Sunday, 21 August 2011

The age of financial repression and the shattered American Dream

One year one, QE2, the wealth effect experience, induced by Ben Bernanke has been nothing but a failure.

With interest rates at zero since 2008, income from US Treasuries and Certificate of Desposits have been nothing but short of miserable for pensioners.
And not only did the 401K, took a recent beating, but the house, previously used as an ATM, in the build up to the financial crisis, is no longer an instrument for pensioners to extract additional income and even help out the younger generation facing up with an increasing burden of student loans.

As per CalculatedRish recent post, here is "The New Retirement Plan: No Retirement"

What we learn from the survey mentioned is fairly dramatic:

39% of workers plan to work past age 70 or do not plan to retire.
54% of workers expect to plan to continue working when they retire.
40% now expect to work longer and retire at an older age since the recession.

"Fewer than one third (30%) have currently saved more than 100,000 USD in all household retirement accounts.
Most workers regarless of age or household income, agree that they could work until the age of 65 and still not have enough money saved to meet their retirement needs."

But it gets worse
"31% anticipate that they will need to provide financial support to family members."

As I indicated in "The end of the American Dream, the call for trade barriers and the rise in populism...", "There are 70 million Americans born between 1945-1960. One-third have zero retirement savings. The oldest are 64. The only money they have is equity in a house, so they must sell. This will add yet another flood of houses to the market, driving prices down even more."

In relation to the survey mentioned above they conclude with the following recommendation to the policymakers:
"From a public policy perspective, with so many workers planning to work past age 65, policymakers should consider tax incentives for employers to hire older workers along with job training / retraining programs for older workers -- to help keep them in the workforce."

But the issue is not only in the retirement space, there is a steady build up in the student loans space and given the house is no longer there to provide equity withdrawal to support younger generations, it is a growing concern, because rising education costs is also affecting consumption levels to some extent.

I also wrote the following in September 2010
"Even young graduates have become disillusioned, will they be able to therefore repay their student loans?"
"Student loan amount has exceeded the total credit card debts for the first time in the American history.":
"The total outstanding student loan is worth 850 billion USD and the most worrying factor is that some students do not even know on how much they owe and to whom..."

Now student loans are close to 931 billions USD, eclipsing 798 billions in credit card debt. Some experts estimate we could hit one trillion this year alone. Total student debt was 72 billions USD 15 years ago according to Mark Kantrowitz, who provides financial assistance for college students via financial aid website
crazy student loans 2011-q2.png

Defaults on student loans nationwide have doubled in the past five years and are on the increase:

Only credit cards have a higher rate of delinquency at 12.2%, but  as indicated  in the below graph from St Louis Fed, overall, delinquencies are falling.
The unemployment rate for workers between 20 and 24 years old is 14.6% compared to 9.1% for the national average. According to Moody's the defaults on securitized private student loans rose to 5.4% in the second quarter. The annualized default rate widened from 5% in the first quarter and 4.5% a year ago, most coming from loans securitized in 2010, containing more delinquencies. The default rate peaked at 7.6% in the third quarter of 2009.

The deleveraging of US Households is still the most important story relating to the ongoing balance sheet recession:
Graph of Household Debt Service Payments as a Percent of Disposable Personal Income

The end of the American Dream of Home Ownership has been dented and its slowely but surely reversing back to the mean:
Graph of Home Ownership Rate for the United States

A concern is the rising trend in consumer loans at all commercial banks for our struggling US Household:
FRED Graph

There is a stronger demand for consumer loans:
Graph of Net Percentage of Domestic Respondents Reporting Stronger Demand for Consumer Loans
The good news it seems so far is that delinquencies on all loans and leases, to consumers, all commercial banks, is trending down, but again, there is what we see and what we don't see and if we end up moving back into recession, which looks like almost certain now, the picture could change rapidly:
FRED Graph

Stay tuned!


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