Debt Crisis
The debt crisis has taken the world by storm; but few seem to be sounding the alarm. The U.S dollar, the go-to currency for global economic stability and growth, is imploding at an unprecedented rate.
Profit Confidential editors have been critics of the U.S.’s inability to rein-in government spending. Based on the White House’s own figures, the national debt will reach $20.0 trillion by the end of this decade—about 140% of our current gross domestic product (GDP).
Historically, countries that have incurred considerable debt and consistent national debt-to-GDP multiples of 120% or more have experienced currency devaluation. The U.S. dollar has been in a free-fall against other major world currencies since 2009.
Since November 2008, Federal Reserve Chairman Ben Bernanke has initiated three rounds of quantitative easing (QE) in an effort to create more economic activity and increase home prices.
Since 2008, the Federal Reserve has printed roughly $3.0 trillion. And, it’s climbing each month by an additional $85.0 billion.
What have three rounds of QE accomplished? It was supposed to increase lending, create more jobs, and lower the unemployment rate. Instead, banks are sitting on a pile of cash and remain tight-fisted, fewer jobs have been created, and the unemployment rate remains high.
What QE has done is flood the global markets with trillions of U.S dollars. It’s not as if this new-found money is backed by gold. It’s simply created out of thin air. It has done nothing to alleviate the debt crisis.
And, the debt crisis could get much worse. The Congressional Budget Office (CBO) expects the U.S. economy to remain moribund in 2013 and for the unemployment to remain high. What’s more, the official U6 unemployment rate (which includes people who have given up looking for work and people who have part-time jobs but want full-time jobs) has held steady around 15% for months.
The unofficial shadow statistic unemployment rate (which includes the long-term unemployed) sits at 22%!
Americans are out of work, and their dollar doesn’t go as far as it used to. Consumer spending might have once been the workhorse for economic growth, but not anymore. And, that could spell doom for the U.S. economy.
The meltdown of the U.S. housing market and economy, coupled with the reckless printing of U.S. dollars, will eventually result in higher inflation…and will hit the U.S. economy and consumers hard. The average American’s bank account is already stretched, paying more for basic necessities.
Unfortunately, personal incomes are not rising in step with higher prices for goods and services. To deal with inflation and higher prices, Americans will need more money to buy essential goods; but with the state of the U.S. economy, an increase in wages is not on the table. The debt crisis continues to deepen.
Nearly 47 million Americans rely on federal food assistance benefits, a 12-year high that is attributed to the weak U.S. economy and high rates of unemployment over the last five years.
For every one person added to jobs rolls since January 2009, 75 people have been added to the food stamp rolls. Or, put another way, since January 2009, food stamp growth is 75 times greater than jobs growth. (Source: ”Food Stamp Growth 75X Higher than Job Creation,” The Weekly Standard, November 2, 2012.)
Post-recession economic growth in 2010 was 2.40%, dropping to 1.80% in 2011. In 2012, it dropped again to 1.77%. Few, if any, net jobs will be created with growth of less than two percent.
This translates into an even greater shrinking of the American middle class…and more people teetering on the brink of poverty.
At Profit Confidential, we believe a home-grown debt crisis is brewing for America, and we believe other aspects our financial system will suffer because of it.
Germany to Pull Back on ECB’s “Whatever It Takes” Position?
By Michael Lombardi, MBA for Profit Confidential
I can’t stress this enough: troubles in the eurozone are far from over.
First and most important, the strongest nations in the eurozone are experiencing an economic slowdown now too. As I have written before, France and Germany are seeing diminishing demand.
Finland, one of the financially strongest nations in the eurozone, fell into a recession in the first quarter of this year. Why? Exports from Finland are declining due to economic slowdown in the eurozone area, unemployment is increasing, and the government has introduced spending cuts. (Source: Wall Street Journal, June 5, 2013.)
The European Central Bank (ECB) expects the eurozone economy to shrink by 0.6% this year, lower than its previous estimate of 0.5%. In the first quarter of 2013, the eurozone experienced its sixth consecutive economic slowdown. (Source: Associated Press, June 6, 2013.)
Regardless of what you hear or don’t hear in the popular media, don’t believe for a second that the economic slowdown in the eurozone is going away anytime soon. The region is struggling with extreme levels of unemployment—the highest ever just recorded in April.
Some countries in the eurozone such as Ireland, Greece, and Portugal have now reached debt-to-income ratios (what the government spends compared to what the government brings in) above 300%. (Source: The Guardian, June 9, 2013.)
We have heard the head of the ECB say that the central bank will do “whatever it takes” to save the eurozone. But Germany is challenging this notion. The President of Germany’s central bank is expected to testify in front of the court and say it is illegal to bail out bankrupt eurozone … Read More
Number of S&P 500 Companies Reporting Negative Guidance a Red Flag
By Michael Lombardi, MBA for Profit Confidential
Standard & Poor’s, the credit rating agency, believes the likelihood of the U.S. credit rating being downgraded in the near term is less than 33% (one in three) and it has decided to keep its credit rating on the U.S. economy at AA+, slightly lower than the best investment grade. (Source: Standards & Poor’s, June 10, 2013.)
This may be good news to the politicians who continue to believe there is an economic recovery in the U.S. economy, but it’s not enough to convince me.
