Tuesday, January 24, 2012

U.S. Wealth & Income Disparity Reach Alarming Proportions

In America today, wealth and income inequality have reached levels not seen in generations — specifically, the years leading up to the Great Depression.

The current statistics are simply stunning.

The top 400 individuals now own more wealth than the bottom 150 million Americans and the top one percent earn more income than the bottom fifty percent.

This disparity has gotten the attention of an increasingly frustrated and struggling American public. In recent decades, things have gone from bad to worse.

Today, the top 1% of Americans controls 40% of the country’s wealth. Twenty-five years ago, the top 12% controlled 33% of the country’s wealth. Meanwhile, the poorer 50% now owns less than 2.5% of the nation's wealth.

The middle class has disappeared before our eyes.

This matters for reasons above and beyond fairness. In an economy that is 70 percent reliant on consumer spending, such massively unequal income and wealth levels don't bode well for growth, now or in the future.

It is abundantly clear that American consumers will not spend the nation out of its economic doldrums. Two-and-a-half years after the recession "officially" ended, unemployment remains stubbornly high and home values continue to sink.

However, the American middle class had already been in long-term decline, even before the Great Recession took hold. Worker's paychecks have been stagnant for decades.

Yes, that's decades.

According to Census figures, the $47,715 median annual income earned by a male, full-time, year-round worker in 2010 was less than the $49,065 a male earned in 1973, adjusted for inflation.

This means that median incomes have actually gone backward over the previous four decades. That's simply stunning.

Meanwhile, the Census reveals that during the same span, the top 5% of earners saw their earnings increase by over 40%.

The evidence is abundant: Over the past few decades, the richest Americans have managed to become continually richer, even as the vast majority have regressed.

According to the Washington Post, since the 1970s, median pay for executives at the nation’s largest companies more than quadrupled even after adjusting for inflation. Yet, during the same period, pay for non-supervisory workers has dropped more than 10 percent.

In 2010, the average American earned $26,487 — down over $2,000 in real terms from 2006. This figure includes females and part-time workers who may be looking for full-time positions.

The above income level amounts to roughly $500 per week. Think about that for a moment; that's the average American income.

There is still plenty of money in the U.S. economy. The problem is that most of it is going to a select few at the top.

Last year, a remarkable report from the AFL-CIO got widespread media attention.

The report found that in 2010, the CEOs of just 299 companies received a combined total of $3.4 billion in pay — enough to support 102,325 jobs paying the median wages for all workers.

Most troubling, perhaps, the report found that in 2010, CEO pay had grown to 343 times workers' median pay — by far the widest gap in the world. Back in 1980, CEO pay was 42 times the average blue collar worker's pay.

In just three decades, inequality has grown to extreme proportions. As Federal Reserve Chairman Ben Bernanke noted, the U.S. now has the biggest income disparity gap of any industrialized country in the world and this is "creating two societies."

In America today, the divide between the haves and have-nots has become enormous. The statistics seem fantastical.

The top one percent of American earners control 40 percent of the country's wealth. Most shockingly, the total net worth of the bottom 60 percent of Americans is less than that of the Forbes 400 richest Americans.

Obviously, wealth can be passed on generationally. There will always be some level of inequality. However, incomes are not inherited. Yet, even there, the level of inequality is astounding.

The top one percent saw their incomes rise by 275 percent between 1979 and 2007, according to the Congressional Budget Office. Meanwhile, the bottom fifth of earners only saw their incomes grow by 20 percent during that same period.

This stark divide worries most Americans.

A new survey finds that 66 percent of Americans see strong or very strong conflicts between the haves and have-nots, up sharply from the figure in 2009. This has become a contentious matter and will surely be a campaign issue this year.

The concerns aren't simply about the differences between the upper class and what's left of the middle class. The concerns are about how fast so many people have fallen into the lower classes and into poverty.

In 2010, poverty hit a new record in the U.S. The 46.2 million Americans below the poverty line was the highest number in the 52 years of reporting. The number of people in poverty rose for the fourth consecutive year, as the poverty rate climbed to 15.1% (the highest since 1993), up from 14.3% in 2009.

In December of 2007, there were 27.385 million food stamp recipients. However, according to the latest data, this had ballooned to 46.268 million. In L.A. County, alone, one million residents subsist on Food Stamps.

While the Great Recession and its lingering after-effects have had a particularly devastating effect on huge segments of American society, the upper class has carried on largely unaffected. Sales of luxury goods at high-end retail stores are booming.

From 2000 to 2010, median income in the U.S. declined 7% after adjusting for inflation, according to Census data. That marked the worst 10-year performance in records going back to 1967.

