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A Debt Crisis of Biblical Proportions

Updated on November 4, 2012
US Jobs Added by Age Group in October 2012
US Jobs Added by Age Group in October 2012 | Source
US Jobs Added  in October 2012 by Age Group
US Jobs Added in October 2012 by Age Group | Source
The sideways "correction" in Equities
The sideways "correction" in Equities | Source
Unskilled Young Americans were worst hit in the Recession; but have prospered relative to their educated peers in the Recovery
Unskilled Young Americans were worst hit in the Recession; but have prospered relative to their educated peers in the Recovery | Source
The Student Loan Bubble
The Student Loan Bubble

Matthew 20:16 in the November Employment Situation Report

Matthew 20:16 opines that those who are last shall be first and those who are first shall be last. The November 2012 US Employment Report confirmed this prophecy.

The report showed that job creation amongst people approaching retirement age was greater than that amongst the young. Taking the young as those who are first, it now seems that they are last in terms of employment creation. Those who are last, coming into traditional retirement, are now first in terms of employment creation.Unfortunately, the creator of this unbalanced natural order of things is man made debt.

The Baby Boomers have found that their debts are not covered by their assets. They now face having to continue to work to pay down these debts; or face bankruptcy and poverty in retirement. The Credit Crunch of 2008, exposed this precarious situation. The Equity Market had in effect been moving sideways since 2000, so that wealth associated with this asset class was static. Many borrowers used their home values as a source of equity to borrow against, in order to fund the escalating cost of maintaining living standards. The collapse of the housing market in 2007 exposed this asset liability mismatch; so that many borrowers now have negative home-equity. The flat Equity Market has not provided any value that can be extracted to pay down debts associated with the negative home-equity. Baby Boomers looking to their Fixed Income portfolios, have found that the Fed has now moved interest rates to zero; so that they cannot even subsist from these assets or meet their own interest payments on debts.

Looking at those who are first, it can be seen that since the Credit Crunch student debt has been rising. Young people have incurred more debt in the hope of finding employment. The November Employment Report showed that this strategy is not working. The Recession was most painful for poorly educated young Americans. Those with an education were not fired; because they are cheaper to employ than more mature workers doing the same job. In the recovery however, it was the unskilled young Americans who benefitted more than their educated peers; because the jobs being created are of the low value kind. This means that those young Americans, who took the Recession as their signal to go back to education and assume greater debts, have been fooled. The Student Loan Bubble is therefore predicated on poor fundamentals; and will be painful when it bursts.

The next Presidential Administration should ideally be addressing the conflict, that is developing in America, between the young and the old. Unfortunately however, the Federal Government is preoccupied with its own debts and not those of its private citizens. In order to mitigate its own debts, the Federal Government is cutting spending and raising taxes; which has the direct knock on effect of increasing the pressure on young and old Americans, as the economy contracts. To help the Federal Government mitigate its debts, the Fed has moved interest rates to zero and is buying up Treasury Bonds. The actions of the Fed have the direct consequence of confiscating income from savers; many of them the old, who are now forced to work into retirement. Since the banks have not passed on these low interest rates to their own borrowers, there has been little economic stimulus or debt mitigation for private citizens.

The Federal Government has therefore abandoned these two demographics; to let them fight over scarce economic resources themselves, whilst it takes care of its own finances. To complete the Biblical analogy, it is interesting to note that those who are first in terms of wealth are still first as long as they have no debts. This self preservation must be what the Federal Government has in mind. Wealthy Americans, known as the "One Percent", who are first in economic and tax aversion terms, must also feel the same way as the Federal Government. In the November Presidential Elections, the "Ninety Nine Percent" who are last will have a chance to make their voices heard; as they do every four years.

In the absence of economic growth, the Federal Government will never be able to meet its debts out of tax revenues. At this point, the only way to meet debt obligations is through the printing of the money to pay them. There are some who already discern this form of Federal Government debt mitigation in operation, in the coordinated action of the US Treasury and Fed. Unfortunately however, private debts will still exist; even when Federal debts have been paid out by the printing press. It is therefore up to the banking system to start lending again, so that the private sector has a chance to participate in the printed prosperity.


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