Unless you live off the interest of your interest, you’re poor. Got that? If you think you’re middle class, then you just think you have a shot at getting rich. In the USA, that’s in the past unless you’re ready to participate in some truly massive crimes. Born poor, you stay poor, because that’s the way it is and you can check the statistics on that for yourself. I’m here today to talk about how to calculate the rate of decrease of wealth among the poor in the USA.

It’s simple. Look at the interest rates they’re paying on credit cards, houses, cars, and other loans. The interest rate is money they are boxing up and shipping to the richest of the rich, because that’s who’s lending the money at interest. I’ll start with the credit cards. The average interest rate on credit cards in the USA is just short of 17% and the average credit card debt in the USA is $16,000 per household. Now, yes, I know those are averages: the poorest folks don’t have credit card debt and the folks that call themselves middle class have many times more than that in credit card debt, but they’ll serve for my illustration just fine. 17% of $16,000 is $2720 in interest paid by every household in the USA on credit cards. There are 114 million (and change) households, so that’s roughly 113 million households that aren’t in the top 1%, so they’ll be paying that interest… so that’s about $308 billion dollars a year that go from the bottom to the top in credit card interest. Money flows uphill, people.

Put another way, credit card debt provides over $300,000 in income every year for the top 1%. They don’t have to work for it: you do. That 6% of average household income going to pay only the interest on the credit cars is paying for a year-round vacation for those beautiful people at the top. But wait – there’s more!

College loans in the USA are at $1 trillion now. That’s more debt than what’s in the credit cards. The average interest rate on student loans is 7.9%. That’s an additional $79 billion flowing uphill. If we have the households average all this out again, that’s $700 per household per year. That average household income of $44,389 just got squeezed by another 1.5% What could we do with a 7.5% pay increase? Well, the richest folks certainly don’t want to end their gravy train, so you’re not having that.

Don’t believe me? Look at how real wages have been flat or declining for a very, very long time. At the same time, our banks made it possible to borrow money in ways that it’s never been borrowed before. That’s two sources of increased profits: making you borrow more and paying you less than what you’re worth.

Then there’s mortgages: if credit cards are #3 and student loans are #2, then mortgages are #1. While it was relatively easy to get numbers on the first two things, mortgages seem to be a good deal more obfuscated in terms of aggregate data. No surprise to me: This is an industry in which 20% of the professionals have a felony conviction and the main real estate lobbying group has made sure that property purchases are exempt from money laundering restrictions – which means that high-end property in the USA is the perfect sink for the profits of crime.

This helped, though: http://www.cnt.org/repository/heavy_load_10_06.pdf. Fun fact: people that spend less money on houses away from city centers, on average, pay considerably more for transportation. 48% of household income goes in that direction – money for the real estate people, mortgage banks, car finance companies, and big oil.

Working families – under $50,000 in annual household income – pay another 9% of income in transportation costs. They also pay 15% of their income for food and 7.7% for medical care. 57 + 15 + 7.7 + the 7.5 from above = 87.2% of income… that leaves $5800 per year for everything else in our average family of $44K income. Could be worse – and it is for those closer to the poverty line – but it could also be better, without those interest payments going up to the people that really don’t need more of our money.

It could be much, much better as well if we didn’t have banks being run as casinos for the benefit of those rich people that aren’t content to simply hit us up for our spare cash every year. No, they need to make massive gambles in which they gain all the profits but – thanks to their lobbyists and de facto ownership of Congress – have zero risk of paying out to cover any losses. Trillions of dollars of losses.

Each trillion a megabank loses means $8849 per non-rich household in America. The nine biggest banks in the USA are on the hook for over $228 trillion in derivatives that are on the razor’s edge of going bust – that would be over $2 million per household in the USA when the bill comes due.

Don’t worry: we won’t have to pay it all at once. I’m sure we can arrange a payment plan.

… as it turns out, I wasn’t paranoid enough. To all my former Economics students, I apologize.

It seems as though the major banks have been colluding to rig the main interest rate in the world, the LIBOR, for their fun and profit since 2005. That means the guys that kept hollering the loudest to let the market decide efficient outcomes were in a back room, letting their own greed decide the best outcome for themselves, no matter who they killed to get it.

