U.S. Middle Class on Verge of Collapse?
Monday, August 27th, 2012
By Michael Lombardi, MBA for Profit Confidential
Economic growth occurs when there is rising demand for goods and services. Historically, in the U.S., this demand has largely been due to the middle class.
Currently, the American middle class makes up about 51% of the U.S population, compared to 61% in 1971. In the 70s, the middle class earned 62% of the nation’s income and the wealthier Americans received 29%. Compare that to now. In 2010, the middle class earned only 45% of the nation’s income. (Source: Associated Press, August 22, 2012.)
According to a recent study released by Pew Research Center, 85% of middle class Americans say it is now more difficult than a decade ago to maintain their standard of living.
Thirty-two percent of those who responded to the study said their household situation is worse than before the 2007 recession began. Of those who said they were worse off, 51% of them said that it will take at least five years for them to recover, while eight percent said that they will never recover!
The recession not only stalled economic growth, but it also affected the net worth of middle class families. The U.S. middle class saw a decline of 28% in their net worth over the last decade—from $129,000 in 2001 to $93,000 in 2011. To top it off, the net worth of lower income families fell a steeper 45%!
There is no doubt the middle class was the reason for economic growth in the past. Unfortunately, they haven’t been able to take the blow or the recession. The standard of living in America has gone down for the people living in a typical middle class family since the recession.
If there is economic growth as some politicians and economists say, then why are the majority of Americans still suffering the after-effects of the recession? This begs the question: why are millions of people unemployed in the U.S. and why are millions being pushed into poverty?
There is a clear indication of weaker demand and no economic growth. The declining middle class and a significant portion of the population falling into poverty are not good signs in any economy.
The growing middle class has fuelled economic growth in countries like India and China. But, in the U.S., we are going in the wrong direction, as our middle class is suffering economic contraction rather than experiencing growth. It seems that the symptoms are being treated, but the root issues stay the same. Declining middle class, high unemployment and decreasing net worth—I can’t see any of this changing anytime soon; hence why I’m so skeptical of any economic recovery.
Something wicked this way comes!
The credit crisis in the eurozone has created an economic and political minefield. Some economies are solid, others have unprecedented unemployment. Some leaders threaten to pull out of the eurozone altogether, while other leaders waffle daily on their political stance. Not surprisingly, no one wants to make the first move within this credit crisis.
Rest assured this political bubble of economic unrest will give at some point. The eurozone may be made up of 17 countries, but the economic divide between the northern and southern countries is becoming more pronounced thanks to the credit crisis. And the once strong northern countries are slowly seeing their economies being pulled under by the stagnating south.
Finnish Finance Minister Jutta Urpilainen said recently, “Finland will not hang itself to the euro at any cost and we are prepared for all scenarios. Collective responsibility for other countries’ debt, economics and risks; this is not what we should be prepared for. We are constructive and want to solve the credit crisis, but not on any terms.” (Source: The Telegraph, July 6, 2012.)
Maybe she has a point. Finland, one of the rich northern eurozone countries, probably doesn’t like the idea of lending a financial hand to bail out countries that helped lead the eurozone into a credit crisis. Countries that may have merrily waltzed into the credit crisis thanks to creative accounting, wasted vast sums on property bubbles, failed to collect taxes, and lived the high life for a decade.
You can only bail out other financially troubled countries for so long and live with a credit crisis for so long. A recent poll by Finnish national broadcaster Yle indicated that 66% of Finns want their country to avoid shouldering more financial responsibility, even if it would save the eurozone. (Source: Wall Street Journal, August 15, 2012.)
In Finland, the euro-loathing opposition True Finns Party has seen its popularity rebound from a sharp drop last year—thanks to the credit crisis—according to a recent Yle poll. True Finns Party Chairman Timo Soini has repeatedly called for Finland to examine an alternative to the eurozone, pointing to the performance of the non-euro Nordic states. Could Finland be the first country to exit the euro? Maybe.
A double-dip recession, high levels of public debt, and loan defaults will make it more difficult for economically viable eurozone countries like Finland to back various bailouts without impacting their own standing.
If anything, this particular credit crisis should remind us that the eurozone is made up of individual countries; countries that have vastly different histories, political and cultural attitudes, social reforms, economic policies, and priorities. And in the end that’s what could eventually cause the breakup of the euro. Maybe that’s what needs to happen.
Finland could certainly be one of the most prepared countries to leave the eurozone. But I can tell you this: once the first of the 17 eurozone countries leaves the union, the rest will be lining up at the exit door.
Where the Market Stands; Where it’s Headed:
In a July 2012 research report from BMO Nesbitt Burns, the brokerage says stocks will move higher in the fourth quarter of 2012. To quote the report, “July should be followed by a solid rally, carrying stocks higher in Q4 of 2012 and perhaps even into 2013.”
I think they’re dead wrong. At the end of December, I’ll revisit their prediction. In the meantime, this humble economist believes that, unassisted by Federal Reserve intervention, the stock market rally that started in March of 2009 is having its last hurrah.
What He Said:
“Overbuilt, over-speculated, over-financed and overdone. This is the Florida real estate market right now. For those looking to buy for personal use or investment, hold off! The best deals are yet to come. I continue with my prediction that the hard landing in the U.S. housing market, which is now affecting lenders, will have significant negative effects on the U.S. economy.” Michael Lombardi in Profit Confidential, April 3, 2007. Michael started talking about and predicting the financial catastrophe we began experiencing in 2008 long before anyone else.