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Guest Post: Debt Serfdom In One Chart

Tyler Durden's picture





 

Submitted by Charles Hugh Smith from Of Two Minds

Debt Serfdom In One Chart

The essence of debt serfdom is debt rises to compensate for stagnant wages.

I often speak of debt serfdom; here it is, captured in a single chart. The basic dynamics are all here, if you read between the lines:

1. Financialization of the U.S. and global economies diverts income to capital and those benefitting from globalization/ "financial innovation;" income for the top 5% rises spectacularly in real terms even as wages stagnate or decline for the bottom 80%.

2. Previously middle class households (or those who perceive themselves as middle class) compensate for stagnating incomes and rising costs by borrowing money: credit cards, auto loans, student loans, etc. In effect, debt is substituted for income.

3. The dot-com/Internet boom boosted incomes across the board, enabling the bottom 95% to deleverage some of the debt.

4. When the investment/speculation bubble popped, incomes again declined, and households borrowed heavily against their primary asset, the home, via home equity lines of credit (HELOCs), second mortgages, etc.

5. The incomes of the top 5% rose enough that these households could actually reduce their debt (deleverage) even before the housing bubble popped.

Here is a chart of real (inflation-adjusted) incomes, courtesy of analyst Doug Short: note that the incomes of the bottom 80% have been flatlined for decades, while the top 20% saw modest growth that vanished once the housing bubble popped. Only the top 5% experienced significant expansion of income. Notice that incomes of the top 20% and top 5% really took off in 1982, once financialization became the dominant force in the economy.

Interestingly, we can see the double-bubble (dot-com and housing) clearly in the top income brackets, as these speculative bubbles boosted capital gains and speculation-based income. Since the bottom 80% had little capital to play with, the twin bubbles barely registered in their incomes.

Bottom line: financialization and substituting debt for income have run their course. They're not coming back, no matter how hard the Federal Reserve pushes on the string. Both of these interwined trends have traced S-curves and are now in terminal decline:

Those hoping the economy is "recovering" on the backs of financial speculation/ legerdemain and ramped up borrowing by the lower 95% will be profoundly disappointed when reality trumps fantasy.

 


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Fri, 05/04/2012 - 11:52 | Link to Comment francis_sawyer
francis_sawyer's picture

We're waxin' down our SERF boards...

we can't wait for June...

We'll all be gone for the summer...

We're on safari to stay...

Fri, 05/04/2012 - 12:35 | Link to Comment Sophist Economicus
Sophist Economicus's picture

...SERFin' U.S.A.

Fri, 05/04/2012 - 20:58 | Link to Comment Buck Johnson
Buck Johnson's picture

We are going to be a high tech serf country, and it will hurt big time.

Fri, 05/04/2012 - 11:53 | Link to Comment Aziz
Aziz's picture

But this time is different!

Fri, 05/04/2012 - 12:03 | Link to Comment Doubleguns
Doubleguns's picture

Yep, all down hill.

Fri, 05/04/2012 - 15:17 | Link to Comment Bicycle Repairman
Bicycle Repairman's picture

Well, ya can't su(e)rf uphill.

Fri, 05/04/2012 - 16:33 | Link to Comment Bearish News
Bearish News's picture

Eventual liquidation of debt = uphill coming?

Fri, 05/04/2012 - 11:54 | Link to Comment veyron
veyron's picture

That first plot should be logarithmic: I can't tell if real wages went up or down in the 2000s

Fri, 05/04/2012 - 11:57 | Link to Comment Oracle of Kypseli
Oracle of Kypseli's picture

How long can they keep this vail is the question

Fri, 05/04/2012 - 12:02 | Link to Comment surfsup
surfsup's picture

INTEREST is the mortal enemy of freedom

There is no mystery to projecting the pattern of failure engendered by any purported economy subject to interest.

As interest multiplies debt in proportion to a circulation, ever more of every existing dollar is dedicated to servicing multiplying debt, and ever less of every existing dollar can be dedicated to sustaining the commerce which is obligated to service the multiplying debt.Everything around you can be understood from the obvious consequences.

http://www.perfecteconomy.com/pg-inherent-pattern-of-failure-of-economy-subject-to-interest.html

Fri, 05/04/2012 - 12:08 | Link to Comment NotApplicable
NotApplicable's picture

Not true. Interest is simply the monetary value of time, and freedom requires that I have the opportunity to enter into such a contract as I (and another party) deem proper.