These guys that demand there be no regulations because banks can self-regulate are also the first to claim innocence when their banks are caught doing heinous things. Why? They claim there’s no way they can watch over all the far-flung operations of their banks.

When guys like that pulled stunts like that in the Roman Republic, the senators there passed ex post facto laws that made stuff like that retroactively illegal and then had the culprits sewn up in bags full of snakes and then tossed into the Tiber. The British Parliament considered a similar course in the wake of the South Sea Bubble of 1721, but chose instead to personally fine each man involved in that financial crisis. In the USA, we can’t do ex post facto laws and corporations have limited liability – the perfect combination for the perfect crime, one in which the government itself is a partner.

So, in sum, interest rates are not set by the market. They are set by gangsters that are out to get every last bit of your money. I’ll be teaching that from now on.

… follow the real interest rate. The nominal rate, what banks and other lenders quote, is only part of the story. Subtract the rate of inflation from that rate and what you have left is the real interest rate. The real interest rate controls the availability of money to borrow, the strength of our currency, our balance of trade, and the severity of the national debt.

The real interest rate also measures the rate at which income disparity is growing. In simpler terms, the higher the real interest rate, the faster the middle class disappears. While we may look at the real interest rate as it pertains to the prime lending rate or the interbank lending rate (also known as the Federal Funds Rate, in case you’re in AP Economics) and see a very low real interest rate, those rates don’t apply to the poor and the middle class. They’re paying the real interest rate as it pertains to credit cards and consumer loans, and those rates are quite high. They’re higher than they used to be in the 1970s, which explains why the middle class has been on the run since that decade.

Even with a very low real interest rate for one and all, the money still flows from borrowers to lenders and the income/wealth gap continues to widen. Whatever other benefits borrowing may provide, the iron rule is that it will enrich the lender and impoverish the borrower, unless the borrower can pass his costs on to his customers via prices. Therefore, borrowing with interest will further impoverish the poor as sure as the moon goes around the earth.

The New York Fed posted an apology for not predicting the economic catastrophe that began in 2007-2008. Better late than never, right? Except this apology dodges responsibility…

The article describes how nobody could have foreseen the catastrophic events of 2007 and on. To be sure, nobody in the rational behavior, efficient market ivory towers could foresee them because their own ideology required that they be blind to market failures. They were weather forecasters that denied the existence of tornadoes and hurricanes; geologists that refused to admit that earthquakes can happen; doctors that could not imagine the possibility of an epidemic. They were useless, in a word.

No, they were worse than useless. They got politicians and academics alike to deny reality and to strip away protections that were necessary to keep disaster from happening. They encouraged a host of policies – subprime lending, home equity loans, no regulation for credit default swaps, et cetera, et cetera – that people not in power said would lead to disaster. Those who were in power became the biggest gang of criminals the world has seen by using their money and influence to have legislatures make their actions legal.

Many of us outside the government and outside the ivory towers saw the reality and knew we were in for a disaster. The double bubble in housing and government debt would lead to a major economic collapse. We called it. We couldn’t say precisely when, but it was obvious it was going to happen, and it did. We also made the call that Europe was coming apart economically and, well… see for yourself.

We live in an age of irresponsibility. People that hold power deny their mistakes with an arrogance that transcends logic. Heads do not roll. The intelligence failure of 9/11 cost more lives than jobs. The same can be said for the terrible destruction of New Orleans in the 2005 Hurricane. In this latest, economic disaster, the perpetrators of the crimes were, for the most part, rewarded. Madoff is doing time. Who else?

So the New York Fed issues its non-apology at 6PM on Black Friday… it’s even dodging the attention it should be enduring for shutting its eyes to the greatest financial disaster in 70 years. Worse, as an Economics teacher, I’m supposed to teach the stuff that got us into this mess like it’s accurate and useful. The establishment’s refusal to recant is particularly galling.

Irving Fisher was the biggest bull market booster in 1929. When he realized he was dead wrong, he abandoned his wrong ideas and developed a workable model for analyzing economic depressions. I can appreciate that. The current crowd has no such ability or desire to recant. It’s as mentally paralyzed as the Chinese Communist Party in the midst of the Great Leap Forward: ideology is more important than reality. We see this in the Fed and we see this in Congress. They tell us their little ivory lies, and even if we don’t believe them, we are bound by their vision.