Saturday, August 15, 2015

Debt and the American worker

The McKinsey Global Institute found that total global debt hit a $199 trillion in 2014. Government debt only makes up $58 trillion of the $199 trillion. The rest is a mountain of interest-addled household, financial and corporate debt. And the grand total represents 286 percent of GDP, meaning all the world's debts are nearly three times the size of the world's economic output.

Americans are in debt to the tune of $11.86 trillion worth of mortgages, credit card bills, consumer debt and student loans. Many households rely on the flood of credit just to keep from going underwater. Household debt is mostly non-collateralized or "unsecured" debt. As of June 2015, figures compiled by Nerdwallet detailed the overall debt load for the "average" US household - with an "average" credit card debt at $15,706, an "average" mortgage at $156,333 and an "average" load of student loans at $32,953.

A vast amount of the debt load carried by US households - including credit cards, medical bills and student loans - is not tied to a hard asset. Automobile loans are tied to cars. And some household debt is leveraged against an actual asset, like a line of credit attached to home equity. But much of the United States' household debt is not tied to an asset that can be quickly and easily liquidated to settle outstanding accounts. This lack of liquidity is a serious problem because any asset not convertible to cash is just a financial liability. And long-term servicing of that liability only compounds the loss. More pernicious, though, are debts accrued to bridge the gap on basics like food, shelter, health care, education, taxes and utilities. These purchases are services that also lack liquidity, so there is no easy way out of those debts. There is no appreciation of those "assets" and no chance to convert them into cash when the going gets tough. The interest is often inescapable. And income spent or wealth reallocated toward that interest is lost forever. People are forced to redirect much needed income to service interest payments on those debts. This debt acts like a wealth removal machine.

In 2014, an Urban Institute study titled "Delinquent Debt in America" estimated that 35 percent of adults with a credit file have a delinquent account "in collections." That's roughly 77 million Americans who cannot service their non-mortgage debts, including credit cards, medical or utility bills that are more than 180 days past due. When debts go into collections, an individual's earnings are an easy target for creditors endowed with the legal resources needed to seek recourse in lieu of liquid assets. Unlike cunning "corporate persons" who are "too big to fail," these "economically fragile" folks get trapped.

In its recently issued "Report on the Economic Well-Being of US Households in 2014," the Federal Reserve shows the extent of the "economic fragility" crippling nearly half of all Americans. Their survey of 50,000 Americans found that just 53 percent could "easily" absorb an unexpected "financial disruption" costing a paltry $400 by turning to savings or a credit card. As for the other 47 percent, they said a $400 surprise would be a serious financial curveball. But that's just the tip of the iceberg:

76 percent of respondents have at least one credit card
56 percent said they "always" paid credit card bills "in-full" (the other 44 percent doesn't)
31 percent passed on medical care during 2014 because they could not afford it
37 percent said they saved no money in 2014
31 percent have no retirement savings or pensions
45 percent of future retirees expect to continue working during retirement to cover expenses

4 million US homeowners still find themselves "drowning" in mortgage debt that exceeds the value of the home by 20 percent. According to MarketWatch, that's $579 billion "negative equity" still floating around in the housing market.

If you owed $2,000 on a credit card with a 15.76 percent rate, it would take more than 10 years to pay off that card if you only made the minimum payment each month, and you'd pay an extra $1,330 in total interest. 75.7 percent of Americans who pay credit card interest of 15 percent or higher with an average monthly payment of $408. Banks will pay 0.01 percent for money [for savings account deposits]. So for $10,902 a bank would pay about $1 in interest. Then they turn around and charge the average American $1,707 in interest.

Just take a chunk of the $2 trillion worth of capital that Americans deposited into savings accounts and lend it back to them in the form of credit cards they probably need to get by because they are getting little or no yield from their savings accounts. The kicker is that the Fed's low rate also makes it profitable for financial elites to borrow money at the institutional level and, among other speculative ventures, turn it into unsecured loans like credit cards.

Gallup reported in May 2015 that 55 percent of Americans are "spending more" on groceries, with utilities, gasoline, cable/satellite and rent or mortgage rounding out the top five expenses. It's not quite the kind of consumer spending that fuels "hard" economic growth. And Gallup's tracking poll for July 2015 showed consumer spending was "flat" - much like the wages many people need to service debts or to actually accumulate real wealth. It's no wonder that many Americans rely on the once-yearly "windfall" from a tax refund to help close the widening gap so many Americans desperately paper over with bank-issued plastic.

Companies with sagging profits and low "earnings per share" have found a novel way to spike their profitability. Instead of earning more profits, they just reduce the number of shares. To do this they've been buying back their own shares on the open market. This raises "earnings per share," thus masking flat or declining profits.

With interest rates low and Wall Street increasingly indifferent to fundamentals like profits, corporations are leveraging debt into the illusion of profitability. They just borrow the money, buy back their own stock and profit off the difference between the minuscule interest rate on the debt and the sudden rise in stock prices from the debt-fueled buyback. This also means corporations and financiers are not leveraging the Federal Reserve's policy of cheap money into "hard" investments in new, improved widget-factories that employ actual people. Instead, they are leveraging their exclusive access to cheap money into short-term spikes in stock valuations.

 Unlike the 99% of Americans who cannot seem to get ahead on the economic treadmill of constant borrowing, stagnant wages and persistent underemployment, the well-heeled 1% has stoked a renaissance in luxury goods, high-priced mansions and high-rise condos. For the last five years of income growth for CEOs versus income stagnation for their employees. Since the crash, CEO compensation in the biggest corporations spiked 54.3 percent, outpacing both the epic rise in the stock market and the lagging wage growth for their employees. Top CEOs of leading firms now earn 300 times these firms' average employees, according to the Economic Policy Institute. And a new International Monetary Fund study found that the top 1% in developed nations like the United States now take home 10 percent of the income, even as poverty has risen in those nations. Add the fact that the middle class has been waiting 15 years for a raise, and the picture is quite clear: The people who have liquidity are swimming in a wider and deeper ocean while the pool for everyone else is drying up.

Full unabridged unadapted article  here