MR. Jones

By: John Mackenzie | Tue, Sep 27, 2005
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There are limits to the seemingly endless parade of DEBT schemes and although U.S. debt has increased several fold since the mid 1990's, the rest of the World has quietly begun removing support for the Dollar Debt. Capital flight began in early 1999 with large inflows into Eurobonds and has continued ever since.

The smart money bailed out years ago.

It's easy to understand why.

Consumer spending has become THE economy and what the Government does not bother to tell you is something so egregious it's almost beyond comprehension.

115,356,000 'Consumer Units' (CU's) are defined as households consisting of (a) occupants related by blood, marriage, adoption, or some other legal arrangement; (b) a single person living alone or sharing a household with others, but who is financially independent; or (c) two or more persons living together who share responsibility for at least 2 out of 3 major types of expenses - food, housing, and other expenses.

Students living in university-sponsored housing also are included in the sample as separate consumer units.

Of the 115,356,000 CU's, the Federal Government can account for ~ 97,391,000 or approximately 84.4%.

Aggregate Reporting Income is neatly divided into quintiles (20% or one fifth) with CU's per quintile @ ~ 19,500,000.

Stay with me here, don't nod off, it's about to get interesting and please remember: 'Income' is stated prior to taxation.

Given the average number of CU's is 2.5, we will use 'Head of Household' for our filing status assumptions for simplicity.

For the lowest quintile or lowest 20%

Income before taxes

$8,201

Average annual expenditures     

$18,492

Income Shortfall

$10,291 or ~125%

Tax Owed

$820

Tax Bracket

10%

Effective tax Rate

10%

________________________
 

For the second quintile or 2nd 20%

Income before taxes

$21,478

Average annual expenditures

$26,729

Income Shortfall

$5, 251 or ~24%

Tax Owed

$2,699

Tax Bracket

15%

Effective tax Rate

12.57%

________________________
 

For the third quintile or 3rd 20%

Income before taxes

$37,542

Average annual expenditures

$36,213

Income Surplus

$1, 239 or ~3%

Tax Owed

$5,109

Tax Bracket

15%

Effective tax Rate

13.61%

________________________
 

For the fourth quintile or 4th 20%

Income before taxes

$61,132

Average annual expenditures

$50,468

Income Surplus

$10,664 or ~17%

Tax Owed

$10,780

Tax Bracket

25%

Effective tax Rate

17.63%

________________________
 

For the fifth quintile or 5th 20%

Income before taxes

$127,146

Average annual expenditures

$81,731

Income Surplus

$45,415 or ~36%

Tax Owed

$28,014

Tax Bracket

28%

Effective tax Rate

22.03%

It is important to note that until we reach the top 20% of CU's reported for 2003, surplus income does not exceed the Tax owed.

Of serious consideration is bottom 40% of the Consumer Units reported to be deeply underwater with respect to income versus expenditures, the 'Great Society' is ensnared in its own trap, the predominant Welfare State. A stratification spreading up the Income Ladder through Monetary Inflation.

The rate of new DEBT growth in CU's is frankly mind boggling; the ratio of household debt to disposable income reached a record of 108.3 percent at the end of 2003 for the CU reporting period above.

We rely on Foreign Capital to elevate this debt bubble at extremely low real interest rates while eating out tax cut cake. The hidden tax of inflation is assuming enormous risks. The simple matter of invading capital stocks to replace the decline in savings has reached its zenith with the Real Estate / Housing.

There is a limit how much DEBT CU's can pay to keep the economy from collapsing.

Collapse may sound overly dramatic, but the DEBT spending boom fed on Chairman Greenspan's latest Bubble is rapidly going to need to contend with rising unemployment and a real economy that is simply folding up under its own weight.

No one appears to want our DEBT.

The Federal Reserve has few choices at this juncture; they can maintain their increasing moral hazard as the buyer of last resort, or they can allow the DEBT to consume itself through default.

We can no longer sustain US DEBT levels, although we will certainly attempt to, the American Way of Life is about to become a 'negotiable' instrument, it is best to wake up to this simple truth sooner than later.


 

Author: John Mackenzie

John Mackenzie

John Mackenzie manages private capital.

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