We know that after 10 years of expansion, a recession is baked in. Trees don’t grow to the moon, etc.
We also know that some people will hardly notice the recession while others are devastated. I addressed this in The Recession Will Be Unevenly Distributed(January 10, 2019). A retiree on Social Security and a bit of income from Treasury bonds isn’t going to be affected much, and a power couple in Washington DC who are high up the food chain in the federal government will also shrug off the recession.
What we don’t know is what kind of recession we’re going to get. It’s been almost 40 years since the U.S. experienced a “real recession,” i.e. a downturn that was severe and not limited to narrow slices of the economy.
The recession of 2008-09 was over before it started, and the damage was largely limited to the speculative housing-mortgage sectors and finance and everyone who was over-leveraged in the housing market.
The recession of 2000-02 was limited to the tech sectors that were exposed to the dot-com meltdown and investors in speculative dot-com companies.
The recession of 1991-92 was brief and shallow by historical standards.
The “real recession” of 1981-82 laid waste to numerous sectors and spread devastation throughout the economy. Interest-sensitive industries were crushed, and this impacted sectors such as government that are typically impervious to recessions.
Even further back, the Oil Shock recession of 1973-74 was also an economy-wide upheaval.
Those pundits who aren’t denying a recession is baked in are busy assuring us it will be a mere slowdown. What the well-paid pundits of the status quo can’t or won’t discuss is the economy’s fragility and vulnerability to self-reinforcing declines.
We rarely ask “does this make any sense?” of things that are widely accepted as beneficial— or if not beneficial, “the way it is,” i.e. it can’t be changed by non-elite (i.e. the bottom 99.5%) efforts.
Of the vast array of things that don’t make sense, let’s start with borrowing from future income to spend more today. This is of course the entire foundation of consumer economies such as the U.S.: the number of households which buy a car or house with cash is near-zero, unless 1) they just sold a bubble-valuation house and paid off their mortgage in escrow or 2) they earned wealth via fiscal prudence, i.e. the avoidance of debt and the exultation of saving.
Debt has this peculiar characteristic: it has to be paid back with interest.Depending on the rate of interest and the length of the loan, this translates into a mind-numbing reality: borrowing $100 can cost $200 once interest is factored in.
One might reckon that people would be cautious about paying two or three times more for something by using debt rather than cash. But consumer economies are based not just on debt, but on TINA (there is no alternative) and on the timeless seduction of getting something now and paying for it later.
Tagged with: credit
Despite the rah-rah about the “ownership society” and the best economy ever, the sobering reality is very few Americans are able to get ahead, i.e. build real financial security via meaningful, secure assets which can be passed on to their children.
As I’ve often discussed here, only the top 10% of American households are getting ahead in both income and wealth, and most of the gains of these 12 million households are concentrated in the top 1% (1.2 million households). (see wealth chart below).
Why are so few Americans able to get ahead? there are three core reasons:
The widespread presumption is the U.S. is wealthy beyond words, and will remain so as far as the eye can see: wealthy enough to fund trillion-dollar weapons systems, trillion-dollar endless wars, multi-trillion dollar Medicare for all, multi-trillion dollar Universal Basic Income, and so on, in an endless profusion of endless trillions.
Just as a thought experiment, let’s ask: how “wealthy” would we be if we stopped borrowing trillions of dollars every year? Or put another way, how “wealthy” would we be if the rest of the world stops buying our trillions in newly issued bonds, mortgages, auto loans, etc.?
The verboten reality is our “wealth” is nothing but a sand castle of debt. Take away more borrowing and the castle melts away. I’ve gathered a selection of charts that show just how dependent we are on massive debt expansion that continues essentially forever, as any pause in debt expansion will collapse the entire system.
I’ve been focusing on inflation, which is more properly understood as the loss of purchasing power of a currency, which when taken to extremes destroys the currency and the wealth/income of everyone forced to use that currency.
The funny thing about the loss of a currency’s purchasing power is that it wipes out every holder of that currency, rich and not-so-rich alike. There are a few basics we need to cover first to understand how soaring future obligations–pensions, healthcare, entitlements, interest on debt, etc.–lead to a feedback loop which will hasten the loss of purchasing power of our currency, the US dollar.
1. As I have explained many times, the only possible output of the way we create and distribute “money” (credit and currency) is soaring wealth/income inequality, as all the new money flows to the wealthy, who use the “cheap” money from central and private banks to lend at high rates of interest to debt-serfs, buy back corporate shares or buy up income-producing assets.
The net result is whatever actual “growth” has occurred (removing the illusory growth that accounts for much of the GDP “growth” this decade) has flowed almost exclusively to the top of the wealth-power pyramid (see chart below).
