Guest Post: Generational Wealth And Upward Mobility

Tyler Durden's picture

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

Advanced democracies have lost upward mobility. 

Both capitalism and democracy promise the opportunity for upward mobility. Capitalism offers upward mobility to anyone with a profitable idea or productive skillset and work ethic. Democracy implicitly promises a "level playing field" of meritocracy, where talent, drive and hard work open opportunities for advancement.

Crony capitalism offers wealth to the class that already possesses it. Feudalism bestows "rights" to wealth to a favored few. In a way, upward mobility is a real-world test of a nation's economic and social order: if upward mobility exits in name only, then that nation is neither capitalist nor democratic. Stripped of propaganda and misleading labels, it is a feudal society or a crony-capitalist economy masquerading as a capitalist democracy.
Japan is an interesting case study. Some readers of last week's series on Japan noted that Japan was still very wealthy and life was good there. Indeed, some commentators have made the case that Japan has purposefully indebted itself to mask the wealth generated by its export machine: The Myth That Japan is Broke. (via Mike H.)
Here is last week's series:
My focus was the consequences of economic stagnation, not measuring Japan's national wealth, and this raises the issue of upward mobility: Yes, Japan remains very wealthy, but the wealth is concentrated in a specific neofeudal class; Japan's economy has lost the upward mobility of its long 1950-1990 growth phase.
We are blessed to have many young (20s and 30s) Japanese friends, single and married. Though it is not a random selection, it is geographically and socially diverse. In reviewing each friend/couple's education, financial stability, homeownership and the wealth of their parents, I realized every young person (under 40) who owns a house or flat has parents who made the purchase of their education and home financially possible.
Everyone without wealthy parents--and "wealth" means enough income/savings to pay for an entire university education in cash, and then pay 50% or more of their child's home purchase in cash--does not own a home, even those with a college education.
In other words, wealth is being transferred within the class that already earned and accumulated the wealth. It is not being earned by young people. The untidy truth is that they aren't paid enough to buy a home and accumulate wealth for their children.
What nobody in Japan dares discuss is the fact that tens of millions of young "freeters" will never make enough to get married, much less own a home or save enough to educate their children, unless they receive a lump sum of wealth from their parents while they are young enough for it to matter. If their parents don't have enough wealth to matter, then the freeters are doomed to membership in Japan's expanding underclass.
So a nation can claim $3 trillion in offshore assets or whatever wealth metric you choose, but if that nation has lost upward mobility, then the wealth is increasingly concentrated in a neofeudal structure. How "wealthy" do we say a nation is that has lost upward mobility?
Once upward mobility is lost, "social recession" sets in and the social contract frays.
How different is the U.S.? Most people who don't have physicians in their nuclear family or close circle of friends think that an M.D. is the ticket to upward mobility. In many cases, this is an exaggeration. I just received an email from an M.D. who stated that adjusted for inflation, his highest earnings were 30 years ago, in 1981. Others write to tell me that the hundreds of thousands of dollars in student loans that those without wealthy parents must borrow to attend medical school take many years to pay off, even with salaries that most people consider generous.
This is an example drawn from what most assume is the top-level "surefire ladder to wealth." We could look at non-Elite graduates of Ivy League universities (i.e. the non-Elites accepted in the name of diversity) and see how they're doing in terms of wealth accumulation that can be passed down to their kids. Sure, they're "doing well" in most cases, making a comfortable living, but are they making enough to pay off their student loans, own a home that isn't 90% owned by the bank and accumulate enough savings to not only pay their children's education in cash but also help them buy their own home with at least 25% down in cash? If not, then they're not really accumulating wealth that can be transferred, they're simply consuming it.
Correspondent Chris Sullins added transferrable generational wealth to my short list of "what makes someone middle class": Priced Out of the Middle Class (June 28, 2012). How many American households can pay for their children's university education in cash and then fund their purchase of a home?
Here are the eight "threshold" characteristics of membership in the middle class:
1. Meaningful healthcare insurance
2. Significant equity (25%-50%) in a home or other real estate
3. Income/expenses that enable the household to save at least 6% of its income
4. Significant retirement funds: 401Ks, IRAs, income property, etc.
5. The ability to service all debt and expenses over the medium-term if one of the primary household wage-earners lose their job
6. Reliable vehicles for each wage-earner
7. Hard assets and cash that can be transferred to the next generation, i.e. generational wealth.
8. Ability to invest in offspring (education, extracurricular enrichment activity, etc.).
How many households meet these criteria? Not many. This is now a list for the upper-middle class, the top 10% who earn in excess of $150,000 a year. But even households with significant incomes and inheritances from their parents are losing items on this list.
What I am seeing, once again anecdotally, is the consumption of family wealth as America "eats its seed corn." Families with savings are "investing" them in $120,000 per child college educations that may not qualify the young person for a job that pays enough to duplicate their parents' purchasing power--or a job at all.
Having lost their corporate job, they're burning $12,000 to $15,000 annually buying their own health insurance.
Having drunk the debt-is-cheap Kool-Aid, they're heavily indebted, and much of their income goes to debt service and taxes.
Families that had significant cash wealth in 2000 are burning through that cash at an alarming rate. By the time the children are all educated and back living at home or in their own apartments, then Mom and Dad have to buy them vehicles, pay their dental bills, etc. because Junior doesn't earn enough to actually support himself.
The wealth that could have been transferred to the next generation has been consumed suporting a "middle class" lifestyle and providing the next generation with what was once the basis for advancement: a university education, healthcare insurance, a reliable vehicle, etc. Now that jobs are hard to find and compensation is low, the next generation still needs the accumulated wealth of the household to get by.
That is not upward mobility, it is downward mobility, on a vast and largely unnoticed scale.