According to a Wall Street Journal survey of economists' forecasts, incomes won't return to year 2000 levels until 2021. That's a two-decade span. How will all of these millions of Americans hang on that long, even as all their expenses continue to rise?

Between June 2009, when the recession officially ended, and June 2011, inflation-adjusted median household income fell 6.7 percent, to $49,909, according to a study by two former Census Bureau officials.

The typical household now has at least two workers. That's because, at current income levels, two workers are a necessity in most households.

Keep in mind, the above income decline continued even after the recession was declared over. So, things have indeed gone from bad to worse. That's why most Americans are still asking, What recovery?

From the start of the recession in December 2007 to June 2011, incomes dropped 9.8 percent, apparently the largest in several decades, according to other Census Bureau data. The result has been a significant reduction in the American standard of living.

Ultimately, less disposable income is being redirected back into the economy, which hurts economic growth.

But while so many millions of Americans are struggling just to pay their mortgage, rent, food and prescription costs, the rich have carried on as if the recession never happened.

While the wealthiest Americans continue buying second and even third homes, plus high-end, luxury vehicles, millions of young Americans are contending with the fact they they will have a lower standard of living than their parents, a start contrast to most of the 20th Century, at least. For the majority of Americans, the American dream has slipped away.

A recent study by Dan Ariely, James B. Duke professor of behavioral economics, found that 20 percent of Americans rake in 84 percent of the nation’s wealth, while the bottom 40 percent only owns a low 0.1 percent. The study found that the U.S. has one of the worst levels of income inequality—not just in the West, but in the entire world. U.S. inequality is now comparable to that of China and some South American nations.

What a sad and disturbing development; instead of China becoming more like the U.S., we're instead becoming more like China.

America is no longer the "land of opportunity" it once was for previous generations.

A report from the Organization for Economic Co-Operation and Development (OECD) finds that America is 10th in social mobility between generations, dramatically lower than in nine other developed countries.

This means that America is now 10th in the world in the American dream.

It wasn't supposed to be like this. The current state of affairs seems so... un-American.

Wednesday, January 18, 2012

Fed Announces Record Profits for Second Time in Three Years

The Federal Reserve paid the federal government $76.9 billion in 2011, the second highest amount in history. In 2010, the Fed paid the government an all-time record of $79.3 billion.

And in 2009, the Fed paid $52 billion to the government, which was, at the time, the highest earnings in the central bank's history.

Are you sensing a pattern here?

The central bank says it "earned" the money from investments made to bolster the U.S. economy. The Fed began buying Treasury bonds and mortgage-backed securities during the 2008 financial crisis and subsequent recession to try to lower long-term interest rates.

The Fed makes money from interest earned on its portfolio of securities. After covering its expenses, the Fed makes a payment of the remaining amount to the Treasury Department.

Well, that's the official story.

The reality is that the Fed has been legally granted the license to print money by the U.S. Congress. The Fed is able to conjure money out of nothing — in essence, out of thin air — to buy Treasuries.

This allows the government to fund its deficit spending, even when there aren't enough available buyers on the open market to meet the government's absolutely massive borrowing needs.

All the Fed's purchases have pushed the central bank's balance sheet to $2.9 trillion, more than three times the size of its balance sheet before the financial crisis struck in the fall of 2008.

This means that the money supply has increased by more than 300 percent in roughly three years. That should scare you because it is the textbook definition of inflation.

Such massive increases in the money supply, especially over such a brief period, raise the specter of rapidly rising price inflation. This is especially true if the central bank is unable to tighten, or mop up all that excess money, when the economy eventually recovers.

There are many who doubt that the Fed has sufficient tools to stabilize inflation over the longer term since the federal funds rate is already at zero. You could say that the Fed may be fighting a battle without any further ammunition.

Inflation is simply the increase of the money supply. When all of this money is brought into creation without a corresponding increase in goods and/or services, inflation ultimately results.

Our money is being devalued and, ultimately, that's all inflation really is.

The $2.9 trillion expansion of the Fed's balance sheet is only what it admits to publicly. The Fed is in the business of secrecy and operates in the most opaque manner.

Bloomberg recently reported that the Fed secretly loaned $7.7 billion in freshly created money to banks and financial institutions around the globe during the financial crisis. A sum that large is just mind-boggling.

The Fed's entire method of operation is a charade. It prints money backed by nothing, lends it out to global financial institutions and is able to legally profit from it. This is outrageous because the Fed is a cartel of privately owned banks and actually has shareholders.