The trouble arises when credit is monetized beyond the wealth backing it. This creates a vacuum that allows compounding interest to work its wealth-transferring magic.

As long as tangible things are being loaned with proper collateral, credit markets can remain functional as well as productive. Get rid of fractional-reserve credit-based fiat, and you'll see how there is nothing wrong with the exchange of time for money (as long as both parties have real exposure to the risk incurred).

Fri, 05/04/2012 - 12:35 | Link to Comment surfsup
surfsup's picture

But WHO receives the un earned gains?   Does a democratically elected body decide when and who?

There in "lies" the rub... 

 

Bottom line is that when the unit of exchange has an abstract cost of mere existence behind it there will be an imbalance somewhere along the line.   What's the saying? Never under estimate the other guy's greed? 

Why should the unit of exchange have a cost?  Interest free money hurts a civilization how?  

Thing is you are pointing to what ALL SUCH SYSTEMS have to do in order to KEEP THE GAME GOING as interest starts to eat its own tail!  THEY HAVE TO GO into hypothecation never never land just to keep the wings up!

 

They MUST PRINT without BACKING because circulation is driven down by debt!  ARTIFICIAL SUSTENTION becomes the ONLY way to keep it all going!  Find me an INTEREST BASED system which didn't have to dilute its so called collateral in order to keep the head from choking on the tail?

ITS EATING ITS OWN TAIL

 

 

Fri, 05/04/2012 - 12:38 | Link to Comment surfsup
surfsup's picture

 

http://www.perfecteconomy.com/pg-mpe-106-money-out-of-thin-air.html

It is not that "the money" "is created out of thin air," or that the gold standard can possibly be implemented *or* save us from further multiplication of debt the gold standard has no power to avert. It's the interest. It's the interest. It's the interest.

In fact the imposed "monetary" system even has no power whatever to inflict the objected injuries but *by interest*.

Fri, 05/04/2012 - 12:44 | Link to Comment surfsup
surfsup's picture

Gosh this sounds so politically INCORRECT to call out mere INTEREST based on the tens of thousands of dollars we've spent on being (dumbed down) "educated" in economics at University!    Ironically many have INTEREST to pay on that education which SOLD them on (enslavement) Interest!

Fri, 05/04/2012 - 12:50 | Link to Comment surfsup
surfsup's picture

http://peacerevolution.podomatic.com/entry/2010-12-02T11_29_08-08_00

Origins of Money / A Virtual Round-Table Discussion

Fri, 05/04/2012 - 12:56 | Link to Comment NotApplicable
NotApplicable's picture

You've made no effort to refute my logic, but rather have assembled one strawman after another to take down instead.

Which part of my freedom of contract do you disagree with? How can I be free if I'm not free to exchange money for time (or vice-versa)?

Fri, 05/04/2012 - 13:10 | Link to Comment francis_sawyer
francis_sawyer's picture

