Are much lower oil prices good news for the U.S. economy? Only if you like collapsing capital expenditures, rising unemployment and a potential financial implosion on Wall Street. Yes, lower gasoline prices are good news for the middle class. I certainly would rather pay two dollars for a gallon of gas than four dollars. But in order to have money to fill up your vehicle you have got to have an income first. And since the last recession, the energy sector has been the number one creator of good jobs in the U.S. economy by far. Barack Obama loves to stand up and take credit for the fact that the employment picture in this country has been improving slightly, but without the energy industry boom, unemployment would be through the roof. And now that the “energy boom” is rapidly becoming an “energy bust”, what will happen to the struggling U.S. economy as we head into 2015?
At the start of this article I mentioned that much lower oil prices would result in “collapsing capital expenditures”.
If you do not know what a “capital expenditure” is, the following is a definition that comes from Investopedia…
“Funds used by a company to acquire or upgrade physical assets such as property, industrial buildings or equipment. This type of outlay is made by companies to maintain or increase the scope of their operations. These expenditures can include everything from repairing a roof to building a brand new factory.”
Needless to say, this kind of spending is very good for an economy. It builds infrastructure, it creates jobs and it is an investment in the future.
In recent years, energy companies have been pouring massive amounts of money into capital expenditures. In fact, the energy sector currently accounts for about a third of all capital expenditures in the United States according to Deutsche Bank…
US private investment spending is usually ~15% of US GDP or $2.8trn now. This investment consists of $1.6trn spent annually on equipment and software, $700bn on non-residential construction and a bit over $500bn on residential. Equipment and software is 35% technology and communications, 25-30% is industrial equipment for energy, utilities and agriculture, 15% is transportation equipment, with remaining 20-25% related to other industries or intangibles. Non-residential construction is 20% oil and gas producing structures and 30% is energy related in total. We estimate global investment spending is 20% of S&P EPS or 12% from US. The Energy sector is responsible for a third of S&P 500 capex.
These companies make these investments because they believe that there are big profits to be made.
Unfortunately, when the price of oil crashes those investments become unprofitable and capital expenditures start getting slashed almost immediately.
For example, the budget for 2015 at ConocoPhillips has already been reduced by 20 percent…
ConocoPhillips is one of the bigger shale players. And its decision to slash its budget for next year by 20% is raising eyebrows. The company said the new target reflects lower spending on major projects as well as “unconventional plays.” Despite the expectation that others will follow, it doesn’t mean U.S. shale oil production is dead. Just don’t expect a surge in spending like in recent years.
And Reuters is reporting that the number of new well permits for the industry as a whole plunged by an astounding 40 percent during the month of November…
Plunging oil prices sparked a drop of almost 40 percent in new well permits issued across the United States in November, in a sudden pause in the growth of the U.S. shale oil and gas boom that started around 2007.
Data provided exclusively to Reuters on Tuesday by industry data firm Drilling Info Inc showed 4,520 new well permits were approved last month, down from 7,227 in October.
If the price of oil stays this low or continues dropping, this is just the beginning.
Meanwhile, the flow of good jobs that this industry has been producing is also likely to start drying up.
According to the Perryman Group, the energy sector currently supports 9.3 million permanent jobs in this country…
According to a new study, investments in oil and gas exploration and production generate substantial economic gains, as well as other benefits such as increased energy independence. The Perryman Group estimates that the industry as a whole generates an economic stimulus of almost $1.2 trillion in gross product each year, as well as more than 9.3 million permanent jobs across the nation.
The ripple effects are everywhere. If you think about the role of oil in your life, it is not only the primary source of many of our fuels, but is also critical to our lubricants, chemicals, synthetic fibers, pharmaceuticals, plastics, and many other items we come into contact with every day. The industry supports almost 1.3 million jobs in manufacturing alone and is responsible for almost $1.2 trillion in annual gross domestic product. If you think about the law, accounting, and engineering firms that serve the industry, the pipe, drilling equipment, and other manufactured goods that it requires, and the large payrolls and their effects on consumer spending, you will begin to get a picture of the enormity of the industry.
And these are good paying jobs. They aren’t eight dollar part-time jobs down at your local big box retailer. These are jobs that comfortably support middle class families. These are precisely the kinds of jobs that we cannot afford to lose.
In recent years, there has been a noticeable economic difference between areas of the country where energy is being produced and where energy is not being produced.
Since December 2007, a total of 1.36 million jobs have been gained in shale oil states.
Meanwhile, a total of 424,000 jobs have been lost in non-shale oil states.
So what happens now that the shale oil boom is turning into a bust?
That is a very good question.
Even more ominous is what an oil price collapse could mean for our financial system.
The last time the price of oil declined by more than 40 dollars in less than six months, there was a financial meltdown on Wall Street and we experienced the deepest recession that we have seen since the days of the Great Depression.
And now many fear that this collapse in the price of oil could trigger another financial panic.
According to Citigroup, the energy sector now accounts for 17 percent of the high yield bond market.
J.P. Morgan says that it is actually 18 percent.
In any event, the reality of the matter is that the health of these “junk bonds” is absolutely critical to our financial system. And according to Deutsche Bank, if these bonds start defaulting it could “trigger a broader high-yield market default cycle”…
Based on recent stress tests of subprime borrowers in the energy sector in the US produced by Deutsche Bank, should the price of US crude fall by a further 20pc to $60 per barrel, it could result in up to a 30pc default rate among B and CCC rated high-yield US borrowers in the industry. West Texas Intermediate crude is currently trading at multi-year lows of around $75 per barrel, down from $107 per barrel in June.
“A shock of that magnitude could be sufficient to trigger a broader high-yield market default cycle, if materialized,” warn Deutsche strategists Oleg Melentyev and Daniel Sorid in their report.
If the price of oil stays at this level or continues to go down, it is inevitable that we will start to see some of these junk bonds go bad.
