The Hurricane Whisperer

“A national debt, if it is not excessive, will be to us a national blessing.” — Alexander Hamilton

“A man in debt is so far a slave.” — Ralph Waldo Emerson


Gold, virtually unchanged: $1,655 an ounce. Dow, virtually unchanged: 13,107 points. Oil, virtually unchanged: $95 a barrel.

Investors should have taken yesterday off…spent some time with the kids…worked on their swing…or whittled away the hours on Praia do Camilo with a good book. Markets aren’t going anywhere, Fellow Reckoner…not without the say-so from the Feds.

“Everyone is waiting,” writes Bill Bonner. “They want to know what will happen when the Fed gets together tomorrow. Will there be an open-ended commitment to QE — as much as you want, when you want it — or will there be nothing at all?”

The Powers that Be are hunkered down in Jackson Hole for their annual international central banking symposium, a jaw-gabbing event where the world’s “brightest” economists get together to come up with the world’s dumbest “solutions”…solutions to problems largely caused by their last round of “solutions.”

The Feds use a number of complicated instruments to determine which way the economic breeze is blowing, almost all of them baloney. Then they imagine that, after holding their windsocks out in the hurricane, they can command the gales to blow in any direction they so desire. And what’s more, people actually believe them!

Growth rates, ostensibly their primary focus, are slowing in the US, down from a limpish 2% rate for the first quarter to a decidedly flaccid 1.7% in the second. And that, after unprecedented amounts of economic “stimulus.” A more modest man might feel a twinge of embarrassment, perhaps even the onset of “performance anxiety.” But Bernanke is not that man. He has pledged, in the face of demonstrable impotence, to do “whatever it takes” to get the economy…“up.”

Alas, the employment situation, another Fed Fetish, has softened too, with official unemployment still above 8%. Factor in discouraged non-workers and those forced to take part-time jobs and we’re looking at closer to 15%. John Williams at ShadowStats, who computes the figures the “old way,” pre Clintonian fiddling, puts the rate at almost 23%…nearly 1 in 4.

But unemployment today is nothing compared to what it might be tomorrow. According to the August report from the US Bureau of Labor Statistics, “From April to July 2012, the number of employed youth 16 to 24 years old rose 2.1 million to 19.5 million.”

The BLS was quick to couch its statement, however, explaining that:

“The youth labor force (16- to 24-year-olds working or actively looking for work) grows sharply between April and July each year. During these months, large numbers of high school and college students search for or take summer jobs, and many graduates enter the labor market to look for or begin permanent employment.”

Even so, the number of unemployed youth increased by 90,000 from the same period in 2011. The generation unlucky enough to find itself graduating today is far worse off than its predecessors. Confirmed the BLS, “The labor force participation rate for all youth — the proportion of the population 16 to 24 years old working or looking for work — was 60.5 percent in July […] 17.0 percentage points below the peak rate for that month in 1989 (77.5 percent).”

Youth Unemployment Cartoon
Politicians to Youth: You’re Screwed!

Today, one quarter of employed youths show up to work in the hospitality sector, which includes scraping coffee residue from Starbucks’ grinders and sweeping peanut shells from barroom floors. Another 20% work retail. It’s honest work, to be sure…but it’s not the kind of Mad Men-like middle-management positions promised to them at the beginning of their studies. More to the point, it’s not nearly enough to cover enormous and growing student loan repayments hanging around their necks.

According to a new research study published by the Young Invincibles, a national youth advocacy group, average debt held by students at time of graduation has increased by an astounding 46% since 2000. “Moreover,” the study reveals, “total outstanding debt held by the public has skyrocketed 511% over the past decade.”

And it’s not only the youth straining under this huge and expanding debt burden. Incredibly, people over 60 carry a total of $2.2 million in student loans that are more than 90 days in arrears, prompting the federal government to reduce benefit payments on Social Security checks for 115,000 retirees. Where will those dependent on Social Security find the spare change to repay these debts, you ask? Our guess is, they won’t. But these sexagenarians are merely the first zephyr of the coming tempest. Their $2.2 million overdue is tuppence when one considers the overall size of outstanding student loans, a debt bubble that has now, at more than $1 trillion and counting, come to eclipse even outstanding credit card debt in the US.

“The US Department of Education has become the Countrywide of student lending,” Dan Amoss, editor of Strategic Short Report, warned in these pages recently. “After a lending binge started in 2009, it now holds a massive $452 billion portfolio of student loan receivables, according to Federal Reserve data. This so-called ‘asset’ will become a liability by next year…

“Like Countrywide,” Dan continued, “the government is not honestly accounting for its portfolio risks. This $452 billion portfolio doesn’t even include a few hundred billion more in guaranteed student loans. The chief accountant of the Government Accountability Office (GAO) wrote a report dated December 2011 on the federal government’s accounting deficiencies: ‘The deficiencies, for the most part, involved credit subsidy estimation and related financial reporting processes.’ In other words, accounting for below-market loan interest rate subsidies is complex, and the government is not adequately disclosing the risks it is taking.”

Borrowers lured in by artificially manipulated rates? Government intervention distorting markets? Policies aimed at assisting people blowing up right in their faces?

We’re shocked, Fellow Reckoner. No, we’re FLABBERGASTED!

And now, all eyes are on the Fed Chairman to mend the situation. What is poor ol’ Ben “The Hurricane Whisperer” Bernanke to do?

“Destiny is demography,” Auguste Comte once declared. The French philosopher made another important observation too. “The dead governs the living,” he said.

Graduating students have zombie politicians to thank for their dismal lot. In their case, it’s the undead calling the shots.

Joel Bowman
for The Daily Reckoning

The Daily Reckoning