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tbone654's picture

so much crap... talk about curve fitting...

economics9698's picture

How are these bail outs paid for?

Citigroup: $2.5 Trillion ($2,500,000,000,000)
Morgan Stanley: $2.04 Trillion ($2,040,000,000,000)
Merrill Lynch: $1.949 Trillion ($1,949,000,000,000)
Bank of America: $1.344 Trillion ($1,344,000,000,000)
Barclays PLC (United Kingdom): $868 billion($868,000,000,000)
Bear Sterns: $853 billion ($853,000,000,000)
Goldman Sachs: $814 billion ($814,000,000,000)
Royal Bank of Scotland (UK): $541 billion ($541,000,000,000)
JP Morgan Chase: $391 billion ($391,000,000,000)
Deutsche Bank (Germany): $354 billion ($354,000,000,000)
UBS (Switzerland): $287 billion ($287,000,000,000)
Credit Suisse (Switzerland): $262 billion ($262,000,000,000)
Lehman Brothers: $183 billion ($183,000,000,000)
Bank of Scotland (United Kingdom): $181 billion($181,000,000,000)
BNP Paribas (France): $175 billion ($175,000,000,000)


Why is the middle class losing?



CH1's picture

<Fingers in ears>

"It's gonna be fine, it's gonna be fine, it's gonna be fine..."

Midas's picture

Brought to you by Carl's Junior,  brought to you by Carl's Junior....

glenlloyd's picture

Once you start eating into the principal without adjusting the consumption side you're finished...

Failure to recognize the above means the problem will accelerate until there's nothing left. Often this is the situation with inheritance, it's burned through because it was never earned or the value of it was never truly recognized.

vast-dom's picture

it's all so glaringly simple: take the $120k per annum for education and buy gold, silver, housing (on the cheap). the education comes from reading and living. you do not need to go to university to learn from those that generally do not do. 

SilverRhino's picture

And that 120K is off the banks radar and books.  They cant steal it if they cant find it. 


dugorama's picture

just tell me how you intend to learn:

finance /accounting /OR(queueing theory, etc)

chemistry / any lab science

calculus/statistics / higher order math / modeling

on your own?  I think a university education is generally consider beyond the scope of home schooling, either self directed or with mom at the kitchen table.

vast-dom's picture


finance /accounting /OR(queueing theory, etc) > ZeroHedge + reading + internships (mailroom) or better yet work for the mob since they are running the real show.




chemistry / any lab science / calculus/statistics / higher order math / modeling

> so how many of these lib arts students study that and become chemists? yes for this and dr and becoming a physicist sure you must go > pray tell what %age of these undergrads study this?


i was referencing the majority / average, and not that flunkie in the patent office coming up with theorums to alter the world.


