Lombardi: Stock Market Commentary & Forecasts, Financial & Economic Analysis Since 1986

Please Save the Middle Class!

Wednesday, October 31st, 2012
By for Profit Confidential

Save the Middle ClassThere’s nothing more exciting than making money. I love capitalism, and the idea that you can generate unlimited wealth without limitation is great. This is the reason why the United States is one of the richest countries in the world with its gross domestic product (GDP) growth driven by consumer spending. Yet there are some issues. Despite the freedom given to everyone to make money, the income gap between the rich and poor has been rising, which, in my view, will ultimately impact consumer spending. This is an issue that must be addressed. Of course, some would argue that paying higher taxes is a form of income distribution, but given the tax loopholes, the current system of taxes as a form of income distribution may need to be remedied.

This concept of income distribution in America and other industrialized countries is becoming a real problem, especially with the Great Recession of 2008. Lower income levels affect consumer spending and economic growth. (Read “Attention Consumers: The Economy Needs You!”)

The median family income plummeted to an inflation-adjusted $45,800 in 2010 compared to $49,600 in 2007, according to the Survey of Consumer Finances published by the Federal Reserve. The survey also indicated that the top 10% of households made an average of $349,000 in 2010 and had a net worth of $2.9 million. This translates into lower consumer spending by the middle class as income levels decline.

What is worrisome is that the recession resulted in a greater disparity in incomes between the rich and the poor, which impacts consumer spending. It’s common for the CEO of a large company to earn multiples of regular workers. According to AFL-CIO, the average S&P 500 CEO earned $12.9 million in 2011, which is 380 times higher than the average income of a worker in the U.S. of $33,947.

In America, the rich are getting richer and the poor are getting poorer. The problem is that with over 30 million Americans using some form of food stamps, there is a great disparity of income in this country and this impacts consumer spending. The same is true in Brazil, Russia, Venezuela, China, and other countries.

The income gap is widening. In 1962, the top one percent of income earners had a net worth of 125 times the median household, according to the Economic Policy Institute. The income gap surged to 288 times in 2010 and is looking to get worse. This means less consumer spending from the middle class. President Obama realizes this and wants to remedy the situation. Of course, the gap will continue to be significant, as the rich have a much larger base of wealth to work from and can accelerate the growth of their net worth much quicker. Making two percent on $10.0 million is a lot easier than trying to get rich on $1,000.

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Whatever your views on income distribution—and there will be some that feel the current tax structure is correct—the problem is that income disparity inevitably causes societal issues; in the long run, this will not be good for America and it will impact consumer spending.

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George Leong - Financial Planner, ConsultantGeorge Leong, B. Comm. is a Senior Editor at Lombardi Financial, and has been involved in analyzing the stock markets for two decades where he employs both fundamental and technical analysis. His overall market timing and trading knowledge is extensive in the areas of small-cap research and option trading. George is the editor of several of Lombardi’s popular financial newsletters, including The China Letter, Special Situations, and Obscene Profits, among others. He has written technical and fundamental columns for numerous stock market news web sites, and he is the author of Quick Wealth Options Strategy and Mastering 7 Proven Options Strategies. Prior to starting with Lombardi Financial, George was employed as a financial analyst with Globe Information Services. Add George Leong to your Google+ circles