New From Sprott: "The Ongoing Rot In The U.S. Economy"

Fri, Jul 18, 2014 - 11:40am

Hot off the presses, the latest from Sprott Asset Management.

"The Ongoing Rot in The U.S. Economy"

by, Eric Sprott

While most have been conveniently blaming the tepid first quarter -2.9% GDP growth figure on the weather, we believe that it is just another symptom of a much deeper malaise. As we have argued many times before (see, for example, the March 2014 Markets at a Glance), the U.S. economy has been on life support, graciously provided by Central Planners. However hard they try, they will soon realize that no amount of money printing can cleanse the rot of the U.S. economy.

Most tellingly, in a recent interview with Reuters, Bill Simon, Wal-Mart’s Chief Executive Officer for the U.S., said that “We’ve reached a point where it’s not getting any better but it’s not getting any worse – at least for the middle (class) and down.”1

Indeed, if one looks past headline figures, things are not really getting better. As shown in Figure 1, real disposable income per capita in the U.S. has increased only modestly since the Great Recession. However, all of this increase is due to Government Transfers, not from an improvement in the real economy. If we exclude those transfers from the numbers, disposable income per capita is actually lower than it was at the end of 2005 and has been painfully flat since 2011. Also, those numbers assume that the headline Consumer Price Index (CPI) accurately represents people’s purchasing power.

In this Markets at a Glance, we investigate the U.S. consumer and show that for a large portion of the population, things are not anywhere close to being better, in fact they are worse than before the recession.

First of all, there is income inequality. Those in the top 20% have seen their incomes increase while those in the bottom 40% have stagnated or even decreased. Figure 2 shows the average after-tax income of U.S. households by quintiles, as measured by the Bureau of Labor Statistics’ Consumer Expenditure Survey, since 2005. It is hard to see from the chart, but in 2012 for the lowest 20% (Quintile 1) of U.S. households, the average annual after-tax income is $10,171 (up from $9,220 in 2005). Similarly, the next 20% is not much better off, with incomes averaging $27,743 (up from $25,200 in 2005). By contrast, during the same period, the average household income for the top earning quintile (Quintile 5) increased 14% to $158,024. From our calculations, the bottom 40% of the U.S. population receives approximately 12% of the nation’s after-tax income, while the highest 20% receives more than 50%. So, because of the wide disparity between U.S. households, it is grossly misleading to consider aggregate measures to assess the health of the U.S. consumer. (Note: For the rest of this analysis we combine the bottom two quintiles (bottom 40%) as they share common characteristics and it facilitates the discussion.)

In light of these disparities and to facilitate the analysis, we have combined the two bottom quintiles’ (bottom 40% of households) incomes and expenditures for 2005 (pre-crisis) and 2012 (most recent data from the Bureau of Labour Statistics). Data is presented in Figure 3.

The first panel of Figure 3 shows after tax income for the bottom 40% of households in 2005 and 2012, along with a breakdown of some of its components. All figures are in current dollars (i.e. not adjusted for inflation). Not too surprisingly, average after-tax annual household income increased by a meagre 8%, from $17,463 to $18,844. Wages and salaries, which represent about half of income, increased only 4%. Most of the increase has been in the form of government transfers; social security increased 14%, unemployment and veteran benefits 102% and other forms of public assistance 40%. In fact, of the $1,380 increase in average after-tax income, 93% comes from increases in government transfers.

The second and third panels of Figure 3 show average annual expenses in dollars as well as in percent of after tax income. We also show a breakdown of spending for categories that we consider “non-discretionary”, in the sense that they are unavoidable expenses such as food, shelter, utilities, health care and transportation. Perhaps the most striking (but not that surprising) finding from that table is the fact that 40% of U.S. households spend about 40% more than they make (138% and 145% in 2005 and 2012, respectively)! In case you wonder how a household can spend more than it earns, there are many ways such as: borrowing, selling assets, assistance from family, etc. While incomes increased only 8%, total expenses increased 14%, driven by very large increases in shelter (22%) and health care (18%) spending.

Additionally, an ever increasing proportion of people’s after tax income goes towards what we call “non-discretionary spending”. As shown at the bottom of Figure 3, in 2005 those households used to spend 97% of their income for basic necessities, while in 2012 this has increased to 104%.