In fact, one Motley Fool article recently stated that one industry analyst believes that up to 40 percent of all energy junk bonds could eventually go into default…
The junk bonds, or noninvestment-rated bonds, of energy companies are also beginning to see heavy selling as investors start to worry that drillers could one day default on these bonds. Those defaults could get so bad, according to one analyst, that up to 40% of all energy junk bonds go into default over the next few years if oil prices don’t recover.
That would be a total nightmare for Wall Street.
And of course bond defaults would only be part of the equation. As I wrote about the other day, a crash in junk bonds is almost always followed by a significant stock market correction.
In addition, plunging oil prices could end up absolutely destroying the banks that are holding enormous amounts of energy derivatives. This is something that I recently covered in this article and this article.
As you read this, there are five “too big to fail” banks that each have more than 40 trillion dollars in exposure to derivatives. Of course only a small fraction of that total exposure is made up of energy derivatives, but a small fraction of 40 trillion dollars is still a massive amount of money.
These derivatives trades are largely unregulated, and even Forbes admits that they are likely to be at the heart of the coming financial collapse…
No one understands the derivative risk positions of the Too Big To Fail Banks, JP Morgan Chase, Citigroup, Bank of America, Goldman Sachs or Morgan Stanley. There is presently no way to measure the risks involved in the leverage, quantity of collateral, or stability of counter-parties for these major institutions. To me personally they are big black holes capable of potential wrack and ruin. Without access to confidential internal data about these risky derivative positions the regulators cannot react in a timely and measured fashion to block the threat to financial stability, according to a National Bureau of Economic Research study.
So do we have any hope?
Yes, if oil prices start going back up, much of what you just read about can be averted.
Unfortunately, that does not seem likely any time soon. Even though U.S. energy companies are cutting back on capital expenditures, most of them are still actually projecting an increase in production for 2015. Here is one example from Bloomberg…
Continental, the biggest holder of drilling rights in the Bakken, last month said 2015 output will grow between 23 percent and 29 percent even after shelving plans to allocate more money to exploration.
Higher levels of production will just drive the price of oil even lower.
At this point, Morgan Stanley is saying that the price of oil could plummet as low as $43 a barrel next year.
If that happens, it would be absolutely catastrophic to the most important industry in the United States.
In turn, that would be absolutely catastrophic for the economy as a whole.
So don’t let anyone tell you that much lower oil prices are “good” for the economy.
That is just a bunch of nonsense.
During a recent interview with Diane Sawyer, Hillary Clinton claimed that Bill and her were “dead broke” when they left the White House. And then on Sunday, Hillary told the Guardian that they are not “truly well off” despite having earned about a hundred million dollars since leaving the White House and owning a couple of luxury homes. This is yet another shocking example of how disconnected our political elite have become to the rest of the American people. Perhaps Hillary Clinton is not “truly well off” when compared to some of the ultra-wealthy individuals that she rubs shoulders with at Democratic fundraisers, but according to numbers provided by the Social Security Administration, the Clintons would easily be in the top 0.01% of all income earners in America since leaving the White House. So was Hillary Clinton joking, or is she really this out of touch with ordinary Americans?
Perhaps she thought that she could just tell a little white lie about how wealthy Bill and her truly are. After all, 66 percent of Americans believe that when it says “natural” on a food label that it actually means something. It seems like people will fall for almost anything these days.
Unfortunately for Clinton, people are not letting this one go. In fact, CNN anchor Alison Kosik recently burst out laughing on air in response to Clinton’s claim that she is not “truly well off”…
If Hillary Clinton really does want to see what “dead broke” actually looks like, she should travel to some of the deeply impoverished communities in the heartland of America.
For instance, just consider what the BBC found when they interviewed two young kids being raised by a single mother in Iowa.
10-year-old Kaylie Haywood and her brother spend much of their time desperately hungry and thinking about food…
And of course Kaylie and Tyler are far from alone. In fact, there are 49 million people
that are dealing with food insecurity in America right now, and that number is growing. For more sobering examples of crushing poverty in rural communities all over the United States, please see my previous article entitled “Vast Stretches Of Impoverished Appalachia Look Like They Have Been Through A War
But Hillary Clinton and politicians like her usually only interact with those kinds of people when it is time to win another election.
And that goes for most politicians from both political parties.
For the moment, life is good for the elite. In places such as New York City, Washington D.C. and San Francisco, unemployment is relatively low and home prices are soaring.
But for the bottom half of the country, things just continue to get even worse. Just consider the following numbers…
-According to one recent survey, 26 percent of all Americans have absolutely no emergency savings whatsoever.
–Approximately two-thirds of all Americans do not have enough money saved up to cover six months of expenses if an emergency arose.
-Close to half of those living in Detroit cannot pay their water bills. It is being reported that the United Nations may step in to help.
-One report discovered that 60 percent of all children in the city of Detroit are living in poverty.
-One out of every three grocery store workers in the state of California is currently receiving public assistance.
-According to the U.S. Census Bureau, about one out of every six Americans is now living in poverty. The number of Americans living in poverty is now at a level that has not been seen since the 1960s.
-Even if you do have a job that does not mean that you are able to escape poverty in the United States today. In fact, about one out of every four part-time workers in America is now living below the poverty line.
-According to numbers provided by Wal-Mart, more than half of their hourly workers make less than $25,000 a year.
-At this point, one out of every four American workers overall has a job that pays $10 an hour or less.
-It is a number that does not seem right, but it is actually true that half the country makes $27,520 a year or less from their jobs.
-Right now, one out of every six men in America in their prime working years (25 to 54) do not have a job.
-Half of all college graduates are still financially dependent on their parents even when they are two years out of school.
-One study discovered that nearly half of all public students in the United States come from low income homes.
-It is being projected that approximately 50 percent of all U.S. children will be on food stamps at some point in their lives before they reach the age of 18.
-It is hard to believe, but right now 1.2 million students that attend public schools in America are homeless. That number has risen by an astounding 72 percent since the start of the last recession.
-According to a Feeding America hunger study, more than 37 million Americans are now being served by food pantries and soup kitchens.