Shizzmoney's picture

My dad made mistakes with a CD he had for my college savings (he's a cop...who was in debt #shocker).  And the IRS took every single dime, costing me a college education (I dropped out after a year b/c I knew I wouldn't be able to pay it back).

On the bright side, at least my college money is paying for some Air Force Engineers to play a live game of Starcraft via drones in Pakistan.

Timmay's picture

Think a little deeper, the IRS did you a favor.....

BigJim's picture

Yes, I got mugged on the way home, and Thank God for that! I might have bought myself a deleterious beer with that money otherwise.

LetThemEatRand's picture

It is very simple.  400 individuals have more wealth than 1/2 of all Americans.  So long as we tolerate this as a society because we fear "redistribution of wealth" (except for the upward kind of redistribution), we're doomed to the neo-feudal system.    It must be in our genetic makeup as humans that most people think it's okay for Kings and Queens to roam the earth and possess most of the wealth of society because they "earned it."

CH1's picture

Overhead at the ZH Five Family Sitdown: After all, we are not communists.

LouisDega's picture

It was Barzini bitchezz all along

malikai's picture

The problem is, any attempts to 'redistribute the wealth' will be made by someone. That someone will be 'one of them'. Therefore, you can expect nothing, regardless of what anybody wants.

Look at Buffett.

CH1's picture

The problem is, any attempts to 'redistribute the wealth' will be made by someone.

Absolutely. Someone gets to collect all those sacrifices. What could possibly go wrong with that?

LetThemEatRand's picture

"They" already have made those decisions, because we the people have allowed "them" to take control of the government.  If you take elected government away, you are left with "them" controlling us directly.  At least that's what the Founders believed.  

malikai's picture

Are you arguing this based on pretense of the current government making these changes or are you talking about a post-revolution government doing that?

LetThemEatRand's picture

Simple changes to current election laws (see Montana as a good starting point) would largely fix our current system.

malikai's picture

I hope I'm wrong, but I'm telling you that short of outright revolution, it will never happen on a federal level.

Too compromised.

LawsofPhysics's picture

I agree, the federal system is indeed far too poisoned to fix.  A complete reset is required.  Get you tribe in order as all eCONomies are indeed local, always have been, especially once everyone figures out all the paper promises are in fact just lies that will never be met.

odatruf's picture

Bypass them. Get elected to or involved in your state legislature and force Congress to hold a Constitutional Convention. You need 2/3rd (34) of the states to demand the convention and then there is nothing Congress or the President could do to stop it. The states, not the feds, appoint the delegates and no one serving in Congress could also serve as a delegate at the Constitutional Convention.

Let's do it and have the chips fall where they may. Abortion legal or illegal is fine, just decide. Same with corporate campaign donations, capital punishment, term limits, balanced budgets, flag burning, national health care and on and on.  I have my views on each of these, of course, but frankly I would prefer that we had clear rules that we didn't debate and manipulate as much even if I disagreed. It's the fight it out to raise money racket that bothers me more.

Heck, while we are at it. Add an amendment that calls for an automatic Constitutional Convention every 20 years so we can keep the tree of liberty refreshed. If nothing needs changing, then at least it's a good party every generation.


Cathartes Aura's picture

there's no "fixing the current system" available, except imaginary scenarios typed on a blog.

however, there IS the possibility that individuals will "fix" their own re-actions to the current system, and survive it.

it's a possibility, but it requires abandoning the hope of changing anything on a level beyond the individual, and focusing entirely on what is real, not imagined.

free your mind(s).

JPM Hater001's picture

The problem with redistribution is someone has to decided who gets what spoils.

I dont trust anyone in the world to make that decision.

Wait.  They will lose it eventually by war or capital destruction.  When almost everyone is poor then is your chance to build personal wealth without first (or forcefully) taking it.

dugorama's picture

yes, eventually we will be a dark chunck of charcoal hurtling through interstellar space, long after our sun burns out.  jBut I'm not quite patient enough to "wait" that long or even for my society to completely collapse.   I would like to be more pro-active than waiting for the food riots to break out before we edit the current system of spoils distribution.  Remind me again how Romney earned and deserved his $400mm but your local university professor of <fill in the blank> can't afford to send their own kid to college without taking on generationally crippling debt?

