Zombie Economy – Living Bubble

Imagine the reaction you would get if you walked into an off-the-hook fraternity party and shouted, “Stop this party! There are too many drunk people and some of you are going to get hurt.” That’s the same reaction you get when you try to warn people about an economic bubble. It doesn’t matter if people were burned before because it is different this time. However, we have a zombie economy that is artificially kept alive through financial engineering and there is a living, growing bubble that is ripe for a big burst.

Of course, one might retort, “We are the wealthiest nation in the world, the stock market is at record highs, housing is booming, inflation is low, and unemployment is reasonable. What are you talking about?”

Let’s take a look at the economy first.

How Bad is Inequality?

When 45 million Americans are on food stamps, 72 million are on Medicaid, and 81% of households are worse off today than they were in 2005 … you know that there is something amiss.

If you look at the overall nominal GDP, yes, the U.S. is still #1. And even under the GDP per Capita, the U.S. is ranked 6th or so in the world, depending on the metrics. Not bad. However, such “average” statistics can be misleading. If I have $999 and you have $1, then on the average, we have $500 each, but that fact is not going to help you buy a coffee at Starbucks.

This inequality has only grown more rapidly since the crash of 2008. To understand what is happening, imagine $1000 being distributed to 1000 people. In a socialist world, everyone will get $1. In the current crapitalist system, this is what is happening:

1 guy gets $600, 9 other people get $39 each, and the remaining 990 peasants get 5 cents each.

The income and wealth inequality is the worst since the Great Depression. In 2015, the Top 1% earned 22% of all income earned in the U.S.

As for wealth, it is even more skewered – the Top 0.1% have as much wealth as the “bottom 90%” combined!

If the Forbes 400 move to an island and establish their own country, it will have the 7th largest GDP in the world – ahead of India, Italy, Russia, Canada, Australia and 185 other countries.

American Workers

So how are the American workers doing? The four most common jobs in America pay $10/hr or less. And half of all American workers make under $30,000 per year.

Good jobs are hard to come by. About 60% of the jobs created since the Wall Street crash of 2008 are low-wage jobs. Consider that more than 250,000 college graduates are working for minimum wage, while the student loan has doubled in the last seven years to $1.3 trillion, crushing 43 million young Americans. No wonder that 40% of people with student loans are delinquent or missing payments.

25 million Americans have part-time and temp jobs, even though many would like to have full-time jobs. This is reflected in the U-6 Unemployment rate (about 10%) that the government never talks about – they prefer the U-3 number.

Even the U-6 number does not include those who have just simply given up looking for jobs, those on disability (15 million), those who are going to college simply because they can’t find a job and so on. Another way to look at the health of the economy is the labor participation rate, which is now about 62% — lowest since the 1970s (Source: Zerohedge.com).  

With all these facts, it is not surprising that a vast majority of Americans are living from paycheck to paycheck and don’t even have $1000 in savings. To make things worse, among the households that have credit card debt, the average balance is more than $15,000.

Adding pain to all of this is the rising cost of living. Health care insurance, prescription drugs, rents, college tuitions have all been rising briskly every year. Even the famous “Big Mac Index” has gone up by 5% every year since 2008. Starting in the 1980s, the federal government has been fudging the math every few years to make the inflation look smaller. That’s why Janet Yellen can tell you that the inflation today is less than 2%. Call it the “Common Core Inflation.” According to the way we used to measure inflation until 1980, the real inflation rate is 9%.

In a nutshell, you can safely say that 0.1% of Americans are swimming in money, 1% are wealthy, 9% are comfortable, and another 15% are truly middle class. The next 25% think they are middle class, but they are not. The rest – 50% – are just financially screwed.

Whoa! If we really have an anemic economy, how do we explain the stock market setting records day after day? And the booming housing market?

Fed-Fueled Frenzy

The simple explanation for the booms in the stock market and the housing market: financial engineering by the Federal Reserve Bank. The Fed creates artificial “wealth effect” by using two tools: lowering interest rates and creating money out of thin air. The latter was called Quantitative Easing (QE) because fancy names legitimize unsound actions.

The Fed kept the interest rates at unprecedented 0% – called ZIRP or Zero Interest Rate Policy – for more than seven years. Then six months ago, they raised it to a meager 0.25%. What does this mean?

• Corporations were able to borrow more than $3 trillion in the last 6 years to buy back their own shares.  What an easy way to boost share prices and bring a windfall for the CEOs and plutocrats!

• Corporations have also used this access to cheap money to buy other corporations – a lazy way to grow, rather than working hard, being innovative, and creating new products. Because the big Central Banks of US, EU, Japan and England coordinate their policies, the Top 0.01% have had so much fun in the last few years. In 2015 alone, corporations spent $3.8 trillion buying other companies, the craziest spree since 2007. We all know what happened the following year.  

• The government has borrowed $9 trillion since January 2009. That is $60,000 for approximately every working American. Did you get your share? Politicians love borrowing, since it’s a great way to reward their lobbyists as well as placate the masses with handouts.