In March, 47.7 million Americans, or 23.1 million households, were on some form of food stamps in the U.S. economy. (Source: United States Department of Agriculture, June 7, 2013.) This is more than 15% of the U.S. population.
And instead of people moving away from the government’s help, as would be the case during economic growth and a recovery, dependence on the government is actually increasing. Food stamp use in the U.S. economy was lower at 44.5 million in March of 2011.
Economic growth in the U.S. economy means job creation and consumers increasing spending—we have the exact opposite today.
After 2009, we had a sense of economic growth in the U.S. economy as demand in the global economy meant many multinational American companies were able to sell their goods for a profit outside the U.S. But as the global economy struggles now, it’s a different story.
For the second quarter of 2013, 116 companies in the S&P 500 have provided corporate earnings guidance; 93 of them have provided negative guidance. The ratio of companies providing negative guidance compared to companies providing positive guidance has … Read More
Next Tiny Country in the Eurozone to Bust
By Michael Lombardi, MBA for Profit Confidential
While cutting the growth outlook of the global economy, Chief Economist of the International Monetary Fund (IMF) Olivier Blanchard said yesterday, “…the main challenge is very much in Europe.” (Source: “IMF Cuts Global Growth Outlook as Europe Demand Urged,” Bloomberg, April 16, 2013.)
Blanchard showed further concerns regarding the economic slowdown in the eurozone, saying, “Europe should do everything it can to strengthen private demand. What this means is aggressive monetary policy and what this means is getting the financial system stronger…” (Source: Ibid.) In other words, print more paper money.
Greece, Spain, Italy, and Portugal are facing a staggering economic slowdown and are dragging the stronger eurozone nations down with them. The countries that were supposedly “immune” to the debt crisis in the region are now feeling the pressures.
Germany, the strongest nation in the eurozone and the fourth-largest economy in the world, is having troubles; demand is falling. German car sales plummeted 13% in the first quarter of 2013. (Source: Financial Times, April 17, 2013.) The Bundesbank, Germany’s central bank, expects the country’s gross domestic product (GDP) to increase by only 0.5% in 2013. (Source: MNI News, April 16, 2013.) But being so early in the year, this 0.5% GDP growth can easily turn into a 0.5% contraction, considering the problems in the eurozone.
As I have been writing since the beginning of 2012, the economic slowdown in the eurozone will spread to other parts of the world, rather than it being contained.
The events in Cyprus sent a significant amount of fear into the global economy. And the crisis there still isn’t over. … Read More
Student Loan Default Rate Hits a Scary 11%
By Michael Lombardi, MBA for Profit Confidential
Another crisis looming in the air…
Student debt is going to be the next big hurdle to deal with in the U.S.’s economic recovery. Total student loan debt currently stands very close to $1.0 trillion and defaults on these loans are increasing at an alarming rate, placing more pressure on economic growth.
In the third quarter of 2012, student loans delinquent over 90 days stood at an alarming 11%. (Source: Federal Reserve Bank of New York, November 2012.)
I expect this delinquency rate and default rate to rise. It’s not rocket science: there is no economic recovery or real economic growth. Americans are still suffering. The more they suffer, the more they fall back on their loan payments. Thus, how can students get a break?
Here is what the U.S. secretary of Education Arne Duncan said about the looming student debt crisis: “We continue to be concerned about the default rates and want to ensure that all borrowers have the tools to manage their debt. In addition to helping borrowers, we will also hold schools accountable for ensuring their students are not saddled with unmanageable student loan debt.” (Source: U.S. Department of Education, “Press Release: First Official Three-year Student Loan Default Rates Published,” September 28, 2012.)
According to a recent survey by Fannie Mae, 20% of respondents believe their financial condition is going to get worse over the next 12 months—this is the highest percentage of people with this opinion since August 2011. In addition, 36% of the respondents reported a significant increase in their household expenses over the past 12 months. (Source: Fannie Mae, January 7, 2013.) Inflation? … Read More
What the Fiscal Cliff Deal Really Means for Investors
By Michael Lombardi, MBA for Profit Confidential
In the end, after weeks of hearing about the fiscal cliff, it was over. Taxes on rich Americans went up, and spending was untouched. But guess what? It doesn’t matter…it makes no difference to America’s debt crisis!
Raising the tax on the rich (individuals making over $400,000 and couples making over $450,000 combined annually) and doing away with some tax loopholes only bring in another $60.0 billion a year to the government. (Source: New York Times, January 1, 2013.)
While $60.0 billion sounds like a big number, it is a paltry amount when compared to four consecutive years of trillion-dollar-plus annual deficits. The $60.0 billion puts a very small dent into the government debt crisis problem. Our analysis shows that a half-percent increase in the interest rate the government pays on its debt would cost it more than $60.0 billion!
What we needed to bring the debt crisis in check were cuts to government spending. That didn’t happen. That “can” was just pushed down the road once again into “debt crisis infinity.”
So what does this really mean to you, dear reader?
It means more of the same. The path of creating a welfare state out of America continues. In 1965, the national debt was equal to 38% of gross domestic product (GDP). Today, our national debt is close to 100% of GDP. (Source: Congressional Budget Office, last accessed January 3, 2013.) For this novice economist, the majority of our debt has been put on by the Obama Administration. Since Obama came into power, the national debt has increased about 60%; hence, the often-mentioned debt crisis that America … Read More
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