  "The trouble arises when credit is monetized beyond the wealth backing it."

~~~

The real problem is what you describe, COUPLED with basic human behavior...

Humans, largely, are incapable of exercising proper restraint... Worse, it is a phenomenon whereby when it occurs en masse, creates a snowball effect of lesser & lesser restraint & greater recklessness... The 'beneficiaries' of this then go to great degrees to create propaganda & bait which enhances it further... It eventually reaches a point of terminal velocity...

Which is all to say... Even if somehow we realize to see the final collapse in our lifetimes, the same game will end up being played again in the next incarnation...

Fri, 05/04/2012 - 14:13 | Link to Comment Slim
Slim's picture

To both Not Applicable and Francis_Sawyer - these are some of the higher quality more thoughtful posts I've seen.  You've hit the nail on the head.  Lending of resources monetary or otherwise with a promise to be paid back and/or other protection is not inherently evil or bad.  It's actually incredibly useful to help fund worthwhile projects as those who don't want to take "all-in" risk, a la equity position, are not required to do so but contribute very meaningfully to the overall process.  The issue is all about human nature and discipline.  I would also argue the developed world has done an abysmal job in educating its citizens in how to properly consider these matters that heavily impact their lives (save for later or spend now, buy or lease a car, rent or own a home - breakeven points etc...).  Human nature will always be a challenge but without some education in these matters to help we created a monster.

Fri, 05/04/2012 - 14:54 | Link to Comment collon88
collon88's picture

Your logic is only half of the story.  I support your freedom to loan money to someone at an agreed upon interest rate.  But isn't it obvious that money creation in private hands has lead us to where we are today?  That is the other half of the story.  The money you loan is already in circulation, has already been created, unless you are a bank operating under fractional reserve banking rules. 

The creation of money is too important to be anything less than a public trust, a public utility.  Should our roads be a public or a private enterprise?  The FED should be abolished and money creation returned to the Treasury.  Failed banks should be nationalized and zero interest loans be made to all people and businesses for legitimate purposes, which would exclude speculation of all kinds.

Think of the enormous benefits to society under my suggestion.  There would be no government debt and interest payments.  This would lower taxes.  Government needs could be met by creating and spending money into existence, but would be limited to the extent that it was inflationary.  But this would lower taxes even more.

You would still be free to loan money but not create it.  Who would borrow from you if they could get interest free loans from a public bank?  I would think only bad credit risks, dead beats and speculators.  Good luck with that and your precious freedom. 

       

Fri, 05/04/2012 - 16:12 | Link to Comment Revert_Back_to_...
Revert_Back_to_1792_Act's picture

Ditto - to Mr. Burke (from this speech).

http://www.afn.org/~govern/mcfadden_speech_1932.html

How cool would it be to have a bank and to have everyone else redeem the notes you wrote.


Fri, 05/04/2012 - 16:08 | Link to Comment Revert_Back_to_...
Revert_Back_to_1792_Act's picture

BAD N/A! stop pickin on him. 

Here is how you refute old N/A's freedom to contract hooey.  The guy who owns the coal mine and the company store will always be talking about CON-tracts the loudest.  But he has a secret advantage.  You have to study really hard to gain understanding.  Understanding and wisdom are precious things.  In the old system in the USA, the people actually had the freedom to cause the creation of the primary medium of exchange (silver and gold coin by the public mints and assay offices and free coinage of those metals).   Now only banks can create the medium of exchange (which might be called scrip - I am not really sure what the hell it is..).  Everyone goes around talking about Sam Walton..how he was a genious..etc..he just was smart enough to buy a bank after he had a couple stores going.  Read his history, you will see I am telling you the truth.  Today, debts are never really settled.  They are discharged.  If he is going to play the freedom card, he also has to give you freedom to create what you are going to settle the contract with. 

Go read this old book for a start.  It might seem like old time gibberish at first but sooner or later it will come to you. There were some institutions back then that do not exist in any really useful form now.  You will get it by intution.  You can discern truth from contradictions.   Lights will go on..fireworks will splode...etc.

