Paul Kasriel of Northern Trust has put together a collection of charts that reveal some dramatic economic changes underway. Let’s go through them. Charts 12-15 are a snapshot of the leverage used by American consumers. These are variations of the charts and data that I have blogged on all year. If you want more background they are sprinkled throughout in my commentary.
I make a primary distinction from this data, and that is the American consumer is now very bifurcated. Most economists act as if it’s fairly monolithic. This bifurcation is measured by what is called the Gini Coefficient (GC), which reflects income and wealth distribution inequality. (It is important that you click the thumbnail link to enlarge the chart.) The latest estimate for the US GC is from 2005 and checks in at about 47, so visually adjust the yellow line on the chart accordingly. It’s now just a bit below Mexico, a process being accelerated by illegal immigration to the tune of 60,000 per month, or six Topeka, Kansas’ per year. It is estimated that only 3% of America’s 12 million illegals have a college education, and many don’t pay taxes.
It is my view however that 47 is likely to be understated, and that the last two years in particular has witnessed a parabolic acceleration, probably to well above 50. Therefore, it is vital when looking at the American economy to start using an economic model that is much closer to Mexico, or even Brazil, than to comparisons with other advanced countries such as Europe, or Japan. Therefore I feel Kasriel’s charts actually understate what’s going on, as they include plutocrats (Bullies). It would be interesting to see an economist do the same charts excluding the top 10% of income earners. In fact, just exclude the top 1%, and I’ll bet it would be a shocker. My strong hunch is that some where between 1-10%, is a mind blowing bifurcation chart. Then you’d get the real picture. This is an idea of how consumption growth looks for Brazil Americans and Bullies using broader quantiles. It’s my theory that the middle group is now in full retreat, and that this chart is skewed even worse.
Another reason (besides open borders) for this worsening GC is that the housing Bubble has reversed, and about 69% of the Americans who are homeowners benefited temporarily (many just to make ends meet) from that Bubble. The other 31% are called non receivers in Austrian economics and were just left out of this artificial Bubble largess. They just eat all the high cost inflationary fumes, without any benefits of the Bubble. I call this group Brazil Americans, an obvious inference to Brazil’s GC. Unfortunately, this inflationary housing Bubble benefit has largely been used up even for the homeowner group. They’ve borrowed huge sums (see Kasriel chart 10), and are left with huge liabilities and high costs to service (chart 14). A large portion of this group is now slipping into the Brazil American group, and it is likely more are on the way. Before going on, I would ask my readers not to get too anal in calibrating the extent of this, but instead just focus on my larger general theme. The calibration can come later.
The activities and expenditures of this lower 80 to 90% group have played right into the hands of the Bully, and especially the Pig Men (financial sphere) and corporatist class. They’ve been binging on the profits, mostly by slashing wages to labor (see next chart). Then they collect all the fees, soft money and switcheroos that goes with loaning out the trillions that the emerging Brazili-fried underclass needs to subsist as they are being “globalized”. Further, the fizzling housing Bubble, has recently been replaced in 2006 with another stock market Bubble. Stock market Bubbles are much more selective in terms of who temporarily benefits. As this study indicates, the top 10% in income of American households hold 77% of all the common stock. Therefore, we come to the obvious. A fizzling housing Bubble affecting 69% of all American households, combined with a big stock market rally (fueled in part by cutting labor’s part of the pie) that benefit only about 10%, or 20% at best and the second 10% just a smidgeon, is going to blow the Gini Coefficient sky high. Then throw in 700,000 uneducated illegals a year, and it’s not too tough to connect the dots.
Now I profess that Bubble blowing as economic policy is doomed to failure from the get go. It’s a bit like excessive drug and alcohol use, feels good when you’re high. Afterwords, though it’s Ali G economics, not to be confused with the mental process of the other AG, Alan Greenspan.
Ali G: When I was high, I sold my car in Amsterdam, for 24 chicken McNuggets. Ain’t it wrong to do dat?
Dr. Schultz: √¢‚Ç¨≈ìDon√¢‚Ç¨‚Ñ¢t be high, that’s a real rule, when your buyin√¢‚Ç¨‚Ñ¢ and sellin√¢‚Ç¨‚Ñ¢√¢‚Ç¨¬ù
But blowing stock market Bubbles at this juncture is the ultimate folly. If it actually works (for awhile), welcome to Brazil America. We can turn to Kasriel’s charts to get a glimmer of what Brazil America is starting to look like. Chart 2 shows a dramatic peak and rollover in credit market borrowing that corresponds with the peak in housing. Despite the large rate of change, household credit growth is still at historic high levels of around 8-9% year over year. That’s because lenders are still willing for the time being to extend credit to these consumers as if we were still operating in an advanced country model, as opposed to the actual Brazil America model. When lenders and their foreign central bankers buddies wake up to the realization that they’ve been lending to Brazil America instead, look out! A credit spread adjustment will have to be made.
Indeed, those who are following the export to the US consumer model may wish to rethink their plans as well. Chart 7 shows that the level of vendor financing may be surpassing whatever demand,and ability to pay is left from the US consumer. In fact, this looks more like a Ponzi scheme than anything else. For the globalization exporters, this could be a Wiley Coyote moment for those outfits as well. The chart shown on this blog, entitled, “China: foreigners run the trade, not locals”, give clues as to who those outfits are. Gee, seems like the same corporatists?
But, what makes economic modeling really difficult when officials and economists use the wrong model, is the impact from the top 10% Bully class. As their financial Bubble is running full tilt, their consumption is as well. And one Bully or one non productive Pig Man can put more consumption (and inflationary pressure) back into the economy than twenty Brazil Americans shopping at Wal Mart. And Bullies don’t need to borrow to fuel their consumption. For example, they can use their corporation’s cash to buy back their inflated stock in giant manipulations, and convert that into currency. Therefore, as long as financial Bubbles persist, you will continue to see strange, perplexing economic reports. That’s because there are two distinct Gini coefficient economies developing. So if you ask me how’s the “economy” is doing, my retort every time will be “which one?” Can the parasites and plutocrats float the US economy alone without the ability to heavily exploit or loot the declining Brazil American class? Highly problematic, as there is a tipping point out there. They will also need a large chunk of the top quintile to hang in there, as that group as a whole is reasonable for 39% of all US consumption.
I believe the financial Bubble is all temporary. That’s because Pig Men and all their foreign central banks (numb nuts who “invest” their national reserve holdings) , pension funds (other numb nuts, who “invest” Brazil America’s remaining retirement funds), and hedge fund (Riskloves) pals and cronies are playing a very high risk game. That game is engaging in late stage speculative lending and exporting to the expanding class of Brazil Americans. Then they trade these securities with each other, and even “insure” each other’s holdings. All I can say to that is, “Lots of luck”. And the reason it won’t work is that there is a rapid and obvious rate of change in Brazil America’s ability to make payments on all the overpriced securities that numb nuts and Riskloves hold. The corporatist players who plan on surviving better glean a new economic model, and quickly.