The New Subprime…

Dow down 70 points. Gold back under $1,300 an ounce. Nothing much to talk about there…

Meanwhile, we see pain and suffering. At the bottom of the financial heap, day by day, people struggle to get by.

The averages hide it. The average figures — for wages, household incomes and household wealth — are lifted skyward by the gas at the top. Thanks to the rise in asset prices, those with substantial assets have become substantially richer, raising the averages.

But what about those at the bottom?

This is not the middle class we’re talking about, but those down below. How do they live? What do they eat and drink? How do they make ends meet?

Not that we have become a bleeding heart. And not that we are concerned about fairness either. Those concerns are much too generous and socially conscious for us.

No, we’re just worried, selfishly, about what happens to the passengers in the upper cabins, when life below deck becomes intolerable.

Last on, first off

More and more of the credit-drenched economy depends on these marginal people down in the hold.

In 2007, it was subprime housing debt that tipped the financial world into crisis. Now, we have subprime auto loans…subprime student loans…subprime corporate loans…and subprime government debt (Senegal…Ecuador…Greece), too.

From Charles Hugh Smith at

The mainstream media is delighted to highlight positive economic data, but nobody ever asks about the quality of the borrowers who are behind the rosy numbers.

Behind the rosy numbers, sales and profits are increasingly dependent on marginal buyers and borrowers: those buying on credit who would not qualify to borrow money in a system ruled by prudent risk-management.

These marginal borrower/buyers are last on, first off: They qualify for loans at the end of a credit expansion, when lenders throw caution to the winds to reap the profits from issuing new mortgages, auto loans, student loans, credit cards, etc. to marginal borrowers.

These marginal borrowers are the first to default, because they have insufficient income and collateral to support their loans.

How bad is it down there?

We have heard the stories about ‘midnight shopping’, for example. The Feds’ food aid program credits its debit cards at 12 am. Desperate shoppers are already in line at the all-night discount stores. Sales rise in the middle of the night.

Falling behind

The numbers add perspective.

The bottom 20% of the US population saw its real household income peak in 1999 at $13,663 (in 2012 dollars). Thirteen years later, it had lost 16% of its wealth, with real household income of only $11,490.

And here’s the Associated Press with further grim details:

More than 35% of Americans have debts and unpaid bills that have been reported to collection agencies, according to a study released Tuesday by the Urban Institute.

These consumers fall behind on credit cards or hospital bills. Their mortgages, auto loans or student debt pile up, unpaid. Even past-due gym membership fees or cellphone contracts can end up with a collection agency, potentially hurting credit scores and job prospects, said Caroline Ratcliffe, a senior fellow at the Washington-based think tank.

"Roughly, every third person you pass on the street is going to have debt in collections," Ratcliffe said. "It can tip employers’ hiring decisions, or whether or not you get that apartment."

Almost half of Las Vegas residents – many of whom bore the brunt of the housing bust that sparked the recession – have debt in collections. Other Southern cities have a disproportionate number of their people facing debt collectors, including Orlando and Jacksonville, Florida; Memphis, Tennessee; Columbia, South Carolina; and Jackson, Mississippi.

Wages have barely kept up with inflation during the five-year recovery, according to Labor Department figures. And a separate measure by Wells Fargo found that after-tax income fell for the bottom 20 percent of earners during the same period.

Down below deck life is hard…and getting harder. Real jobs are hard to find. Real incomes are falling. Prices are still going up.

What do they do? How do they cope? Do they spit in our soup? Do they sabotage our plumbing?

Do they rise up…and come looking for us, like zombies searching for fresh meat?


Bill Bonner
For Markets and Money

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Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America’s most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind Markets and Money.

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