Wednesday, June 11, 2014

One Overlooked Reason Why the Middle Class Is in Decline

The middle class happily accepts high risk in return for temporary gains in the asset bubble of the day, guaranteeing a steady progression of losses.


It's well known that a major reason why the middle class is in decline is the stagnation of wages, a topic I have covered many times, most recently in What's the Source of Soaring Corporate Profits? Stagnant Wages.

But another often overlooked source of middle class decline is the erosion of middle class wealth. The dynamic behind this long-term trend was indirectly described in The Stock Market Is Like a Fish Tankthe middle class is the majority of fish in the wealth tank that arrive after the gains have been reaped.

In effect, the few who skim most of the financial gain need the middle class to pony up the liquidity and wealth to be skimmed.

In terms of risk, the middle class is always late to the asset class feeding frenzy, meaning that the middle class invests its capital when the opportunities for outsized gains is long-gone and the risk of loss has risen to levels that guarantee declines.

Moving with the majority offers an illusion of low risk. Following the crowd into real estate, tech stocks, tulips, etc. seems like a safe bet because "everybody's making money," but like the fish in the pond, what the middle class is seeing is not "everybody making money" but the relative few who invested early making money and selling to the middle class to reap their outsized gains.

The illusory safety of following the crowd feeds the wealth-destroying dynamic of taking on high risk for either zero gains or huge losses once the asset bubble du jour pops.
The 10 million homeowners who are still underwater (their mortgage debt exceeds the value of their home once selling transaction commissions and fees are subtracted) provide an example of this dynamic. Despite the inflation of an echo-housing bubble (a second bubble in housing valuations, driven by cash buyers), around 25% of all homeowners have no home equity or too little home equity to buy another house should they sell their current home.

Another significant percentage of middle-class homeowners is trapped in their current house by the enormity of their debt and their stagnant income: they no longer qualify for a mortgage or refinance.

There are now three asset bubbles to choose from: housing, stocks and bonds. In each asset class, the majority is convinced that there can only be further gains from here. Risk is seen as low and complacency is high, the classic signs that the outsized gains have already been reaped and all that's left in the tank to divvy up are the risks and losses.

No wonder the wealth of the middle class keeps declining: every temporary gain from joining the investing feeding frenzy sets up staggering losses when the bubble du jour pops and there's nobody left to sell to.

Meanwhile, those who bought early have long since sold out and are now buying outlier assets that are viewed as "risky" by the majority who happily accept high risk in return for temporary gains in the asset bubble of the day, guaranteeing a steady progression of losses and an erosion of real wealth.

Administrative note: due to family obligations, email replies will be near-zero for the next week or so. Thank you for your understanding. 




Get a Job, Build a Real Career and Defy a Bewildering Economy(Kindle, $9.95)(print, $20)
go to Kindle edition
Are you like me? Ever since my first summer job decades ago, I've been chasing financial security. Not win-the-lottery, Bill Gates riches (although it would be nice!), but simply a feeling of financial control. I want my financial worries to if not disappear at least be manageable and comprehensible.

And like most of you, the way I've moved toward my goal has always hinged not just on having a job but a career.

You don't have to be a financial blogger to know that "having a job" and "having a career" do not mean the same thing today as they did when I first started swinging a hammer for a paycheck.

Even the basic concept "getting a job" has changed so radically that jobs--getting and keeping them, and the perceived lack of them--is the number one financial topic among friends, family and for that matter, complete strangers.

So I sat down and wrote this book: Get a Job, Build a Real Career and Defy a Bewildering Economy.

It details everything I've verified about employment and the economy, and lays out an action plan to get you employed.

I am proud of this book. It is the culmination of both my practical work experiences and my financial analysis, and it is a useful, practical, and clarifying read.

Test drive the first section and see for yourself.     Kindle, $9.95     print, $20

"I want to thank you for creating your book Get a Job, Build a Real Career and Defy a Bewildering Economy. It is rare to find a person with a mind like yours, who can take a holistic systems view of things without being captured by specific perspectives or agendas. Your contribution to humanity is much appreciated."
Laura Y. 





Terms of Service

All content on this blog is provided by Trewe LLC for informational purposes only. The owner of this blog makes no representations as to the accuracy or completeness of any information on this site or found by following any link on this site. The owner will not be liable for any errors or omissions in this information nor for the availability of this information. The owner will not be liable for any losses, injuries, or damages from the display or use of this information. These terms and conditions of use are subject to change at anytime and without notice.


Our Privacy Policy:
Correspondents' email is strictly confidential. The third-party advertising placed by Adsense, Investing Channel and/or other ad networks may collect information for ad targeting. Links for commercial sites are paid advertisements. Blog links on the site are posted at my discretion.


Our Commission Policy:
Though I earn a small commission on Amazon.com books and gift certificates purchased via links on my site, I receive no fees or compensation for any other non-advertising links or content posted on my site.

  © Blogger templates Newspaper III by Ourblogtemplates.com 2008

Back to TOP