-Numbers from the U.S. Census Bureau reveal that 49.2 percent of all Americans are now receiving benefits from at least one government program.
But if you still feel sorry for Hillary Clinton after reading all of this, there is a way that you can help.
For just pennies a day, you can contribute to “The Hillary Clinton Fund For Broke Politicians”. In the video posted below, you can see how ordinary Americans respond when they are asked to donate to the fund…
So what do you think about all of this?
Are we being too harsh on Hillary Clinton or does she deserve the flak that she has been getting?
Please feel free to share what you think by posting a comment below…
There are hundreds of formerly prosperous communities all over America that are being steadily transformed into rotting, decaying hellholes. The good paying middle class jobs that once supported those communities are long gone, and they have been replaced with low paying service jobs if they have been replaced at all. When you visit those communities, it is almost as if all of the hope has been sucked right out of the air. It can be absolutely heartbreaking to look into the hollow eyes of someone that has totally given in to despair, but unfortunately the number of Americans that are giving up on the economy continues to grow. Today, the labor participation rate is the lowest that it has been in 35 years, and more than 100 million Americans are enrolled in at least one welfare program. It is easy to say that they should just “get a job”, but as I have written about repeatedly, our economy simply is not producing enough jobs for everyone anymore. The percentage of working age Americans with a job has remained at the same level that it was at during the worst days of the last recession, and meanwhile the quality of our jobs has continued to steadily decline. Median household income has fallen for five years in a row, but the cost of living continues to rise rapidly. The middle class is being systematically shredded, and poverty is growing at an alarming rate. The U.S. economy has been in decline for a long time, and the really bad news is that it appears that this decline is about to accelerate.
We are a nation that consumes far more wealth than we produce. We are a nation that buys far more from the rest of the world than they buy from us. We are a nation that has a “buy now, pay later” mentality.
As a nation, we have accumulated the largest mountain of debt in the history of the world. 40 years ago, the total amount of debt in our system (government, business and consumer) was about 2 trillion dollars. Today, it is more than 56 trillion dollars.
The consequences of decades of incredibly foolish decisions are starting to catch up with us, and it is those at the bottom of the food chain that will suffer the most.
I could spend the rest of this article quoting 30 or 40 more statistics that show how bad things are, but today I wanted to do something different. Today, I wanted to share some quotes from some of my readers about what they are seeing where they live. The following are 20 quotes from ordinary Americans about the economic despair that is rapidly growing like a cancer all around us…
“Yes, the American economy is in the pits. I know five languages, have three degrees (including two graduate degrees), and have lived overseas for 16 years and I still can’t find a job in the USA. Everything is broken in America. Maybe I should give up my American citizenship.”
“I’ve been struggling since I finished college in the summer of 2010. My dream is to work in the courts, law enforcement but it’s almost impossible to get a call back for an interview. I interviewed with Garland, Texas PD for a position in the city jail and I made the final 30 of 300 applicants that applied for the 3 positions.”
“I have two Master’s degrees, am 61 years old and earning $10 per hour. What does that say about the current economy?”
#4 Cincinnati Dave:
“I work for one of the banks mentioned in your article. I was in mortgages. I saw all of this coming, so several months ago I asked to get into another area of the bank and fortunately, for me, they granted by request. A lot of people are losing their jobs and there is really no prospects out there for anything else whereby the same kind of money could be made. I will make nothing near what I had been earning but am at the least grateful to be employed. This is all so sad to watch happen.”
“I used to work for WF processing mortgages. The week that the rates went up, I was out of work, not one extra week of work.”
“The U.S. economy is producing mostly part-time, low-wage jobs. These jobs barely pay enough to put food on the table.”
“What I am aware of, is every person I know, who had to switch jobs in the last five years took a pay cut. The smallest cut among my friends was 10%, the average was closer to 18%. No we are heading down a bad road, and we are past the point of no return.”
“After spending most of my life in the middle class, I now consider myself lower class due to age and income. Nothing wrong with that. I am still able to provide myself with what I need and some of my ‘wants’. I am like most retirees today.”
“As many of you already know (but maybe some new members of this blog don’t) – I live in Phoenix, Arizona. Where you live here, determines (to a great extent) your economic well being. Those in the “East Valley” – Chandler, Gilbert, Scottsdale, etc – have the jobs, the opportunities and the transportation. Those in the wealthier areas of the “West Valley” also have these benefits.
The remainder – those who live in the older west side of town, and the south side of town – are mainly forgotten and left to struggle. Many are hard working citizens who just want a chance. Unfortunately, chance costs money, in the view of many people, and as far as the municipal government is concerned, there’s no money for us. It’s cheaper to let them live in a tent in the park, where the cops at least have an excuse to evict them.”
“We are no longer the land of opportunity where anyone can make it.”
“There is no middle class here in the Florida Panhandle. Only folks who have money are the retired and they hate everyone. They own all the antique stores [big business] and most thriving businesses and restuarants. Military is big here, they spend every dime they have on stupid stuff and taxis. Tourist are way down since the spill. Now for the good news. A major food chain here is going out of business [Food World] Another is losing 20k a month to theft. Every other property it seems is up for sale. There are tons of empty real estate [store fronts] There are thrift stores opening everywhere. People are selling goods on the streets, only to be run off by the cops. Crime is getting out of hand. Most don’t go out after dark. Police are beating up the homeless at the beaches. Panhandling now is mainly younger people. Where did all the older ones go?”
“In my area which is SW Florida, it’s been getting tighter for my customers so on a case by case basis I lower my price when they need auto repairs. I still find road signs advertising homes for sale (cash only). Many are advertised as foreclosed.
I’ve started seeing people living out of their cars. It’s not a daily occurrence but I have been noticing it.”
I have been looking after the homeless now for 4 years. Last winter I had an encounter where I was told that I could not hand out blankets and sleeping bags in the dead of winter and that I would be arrested for trespassing if “me and my friends” didn’t move along.
So, I adopted the policy that I would pull up next to them, have them get in the car and we would go for a drive. I would find a place to pull over and give them what they needed then I would drop them off in a different place.
