Welcome To NeoFeudalism. The Middle Class Is Sinking In To Debt Surfdom And Doesn't Even Know It.

Debt Serfdom in One Chart

The essence of debt serfdom is debt rises to compensate for stagnant wages.

Charles Hugh Smith

Friday, May 04, 2012

I often speak of debt serfdom; here it is, captured in a single chart. The basic dynamics are all here, if you read between the lines:

1. Financialization of the U.S. and global economies diverts income to capital and those benefitting from globalization/ "financial innovation;" income for the top 5% rises spectacularly in real terms even as wages stagnate or decline for the bottom 80%.

2. Previously middle class households (or those who perceive themselves as middle class) compensate for stagnating incomes and rising costs by borrowing money: credit cards, auto loans, student loans, etc. In effect, debt is substituted for income.

3. The dot-com/Internet boom boosted incomes across the board, enabling the bottom 95% to deleverage some of the debt.

4. When the investment/speculation bubble popped, incomes again declined, and households borrowed heavily against their primary asset, the home, via home equity lines of credit (HELOCs), second mortgages, etc.

5. The incomes of the top 5% rose enough that these households could actually reduce their debt (deleverage) even before the housing bubble popped.

Here is a chart of real (inflation-adjusted) incomes, courtesy of analyst Doug Short: note that the incomes of the bottom 80% have been flatlined for decades, while the top 20% saw modest growth that vanished once the housing bubble popped. Only the top 5% experienced significant expansion of income. Notice that incomes of the top 20% and top 5% really took off in 1982, once financialization became the dominant force in the economy.

Interestingly, we can see the double-bubble (dot-com and housing) clearly in the top income brackets, as these speculative bubbles boosted capital gains and speculation-based income. Since the bottom 80% had little capital to play with, the twin bubbles barely registered in their incomes.

Bottom line: financialization and substituting debt for income have run their course. They're not coming back, no matter how hard the Federal Reserve pushes on the string.Both of these interwined trends have traced S-curves and are now in terminal decline:

Those hoping the economy is "recovering" on the backs of financial speculation/ legerdemain and ramped up borrowing by the lower 95% will be profoundly disappointed when reality trumps fantasy.

Conservative Austerity Measures Proven Detrimental To Recovery Again In EU

Eurozone Unemployment Hits 10.9 Percent, A Record High

 
By PAN PYLAS 05/ 2/12

LONDON — Record high unemployment for the 17 countries that use the euro is set to increase the pressure on Europe's leaders to switch from a focus on austerity to a pro-growth strategy to stop the region from moving deeper into recession.

Unemployment across the 17-member eurozone rose by 169,000 in March, official figures showed Wednesday, taking the rate up to 10.9 percent in March – its highest level since the euro was launched in 1999.

The rate was up from 10.8 percent in February and 9.9 percent a year ago, and reflects the downturn in the eurozone economy as governments pursue tough austerity measures to deal with their debts – nearly half the countries in the eurozone, including Spain and the Netherlands, are now officially in recession.

The seasonally adjusted figures from European statistics office Eurostat are likely to ratchet up the pressure on the region's policymakers to introduce more pro-growth measures alongside the spending cuts and tax increases they have already implemented in an attempt to fix their debt crisis.

"The question is how long EU leaders will continue to pursue a deeply flawed strategy in the face of mounting evidence that this is leading us to social, economic and political disaster," said Sony Kapoor, managing director of Re-Define, an economic think-tank.

European Central Bank president Mario Draghi has spoken of the need for a "growth pact" in Europe and Francois Hollande, who is tipped to beat President Nicolas Sarkozy in France's presidential runoff this Sunday, has said he would renegotiate the eurozone's austerity-focused fiscal pact to include more pro-growth measures.

Austerity has so far been Europe's main policy response to the debt problems afflicting many countries. It's been pushed hard by Germany, Europe's biggest economy, as a way to convince markets and international investors that the region has a grip on the problem.

However, analysts have pointed out that Germany may change its stance as there are already indications that its economy may struggle this year.

April unemployment figures from Germany's statistics office showed a monthly rise of 19,000, only the second increase in the past 25 months.

And a survey of the manufacturing sector in the Europe's' export powerhouse economy pointed to grim times ahead. The monthly purchasing managers index – a gauge of activity levels – for the eurozone from financial information company Markit fell to 45.9 in April from 47.7 the previous month. Anything below 50 indicates a contraction in activity. Germany's index slumped to 46.2, its lowest level since the summer of 2009 when the global economy was in its deepest recession since World War II following an acute banking crisis.

"There may be a growing consensus on the need for growth in the eurozone but with unemployment rising and industry slumping, a prolonged recession looks much more likely," said Jonathan Loynes, chief European economist at Capital Economics.

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