hard out there for middle class American families these days.

And unfortunately, many American families now have at least one parent that is not working.  In some areas of the nation it just seems like there are virtually no jobs available.  For example, at 14.3%, the state of Nevada now has the highest unemployment rate in the nation.  Michigan (which had been number one) is not very far behind.

But even those Americans who are able to find work are finding themselves increasingly squeezed.  For many Americans, a new job means much lower pay.  Millions of highly educated people who once worked in professional positions now find themselves working in retail positions or in the food service industry.  Many are hoping that the economy will “turn around” soon and that they will be able to go back to higher paying jobs, but the truth is that the U.S. economy is simply not producing enough good jobs for everyone any longer.

So where did all the good jobs go?  Well, millions of them have been shipped off to China, India and dozens of other nations around the globe.  Today the United States spends approximately $3.90 on Chinese goods for every $1 that China spends on goods from the United States.  A Chinese factory worker makes about a tenth of what an American factory worker makes.  And China continues to keep their currency artificially low so that jobs will continue to flow into China and so that we will continue to run a massive trade imbalance with them.

In a previous article, “Winners And Losers“, I went into much greater detail about how globalism is destroying middle class jobs.  We are rapidly moving toward an America where there will be a small group of “haves” and a very large group of “have nots”. 

The middle class in America is going to continue to shrink and shrink and shrink in the years ahead.  Not only are both parents going to have to work to pay the bills, but both parents in many families will be forced to take two or three jobs each just to make it each month. 

The Economic Collapse

It was interesting to see the spin regarding the FDIC quarterly report this week.  The report was largely a reflection of the way we now categorize profits in the banking system.  Banks made a nice amount of profit through trading securities (on bailout leverage) while at the same time cutting back the amount of capital available to the American public.  The number of institutions decreased by 104 but interestingly enough, the number of employees grew in this sector.  Why?  The too big to fail banks are simply getting bigger and stepping in where other smaller banks have failed.  The amount of assets held at the 7,830 institutions is a stunning $13.2 trillion and who really knows if it is even that amount.  To a bank, a loan is an asset and with mark to market suspended they can value these things at absurd bubble level prices.

Let us look at some key details in the report:

Source:  FDIC

First, you’ll notice that the amount of assets backed did decrease by over $100 billion.  If the economy is supposedly growing, you would expect this number to increase as well.  Next, you will see the incredible amount of commercial real estate and industrial loans (this is the bailout that is currently occurring but the government and banks don’t want you to know about).  How can an industry that has lost 104 institutions add employees?  Simple, when you have the U.S. Treasury and Federal Reserve bankrolling your finances you have more capital.  Over 95 percent of all mortgages made this year are backed by the Federal government so why do we even need banks serving as middlemen here to skim additional profits?  Why not let the public borrow directly from the government for say a 30 year fixed mortgage?  The underwriting is already computerized and IRS data is already in the government’s hands (heck, at least you’ll know the government will check this as opposed to the no-doc fraud of the too big to fail banks).  Either way, the report is more of a reflection of banks not realizing losses and pretending all is well.

The big 4 banks control a large amount of banking assets in the system:

So even though we have nearly 8,000 banks, the bulk of the assets sit with a small number of banks.  I’m not sure why the report was spun as being good especially when the Deposit Insurance Fund (DIF), the fund that backs the assets of the banks is actually in the red for $15 billion:

This is the fourth consecutive quarter of it being in the red yet it is perceived as being good.  Keep in mind that this also has to do with programs like HAMP and also CRE delays because banks are basically ignoring bad loans with these stop-gap measures so this helped here.  After all, if you didn’t have to recognize the actual value of an asset then you can still claim the inflated price and boost your assets.  For those that were pushed into HAMP, banks were able to shift toxic loans onto the taxpayer bill.  As we now know, over 50 percent of these loans re-default so instead of them going bad on the bank’s books, they will now go bad and the taxpayer will have to cover the entire bill.  The FDIC report title should have included “shell game” somewhere.

Banks also are making a tremendous amount of money through their security divisions:

Banks have increased their securities gains by 345 percent in the last year.  Charge-offs are up because in the real economy, middle class Americans are having a tough time paying bills with such a weak economy.  Banks continue to speculate on Wall Street and make money with taxpayer leverage.

Solutions?

We all accept that banking is a necessary part of the economy.  Yet no other industry has the ability to pause accounting rules to suit its needs or has such control over the government.  There is a deep need to separate commercial and investment banking.  Since the Great Depression, we have seemed to avoid falling into another major economic calamity for over 60 years.  Yet as time went on, regulators were thinned out and regulations were stripped away.  Each crisis progressively got bigger.  So today, we now have a crisis that is the largest since the Great Depression but banks have learned well from that time.  They have learned how to mitigate public anger by pumping out propaganda (i.e., if you don’t bail us out we won’t make loans etc) and at the same time have consolidated power in the hands of a few banks.

Commercial banking should be treated as a utility.  We all need banking and banks wouldn’t survive without the government.  So there is a social contract here.  Liken this to water, electric, or any strictly governed industry.  This component should include mortgages (95 percent are already government backed), debit cards, checking, savings, and credit cards.  Since these industries are protected by government and taxpayer money, they should be incredibly over regulated and have a strong enforcement branch protecting consumers.  People will point to Fannie Mae and Freddie Mac as big failures.  Well who was doing the gate keeping?  The banks.  After all, you can’t go to the corner to get a Fannie Mae checking account.  But all the big banks including BofA, JP Morgan, Wells Fargo, and Citi currently pump out mortgages that are backed by the government.  We seemed to do well for many decades when banks made these loans but under strict underwriting (i.e., big down payments, income verification, etc).

The other part should be the investment banking component.  If banks want to leverage their own capital in the stock market and operate like hedge funds, so be it.  But absolutely no bailouts no matter what.  The example that is currently set is basically that if you become too big, the government will bail you out no matter what.  And why do you think the number of smaller banks are disappearing all the while bigger banks are growing?  This is the current reward system.  Until this changes, you can rest assured another gigantic bailout is around the corner.  After all, no one saw the flash crash day in May coming and we still have no explanation for it.  Dose that instill confidence in the banking system or even our capital markets?

My Budget 360

Again, I must say……

The same principal has left the nation’s public and private pension funds badly underfunded.

“We are actually more underfunded than we were at the end of 2008 because of the drop in interest rates since then,” said John Ehrhardt, who tracks fund performance for benefits consultant Milliman.

That “same principal” is The Fed’s ZIRP policy.

By picking winners – in this case the banks who made imprudent loans and should have been forced out of business, along with “protecting” the imprudent buyers of bonds in institutions that made those imprudent loans, the prudent are getting hammered.

There is no solution to this other than to stop doing that.  And this means withdrawing liquidity and forcing the borrowing of money to have a reasonable cost, so that those who lend money through the purchase of bonds can earn a reasonable inflation-adjusted return.

The initial “impact” of low interest rates appears seductively good.  It’s not – it’s always bad.  It forces people to take imprudent risks (how do you think we got a housing bubble in the first place?) and destroys the prudent investor, lender of capital and saver.

As these people are eviscerated their ability to contribute positively to the economy is likewise destroyed, and in particular, capital formation is critically damaged.

This is the real story on how Japan lost two decades. 

We will follow them unless we stop this insanity, and soon.

(PS: Are the unions still sheep on this issue, more than two years after I started sounding this alarm?)

The Market-Ticker