BigJim's picture

 "They" already have made those decisions, because we the people have allowed "them" to take control of the government.  If you take elected government away, you are left with "them" controlling us directly.  At least that's what the Founders believed. 

The problem is, that it seems to happen with elected governments, too. The oligarchs just get their elected puppets to bribe a wide enough swath of the poorest with freebies and they can guarantee to stay in power. Of course, an unelected government doesn't even bother to do that, and just plunders even more indiscriminately. And you can't chuck them out without violence. So at least elected governments have that going for them.

But the issue isn't elected vs unelected governments. The issue is how do we stop elected governments getting hijacked by an oligarchy? By limiting what that government can do. That was the original Founders' belief, wasn't it? Keep government small and limited in scope.

Of course, the big question now is what to do about our hijacked, not-small, not-limited polity... particularly now that a slim majority of citizens are essentially clients of the state, and, furthermore, believe governments not only can create wealth, but should create wealth, rather than just create the conditions in which wealth can be created (rule of law, punishment of fraud & force, etc).

JOYFUL's picture

...Therefore, you can expect nothing, regardless of what anybody wants...

that would seem to nail it. Adjusting perspective to suit limited outcomes -sounds awkward, but is in fact what most people have done, most of the time, throughout history...and gotten on with it with a limited amount of whineing and moaning. Today is different mostly because expectations have gotten wildly out of control on the part of those force-fed on media created myths of abundance and mobility.

"Capitalism and democracy" promise the moon, and deliver nothing. With this piece CHS comes out into the open as a shrill proponent of false conciousness of the neo-enlightenment variety. Expect everything, and demand the world change to accomodate your entitlement fantasies.

One of the most interesting outcomes of the experience of America in the Pacific war theatre was the return of servicemen from Japan who had picked up something of the real culture and decided to run with it...rather than integrate into the upward mobility rat race, they started to build upon the real (pre-Hollowwood)superstructure of American mythology a stripped down, true to life expectationless existence that expressed the essence of what life really has to offer[hint-not as much as we are led to believe...and at the same time, infinitely more!]

Concurrently, a different, but somehow related strand of authentic American values was forcing itself through the mediocracy of merikan cinema... while Europe was indulging itself in moronic existential 'haut cinema' the western epics of Malpaso Productions were creating a legendary outsized figuration of what a man could really expect to encounter in his life, and how he could deal with it...

It's no accident that "Fistful of Dollars" was based upon Kurasowas' 'Yojimbo' nor that the flick was Clint's breakout movie...looked down upon and sneered at by the sniveling sionist shills who would load up Merikan cinema with their pretentious claptrap leaving no room for reality, the man from Malpaso gave expression to the road not travelled yet so full of expectationless promise that dudes like Gary Synder cultivated with bonzai-like attention in their west coast fire towers - east meeting west and the best of both distilled in an elixir of lifegiving meaning.

Unfortunately, the Ginsbergs, Zimmermans, Speilbergs and the rest of the khazarian crew won out in the cultural wars of C20th Merika...this piece by CHS is a direct result and reflection of that defeat... whiney drivel about infantile expectations.


karp4cy's picture

Failing to make distinctions between real earned wealth and wealth obtained by employing the power of the state through a collusive alliance, leads to the creation of an environment that often forms the basis for works of post-apocalyptic science fiction.

duo's picture

Better yet, when Michael Jordan pimped for Nike, he made more than all of the employees of Nike, combined, except for the CEO.

odatruf's picture

Didn't Jordan pimping for Nike also uniquely cause more sales than all of the other employees combined?

I say uniquely because while I fully understand that there would be nothing to sell if there was no one pressing leather and rubber in a factory, the unique aspect means you could swap that worker(s) out with any of the planet's 7 billion people while no one else could promote it like MJ.  And I hated the Bulls...

Ghordius's picture

"It must be in our genetic makeup as humans..." Don't know "must", but it seems that in all societies that permit unrestricted, unlimited accumulation of wealth (and often also in those who don't) go after the same principle that Pareto found out in the 19th Century: one fifth owning four fifths.

