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Thread: weekend commentary - Debt Serfdom

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    Banned Melonie's Avatar
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    Default weekend commentary - Debt Serfdom

    from our 'old friend' Charles Hughes Smith athttp://www.oftwominds.com/blogmay12/debt-serfdom5-12.html


    (snip)"The essence of debt serfdom is debt rises to compensate for stagnant wages.

    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.(snip)


    IMHO, Author Charles Hughes Smith has an uncanny ability to get right to the 'heart' of any topic. In this case, the central point is that, for the past ~25~30 years, the vast majority of Americans have been maintaining or improving their standard of living via the assumption of ever greater amounts of additional personal debt. This segment of Americans essentially comprises those in the 'bottom 80%' of earnings, or those households with combined earning of less than $170,000 per year, and arguably includes those in the 'bottom 95%' i.e. those households earning less than $ 288,000 per year.

    The arguable 'take away' from this article, of course, is that with earnings now stagnant or declining, with increasing costs of 'necessities' such as food, energy, and taxes, etc., and with lenders now paying much more attention to such particulars as debt to income ratio, verifiable income etc., those 'bottom' 80% / 95% of American earners now face a rude awakening. With 'additional borrowed money' no longer being available to supplement their actual incomes, many of these Americans are now living an economically unsustainable lifestyle. Thus after paying for increasingly expensive 'necessities', they now find themselves increasingly unable to service existing debt payments. Sooner rather than later, enforcement measures to collect on existing debts will force these 80% / 95% of American households to adjust their standard of living downwards.

    And that, of course, is very bad news for exotic dancers and camgirls ... or at least those catering to customers earning less than $170,000 / $288,000 per year !

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    Default Re: weekend commentary - Debt Serfdom

    Quote Originally Posted by Melonie View Post

    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.

    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.(snip)


    In this case, the central point is that, for the past ~25~30 years, the vast majority of Americans have been maintaining or improving their standard of living via the assumption of ever greater amounts of additional personal debt. !
    While I agree with the whole piece..... These especially stand out as true..... It's important for people to read this.... Lol then somebody go tell me how important is is to vote....





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    The country has been looted.

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    Banned Melonie's Avatar
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    Default Re: weekend commentary - Debt Serfdom

    ^^^ trying to stay on the 'economic' side, don't forget that a large and growing number of Americans have a huge personal stake in seeing the economic status-quo maintained. Arguably, between extended unemployment insurance check recipients, disability check recipients, social welfare benefit recipients, social security check recipients, gov't worker employee paycheck recipients, gov't contractor paycheck recipients, gov't subsidized private industry paycheck recipients, student grant and loan dependent college students, etc. it's not impossible that 51% of voting age Americans stand to benefit personally from the continuation of current economic policies ... in the short term at least.

    Also, the above arguably corresponds to another changing economic trend ... the shifting of 'private' debt burden to US gov't agencies / taxpayers, with associated necessary increases in future tax rates to pay for that increased gov't debt. This is of little or no personal consequence to those Americans receiving extended unemployment benefits, disability benefits, social welfare benefits, college students etc. whose incomes are such that they don't actually have to pay income taxes. This is also of little personal consequence to most social security recipients, whose total retirement income level is low enough to avoid actually having to pay income tax. And it is of debatable consequence to gov't employees, gov't contractor workers, etc. since all or most of their paychecks originate from US taxpayer dollars ( i.e. higher income taxes are a pre-requisite to their future job security ).

    Viewed from a different economic perspective, that top 5% discussed in the original post now pay 59% of all federal tax dollars, and that top 20% discussed in the original post now pay ~70% of all federal tax dollars. Data at

    This somewhat dated but highly effective chart illustrates the point beautifully ...





    The percentages illustrated in this 2005 chart have actually become more 'progressive' over the last 6 years ... with the higher earners paying an even greater share of total federal tax dollars and with the lower earners paying an even lower percentage !!! At the risk of running afoul of the politics ban, I will point out that this economic reality can lead to a 'tyranny of the majority' ...


    (snip)"Politicians, always on the lookout for some Bad Guys, someone to pin the blame on when things go wrong, can find easy targets among the Greedy Capitalists. So the bankers and business people, particularly Big Business, gets blamed and the politicians, looking for [re-]election, promise to make things right with some new regulations, restrictions, taxes. And thus capitalism, real free-enterprise, property-rights, self-ownership gets stifled. The market starts to fail (and governments love to discover some “Market Failure”) thus requiring even more regulating, taxing and thus stifling.

    Thus capitalism struggles to survive in a “Democracy” where the majority votes and becomes, with the government of the day as their agents, tyrants themselves.
    "(snip) from


    And, of course, the Author's original point about rising levels of personal debt having been used to supplement stagnant middle-class incomes ... which increasingly burdens the ( would-be ) middle class as the benefits of spending the borrowed money lie in the past while the burden of repayment overhangs the future ... takes on a sideways twist when ( some portion of ) that personal debt can be 'transferred' to the gov't / actual US federal income taxpayers - via actual / proposed gov't programs like student loan 'forgiveness', first time home buyer mortgage programs, cash for clunkers, etc. As above, this is arguably just another form of 'borrowing' to supplement low / stagnant incomes - but with the US gov't being the true borrower. The difference, of course, is that the people who will eventually have to pay back these 'loans' via their US tax dollars may not be the same people who benefitted from spending the borrowed money !!!

    And taking this a step further, besides the already discussed 'side effects' of the future burden of debt service for ( would be ) middle class Americans i.e. paying down the personal debts that they themselves have increasingly taken on, if/when these ( would be ) future middle class Americans do achieve career success to the point of 'joining' the top 20% of earners, they will also then be hit with a 'double whammy' in their new role as high tax rate US taxpayers forced to pick up a disproportionately large share of servicing an ever increasing amount of US gov't debt as well ! This only amplifies the author's original comment about 'debt serfdom'. And many financial analysts make the point that, given the size of US gov't debt versus the total number of income dollars available to the top 20% of American earners, making the gov't debt repayment numbers work will require that significantly higher tax revenues be collected from the next 20% as well ( i.e. Americans whose incomes are in the $ 50,000 ballpark )
    Last edited by Melonie; 05-05-2012 at 06:26 AM.

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