“Around where I live in the SE, things seem ok but I live in a university town. Go to some of the surrounding small towns and it is desolate. Car dealerships closed. Entire streets with abandoned stores. The only activity is a one clerk post office. I know people in our church who are a paycheck away from going over the edge or going over due to a spouse dying and losing one of their social security checks. I see grim. More homeless. A local church is feeding many more including some folks living out of their cars—lots of children. Mostly minimum wage jobs in the area. If it were not for the university and its 34,000 students, this place would look as bad as the smaller communities.”
#15 TN Gal:
“Here in southeast TN we have jobs, mostly part-time or low wage. Our problem these days are so many people dependent on government programs no one wants to work. They do better on programs than working partying and paying for insurance. Housing still very depressed. Seeing more homeless around and local churches straining to provide food. Crime is up and drugs, which were down, are coming back with a vengeance. Middle class here are senior citizens on SS, younger retirees not the older ones. Older ones seem to be struggling. Sad.”
Michael, I live in North Central Illinois. About 60 miles southeast of Chicago. The town we live in has about 8,000 in it. Very “middle class” farm community. Unemployment is high and so is underemployment. We know many people living off 2 part time jobs. That seems to be the norm around here. Or people taking jobs that they would never of considered in the past, just to get by. My son used to work for CAT in Aurora, but was “let go” in order to bring in new workers at a lower pay scale. It took him over a year(which really isn’t bad) to find a part time job with 3M.
“Drive around Los Angeles at 3:00 AM any day and you will see the devastating and pervasive homelessness from 8 to 80 year olds. And the massage parlors and hookers on the streets of used to be ‘high-end’ neighborhoods are exploding. No other way to make a living.”
“A couple of years ago it was reported 9K people a night slept in their cars here in San Diego County. Special car parks are set up in some church parking lots. The cops look the other way. Wonder what the figure is now?”
“My own viewpoint is that a collapse of the current economic system is inevitable and imminent.”
#20 El Pollo de Oro:
“During a conversation on prepping, someone recently said to me, ‘If things get half as bad as these preppers think they will, I don’t want to be alive.’ So, how bad will things will get? Real unemployment is already at Great Depression levels (John Williams’ Shadow Statistics contradicts the BLS’ bogus figures), but when this depression deepens, I think we’ll be looking at 50% or 60% unemployment easily. Much worse than the 1930s. It will be absolute hell for millions of Americans, and when the money stops flowing down to the man on the street, the blood will flow in the streets (Gerald Celente). Lots of it.”
It is so sad to watch one of America’s greatest cities die a horrible death. Once upon a time, the city of Detroit was a teeming metropolis of 1.8 million people and it had the highest per capita income in the United States. Now it is a rotting, decaying hellhole of about 700,000 people that the rest of the world makes jokes about. On Thursday, we learned that the decision had been made for the city of Detroit to formally file for Chapter 9 bankruptcy. It was going to be the largest municipal bankruptcy in the history of the United States by far, but on Friday it was stopped at least temporarily by an Ingham County judge. She ruled that Detroit’s bankruptcy filing violates the Michigan Constitution because it would result in reduced pension payments for retired workers. She also stated that Detroit’s bankruptcy filing was “also not honoring the (United States) president, who took (Detroit’s auto companies) out of bankruptcy“, and she ordered that a copy of her judgment be sent to Barack Obama. How “honoring the president” has anything to do with the bankruptcy of Detroit is a bit of a mystery, but what that judge has done is ensured that there will be months of legal wrangling ahead over Detroit’s money woes. It will be very interesting to see how all of this plays out. But one thing is for sure – the city of Detroit is flat broke. One of the greatest cities in the history of the world is just a shell of its former self. The following are 25 facts about the fall of Detroit that will leave you shaking your head…
1) At this point, the city of Detroit owes money to more than 100,000 creditors.
2) Detroit is facing $20 billion in debt and unfunded liabilities. That breaks down to more than $25,000 per resident.
3) Back in 1960, the city of Detroit actually had the highest per-capita income in the entire nation.
4) In 1950, there were about 296,000 manufacturing jobs in Detroit. Today, there are less than 27,000.
5) Between December 2000 and December 2010, 48 percent of the manufacturing jobs in the state of Michigan were lost.
6) There are lots of houses available for sale in Detroit right now for $500 or less.
7) At this point, there are approximately 78,000 abandoned homes in the city.
8) About one-third of Detroit’s 140 square miles is either vacant or derelict.
9) An astounding 47 percent of the residents of the city of Detroit are functionally illiterate.
10) Less than half of the residents of Detroit over the age of 16 are working at this point.
11) If you can believe it, 60 percent of all children in the city of Detroit are living in poverty.
12) Detroit was once the fourth-largest city in the United States, but over the past 60 years the population of Detroit has fallen by 63 percent.
13) The city of Detroit is now very heavily dependent on the tax revenue it pulls in from the casinos in the city. Right now, Detroit is bringing in about 11 million dollars a month in tax revenue from the casinos.
14) There are 70 “Superfund” hazardous waste sites in Detroit.
15) 40 percent of the street lights do not work.
16) Only about a third of the ambulances are running.
17) Some ambulances in the city of Detroit have been used for so long that they have more than 250,000 miles on them.
18) Two-thirds of the parks in the city of Detroit have been permanently closed down since 2008.
19) The size of the police force in Detroit has been cut by about 40 percent over the past decade.
20) When you call the police in Detroit, it takes them an average of 58 minutes to respond.
21) Due to budget cutbacks, most police stations in Detroit are now closed to the public for 16 hours a day.
22) The violent crime rate in Detroit is five times higher than the national average.
23) The murder rate in Detroit is 11 times higher than it is in New York City.
24) Today, police solve less than 10 percent of the crimes that are committed in Detroit.
25) Crime has gotten so bad in Detroit that even the police are telling people to “enter Detroit at your own risk“.
It is easy to point fingers and mock Detroit, but the truth is that the rest of America is going down the exact same path that Detroit has gone down.
