Monday, 23 March 2015

Illusion of Prosperity

By
President Obama and Federal Reserve chair Janet Yellen have recently been crowing about improving economic conditions in the U.S.  Unemployment is down to 5.5% and economic growth in 2014 hit 2.4%.

Journalists and economists point to this improvement as proof that quantitative easing was effective. They seem to have political blinders on. The boom is artificial and has been built by adding debt on top of excessive debt.  Total household debt increased 2.5 % in 2014 – the highest level since 2010. Mortgage loans increased 1.5%, student loans jumped by 6.6%, and auto loans swelled a hefty 9.6%.  The improving auto sales are based on a bubble of sub- prime borrowers. Auto sales have been brisk because of a surge in loans to individuals with credit scores below 640. Auto loans to individuals with strong credit scores, above 720, have barely budged.

Sub-prime consumer borrowing climbed $189 billion in the first 11 months of 2014.  Excluding home mortgages, this accounted for 41% of total consumer lending. This is exactly the kind of lending that got us into trouble less than a decade ago. This trend can only end in tears.
Here’s the lingering question: is the current boom built on sound foundations? Do we have sharp increases in productivity or real wage growth?

The truth is productivity has barely budged since 2010 and real wages have flat lined, or declined for decades. From mid-2007 to mid-2014, real wages declined 4.9% for workers with a high school degree, dropped 2.5% for workers with a college degree, and sunk 0.2% for workers with an advanced degree.


So is the boom being built on broad base investment in plant and equipment?  The average age of plant and equipment in the US is currently the oldest on record.

Continue reading the article here.