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Hard Times

Richard Benson
Jul 9, 2009

Our measure of how bad it is in this economy for a broad swath of Americans can be analyzed by asking three basic questions: Are people working, are they making any money, and do they have any money in reserves? To answer these questions and more, below are some shocking facts!

First, are people actually employed? The glum employment situation continues to unravel and on the summer jobs front, 16-19 year olds are facing the worst environment since 1954, before their parents were even born. In 2007, 51 percent of graduating college students had jobs lined up before graduation. This year, less than 20 percent had jobs. Because they can't find work, the youth of America are staying at home with their parents (maybe forever) and parents can be categorized as "payrents."

The number of unemployed workers reported in the "headline" unemployment rate of 9.5 percent is now 15 million, but only seven million are eligible and collecting unemployment insurance benefits. Each week, when initial unemployment claims of over 600,000 are announced, it's a virtual certainty that a million people have actually lost their jobs, considering 400,000 workers are out of the work force and not eligible to file. When a million jobs a week are lost, there is no way our current economy can replace them!

In America, only about 60 percent of workers are eligible to file for unemployment benefits. The rest are part-time, contract workers, and those that worked only a short time and don't qualify to receive benefits.

An alternative measure of unemployment reported by the Bureau of Labor Statistics ("BLS") shows a 16.5 percent unemployment rate. This measure, called the U-6, includes workers who would like a job but have stopped looking, and part-timers who want full-time work (there are approximately nine million part-timers seeking full-time employment). Unemployment and underemployment are massive.

Second, is anyone making any money? With 28 million people working part-time and 10 million self-employed (this includes dog walkers, yoga instructors and independent contractors, such as real estate sales agents), 38 million Americans in the work force are working but not making that much. Many firms and state and local governments have also begun to cut payroll hours and eliminate overtime altogether. The weekly hours worked were at their lowest level ever recorded in the BLS survey - if you don't work, you don't get paid! But the survey is very likely still overestimating personal income (hourly wages are multiplied by hours worked to give a good indication of income), so another way to measure income is to examine tax collections. If you are working part-time or are self-employed you're counted as working in the survey, but if you're not paying taxes, it's because you didn't make any money! State income tax receipts from January 2008 - April 2009 were down 26 percent from the year before, and money wired back to homes in Mexico from America is down 20 percent.

Small businesses are also failing at a catastrophic rate. These businesses used to be a major source of job growth and income, but not anymore! Mom and Pop businesses have been gutted and many used personal credit cards to fund their operations, resulting in a default rate that has grown to 12 percent on small business credit cards.

Third, does anyone have any financial resources? The government recently reported the savings rate had increased to 7 percent, but with personal income so grossly overestimated, it's likely the numbers are way off. There's a big difference between paying down your credit card debt (as your credit limit is cut), and stashing real cash in the bank. Cash in the bank is real savings, paying down credit card debt is not. But since the Fed cut interest rates to zero, many older Americans, who relied on the interest to help pay the bills, are scrambling and uncertain about the future.

In addition, 51 million Americans are collecting Social Security benefits. Nobody would consider this demographic rich or well to do. Indeed, given the high cost of living, you don't live on Social Security, you simply subsist. Another 12 million people are collecting Social Security Disability ("SSI"). (If you're 55 and used to work at an auto plant and have exhausted your unemployment benefits, SSI is likely where you will find your friends until you turn 62 and start collecting Social Security.) And still another 34 million people are collecting food stamps, and the total is rising at the rate of 4 million a year. (To be eligible for food stamps you need to have less than $2,000 in resources such as a bank deposit).

RECAP: Seven million people are collecting unemployment benefits, and another eight million are unemployed and collecting nothing! There are 38 million part-time or self employed workers, and 2.4 million people in jail (1 in 100 adults). 51 million are collecting Social Security benefits, 12 million are on Social Security Disability, and 34 million are on food stamps. What financial resources can this huge segment of the population have? Not much!

I bet no one under the age of 70 can remember an economy this bad. Tens of millions of Americans subsisting on government handouts are one paycheck away from homelessness and hunger. The hard times we are experiencing today, due to the misalignment of over-consumption financed by debt, are severe. It will take at least a few more years to work down the debt, build real savings and put the economy on a sound footing. If the American press focused on the economic statistics that reflect the seriousness of the economic catastrophe, the officials in Washington will surely panic. Americans could step up to the plate and ask for some of that bailout money that Wall Street received. It's time to get grumpy and politically active!

You have to wonder what the government will do to try and jumpstart the dying economy. We expect three major policies by the end of the year:

First, there will be another massive stimulus for job creation;

Second, there will be another round of quantitative easing from the Federal Reserve to finance the job creation stimulus; and

Third, expect a major devaluation of the dollar to encourage exports and discourage imports.

God help the Federal Deficit and the saver because printing money like crazy, and devaluing the dollar, will only get inflation started...

...Whoever said that Hard Times weren't interesting?

[Editor's comment: Got Gold?]

Jul 9, 2009
Richard Benson

Specialty Finance Group, LLC
2505 S. Ocean Boulevard - Suite 212
Palm Beach, Florida 33480
1 800-860-2907

Richard Benson, SFGroup, is a widely-published author on securitization and specialty finance, and a sought after speaker at financing conferences on raising equity for mid-market companies.

Prior to founding the Specialty Finance Group in 1989, Mr. Benson acted as a trading desk economist for Chase Manhattan Bank in the early 1980's and started in the securitization business in 1983 at Bear Stearns, and helped build the early securitization businesses at Citibank and E.F. Hutton.

Mr. Benson graduated from the University of Wisconsin in 1970 in the Honors Program in Math, and did his doctoral work in Economics at Harvard University. Mr. Benson is a member of the Harvard Club of New York and Palm Beach.

The Specialty Finance Group, LLC is a Florida Limited Liability Company and is registered with FINRA/SIPC as a Broker/Dealer.

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