Five years into this so-called economic recovery, on average 40% of the poorest U.S. households still spend more than they earn (including government transfers) for basic necessities!

We believe that there are two main reasons for this. The first one has to do with income inequality; as we have shown, incomes have been almost constant since 2005, with most of the increase driven by unsustainable governmental assistance. Furthermore, prices for basic necessities, which constitute the entirety of these households’ budgets, have been increasing at a steady pace. Figure 4 shows the reported price over the past 7 years for energy, food commodities and rents against the “Official” Headline Consumer Price Index (CPI).

Over that period, overall price levels, as measured by the CPI, went up 22% (versus 8% for after tax incomes). However, for the same period, rent, energy and food prices increased 26%, 54% and 115%, respectively. No wonder those same households spend 33% of their income on shelter, 21% on food and 14% on utilities and fuels!

How can we have an economic recovery when there is barely any discretionary disposable income for 40% of the population? As we have shown above, those that have seen their incomes grow and not the ones most likely to spend, while the bottom 40% of households still rely heavily on government assistance, have had stagnant incomes and have been faced with increasing inflation for “non-discretionary” goods that constitute a very large share of their incomes.

There is clearly no recovery…


About the Author

turd [at] tfmetalsreport [dot] com ()


thurd aye
Jul 18, 2014 - 11:51am

falseflag/black swan

sod first,

it aint no fun when they murder people like this.Ukies ,no,assist USG yes?russkies,no. discuss.

Jul 18, 2014 - 12:12pm

#2, #2, #2!!!!!!

I will refrain from making my normal Turd joke when claiming the #2 spot today.

In my own observations, the economy is really starting to slow down, and people are starting to change their buying habits because they have fewer resources on hand.

I do a lot in the tourism industry. A couple of years ago, several suppliers would not even talk to us, because hey were completely booked up. This year, those same suppliers are running deep discounts and aggressive marketing campaigns attempting to scoop up customers. I just finished a trip looking at about a dozen hotels. None were operating at full capacity, and this should be their peak season. Never seen this before. In my opinion, I am seeing an economic slow down unlike any I have ever seen.

Happy weekend everyone

Jul 18, 2014 - 12:22pm

I Guess Turdville

still exists somewhere behind the Great Wall of Pay where the 20% dwell?

As above, so below.

Pleases ignore whining.

Jul 18, 2014 - 12:52pm

As George Bush might say ...

"I'm not much of an expert in this economical stuff, but I think I'd use today to buy a bunch of stocks and get rid of any precious metaloids that I might have. Nice summerish weekend comin' up. What could go wrong?"

wax off

Jul 18, 2014 - 1:05pm

I'm sorry that it has to be this way

But for Turdville to exist at all, it must.

These public forums still exist for those unwilling to shed the whopping 33¢/day. There is no reason why there can't still be a vibrant exchange of ideas on these pages.

Jul 18, 2014 - 1:09pm

New King, New Kingdom, Monetary Transition

Right now the USD is the King and the World Fiat Currency System is the kingdom over which it rules.

Silver (and Gold) will be the next King, and their Kingdom will be a free market.

The systemites who work in the shadows of the WFCS are trying to set up their systemite king (SDR?) but they just don't, and won't, have the Monetary horsepower to make it happen.


The media's (apparently very effective) Theater of Distraction and Misinformation is currently running Airplane II.

Don't be distracted or sucked in to their BRICS/SDR/Death of Money/Big Reset misinformation narrative that would have you believe the USD is going to be replaced by the systemite king, and that the WFCS is going to continue on in perpetuity. This effort is already failing...

The system is already dying as every day more and more people are "THINKING" for themselves and questioning the fundamental legitimacy of all the reports and especially charts that seem to have no connection to reality, or even each other.

...and Silver and Gold are already returning to their Monetary role in the hearts and minds of the people of the world as every day more and more and more people disconnect from the system and turn towards Silver and Gold.

As tipping points are reached, and systemite efforts fail, the world will be making these transitions that most people reading this have already had the good fortune of making.

Only Silver and Gold are Money

Jul 18, 2014 - 1:24pm

Yup and fails to deliver as liquidity gets stuffed,

when all the dollars printed head for USBonzi's. The bonzi's are guaranteed to return principle and you can see from the break below the 2.5 yield on 10's, the recovery meme is blown out of the water, as all will risk principle for a guarantee to get their dollars back. dead head feds of last resort already have stated 29 trillion in buying up global stock markets. It's only 50% of the total the liars state. Get out of your paper asset bubbles folks. If you think you're smarter the the skilled criminals you're kidding yourselves. When the financial iron curtain slams shut, what you have in your 100% possession is it.