Detroit just got there first.
All over this country, there are hundreds of state and local governments that are also on the verge of financial ruin…
“Everyone will say, ‘Oh well, it’s Detroit. I thought it was already in bankruptcy,’ ” said Michigan State University economist Eric Scorsone. “But Detroit is not unique. It’s the same in Chicago and New York and San Diego and San Jose. It’s a lot of major cities in this country. They may not be as extreme as Detroit, but a lot of them face the same problems.”
A while back, Meredith Whitney was highly criticized for predicting that there would be a huge wave of municipal defaults in this country. When it didn’t happen, the critics let her have it mercilessly.
But Meredith Whitney was not wrong.
She was just early.
Detroit is only just the beginning. When the next major financial crisis strikes, we are going to see a wave of municipal bankruptcies unlike anything we have ever seen before.
And of course the biggest debt problem of all in this country is the U.S. government. We are going to pay a great price for piling up nearly 17 trillion dollars of debt and over 200 trillion dollars of unfunded liabilities.
All over the nation, our economic infrastructure is being gutted, debt levels are exploding and poverty is spreading. We are consuming far more wealth than we are producing, and our share of global GDP has been declining dramatically.
We have been living way above our means for so long that we think it is “normal”, but an extremely painful “adjustment” is coming and most Americans are not going to know how to handle it.
So don’t laugh at Detroit. The economic pain that Detroit is experiencing will be coming to your area of the country soon enough.
Can you support a family on $2,000 a month? Recently, McDonald’s and Visa teamed up to launch a website that is intended to help employees of McDonald’s manage their money. The aspect of the website that is getting a tremendous amount of national attention is the “McDonald’s Budget” which is a sample monthly budget which is designed to help workers plan their spending. You can see a copy of it for yourself right here. This budget is laughably unrealistic, but it is also deeply tragic, because there are tens of millions of American workers that are actually trying to raise families on this kind of an income.
The first thing that you will notice about the McDonald’s Budget is that it expects workers to have two jobs. It is an open admission that working at McDonald’s is not enough to survive. So this budget assumes that the worker will take on a second job which will pay nearly as much as the first one does. Assuming that both jobs pay about the minimum wage, the budget will require about 70 to 80 hours of work every week.
People can put in those kind of hours for a time, but after a while your body starts to break down. I have been there, and I have known many others that have been there.
But let’s assume that the hypothetical worker that this budget is for can work that many hours indefinitely. The budget assumes a yearly income of about $24,000 after taxes, and that would make it a fairly typical budget for a typical working class American.
In the United States today, 47 percent of all U.S. workers make less than $25,000 a year before taxes. So millions upon millions of U.S. workers are trying to make ends meet each month on very limited incomes.
Does the “McDonald’s Budget” provide any solutions for those workers?
Well, this budget allocates $0 for food, so if you plan on following this budget you might want to anticipate fasting a lot each month.
This budget also allocates $0 for gasoline. So either you will have to ride a bicycle or walk everywhere you go.
This budget does not allocate any money for clothing either. If you really need something to wear, perhaps you can take some cash from the “monthly spending money” category and go down to the local thrift store and get something.
In addition, this budget has no money for water, no money for child care and you might as well forget about saving for retirement. But if you work yourself 70 to 80 hours a week, you probably won’t even make it to retirement age anyway.
So what are some of the things that actually are in the budget?
Well, it allocates $20 a month for health insurance.
Wow – where can I sign up for that health insurance plan?
As the Washington Post noted, nobody is going to be able to get health insurance that cheaply…
Low-income individuals receive assistance from Medicaid, but an after-tax income of $24,720 would put Medicaid out of reach in most states. The same point will likely apply to the subsidies offered by Obamacare: An individual with an income of $17,000 in California will be able to get a basic health insurance plan at no cost, but an individual making $28,000 will have to pay at least $137 per month.
So even a young, healthy person will have to pay $100 or more for an individual health insurance policy in most circumstances. Perhaps McDonalds is tacitly admitting that many low-income workers, including McDonalds employees, can’t afford health insurance and simply make do without it.
The original version of the budget also assumed that the worker would spend zero dollars a month on “heating”.
Perhaps McDonald’s just expects their workers to freeze all winter.
The new version of the budget now allocates $50 a month for heating. Perhaps that may work for the state of Florida, but anyone that lives in a northern state knows that it takes a whole lot more than that just to heat up your home to a level that is barely livable during the winter.
This budget is absolutely crazy. But perhaps even more patronizing then the budget itself is the following statement that is made on the website: “You can have almost anything you want as long as you plan ahead and save for it.”
Do they expect anyone to actually fall for that line?
Don’t get me wrong. Working at McDonald’s is great for some people. I worked there myself when I was in high school. But the vast majority of adult Americans need jobs that will enable them to take care of their families. And those kinds of jobs are rapidly disappearing.
Last month, the U.S. economy lost 240,000 full-time jobs. We are about 6 million full-time jobs below the all-time record that was set back in 2007. For much more on this, please see my previous article entitled: “The Decline Of Breadwinner Jobs Has Resulted In The Longest Bread Lines In American History“.
Today, one out of every four American workers has a job that pays $10 an hour or less. A lot of very talented people are cutting hair, flipping burgers or working for temp agencies. Those people should be doing something that takes advantage of their skills and abilities, but the U.S. economy is not producing enough of those kinds of jobs anymore.
Unfortunately, this is only just the beginning. The next major wave of the economic collapse is rapidly approaching, and when it strikes unemployment in this country is going to get much worse.
So don’t put all of your faith in the system, because the system is failing. Even if you do have a good job right now, you could lose it at any moment.
Whatever you can do to become more independent of the system is a good thing. For example, starting up a side business is a wonderful thing. It takes a tremendous amount of effort, but nobody can fire you if you are the boss.