Interest earned on the Fed's portfolio of securities should not qualify as earnings. It is nothing less than manipulation — a rigged game. What other industry has the extraordinary privilege of creating something out of nothing, at no cost, and is then able to then profit from it?

The legal ability to create money out of thin air amounts to larceny and counterfeiting on a massive scale. It should be viewed as a criminal activity by a criminal enterprise.

But the Fed was granted this extraordinary privilege by the U.S. Congress back in 1913. Since that time, particularly since the U.S. went off the gold standard in 1971, the value of the dollar has been steadily losing value.

The dollar declined 40% in the 25-year period from 1985 to 2010, and 80% since 1970.

That is the end result of unchecked, unfettered money-printing.

And that's the business of the Federal Reserve.

Tuesday, January 10, 2012

Trade Deficit Forces U.S. to Borrow Billions

The U.S. is now confronted by a massive $15.23 trillion national debt. However, it is also facing another serious debt problem — its massive trade deficit.

In 2010, the total U.S. trade deficit was $497.9 billion, resulting from $2.3 trillion in imports minus $1.8 trillion in exports.

Countries with big, persistent trade deficits have to borrow to fund themselves. This is a reality that many deficit hawks aren't considering in their quests to shrink the U.S. budget.

Even if Washington somehow managed to balance its budget, the trade imbalance alone would continue sucking billions out of the U.S. each and every day.

The U.S. trade deficit surged to more than $50 billion in May of 2011, marking its largest gap since October 2008. And by October of last year, the latest month of available data, the U.S. trade deficit was still a whopping $43.5 billion.

A surge in exports was one of the lone bright spots in a string of negative economic indicators last year. Exports have been aided by a declining dollar.

The problem is that imports continue to exceed exports each and every month, resulting in an ever-expanding trade gap.

More than half of that deficit is with China.

The U.S. trade deficit with China swelled to a record $273.1 billion in 2010, from about $226.9 billion in 2009. The cumulative Jan-Oct 2011 deficit with China, of around $245.5 billion, was on track to top that.

China aside, one of the biggest drivers of the U.S. trade deficit is imported crude oil. Since oil is priced in dollars, the weakened dollar is punishing Americans every time they fill up their tanks. Simply put, the dollar is buying less these days.

In 2001, the U.S. Dollar Index traded around $120. Today, the U.S. Dollar Index is trading at $81, about 32 percent below the 2001 high. That's a serious decline in value.

Though a declining dollar makes U.S. exports cheaper overseas, our No. 1 import is oil, which is also priced in dollars. A weak dollar makes oil, and ultimately gasoline, more expensive, forcing the trade deficit further into the negative.

As long as the U.S. remains so reliant on foreign oil, the trade imbalance will remain a source of trouble, leading to billions of dollars flowing out of the country every day.

Moreover, as long as the trade deficit continues, the U.S. will also continue borrowing from abroad to pay the difference.

Since imports shrink the nation's gross domestic product, U.S. GDP will continue to face downward pressure. Every $1 billion of a larger deficit subtracts about 0.1 of a percentage point from the annualized growth rate.

This means that the trade gaps in May and June of last year, alone, likely reduced GDP by more than half-a-percent. As it is, the economy was already growing at an anemic pace through most of the year.

U.S. GDP expanded 1.8 percent in the third quarter of 2011, and just 1.3 percent in the second quarter.

The trade deficit just makes maters worse.

The flow of imports into the U.S. is also displacing American jobs. We're buying all these foreign goods instead of making them here at home.

The U.S., the world's No. 1 importer, has been able to run continual trade deficits for many years because it has been receiving an inflow of capital from surplus nations, such as China, Japan and Saudi Arabia. If these surplus nations ever hope to get repaid (i.e. to reverse those capital flows) then those trade imbalances must be reversed.

Every nation would love to be a net exporter. This simply isn't possible.

Countries cannot run surpluses forever, just as they cannot run deficits forever. Unless deficits and surpluses are ultimately reversed, debt eventually builds to unsustainable levels in the deficit countries — like the U.S. That time seems to have finally arrived.

Trade deficits are nothing new to U.S. In fact, the U.S. has run deficits in the trade of goods every year since 1976.

The U.S. has long since reached the point of unsustainability. No nation can continually buy more from abroad than it sells abroad. It's simple arithmetic. Where will the money for all the purchases come from?

The trade deficit has helped make the U.S. the world’s biggest debtor nation. Balancing the federal budget won't even begin to address the nation's trade deficit.

That will require less consumption, more saving and more production here at home, plus more consumption and less saving in places like China.

Those will be tough trends to reverse.