US Treasury Admits Collateral Problem In Bond Market; Considers Issuing Ultra Long-Dated Bonds

Submitted by Tyler Durden on 07/18/2014 - 12:18

We noted yesterday once again that The Fed was out en masse demanding investors sell their bonds because "bonds are in a bubble" but not stocks. The reason - as we have explained in great detail - is the repo market is broken due to massive collateral shortages (thanks to the Fed). Today, the Fed admitted it has a problem...


The bottom line is - The Treasury wants to know why all the dealers are so short bonds (even as it urges 'investors' to sell). Furthermore, it is surveying dealers over the need to issue bonds of greater maturity than 30 years in order to fulfill collateral needs.


Century worthless bonzi's to stuff 401K's; pensions. You do remember 100 year maturity century bonds discussed some years back. Coming to a 401K; pension near you or yours.

Jul 18, 2014 - 2:29pm

A slow day (again) in PMs . . .

So, lets look again at 9/11, "a burning of the trolls":

"Backing them up, sources at the highest levels of the Russian government acknowledge having a copy of this highly classified report and have supplied key sections that outline an astounding plot involving Israel and rogue American officials at the highest levels of the Bush administration, a report they may well have gotten from Edward Snowden; a report which many very powerful and very very frightened individuals are trying to suppress.

The report tells of the theft of nuclear weapons from American stockpiles, they named names and gave every detail, their story told of rebuilding those weapons, details of design, hard science, hard facts, proven and supported.The story is now clear – stolen American nuclear weapons, reworked in Israel were used to attack the USA on 9/11.

In a series of articles published by Press TV and New Eastern Outlook in Russia, along with Veterans Today, important questions have been answered such as the exacting details of the plot and details of the science.These are some of the biggest intelligence leaks in history, right there in the open for the public to see.

The response in some circles has been tremendous; military, diplomatic and intelligence groups are asking for more and more details and responding to new and more frightening security threats which these leaks have revealed. Other however, particularly the mainstream media, have been boycotting these stories which have been front page in Europe, Russia and the Middle East. Others, let’s call them “bloggers” or “trolls,” have attacked."

Jul 18, 2014 - 2:38pm

And more from VT on 9/11 . . .

"Chemical analysis done by DOE Sandi was able to identify the chemical/radiation footprint or fingerprint of the warheads based on samples taken after 911 of the fallout at ground zero. (Editor’s note: Nuclear weapon use at ground zero is confirmed from multiple sources)

All plutonium based warheads have a chemical fingerprint that can identify the type of design and where the PU was made and how old it is. This was the 911 blackmail on Bush 1 and 2, the illegal transfer of surplus US nuclear weapons to the Israelis and why the continued cover up, along with the stolen gold and stock fraud that was going on Wall Street etc. According to file ENW57.pdf on page 66. (Editor’s note: Document received and confirmed)

Only a 2 kiloton device was needed to drop the buildings. A 2 kiloton device will produce a fireball of apx 150 to 200 feet in diameter at over 4000 degrees Centigrade. Just large enough to melt the I beams of the central core of the building and drop them in place. The light flash would last less than 1 second and primarily be in the UV light range. Overpressure would only be at 60PSI max and directed upwards with the blast. See underground effect.

Fallout would be minimal and located to within ground zero range only. Radiation would drop to acceptable levels within 72 hrs. after the blast. Most fall out was trapped in the cement dust thus causing all of the recent cancer deaths that we are now seeing in NYC amongst first responders. "

Jul 18, 2014 - 3:09pm


9th, for a top tenner.

A break above trend, usually has a retest back down to trend, the support and launch pad on the retouch, for trend reversal. LOOKING GOOD!!!

sp-ROT-t calls it ROT

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8/21 10:00 ET Existing home sales
8/21 2:00 ET July FOMC minutes
8/22 9:45 ET Markit Manu and Svc PMIs
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Key Economic Events Week of 7/8

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6/18 8:30 ET Housing Starts and Building Permits
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6/19 2:30 ET CGP presser
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