Tuesday, January 28, 2014

The Student Debt Crisis: Meet The Monster

Seth Mason Charleston SC blog 9
Washington has shown little concern about the destructive potential of its next economic monster, America's ballooning student debt burden. Although the Financial Crisis should have taught the feds a thing or two about the perils of indiscriminate lending, Uncle Sam continues to invigorate his latest Frankenstein by lending to nearly any aspiring student for nearly any degree program (continuing to drive-up the cost of tuition in the process). And he has a perverse incentive to continue his reckless lending policies: he's pocketing tens of billions of dollars annually from financially-strapped student loan holders.

But Washington better start considering the potential economic fury of its latest monster. Nearly half (41%) of student loan holders have been behind on their payments over the last 5 years, and, last year, a full 12% of borrowers were in outright default on their student loans. At the current rate of growth, the student loan default rate will eclipse the historic maximum default rate for home loans, 14%, by mid-2015.

The mortgage crisis, of course, put us in this terrible economic condition in the first place.

As a testament to the insufficiency of this seemingly-endless economic "recovery", the rate of default on student loans has grown steadily since the 2009 economic bottom, even as the default rates on other types of loans have begun to decline. (Article continues after chart.)

The Student Debt Crisis: Meet The Monster - studen loan default rate chart

Here are some more unsettling facts about the student debt monster from Kyle McCarthy, contributor to the Huffington Post's college section:
Seven Million Defaulted:

Out of the nearly 40 million borrowers, about seven million have defaulted on these student debts. Translation: 7 million (or about 2 percent of the population of the United States) have had their credit trashed as a result of their student loans and can have 25 percent in penalties added onto their total student loan debts. To add insult to injury, about 60 percent of employers run credit checks on applicants before hiring or promoting, making it close to impossible for millions to get a higher paying job to actually repay these debts.

Average Student Debt Increases While Wages Decrease:

Since 1999, student debt has increased more than 500 percent. Unfortunately, average salaries for young people have not. In fact, since 2000, the average salary for young people has decreased by 10 percent. It's no wonder that we are seeing millennials delaying starting families, making car purchases and buying homes.
Delayed life milestones create opportunity costs for the economy.

According to the non-profit American Student Assistance, the origin of student borrowers' repayment difficulties has been the persistently-high unemployment and underemployment caused by the Fed and federal government's last monster, the housing bubble.

As a side note, a buddy of mine recently asked me why student loans aren't dischargeable by bankruptcy like other kinds of loans. I told him that it's because indebted students--unlike investment bankers--have little lobbying power in Dr. Frankenstein's laboratory on the Potomac.

Seth Mason, Charleston SC

Wednesday, January 22, 2014

State Marijuana Legalization Approaching Critical Mass

Seth Mason Charleston SC blog 10The push to legalize marijuana on the state level has been spreading like wildfire. In the course of 2 years, 20 states and the District of Columbia have legalized cannabis for medical use, and 2 states have legalized it for recreational use. Here's what the scoreboard looks like as of today:

State Marijuana Legalization Approaching Critical Mass - legalization map

There's a "high" probability that, this year, 2 of the light-green states on the preceding map (Oregon and Alaska) will turn dark green as state legislatures in the Beaver State and The Last Frontier approve possession of cannabis for recreational use. Outright legalization in 2014 is also a possibility in Maine, Vermont, New Hampshire, Rhode Island and Massachusetts. Additionally, 6 states (Kentucky, Ohio, Minnesota, Pennsylvania, New York, and Tennessee) will consider bills this year to legalize medical marijuana. And get this: this year, even Alabama will consider a bill to decriminalize!

It's possible that, by year's end, more than half of the states will have either legalized or decriminalized marijuana.

As "purple" and "red" states start to embrace legalization or decriminalization, the building momentum will become unstoppable. At that point, Washington will have no choice to but to anger its Big Pharma financiers--who spend millions of dollars annually to lobby Uncle Sam to keep marijuana illegal--and consider legalization on a federal level.

And that, my friends, will be a huge blow to crony capitalism and spell the beginning of the end of the disastrous War on Drugs.

Seth Mason, Charleston SC

Wednesday, January 15, 2014

Jobs Depression Year 6: More Americans Worse Off Financially

Seth Mason Charleston SC blog 11Gallup reports that, in the last year, more Americans have become worse off financially than better off. This revelation--five and a half years after the fall of Lehman--is just the latest evidence that our jobs depression continues. (Article continues after chart.)

Depression Year 6: More Americans Worse Off Financially - change in financial situation

For years, I've been calling this period of American history a jobs depression. Before calling me a Chicken Little for using the "D" word, please keep in mind that, while there's no official definition for "depression" in an economic sense, most economists call protracted periods of economic malaise "depressions".

And the last 6 years have absolutely been a protracted period of economic malaise.

Years after the economy bottomed in 2009, the epidemic of long-term unemployment and underemployment continues to afflict the American workforce. Incredibly, 5 years into "recovery", fewer jobs were created last year than the year before. And, as has been the case throughout this depression, the vast majority of jobs created last year were menial in nature. Very few new "breadwinner" jobs.

Keep in mind that the unacceptably tepid jobs recovery that we have had has been merely a result of the inflation of the Fed's latest asset bubble. The Fed's balance sheet just passed $4 trillion...that's 22% of the entire economy! The Fed has been feigning healthy economic growth for years by inflating what Nouriel Roubini is calling the "mother of all bubbles".

Seth Mason, Charleston SC

Friday, January 10, 2014

More Bureau Of Labor Statistics Data Manipulation?

Seth Mason Charleston SC blog 12Last month, I predicted that the Bureau of Labor Statistics would remove from the workforce many of the 1.3 million Americans who lost their unemployment benefits this month. And that's exactly what happened. According to the BLS, 5 people left the workforce for every job added last month. And yet, the unemployment rate mysteriously fell from 7% to 6.7%.

The BLS, which is under investigation for data manipulation, has been proven wrong before. According to ZeroHedge, here's what the "headline" unemployment rate would look like if the bureau used the 30-year average labor force participation rate as opposed to its current 1970s rate. Keep in mind that this chart DOESN'T COUNT the tens of millions of UNDERemployed Americans. Lest we forget, a woefully insufficient number of "breadwinner" jobs have been created since the economy crashed.

More Bureau Of Labor Statistics Data Manipulation - real unemployment rate

Using the 30 year average labor force participation rate, we get a headline unemployment rate hovering between 11 and 12 percent. And, again, that doesn't count the tens of millions of Americans working below their capabilities. Gallup pegs the UNDERemployment rate at 17.2%. Recalculating the underemployment rate using the 30-year average participation rate, we get a number closer to 20%.

The BLS, of course, has been crushing down the headline unemployment rate by crushing down the labor force participation rate, as evidenced by the following chart:

More Bureau Of Labor Statistics Data Manipulation - unemployment vs. labor force participation

Considering this next chart, it's highly unlikely that unemployment has dropped from 10% to 6% over the last few years, as the BLS has been reporting.

More Bureau Of Labor Statistics Data Manipulation - mean duration of unemployment