http://archive.org/details/coinsfinancialsc00harvrich

Have fun.  Apologies to N/A.  Your posts are always interesting.

Fri, 05/04/2012 - 16:22 | Link to Comment Sean7k
Sean7k's picture

You did nothing to refute NA's comment about contracts. You just spewed a bunch of gibberish. Totally unconnected concepts and historical trivia. If you understand something, you can explain it- you don't admonish "it will come to you". 

Fri, 05/04/2012 - 15:53 | Link to Comment Revert_Back_to_...
Revert_Back_to_1792_Act's picture

.

 

Fri, 05/04/2012 - 13:35 | Link to Comment Sean7k
Sean7k's picture

Actually, it is the debt, the debt, the debt. Without debt that is created to provide funding for projects without revenue streams to pay the debt nor a profit stream to resolve the interest, you have the problems associated with interest. 

Fri, 05/04/2012 - 13:31 | Link to Comment Sean7k
Sean7k's picture

Perhaps you should revisit the middle ages and the policies on usury, as required by the church. It is a more complicated subject. Even the church recognized that money would not be loaned without interest. They left it to the jews to loan at interest, since they were going to hell anyway.

Merchants needed capital and time preference dictates an interest rate. You are confusing interest with fractional reserve banking and the associated problems that come from governments being given free hand to spend what they don't have. Not all interest is the same.

 

Fri, 05/04/2012 - 12:47 | Link to Comment samsara
samsara's picture

Problem is that Interest goes up geometrically  while

Wages go up linearly

Fri, 05/04/2012 - 11:59 | Link to Comment GottaBKiddn
GottaBKiddn's picture

 

Truly.

Fri, 05/04/2012 - 12:00 | Link to Comment Chupacabra-322
Chupacabra-322's picture

MK Occupy Minnesota: Drugs & the DRE Program at Peavey Plaza

Video documentation by local activists and independent media shows that police officers and county deputies from across Minnesota have been picking up young people near Peavey Plaza for a training program to recognize drug-impaired drivers. Multiple participants say officers gave them illicit drugs and provided other incentives to take the drugs. The Occupy movement, present at Peavey Plaza since April 7th, appears to be targeted as impaired people are dropped off at the Plaza, and others say they've been rewarded for offering to snitch on the movement.

Local independent media activists and members of Communities United Against Police Brutality began investigating police conduct around the Plaza after witnessing police dropping off impaired people at the plaza and hearing rumors that they were offering people drugs.  We videotaped police conduct and interviewed participants, learning some very disturbing information about the DRE program.

After the OWS launched their Spring offensive, the feds responded by arranging a bogus terror plot on a Cleveland Bridge and have also apparently mailed themselves white powder to drum up terrorism fears. Both incidents have been pinned on the OWS movement by the establishment media.

http://www.youtube.com/watch?v=vTgN17FZGKE&feature=player_embedded#!

Fri, 05/04/2012 - 11:59 | Link to Comment ACP
ACP's picture

As long as the masses have their Charismatic Boy-King, and keep getting liberal handouts, they won't give a shit.

Fri, 05/04/2012 - 12:07 | Link to Comment NotApplicable
NotApplicable's picture

Well, that's the thing, see. While those handouts grow in aggregate, their purchasing power declines.

So, they will give shits, just not proper ones, perhaps.

Fri, 05/04/2012 - 12:00 | Link to Comment Alcoholic Nativ...
Alcoholic Native American's picture

The economy is the game of monopoly.  The Capitalist are now giving you the option of borrowing to pay rent on their property. They never want the game to end! 

Fri, 05/04/2012 - 12:18 | Link to Comment surfsup
surfsup's picture

Capitalists?  Captial formation is a good thing -- you invest in a business and it profits -- that is capitalism...   What is going on here is a MANIPULATION of meta-capital -- or that which makes capital out of nothing and charges you because you are not aware of the game.  A person saves money to start a business and that business grows and prospers -- that is capitalism...

 

A wanker by force and by decree has the sole right to merely "publish" money with no elected standing?  That is NOT capitalism -- it is something else.

 

But of course since the entire idea is to create division to domonate and control they will issue labels and slogans to attempt to make us blame commerce itself -- as if such commerce is something twisted and morose.   I bought a dozen eggs from the local farmer and had breakfast -- is that evil capitalism?   The farmer invested in equipment to farm his produce and distribute it to others -- he makes a living doing this -- is that evil capitalism? 

