Consumer Inflation Threatens Too Big to Fail Banks

by: Russ Winter

I start this off by asking you to consider an essential fact: The 10 largest banks hold 80% ($11 trillion) of all the assets in the FDIC system. The largest four "too big to fails," with $7 trillion in assets, are in effect the majority of the banking system. As such, what they want pretty much rules the nation, and also explains the corrupt support-at-any-cost responses from government to the situation.

  • Bank of America (NYSE:BAC): $2.268 trillion assets

  • JP Morgan Chase (NYSE:JPM): $2.118 trillion assets

  • Citigroup (NYSE:C): $1.914 trillion assets

  • Wells Fargo (NYSE:WFC): $1.258 trillion assets

  • Goldman Sachs (NYSE:GS): $911 billion assets

  • Morgan Stanley (NYSE:MS): $808 billion assets

  • Metlife (NYSE:MET): $731 billion assets

  • Taunus (NYSE:DB): $373 billion assets

  • HSBC (HBC): $344 billion assets

  • US Bancorp (NYSE:USB): $308 billion assets

The second element is the concentration of wealth in Banana Republic America. The bottom 80% for all practical purposes is broke, has few savings or reserves or, at minimum, is in poor shape to handle an inflation-induced recession, let alone a bust.



Wall Street seems to pass off propaganda that the top 5% holding 69% of U.S. wealth can carry the U.S. economy. Certainly, if they are doing well on the financial assets and commodity speculation, they will feel confident. They are insulated up to a point from the inflationary effects that are now biting the rest of the population. So until there is another financial bust or even correction, which I think is soon, for the sake of the argument let's just set this group aside as "healthy" at the moment. Once the markets fall we will need to revisit this in a flash.

What is completely missing in this equation, however, are the large debts still owed by the bottom 95% of the population to the too big to fail (TBTF) banking system.

Chart source: IMF

After trillions in government-borrowed debt has been spent to prop up the TBTF system and provide subsistence transfer payments, subsidies and tax rebates to much of the rest of the population, it is really fair to ask about the perfomance of that debt now. The answer is that it is still hanging out there like the sword of Damocles. Banks and mortgages make up of 74% of the household debt held by banks. In 2010, a little of the distress came off these first lien mortgages, but some of this (beyond government props) can be explained by an increase of loans in foreclosure and charge offs.

Click to enlarge:

Chart source: FDIC

First, I would argue that the slight improvement in mortgage delinquencies during the last year is the result of a concerted effort to modify loans. Second, there was a large refi wave in the summer of 2010. That wave is over with new applications dropping by more than half. Third, housing prices stabilized mid-year, but now prices are generally being reported as rolling over. An estimated 30% of homeowners are underwater. Fourth, the government has been a huge player, throwing money and resources at the general population to keep them in the game. But by all indications, that source is peaking and rolling over. The slightest additional austerity will accelerate this.

Lastly, and I suggest this will be critical, consumers are only now feeling the intensifying wave of essentials, with inflation now taking hold and emptying out their pocketbooks. It is important also to state that businesses can only cope with input costs inflation in two ways: Passing on costs or reducing overhead. A tried and true method in modern business practices are layoffs. Because housing is not participating in this essentials inflation, it will be even more difficult to service this debt. Further, the government is playing a game of rigging Social Security payments to some fantasy zero inflation number.

Thus, this is inflation of the most toxic kind. It will also be the final nail into the coffins of the TBTF banks. Worse, I fear some consumers will try to survive by using credit again to pay for essentials like food and energy. If so, banks will suffer even more credit losses.

It is essential to dispense with the absurd notion that inflation somehow benefits this population, as in truth it's the exact opposite. It punishes them mercilessly. The Lohmann chart shows the effects of mere gasoline inflation. So far, gasoline prices are up 60 cents from last year, which translates into an $871 hit per household. The impact on the bottom 80% of the population is far more than the 1.74% of median income indicated on the chart.

The second chart, showing the MIT billion price survey, indicates that the consumer has experienced 6% annualized inflation during the last three months (100.98 on November 24, 102.53 on February 25) at the retail level. The parabolic look of the MIT chart speaks for itself.

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Source: MIT price survey

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.