One in seven Americans is living at poverty levels which equates 43.6 million people. This number does not account for the underground cash economy. Some of these people are not reporting cash payments and are evading the tax system. By doing this, they do not contribute their share of social security and the tax structure of state and local governments. They consume the services but avoid paying their share of the costs. On the other hand, wage destruction of those who are not yet classified at the poverty level would probably offset those who avoid taxes.
Declining interest rates are now moving toward diminishing returns. When interest rates move lower, the monthly payment difference is not as great as it would be if the rates were above 7-9%. For instance, a $100,000 loan moving from 7.5% to 6% would save about $100 per month. From 6.5% to 5% saves $95. When comparing the savings to the closing costs and upfront cash requirements, the incentive and the ability to lower monthly borrowing costs is reduced. Couple this with many Americans’ change in credit score and monthly cash flow, you find that lower rates are not functioning as the Federal Reserve had expected.
Energy prices remain high while the American economy suffers. Why? The developing countries such as China are taking up the slack in American demand for oil and other sources of energy. China is now the largest new car market in the world. Increased commodity prices will translate to higher inflation in food and energy prices.
Home foreclosures are up 25% over last year and home construction is in the tank. It appears that the weak recovery has just about run its course. Locally, our economy is in better shape than most but new construction reflects the national trend. People are pessimistic about the future and are rethinking all purchases.
Savings rates are dismal. The problem is that there are no truly safe alternatives to cash at this point in time except for gold and silver. The Fed has reduced rates to benefit the banking system thereby transferring wealth from the savers to the bankers. The banks enjoyed the profits in the past without the exposure of the offsetting risks of loss. How sweet it must be!
Gold has hit a new record high. For those reading the blogs at this website, we have been predicting this event for some time. NBC Nightly News is now reporting on gold as an investment. This signals an increase in public awareness which typically causes an increase in overall demand. The result is higher gold (and silver) prices.
It wasn’t that long ago you could eat lunch for $5 at the local sandwich shop. Now the price point is $6.50. This 30% increase in prices is not reflected in the government numbers but the average citizen feels the pinch. Utility bills continue to rise and exceed the meager wage increases that employers can pay. All of this combined causes consumer frustration. How can the average person save for retirement with all of the stiff economic headwinds. To some, these are hurricane winds.
Complexity promotes diminishing returns. The automobile is a great example. In the 1960’s, I could replace the starter, alternator, and thermostat. Today, the engine has become too complex for the average person to tackle auto repair. Special tools are required that most of us don’t own. Now where do these extras parts go? Yes, the extra gadgets are great, your buns can be cooled in the summer and heated in the winter by those new seats but at what cost!
Over the last 50 years, we have enjoyed improvements in the comforts of living. All of this was built on cheap energy. Those days are coming to an end. Our infrastructure promotes energy consumption, not conservation. There are those who point out cheap alternatives but the capital costs and the time frame to make the transition are substantial. Also, the corporate will to change has not yet manifested. The Tea Party has surfaced to reflect the “anger” cycle of loss. Loss of what? The way of life we have come to expect. We are no longer in denial of the problem. Next comes the sadness then followed by acceptance. At that point will new leadership rise to guide us in the right direction. Could it be the glorified sons of GOD?