Chances are when we are emotionally "against" something the control freaks have filled the agenda with pre packaged half truths to get us going on a bandwagon that only serves to divide us from ourselves and blame things which have nothing to do with the core issue...  

 

Fri, 05/04/2012 - 12:45 | Link to Comment Alcoholic Nativ...
Alcoholic Native American's picture

Right Right, don't want to offend all those hard working capitalist egg farmers out there.  Thanks for explaining and breaking down capitalism for me, I was having a little trouble following its logical conclusion.  Prosperity and growth, I never would have guessed.

 

Fri, 05/04/2012 - 16:17 | Link to Comment Revert_Back_to_...
Revert_Back_to_1792_Act's picture

Capitalist egg farmers are rare as hens teeth nowdays...

 

Fri, 05/04/2012 - 13:03 | Link to Comment NotApplicable
NotApplicable's picture

Okay, now I'm confused. How can you understand this so well, yet not understand that capital formation works only in an interest bearing environment, where providers are rewarded for putting their SAVINGS (not fiat credit, that's a different subject) at risk.

Without payment of intetest, there is no reason for anyone to seek to put their savings at risk.

Fri, 05/04/2012 - 13:40 | Link to Comment Sean7k
Sean7k's picture

I am assuming this person is new to the movement. There is so much to learn and it takes time. Nicely caught.

Sat, 05/05/2012 - 07:53 | Link to Comment Bartanist
Bartanist's picture

Why, in your mind does it have to be "interest". Why cannot it be dividends from the profit?

Real wealth is ONLY created from labor. Labor increases or transforms the value of things. The "fair" use of money is as an exchange medium, not as a way to extract wealth from others. However, "clever people" have found the way to not create any value through labor and to extract money from others by creating money out of thin air, lending it to others, then either receiving a tax on their assets through interest OR confiscating their assets when the fiat (our of thin air) money cannot be repaid.... silly to allow that, no?

Fri, 05/04/2012 - 12:21 | Link to Comment Dr. Engali
Dr. Engali's picture

Capitalism has nothing to do with this. If we had capitalism there would be no bail outs. The dead would have been allowed to die instead of sticking around taking up precious resources on life support. If they were allowed to die off we would have capital reallocation into more efficient enterprises. What we have is a corporate fascist state.

Fri, 05/04/2012 - 12:54 | Link to Comment Alcoholic Nativ...
Alcoholic Native American's picture

Efficient enterprises?  Efficient in which way?  Capitalist seeks the most profitable enterprises not the most moral or the most socially needed.

Milking the grandparents out of their retirement and throwing Jr. into student loan debt servitude is a highly effcient way to extract wealth.

Fri, 05/04/2012 - 13:03 | Link to Comment Dr. Engali
Dr. Engali's picture

Again your examples are not capitalism. You are citing the result of the state and corporate alliance also known as fascism.

Fri, 05/04/2012 - 13:44 | Link to Comment Sean7k
Sean7k's picture

Okay, present your list of moral and social imperatives. Please list by order of magnitude. Compare with someone else. Let me know when you completely agree with someone. Then explain how it will be paid for, if not out of profits.

Fri, 05/04/2012 - 20:01 | Link to Comment lotsoffun
lotsoffun's picture

the -ism is consumerism.  you don't have to goose step - you have to consume.  like a goose nailed to a board.  foie-gras for all the bankers.

 

Fri, 05/04/2012 - 12:05 | Link to Comment l1b3rty
l1b3rty's picture

Oh the indentured servant in the US, being hanged by own father!

 

http://silvervigilante.com

Fri, 05/04/2012 - 12:04 | Link to Comment hedgeless_horseman
hedgeless_horseman's picture

 

 

Both of these interwined trends have traced S-curves and are now in terminal decline

What should we do? 

Quick...everyone run to the safety of GMCR!

Fri, 05/04/2012 - 12:05 | Link to Comment pods
pods's picture

So basically 80% of incomes have been almost stagnant for 30+ years.

Serfdom.  

It would be nice to see the income chart normalized for increases in productive efficiencies.  That would put them on the down slope.

pods

Fri, 05/04/2012 - 20:00 | Link to Comment lotsoffun
lotsoffun's picture

but - it is more subtle than that - because now you can have an i-toy and 24/7 500 channels and internet at home.  which makes you feel richer, because it didn't exist at all 30 years ago.  but 30 years ago - you ate at mcdonalds once in a while, not 3x times a day.  because you ate at home with family.  and you had a 'savings' account. etc.

 

Fri, 05/04/2012 - 12:18 | Link to Comment ebworthen
ebworthen's picture

Good stuff.

FED the biggest vampire squid there is, trying desperately to keep the financialization ponzi going under the pretense of aiding employment and controlling inflation while bankrupting generations of 95%'ers and enriching the top 5%.