One of the enduring mysteries of the past decade is why inflation has remained tame while the central bank and government have pumped trillions of dollars of newly created money into the economy. Millions of words have been written about this, and so some shortcuts will have to be taken to make sense of it in one essay.
Let’s start with the basics.
1. Adding newly created money but not generating new goods and services of the same value reduces the purchasing power of existing money. To keep it simple: say the economy of a country is $20 trillion. (Hey, the US GDP is $20 trillion…) Say its money supply is $10 trillion.
So banks and/or the government create $2 trillion in new money but the value of goods and services only expands by $1 trillion. the “extra” $1 trillion of newly created money (either “printed” or borrowed into existence) reduces the value of all existing money.
In effect, the new money robs purchasing power from all existing money.Those holding existing money have lost purchasing power while the recipients of the new money receive purchasing power they didn’t have prior to receiving the new money.
Beneath the permanent whatever it takes “rescue” by the European Central Bank (ECB) lie fundamental asymmetries that doom the euro, the joint currency that has been the centerpiece of European unity since its introduction in 1999.
The key imbalance is between export powerhouse Germany, which generates huge trade surpluses, and its trading partners, which run large trade and budget deficits, particularly Portugal, Italy, Ireland, Greece and Spain.
Few topics are off-limits nowadays: the personal and private are now splashed everywhere for all to see.
One topic is still taboo: the holiday’s perverse incentives to over-consume and over-spend,lest our economy implode. This topic is taboo because it strikes at the very heart of our socio-economic system, which is fundamentally based on permanent growth, the faster the better, as if unlimited expansion on a finite planet is not just possible, but desirable.
In the current Mode of Production, the solution to every social and economic ill is to “grow our way out of it.”
The demise of the U.S. dollar has been a staple of the financial media for decades. The latest buzzword making the rounds is de-dollarization, which describes the move away from USD in global payments.
De-dollarization is often equated with the demise of the dollar, but this reflects a fundamental misunderstanding of the currency markets.
Look, I get it: the U.S. dollar arouses emotions because it’s widely seen as one of the more potent tools of U.S. hegemony. Lots of people are hoping for the demise of the dollar, for all sorts of reasons that have nothing to do with the actual flow of currencies or the role of currencies in the global economy and foreign exchange (FX) markets.
So there is a large built-in audience for any claim that the dollar is on its deathbed.
I understand the emotional appeal of this, but investors and traders can’t afford to make decisions on the emotional appeal of superficial claims–not just in the FX markets, but in any markets.
So let’s ground the discussion of the demise of the USD in some basic fundamentals. Now would be a good time to refill your beverage/drip-bag because we’re going to cover some dynamics that require both emotional detachment and focus.
How would extraterrestrial anthropologists characterize Earth’s dominant socio-economic system? It’s not difficult to imagine their dismaying report:
“Earth’s economy glorifies waste. Its economists rejoice when a product is disposed as waste and replaced with a new product. This waste is perversely labeled ‘growth.’
Aimless wandering that consumes fossil fuels is likewise rejoiced as ‘growth.’
The stripping of the planet’s oceans for a few favored species of edible fish is also considered ‘growth’ as the process of destroying the ocean ecosystem generates sales of the desired seafood.
Even more perversely, the resulting shortages are also causes of rejoicing by the planet’s elites, as their ability to purchase the now-scarce resources boosts their social status and grandiose sense of self-worth.
Every conventional “solution” to the systemic ills of our economy and society boils down to some version of free money: Universal Basic Income (UBI) schemes– free money for everyone, funded by borrowing from future taxpayers (robots, people, Martians, any fantasy will do); debt jubilees funded by central banks creating trillions out of thin air, a.k.a. free money, and so on.
Free money is compelling because, well, it’s free, and it solves all the problems created by burdensome debt and declining incomes for the bottom 95%. Just give every household $100,000 of free money that must be devoted to reducing interest, then give every household $20,000 annually for being among the living, and hey, a lot of problems go away.
Getting out of debt is hard on its own because a large part of what’s supposed to be disposable income goes down the drain. We are used to paying money in exchange for goods or services but you won’t get any ‘tangible’ stuff in return when you send out checks to your creditors. Paying off debt while struggling with low-income finances is much harder because your income is probably not yet enough to make ends meet.
Many families in the U.S. fall under the low-income category and they don’t even know. You can be an professional with a college degree and still be a low-income earner despite your seemingly ‘elevated’ social class. In 2014, the US Census report classified a low income household as – any 3 -family earning less than $38,110, any 4-person family earning less than $48,016, or any 5-person family earning less than $56,504.
Hence, one of the salient factors that might make it hard for people to get out of debt despite their best efforts is that they are simply not earning enough money to get out of debt easily. Nonetheless, you can get out of debt (it might take longer) even on a low income if you follow the right strategies. This piece provides information for getting out of debt faster regardless of your income level.