So what do you think of the “McDonald’s Budget”? Please feel free to share your opinion by posting a comment below…
What is happening to you America? Once upon a time, the United States was a place where free enterprise thrived and the greatest cities that the world had ever seen sprouted up from coast to coast. Good jobs were plentiful and a manufacturing boom helped fuel the rise of the largest and most vibrant middle class in the history of the planet. Cities such as Detroit, Chicago, Milwaukee, Cleveland, Philadelphia and Baltimore were all teeming with economic activity and the rest of the globe looked on our economic miracle with a mixture of wonder and envy. But now look at us. Our once proud cities are being transformed into poverty-stricken hellholes. Did you know that the city of Detroit once actually had the highest per-capita income in the United States? Looking at Detroit today, it is hard to imagine that it was once one of the most prosperous cities in the world. In fact, as you will read about later in this article, tourists now travel to Detroit from all over the globe just to see the ruins of Detroit. Sadly, the exact same thing that is happening to Detroit is happening to cities all over America. Detroit is just ahead of the curve. We are in the midst of a long-term economic collapse that is eating away at us like cancer, and things are going to get a lot worse than this. So if you still live in a prosperous area of the country, don’t laugh at what is happening to others. What is happening to them will be coming to your area soon enough.
The following are 24 signs that our once proud cities are turning into poverty-stricken hellholes…
#1 According to the New York Times, there are now approximately 70,000 abandoned buildings in Detroit.
#2 At this point, approximately one-third of Detroit’s 140 square miles is either vacant or derelict.
#3 Back during the housing bubble, an acre of land in downtown Phoenix, Arizona sold for about $90 a square foot. Today, an acre in downtown Phoenix sells for about $9 a square foot.
#4 The city of Chicago is so strapped for cash that it is planning to close 54 public schools. It is being estimated that Chicago schools will run a budget deficit of about a billion dollars in 2013.
#5 The city of Baltimore is already facing unfunded liabilities of more than 3.2 billion dollars, but the city government continues to pile up more debt as if it was going out of style.
#6 Today, the murder rate in East St. Louis is 17 times higher than the national average.
#7 According to USA Today, the “share of jobs located in or near a downtown declined in 91 of the nation’s 100 largest metropolitan areas” between 2000 and 2010.
#8 Between December 2000 and December 2010, 48 percent of the manufacturing jobs in the state of Michigan were lost.
#9 There are more than 85,000 streetlights in Detroit, but thieves have stripped so much copper wiring out of the lights that more than half of them are not working.
#10 The unemployment rate in El Centro, California is 24.2 percent, and the unemployment rate in Yuma, Arizona is an astounding 25.6 percent.
#11 It has been estimated that there are more than 1,000 homeless people living in the massive network of flood tunnels under the city of Las Vegas.
#12 Violent crime in the city of Oakland increased by 23 percent during 2012.
#13 If you can believe it, more than 11,000 homes, cars and businesses were burglarized in Oakland during 2012. That breaks down to approximately 33 burglaries a day.
#14 As I have written about previously, there are only about 200 police officers assigned to Chicago’s Gang Enforcement Unit to handle the estimated 100,000 gang members living in the city.
#15 The number of murders in Chicago last year was roughly equivalent to the number of murders in the entire country of Japan during 2012.
#16 The murder rate in Flint, Michigan is higher than the murder rate in Baghdad.
#17 If New Orleans was considered to be a separate nation, it would have the 2nd highest murder rate on the entire planet.
#18 According to the Justice Department’s National Drug Intelligence Center, Mexican drug cartels were actively operating in 50 different U.S. cities in 2006. By 2010, that number had skyrocketed to 1,286.
#19 Back in 2007, the number of New York City residents on food stamps was about 1 million. It is now being projected that the number of New York City residents on food stamps will pass the 2 million mark this summer.
#20 The number of homeless people sleeping in the homeless shelters of New York City has increased by a whopping 19 percent over the past year.
#21 As I noted yesterday, approximately one out of every three children in the United States currently lives in a home without a father.
#22 In Miami, 45 percent of the children are living in poverty.
#23 In Cleveland, more than 50 percent of the children are living in poverty.
#24 According to a recently released report, 60 percent of all children in the city of Detroit are living in poverty.
As I mentioned at the top of this article, the decline of the city of Detroit has become so famous that it has actually become a tourist attraction. The following is a short excerpt from an article in the New York Times…
But in Detroit, the tours go on, in an unofficial capacity. One afternoon at the ruins of the 3.5-million-square-foot Packard Plant, I ran into a family from Paris. The daughter said she read about the building in Lonely Planet; her father had a camcorder hanging around his neck. Another time, while conducting my own tour for a guest, a group of German college students drove up. When queried as to the appeal of Detroit, one of them gleefully exclaimed, “I came to see the end of the world!”
For much more on the shocking decline of one of America’s greatest cities, please see my previous article entitled “Bankrupt, Decaying And Nearly Dead: 24 Facts About The City Of Detroit That Will Shock You“.
So are there any areas of the country that are still thriving?
Well, yes, there are a few. In particular, those areas that are sitting on top of energy resources tend to be doing quite well for now.
One example is Texas. In recent years people have been absolutely flocking to the state. There are lots of energy jobs, the cost of living is low and there is no state income tax.
But overall, things are really tough out there. Over the past decade America has lost millions of good jobs to offshoring, advancements in technology and a declining economy.
Last year, the United States had a trade deficit with the rest of the world of more than half a trillion dollars. Overall, the U.S. has run a trade deficit with the rest of the world of more than 8 trillion dollars since 1975.
All of that money could have gone to U.S. businesses and U.S. workers. In turn, taxes would have been paid on all of that income which could have helped keep our cities great.
But instead, our politicians have stood idly by as we have lost tens of thousands of businesses and millions of jobs. If you can believe it, more than 56,000 manufacturing facilities have closed down permanently in the United States since 2001.
We have allowed our economic infrastructure to be absolutely gutted, and so we should not be surprised that our once proud cities are turning into poverty-stricken hellholes.
And this is just the beginning. The next wave of the economic collapse is rapidly approaching, and when it strikes unemployment in this country will eventually rise to a level that is more than double what it is now.
