“Buffett: Economy ‘Dead in Water’ Without Bernanke”
– headline from MoneyNews.com
If you look at the performance of the large banking stocks or even the Dow and S&P 500, you could come to the conclusion that the economy is growing. Certainly, there are some aspects of the economy that are healthy, but there is more to the story. Zero Hedge presented an article by Michael Snyder, “16 Signs That The Middle Class Is Running Out Of Money.” It asks the question “How will we ever have a sustained economic recovery if consumers don’t have much money to spend?” Even though the Dow is surging toward a record high now, everyone knows that things are not good for the middle class. I write about that all the time.
If you want proof, look at the following store closures, and ask yourself how can this happen if the economy is strong and the middle class has money to spend?
Forecast store closings: 200 to 250
Sears Holding Corp.
Forecast store closings: Kmart 175 to 225, Sears 100 to 125
Forecast store closings: 300 to 350
Forecast store closings: 125 to 150
Barnes & Noble
Forecast store closings: 190 to 240, per company comments
Forecast store closings: 500 to 600
Forecast store closings: 150 to 175
Forecast store closings: 450 to 550
-Data from “The 8 Retailers That Will Close the Most Stores in 2013” on DailyFinance.com
What has happened to the trillions of dollars that TARP and the Fed injected into the economy since 2008? It went to the too-big-to-fail banks (thanks, Hank Paulson) and the insurance companies (Good job, AIG). But the money never made its way down to Main Street and the middle class. It was never designed to. The Fed is, after all, a private corporation that is in business to protect the big banks, and that is exactly what they do. Do you think that zero interest rates are meant for you and me? Oh, a few of us can get a cheaper home loan or car loan, but that is way more than offset by the ultra-low rate of return on CDs, bonds, and money market funds. Those are the financial assets that the older folks used to use to pay their living expenses with.
Today, if you retire with one million dollars and try and live off the interest, you can’t make ends meet unless you really change your lifestyle. After all, if you made enough to save a million bucks, you most likely had a very nice life style. Now, you will probably have to supplement your retirement income with a part time job or may have to put off retirement entirely.
But the bankers, courtesy of Fed loans, can make a nice profit and take home multi-million dollar bonuses. But that doesn’t mean that the banks are out of danger. They do not have to mark their assets to market (their real current value) like other businesses do under GAAP accounting rules. That’s why they are reluctant to force people out of their homes, because once they do, they then have to mark down the property to its real value.
One of my Minnesota friends mentioned how well US Bancorp is doing. They are a local too-big-to-fail bank. I pointed out that in 2008 they were given a $6.5 billion loan as part of TARP. To put that into perspective, that is the equivalent of over 66 tonnes of hundred dollar bills. (Even I could get rich with access to that kind of money!) Granted, they paid the loan back, with interest, in a little over a year, but I am not impressed. Banks can leverage their loans by say 10 to 1, so the $60 billion became $60 billion that they could lend to hedge funds and Fortune 500 firms with low risk. If they only earned 5%, they earned a return of $3 billion a year on the TARP loan. I ask, how could they have mis-managed their business to get into that kind of trouble in the first place? My personal banker in Edina, MN never got a bail out loan and he prospered. Big is no indication of success – it’s who you know and if your contacts are in Washington, DC or at the Fed, you’ve got it made.
My point here is that the money doesn’t make it down to Main Street, or very little of it does and that is why the Middle Class is struggling and that is why nearly 3,000 stores that cater to the middle class are being shuttered up.
Be sure and read this eye-opening article by Zero Hedge. It is one you can pass on to your friends who still believe that all is well with the economy. The article ends with some very good advice:
…those that are wise are taking advantage of these times of plenty to prepare for the great economic drought that is coming.
Don’t be caught living paycheck to paycheck and totally unprepared when the next wave of the economic collapse strikes. Anyone that believes that this debt-fueled bubble of false hope can last indefinitely is just being delusional.