Debt jubilee or collapse; they will deny it up until the last minute as riots shut down major cities; then it will come.

Fri, 05/04/2012 - 12:17 | Link to Comment matt_chart
matt_chart's picture

Want to learn how to read Charts?

Support and Resistance

http://stocklegends.com/technical-trading/support-and-resistance/

Understanding Trends

http://stocklegends.com/technical-trading/understanding-trends/

Stock Volume As Reverse Indicator

http://stocklegends.com/technical-trading/stock-volume-as-reverse-indica...

Using The MACD Indicator

http://stocklegends.com/technical-trading/macd/

Using The RSI

http://stocklegends.com/technical-trading/trading-with-the-rsi-indicator...

Fri, 05/04/2012 - 13:12 | Link to Comment pods
pods's picture

Nah, just someone showing their wares.  Threadjackers are like MDB, who jump in at the top of a thread, and push 95% of the comments down below their troll.

I spam links from time to time, not of my wares, but of stuff I think is important. 

pods

Fri, 05/04/2012 - 12:18 | Link to Comment Dr. Engali
Dr. Engali's picture

It's all good. I hear they have swimming pools at the FEMA camps. One of my friends was telling me about all the water boarding they have there. Sounds like great fun.

Fri, 05/04/2012 - 12:24 | Link to Comment navy62802
navy62802's picture

If you can pay for shit in cash, then the predatory financing doesn't even come into the picture. It's no wonder the top 5% haven't amassed fantastic sums of debt. They're not paying a 14% credit card or taking out 30% APR loans.

Fri, 05/04/2012 - 12:40 | Link to Comment LoneCapitalist
LoneCapitalist's picture

Im certainly not in the top 5%, but I dont pay 14% cc or 30% apr loans. I think that has less to do with income and more to do with common sense.

Fri, 05/04/2012 - 13:05 | Link to Comment navy62802
navy62802's picture

Yeah, I'm in the same boat. Definitely not in the top 5%, but I pay for everything in cash. I just don't think there are enough people like us who are financially prudent. The US society, in general, doesn't look favorably on personal financial prudence ... for example it's not "cool" to drive a 2004 grand Cherokee with 100k miles on it because you refuse to pay $30k for a new vehicle.

Fri, 05/04/2012 - 12:59 | Link to Comment dcb
dcb's picture

please explain this to paul krugman who refuses to believe who financialization helps the top 1% and how the federal reserve enables this class

Fri, 05/04/2012 - 13:18 | Link to Comment Revert_Back_to_...
Revert_Back_to_1792_Act's picture

The models are different when you using company store money.

 

http://en.wikipedia.org/wiki/Capitol_Hill_Babysitting_Co-op

http://en.wikipedia.org/wiki/Scrip

Now..lets talk about something important. 

Lets see how many virgins there are in the ZH audience.

It's astounding
Time is fleeting
Madness...takes its toll
But Listen Closely
Not for very much longer
I've got to...keep control

http://www.youtube.com/watch?v=opOsgzzDPdw

It's just a jump to the left...

PS: Janet faints around 1:38, Asshole 4:30.

 

 

 

Fri, 05/04/2012 - 15:20 | Link to Comment azzhatter
azzhatter's picture

The debt is like a cancer on america and europe. Dr. Paul, being a doctor, wisely knows you have to remove the cancer or the patient will die. But the jizzbag witchdoctors like Bernanke or Draghi prefer giving the patient pain killers so he won't feel the growing cancer. But the cancer (debt) will eventually kill the patient, the pain killers are merely another form of can kicking. Only question is when, not if. What's the trigger? Much better to liquidate the debt and go thru a 2-3 year depression and then start healing. We will continue the slow death because the jizzbags tell the people what they want to hear not what they need to hear

Fri, 05/04/2012 - 15:22 | Link to Comment ReligiousAtheist1
ReligiousAtheist1's picture

Another excellent piece by CHS

Fri, 05/04/2012 - 18:16 | Link to Comment Matt
Matt's picture

Looking at these charts, the solution is simple and obvious; we NEED another tech bubble!

 

PS: it is disengenous to call your article "Debt Serfdom In One Chart" and then use three charts.

Fri, 05/04/2012 - 21:37 | Link to Comment Bob
Bob's picture

Thanks for continuing your beat, Charles.  Much appreciated. 

Sat, 05/05/2012 - 07:42 | Link to Comment Bartanist
Bartanist's picture

OK, so that means deflation in US based assets and inflation of foreign based goods. However, there is still one monkey on the back of the people and that is the government, its over-reach and taxes. The US cannot be competitive with its current government structure which distorts everything economically.

I am still thinking that there will be a need to go through deflation and asset write-off (bank defaults) before healing can occur.

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