As soon as a society reaches a certain size, this two classes split again and again and again, still according to the 80/20 rule. no BS, wealth managers use this power-law curve for marketing research.

The Greeks and the Romans tried several times to solve this problem by a completely different approach: "you wealthy enough to afford a horse for war? then you have to buy your own and we'll call you a knight and we will honor your additional and extended military service." and "you wealthy enough to buy an entire fleet? one of the top 100, 200, whatever? then we'll call you a senator and expect you to be a public (and scrutinized) person eligible to lead the republic and to pay for any exceptional expenses like wars, disasters, famines, etc. The idea behind it was that if the top 400 are not in the senate than their puppets will.

BigJim's picture

This led to the warlord-ism of the triumverate (remember Crassus?) and the eventual tyranny of the Caesars.

But perhaps you have some stouter Rubicon in mind?


Ghordius's picture

Remember how many of the communist regimes fell? All human endeavours are limited, after all. But polities have to understand their mistakes before they can try to correct them.

Tango in the Blight's picture

If people don't fight to preserve their freedom they lose it. And our children en grandchildren will damn us for our inactivity and will have to fight to regain their freedom. It's how it's always has gone down in thousands of years of history. Our folly is that we think that we have outgrown history, that we now live in the land of middle class luxury and happiness forever. But history will eventually catch up with us.

Sean7k's picture

Re-distribution of wealth is theft. How do you justify that? 

If you have problems with access by the wealthy and the favors provided through crony capitalism- fine, you list your solutions. However, theft penalizes the producer as well as the parasite. It makes no distinctions and is entirely subjective according to which power group does it. 

This kind of thinking is morally reprehensible and economically destructive for ALL classes. Like all simple thoughts, it sounds great until you consider the ramifications. 

There has always been a debtor class and always will. Someone is always willing to trade future earnings for present goods and another will provide those goods for a fee. If you want to level the playing field, you eliminate State government and the opportunity to acquire power and influence through the domination of a few representatives.

Power must be decentralized to the extent it reduces any leadership to the role of advisors. Otherwise, those with the willingness and drive to gain control will. Some still will gain power and influence, but there circle will be diminished by opportunity and the resolution of your neighbors. 

There are no simple answers, but there are simple strategies that work to frustrate the acquisition of power. Decentralization, sound money, free markets and liberty.  This is not a panacea, just something preferable to the fascism of today.

cornedmutton's picture

Democracy implicitly promises a "level playing field" of meritocracy, where talent, drive and hard work open opportunities for advancement.


Explain, please. I don't understand how mob rule implies what you say it does.

HangSorosHigh's picture

People go to great lengths to pretend there's some difference between "democracy" and "mob rule".

Democracy, mobocracy, mob rule, ochlocracy, kakistocracy, ineptocracy. It's all the same, just different names.

malikai's picture

Mobocracy has a nice ring to it..

Manthong's picture

“Democracy implicitly promises a "level playing field" of meritocracy, where talent, drive and hard work open opportunities for advancement”

Good piece CHS, but you are way off on that point.

That lowest common denominator perspective gets you EBT cards and Obamaphones.  

The representative republic with arms-length relationships between national and self-interested democratically elected state legislatures, all based in a limited, principled (God-acknowledging) federal government as envisioned by our founders will allow people to be protected from the state and  fairly rewarded for merit.  

The 17th Amendment, the personal Income Tax and the Federal Reserve Act (all in 1913) killed the promise of the United States of America as established in the original Constitution.

This is not debatable.

spooz's picture

So you prefer an aristocracy?  Whoever has the biggest pile gets to make the rules?

odatruf's picture

In theory, so long as the democracy is limited by inalienable rights that can not be changed or waived, there is a distinction. Without them, there isn't.


cornedmutton's picture

Yes, and we generally call the charter the enshrines these truths the Constitution, and the formation of The People for which it is errected, The Republic.


But that's all over now.

HangSorosHigh's picture

Both capitalism and democracy promise the opportunity for upward mobility.

Democracy just promises more moochers voting themselves my money.

spooz's picture

Capitalism promises free markets where wealth accumulation buys cronies in government who will change the rules if you need a bailout. Unless you think there is the possibility of an economy without laws, in which case you are dreaming.

Overfed's picture

Actually you're describing fascism and corruption.