• To keep the Middle Class and the banks happy, the housing bubble was resuscitated. The Fed created digital money and bought mortgages from the banks, which freed up the banks to issue more mortgages . The government also has spent a lot of money subsidizing low-interest and low-down-payment programs. It’s literally Housing Bubble 2.0. Rinse and Repeat. The one new feature of this bubble is that it has also created the world’s largest real estate owner – Blackstone, which now owns hundreds of thousands of homes all over America. But since they are the elites and insiders, they bought most of their homes in 2009-2012 when the prices were low.

• Cheap money also created the student loan bubble. Student loans are great for politicians, since it keeps young people out of the labor force, thereby artificially lowering the unemployment rate. Lobbyists of private colleges also encourage this, obviously. Thus the total student loans in America doubled under Obama, and today the average student graduates with a $40,000 ticket to serfdom. Of course, many young people are now finding the reality about the economy and are demanding a bailout – forgiveness of the loans.  

• The auto loan bubble is a reward for car companies and also another tool to create the “wealth effect.” After all, when people drive new cars, they feel wealthier and happier. For the first time, the same shenanigans used in the housing market are being used for car loans – subprime loans, bundling up car loans and selling them as “asset-backed securities” and so on. This is a $1 trillion bubble waiting to be pricked.

• Low-interest rates are also essentially theft from the savers and the retired. Imagine an old couple who worked all their lives to save $400,000. The difference between a 6% and a 1% return is $20,000 a year. This can mean a vast change in their lifestyle and even their ability to buy medicine and other essentials. A record 1 in 5 retired Americans are now forced to work. This is twice the rate of what it used to be in 1980.  

The Crash is Imminent

Apologies for bearing the bad news, but the crash is coming, regardless of any financial engineering by the banksters.

The global economy has been force-fed on debt, money-printing and artificial interest rates. The central banks around the world have cut the interest rates 666 times since the collapse of Lehman Brothers in 2008 (an ominous number, for sure).

To make things worse, banksters have pushed economics as we know it into a nightmarish fantasy land where “negative interest rates” have become common in Europe and Japan. Eventually, it will come to America as well.

But regardless of all their chicanery, the world has considerably slowed down, with clear signals of a coming crash.

• Price of oil has plummeted from $120 a barrel to about $40. This is a sign of weak global demand. The US oil rig count is down 70% and the effects are felt in Texas, Alaska, North Dakota, Louisiana etc. Fracking companies that had borrowed hundreds of billions of dollars are now on the verge of going belly up.

• Many stock markets around the world are down, despite all the stimulus. China’s Shanghai index is down 40% from its highs and Japan is down 20%. Both should be down 80%, but are being blatantly propped up by their governments.

• European banks are in serious trouble and are openly asking for bailout

• IPOs in the U.S. are down 50% compared to last year. The go-go days of making silly apps are over. Popular internet stars such as Yelp, Twitter, GoPro, Etsy etc. have all lost more than half of their values. Even big tech corporations such as Yahoo, Intel, Microsoft and IBM have announced major layoffs this year. Twitter, the 2nd largest tech company in San Francisco, is dumping 1/3rd of its office space.

• Large companies such as Amazon and Netflix are insanely overpriced, with P/E ratios of 190 and 300 respectively, when the average P/E for S&P 500 stocks is 26. The chart below shows the S&P 500 index from 1996 till now. Does it look healthy?

• The housing bubble, as explained before, is just a repetition of the 2008 crisis. Prices are so crazy that homeownership rate in the U.S. is the lowest since 1965. Luxury housing markets are already bursting in New York City, Miami, London and Vancouver, to name a few. Wealthy Chinese who helped the U.S. housing market are now disappearing fast.

• U.S. retail stores have announced more than 38,000 layoffs so far. Americans are also spending less on restaurants this year. This combination of weak retail and restaurant business can very well portend a recession.

• The U.S. GDP has been growing at about 1% for the last 3 quarters. If you exclude growth due to government debt, we have already been in recession during that time!

• Finally, China has slowed down a lot. In 2008, it’s GDP was growing at 14%; this year, it will be less than 7%. With a total debt to GDP ratio of 250%, China is possibly staring at a monumental financial crisis. In spite of some people’s claims, you cannot ignore China – the largest exporter and the 2nd largest importer in the world.

What’s Next?

In conclusion, going back to the frat party analogy, it’s hard to predict exactly when the party will come to an end. October of this year is definitely a potential candidate, or the central bankers may decide to wait until after the election to pull the plug. Another horrible possibility is that the US would start a war with Russia or China, so that the crash could be blamed on the war. Even mainstream media is running articles with titles such as “Inevitable War Between the U.S. and China.”  Furthermore, NATO troop buildup on Russian border is the largest since the 1950s, and troubling military escalations are happening in Ukraine this very week. None of this is being discussed seriously in the corporate media or in the presidential campaign. But, of course, when the bubble bursts, everybody in the mainstream media will be shocked that there was a bubble, and they will assure you that nobody could have seen the crash coming.