When that happens, I wouldn’t want to be anywhere near our rotting, decaying cities.
Did you know that the greatest period of economic growth in American history was during a time when there was absolutely no federal income tax? Between the end of the Civil War and 1913, there was an explosion of economic activity in the United States unlike anything ever seen before or since. Unfortunately, a federal income tax was instituted in 1913, and this year it turned 100 years old. But there was no fanfare, was there? There was no celebration because the federal income tax is universally hated. Sadly, most Americans just assume that there is no other option to an income tax. Most Americans just assume that it has always been with us and that it will always be with us. This year, the American people will shell out approximately $4.22 trillion in state and federal income taxes. That amount is equivalent to approximately 29.4 percent of all income that Americans will bring in this year, and that does not even take into account the dozens of other taxes that Americans pay each year. At this point, the U.S. tax code is about 13 miles long, and those that are honest and pay their taxes every year are being absolutely shredded by this system. But wouldn’t the federal government go broke if we didn’t have a federal income tax? No, actually the truth is that the federal government did just fine before there was an income tax. In fact, the U.S. national debt has gotten more than 5000 times larger since the federal income tax and the Federal Reserve were created by Congress back in 1913. As I have written about previously, the Federal Reserve system was actually designed to trap the United States in a debt spiral from which it could never possibly escape, and the federal income tax was needed to greatly expand the size of the federal government and to soak the American people of the funds necessary to service that debt. But it doesn’t have to be this way. America was once much better off before the income tax and the Federal Reserve were created, and we could easily go to such a system again.
What we desperately need to do is to teach the American people a little history lesson. The truth is that the greatest period of economic growth in U.S. history was between the Civil War and 1913 when there was no federal income tax at all. The following is from Wikipedia…
The Gilded Age saw the greatest period of economic growth in American history. After the short-lived panic of 1873, the economy recovered with the advent of hard money policies and industrialization. From 1869 to 1879, the US economy grew at a rate of 6.8% for real GDP and 4.5% for real GDP per capita, despite the panic of 1873. The economy repeated this period of growth in the 1880s, in which the wealth of the nation grew at an annual rate of 3.8%, while the GDP was also doubled.
Sadly, most Americans cannot even conceive of an economy like that. Most Americans cannot even imagine having a nation without a massively bloated federal government and without an unelected central bank centrally planning our financial system.
But you know what?
It worked. In fact, it worked fantastically well.
The period between the Civil War and 1913 propelled the United States to greatness. Just check out all of the good things that Wikipedia says happened for the U.S. economy during those years…
The rapid economic development following the Civil War laid the groundwork for the modern U.S. industrial economy. By 1890, the USA leaped ahead of Britain for first place in manufacturing output.
An explosion of new discoveries and inventions took place, a process called the “Second Industrial Revolution.” Railroads greatly expanded the mileage and built stronger tracks and bridges that handled heavier cars and locomotives, carrying far more goods and people at lower rates. Refrigeration railroad cars came into use. The telephone, phonograph, typewriter and electric light were invented. By the dawn of the 20th century, cars had begun to replace horse-drawn carriages.
Parallel to these achievements was the development of the nation’s industrial infrastructure. Coal was found in abundance in the Appalachian Mountains from Pennsylvania south to Kentucky. Oil was discovered in western Pennsylvania; it was mainly used for lubricants and for kerosene for lamps. Large iron ore mines opened in the Lake Superior region of the upper Midwest. Steel mills thrived in places where these coal and iron ore could be brought together to produce steel. Large copper and silver mines opened, followed by lead mines and cement factories.
In 1913 Henry Ford introduced the assembly line, a step in the process that became known as mass-production.
But if we didn’t have an income tax, how did we fund the government? Well, we mostly did it with tariffs and excise taxes. The following is from a recent article by Thomas R. Eddlem…
Prior to ratification of the 16th (income tax) Amendment in February 1913, the federal government managed its few constitutional responsibilities without an income tax, except during the Civil War period. During peacetime, it did so largely — or even entirely — on import taxes called “tariffs.” Congress could afford to run the federal government on tariffs alone because federal responsibilities did not include welfare programs, agricultural subsidies, or social insurance programs like Social Security or Medicare. After the Civil War, tariff revenues sometimes suffered under a protectionist policy ushered in by the Republican Party that supplemented federal income via excises on alcohol, tobacco, and inheritances. But before the war, the need for tariff revenue to finance the federal government generally kept the tariff at reasonable levels. During wartime throughout early American history, the Founding Fathers were able to raise additional revenue employing a different method of direct taxation authorized by the U.S. Constitution prior to the 16th Amendment. These alternative taxing methods gave the young American nation embarrassing peacetime budget surpluses that several times came close to paying off the national debt.
So why didn’t we stick with that system?
Well, early in the 20th century the “progressives” and the social planners started to take control in Washington.
And one of the things that “progressives” and social planners love is an income tax. In fact, the second plank of the Communist Manifesto is a “heavy progressive or graduated income tax”.
Of course they promised us that income tax rates would always remain low. And at first they were quite low. The following is from an article by Adam Young…
The presidential election of 1912 was contested between three advocates of an income tax. The winner, Woodrow Wilson, after the ratification of the Sixteenth Amendment, called a special session of Congress in April 1913, which proceeded to pass an income tax of 1% on incomes above $3,000 and applied surcharges between 2% and 7% on income from $20,000 to $500,000.
But once the “progressives” and the social planners get their feet in the door, they always want more.
And we have seen how things have worked out. Today, the American people are being taxed into oblivion.
