MB360: Americans back to spending on credit

Any economist, pundit or politician who tells you that our economy would get better if we could only increase access to credit (debt) or "incentivize" poor people to work while cutting their food stamps and the minimum wage, is either a charlatan or an idiot.

What happens when Americans, as a nation, start saving and stop spending on credit is economic stagnation or recession. So we must increase Americans' household incomes, and/or lower their household expenses to allow them to continue spending. After all, the well-off can buy only so many houses, yachts and luxury goods. Yes, they can save and invest in stocks and other securities... but their investments won't translate into U.S. jobs and economic growth if there is no market (consumer demand) to drive it. 

Indeed, the Dow just hit a record high, corporate profits and U.S. workers' productivity are at all-time highs, and yet... nobody is doing an economic endzone dance right now. Working class Americans feels more economically insecure than ever.

And that's why Obamacare is so necessary, among other federal programs.  

According to a 2013 study by the AARP, over the past 10 years, health care spending for average middle-income households increased 51 percent, compared to only 30 percent growth in household income. Over that same period, healthcare inflation increased three times the rate of growth for all other products and services; and per capita expenditure on health care increased 72 percent! 

We must cut our per capita expenditure on health care while protecting average Americans from treatable illness and medical bankruptcy. Only the Democrats are proposing real solutions to do that.  Republicans keep dawdling while Americans are dying and drowning in debt.  

Under President Obama, the rate of healthcare inflation has finally slowed and is projected to slow further. Coincidence?

The average American is broke and buying things they cannot afford with debt again. Debt based consumer financing again filling the gap of a shrinking middle class.

Posted by mybudget360 | December 1, 2013

URL: http://www.mybudget360.com/holiday-spending-debt-auto-sales-up-on-auto-loans/?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+mybudget360%2FQePx+%28My+Budget+360%29

Ritholtz: Declining U.S. middle class

Median income is down, savings are down, prices are up.  It's been a long, steady decline for the American middle class since the 70s...

Labor Day, Income & The Middle Class

By Barry Ritholtz

September 3, 2012 | Ritholtz.com

URL: http://www.ritholtz.com/blog/2012/09/the-middle-class/

Buffett has skin in the housing game

Don't let anybody say I'm a blind cheerleader for Warren Buffett. (Maybe smarter or more pessimistic types can find a self-serving aim in Buffett's saying high U.S. corporate taxes are "myth," but I can't.)

So, let's just say Buffett is wily, hypocritical at times, and usually self-serving, but also often right. And anyway, with Buffett, we always have an easy way to find out what he really thinks: where he invests his money.

Warren Buffett Says "Hormones" Will Fix the Housing Crisis

By Matt Stoller

February 27, 2012 | Naked Capitalism

URL: http://www.nakedcapitalism.com/2012/02/matt-stoller-warren-buffett-says-hormones-will-fix-the-housing-crisis.html

U.S. spending power won't come back

The lost spending power of U.S. consumers was driven largely by debt, largely financed by inflated home values. On the part of banks, this vanished wealth was based on derivatives whose value was based on homes whose value evaporated, bringing down the whole house of financial cards. In both cases it was wealth that should never have existed in the first place. We all must come to terms with the new normal. There is no going back to 2005. Anybody who says we can is ignorant or a charlatan.

Conference Board Economists: U.S. Economy Transitioning To A New Normal

By Bonnie Kavoussi

February 13, 2012 | Huffington Post

"The economy that we had before the recession is gone," said Kenneth Goldstein, economist at the Conference Board. "It's not coming back."

The U.S. economy is transitioning to a new normal in which businesses invest less and consumers spend less than before the recession, Goldstein told The Huffington Post in an interview last week. As a result, he said, economic growth and job growth will be slower than before.

He said that businesses, consumers and the government would need to spend at least $1 trillion more than they are likely to spend in order for the economy to return to its pre-recession growth rate. But he added that no one is willing to spend the money necessary to jumpstart the economy, since the government is cutting spending, consumers are saving more, and businesses expect a lower return on their investments.

"Where's the money?" Goldstein asked.

The Conference Board, which counts half of all Fortune 500 companies among its members, provides economic and business advice and research to its member companies.

The main problem is that consumers' expectations for the future have plunged, Goldstein said. They suffered from such a large economic shock in 2008 and 2009 that many older people now do not expect to return to work, and many younger people no longer expect to make that much money, he continued. As a result, Americans have cut back on spending.

Consumers are indeed saving more than they did before the recession. They saved 3.7 percent of their incomes at the end of 2011, in contrast to less than 2 percent of their incomes during all of 2005, according to government statistics. Their wages, when accounting for inflation, actually fell in 2011.

Consumer confidence has been at recessionary levels for the past four years, according to the Conference Board's Consumer Confidence Index.

Like consumers, businesses are spending less because they have lowered their expectations of future income, Goldstein said. While businesses could expect returns of 8 to 12 percent on their investments before the recession, they are now expecting returns of about half that amount. If they raise prices too much, consumers will choose cheaper alternatives, he said.

Exports are one of the only bright spots sustaining U.S. economic growth at this slower pace, he added.

Now that people's homes are often worth less and credit is expensive, people are relying on their wages to be able to spend money -- and their wages have barely been growing, said Lynn Franco, director of the Conference Board's Consumer Research Center. She said this means that economic growth will be slower than it was before the recession for the foreseeable future, since consumer spending comprises two-thirds of the U.S. economy.

"If you just take a look at the fundamentals alone," she said, "you cannot get back to the levels of consumer spending that we had prior to the crisis."

Consumer debt, not federal debt, is the crisis

The real debt problem in the U.S. is private household debt. U.S. federal debt by historical standards is still manageable and not in a crisis; it's not holding the economy back; although long term it must be faced. Right now consumer/household debt -- which is still at 154 percent of wages and salaries -- is the crisis. Until Americans clean up their personal balance sheets and start spending again, all kinds of businesses which depend on them for sales won't start increasing capacity or hiring again.

Without some gov't policies to induce home mortgage modifications, speeding foreclosures, and debt write-offs, the de-leveraging process will take several years, perhaps a decade, of needlessly low economic output, which will in turn cause lower tax receipts and more strain on the federal budget than necessary.

This is pretty basic economics and yet it is such a sore political topic, which forces me to conclude that that many Americans are willfully ignorant about it. Also, I think there is some deep-seeded American moralism at play here: many believe we should "take our medicine" and suffer for our mistakes, even if that suffering is needless and the "innocent" suffer, too.

If you want a more detailed explanation then read this analysis by Henry Blodget of Business Insider: HERE'S WHAT'S WRONG WITH THE ECONOMY... (And How To Fix It): We must "reduce the debt that is crippling the productive part of the economy:" consumer debt.

Economists: Consumers won't save the economy

By Karina Frayter

October 2, 2011 | CNBC.com

URL: http://usat.ly/nEov30