In a previous article entitled “Show This To Anyone That Believes That Taxes Are Too Low“, I listed dozens of other taxes that the American people pay each year in addition to federal and state income taxes…
#1 Building Permit Taxes
#2 Capital Gains Taxes
#3 Cigarette Taxes
#4 Court Fines (indirect taxes)
#5 Dog License Taxes
#6 Drivers License Fees (another form of taxation)
#7 Federal Unemployment Taxes
#8 Fishing License Taxes
#9 Food License Taxes
#10 Gasoline Taxes
#11 Gift Taxes
#12 Hunting License Taxes
#13 Inheritance Taxes
#14 Inventory Taxes
#15 IRS Interest Charges (tax on top of tax)
#16 IRS Penalties (tax on top of tax)
#17 Liquor Taxes
#18 Luxury Taxes
#19 Marriage License Taxes
#20 Medicare Taxes
#21 Medicare Tax Surcharge On High Earning Americans Under Obamacare
#22 Obamacare Individual Mandate Excise Tax (if you don’t buy “qualifying” health insurance under Obamacare you will have to pay an additional tax)
#23 Obamacare Surtax On Investment Income (a new 3.8% surtax on investment income that goes into effect next year)
#24 Property Taxes
#25 Recreational Vehicle Taxes
#26 Toll Booth Taxes
#27 Sales Taxes
#28 Self-Employment Taxes
#29 School Taxes
#30 Septic Permit Taxes
#31 Service Charge Taxes
#32 Social Security Taxes
#33 State Unemployment Taxes (SUTA)
#34 Tanning Tax (a new Obamacare tax on tanning services)
#35 Telephone Federal Excise Taxes
#36 Telephone Federal Universal Service Fee Taxes
#37 Telephone Minimum Usage Surcharge Taxes
#38 Telephone State And Local Taxes
#39 Tire Taxes
#40 Tolls (another form of taxation)
#41 Traffic Fines (indirect taxation)
#42 Utility Taxes
#43 Vehicle Registration Taxes
#44 Workers Compensation Taxes
Yet even with all of these taxes, our local governments, our state governments and our federal government are all absolutely drowning in debt.
In another previous article entitled “24 Outrageous Facts About Taxes In The United States That Will Blow Your Mind“, I listed a number of reasons why our federal income tax system has become a complete and utter abomination that can never be fixed…
1 – The U.S. tax code is now 3.8 million words long. If you took all of William Shakespeare’s works and collected them together, the entire collection would only be about 900,000 words long.
2 – According to the National Taxpayers Union, U.S. taxpayers spend more than 7.6 billion hours complying with federal tax requirements. Imagine what our society would look like if all that time was spent on more economically profitable activities.
3 – 75 years ago, the instructions for Form 1040 were two pages long. Today, they are 189 pages long.
4 – There have been 4,428 changes to the tax code over the last decade. It is incredibly costly to change tax software, tax manuals and tax instruction booklets for all of those changes.
5 – According to the National Taxpayers Union, the IRS currently has 1,999 different publications, forms, and instruction sheets that you can download from the IRS website.
6 – Our tax system has become so complicated that it is almost impossible to file your taxes correctly. For example, back in 1998 Money Magazine had 46 different tax professionals complete a tax return for a hypothetical household. All 46 of them came up with a different result.
7 – In 2009, PC World had five of the most popular tax preparation software websites prepare a tax return for a hypothetical household. All five of them came up with a different result.
8 – The IRS spends $2.45 for every $100 that it collects in taxes.
9 – According to The Tax Foundation, the average American has to work until April 17th just to pay federal, state, and local taxes. Back in 1900, “Tax Freedom Day” came on January 22nd.
10 – When the U.S. government first implemented a personal income tax back in 1913, the vast majority of the population paid a rate of just 1 percent, and the highest marginal tax rate was just 7 percent.
11 – Residents of New Jersey pay $1.64 in taxes for every $1.00 of federal spending that they get back.
12 – The United States is the only nation on the planet that tries to tax citizens on what they earn in foreign countries.
13 – According to Forbes, the 400 highest earning Americans pay an average federal income tax rate of just 18 percent.
14 – Warren Buffett had an effective tax rate of just 17.4 percent for 2010.
15 – The top 20 percent of all income earners in the United States pay approximately 86 percent of all federal income taxes.
16 – Sadly, as Bill Whittle has shown, you could take every single penny that every American earns above $250,000 and it would only fund about 38 percent of the federal budget.
17 – The United States has the highest corporate tax rate in the world (35 percent). In Ireland, the corporate tax rate is only 12.5 percent. This is causing thousands of corporations to move operations out of the United States and into other countries.
18 – Some tax havens are doing a booming business in setting up sham headquarters for U.S. corporations. For example, the city of Zug, Switzerland only has a population of 26,000 people but it is the headquarters for 30,000 companies.
19 – In 1950, corporate taxes accounted for about 30 percent of all federal revenue. In 2012, corporate taxes will account for less than 7 percent of all federal revenue.
The wealthy have become absolute masters at avoiding taxes, and the poor are not able to pay much.
So who always gets squeezed?
The middle class does.
No matter what our politicians promise us, the hammer is always brought down on the middle class.
And now, according to The Huffington Post, the IRS says that it can even read our old emails without a warrant to make sure that we are paying all of the taxes that we should be…
The IRS apparently interprets that authority very broadly, the documents show: as long as you’ve stored your email in a cloud service like Google Mail, and as long as those emails haven’t been deleted after a few months, the agency thinks it doesn’t need a warrant to read them.
The idea of IRS agents poking through your email account might sound at the very least creepy, and maybe unconstitutional. But the IRS does have a legal leg to stand on: the Electronic Communications Privacy Act of 1986 allows government agencies to in many cases obtain emails older than 180 days without a warrant.
That’s why an internal 2009 IRS document claimed that “the government may obtain the contents of electronic communication that has been in storage for more than 180 days” without a warrant.
It should be noted that the IRS is claiming that it does not use emails “to target” specific taxpayers, but notice that they are not promising not to use old emails against taxpayers once they are officially being audited or investigated…
“Contrary to some suggestions, the IRS does not use emails to target taxpayers. Any suggestion to the contrary is wrong.”
In any event, the truth is that we have one of the most complicated and one of the most intrusive tax systems in the history of the world.
Don’t the American people deserve better?
What do you think?
Should America go back to a system where there is no income tax and no Federal Reserve?
Please feel free to share what you think by leaving a comment below…