One Overlooked Reason Why The Middle Class Is in Decline

Tyler Durden's picture

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

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 Tank: the 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 is 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.

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RacerX's picture

so Middle class = Muppet class

Got it.

wallstreetaposteriori's picture

Risk?  Low Risk?  What is this risk thing you talk about?.. Financail advisers around the world say stocks can only go up and bonds can only go down... pfff risk.

TruthHunter's picture

"middle class is the majority of fish in the wealth tank"

 

The middle class is pretty over "fished". I quess that's why they resort to QE.

Direct from the hatchery to the hook.

mrdenis's picture

I love fishing ...........

Soul Glow's picture

Blankfein aggrees with your statement.

Stuck on Zero's picture

Correct.  The Author doesn't point out who informs the middle class of what the "big opportunities" are.  It's the media i.e. Wall Street.

 

NOTaREALmerican's picture

The economic system is just a game.     There are those who understand the game, and those who don't.

Survival of the fittest is a bitch if you happen to be the food for the smart-n-savvy people.

Government needs you to pay taxes's picture

You mean the schlubs who willingly act as counterparties to Goldman Sach's prop trades?

Big Brother's picture

Poor schlubs.  All they had to do was read ZeroHedge, and they could have gotten in the "Stopler-Contrarian" trade.  It was good while it lasted.  Speaking which, does anyone know who's doing the media relations for Goldman and publishing their new reco's?  There's gotta be someone who's replaced him.

zorba THE GREEK's picture

The middle class are the sheep to be shorn for the wool that keeps the wealthy warm over the cold winters.

snodgrass's picture

Please. Most middle class "wealth" is in their homes. Home price have seriously deflated and many have used their homes as ATM's meaning they have even less cash value. Wages are stagnant or less than what people made in the 60's. But hey, the guys on Wall Street are doing fine.

asteroids's picture

Don't you get it, house-bonds-stocks. That is where the wealth of the "boomer" is. I expect the value of all three asset classes to crash in the next few years as the "boyz" find ways of stealing it.

Soul Glow's picture

And most is in house, and the house is not always owned outright, especially considering the fervor of reverse mortgages.

Soul Glow's picture

The middle class bought the myth that if you go to school, go to college, and get a job you will marry a semi-attractive person, have semi-attractive kids, and all will be ok.  They missed the part that they would need to leverage their soul to banks to get any traction in this come up.

Debt is a bitch.

insanelysane's picture

Debt is an ugly bitch but she looked a lot better to the middle class when their McMansions were "growing" in value each year.  Now that everything has flat lined, existing debt is fugly.

Soul Glow's picture

Haha, yes, and how anyone could think buying a McMansion is a wise investment shows the naivete of the status quo.  Houses, although necessary, are not finite; coupled with the fact that most lie in suburbs - or hellholes as I think of them - and also usually not well made, well, fellow Americans, you will die treading water.

WALLST8MY8BALL's picture

And you may ask yourself
What is that beautiful house?
And you may ask yourself
Where does that highway go to?
And you may ask yourself
Am I right?...Am I wrong?
And you may say to yourself
My God!...What have I done?!

screw face's picture

what is this regurgitated crap!?

 

 

ZeroHedge #FUKU

 

fc

CaptainSpaulding's picture

Answer....#Click Cick Click. $$$$$

JRobby's picture

Bait for the soon to be flamed

Be_Optimistic's picture

Ever played the board game Monopoly? As soon as one person starts getting powerful (lots of hotels and properties) and a little bit ahead of the pack its almost impossible for the other players to catch up. Basically the game goes around half a dozen times until all the wealth has funneled to the one rich person (the winner).

NOTaREALmerican's picture

What commies like you don't understand is it's the government intrusion of the Community Chest that awards the undeserving an "advance to go and collect $200" advantage.   Eliminiate the goddamn welfare and then see who wins the goddamn game.   Wouldn't be the goddamn leaches living off the Community Chest THAT'S for sure! 

duo's picture

Except in today's monopoly there are no "Go directly to JAIL, do not pass GO" cards.

Colonel Klink's picture

Yes there are, except it's only for the "little" guy.

silly putty's picture

I dont play Monopoly very often , but when i do i go staight to the Fed window and get a loan so i can buy all the property in my first move . Game over

Government needs you to pay taxes's picture

Wait, you're playing with the old Monopoly rules.  In my games, I can always print more Monopoly-money to settle the rent associated with the spaces I land on.  Makes no difference whether I land on Park or Baltic Ave.

TruthHunter's picture

"Ever played the board game Monopoly? ... Basically the game goes around half a dozen times until all the wealth has funneled to the one rich person (the winner)."

You left out the last step. Least mature loser dumps the board.  Game over, nobody has

any hotels.

New game gets played which is usually some version of Baby Mama Drama.

Chuck Knoblauch's picture

MONEY PRINTING IS THE REASON

DEVALUATION = INFLATION

EXPECT MORE OF IT

NO SOLUTIONS

TOTAL DESTRUCTION

JRobby's picture

And now over to Jim with the weather.

NOTaREALmerican's picture

Just another hippy pinko who hates Free Enterprise, and the troops.

Imagine how wealthy the middle class would be if they were able to invest their hard-earned social-security money in the stock market?  Yeah,  they'd all be wealthy enough to retire at 30.   That's what commies like this don't want you to know! 

redd_green's picture

You're not supposed to drink wood alcohol there, Archie, only grain.    The wood alcohol affects your brain.

kchrisc's picture

The middle-class' weath can be found n the hands of the banksters. They stole it, and they have it.

Incubus's picture

The middle class never had wealth.

 

They just let the serfs have a few luxuries in order to innovate and raise the quality of life for their own upper crust. 

They can take it away whenever they feel like it.  Never forget that despite all of your wishes and wants, someone out there owns you.

 

 

kchrisc's picture

"The middle class never had wealth."

I would argue that until 1913 they did.

Incubus's picture

 

Paraphrasing the first fast and the furious:

 

Founding Fathers: Dude, we almost had you!

Rothschilds: You almost had us?  You never had us.  You never had your nation.

 

Just because TPTB let some rebels set up a nation of their own doesn't mean it was their outright intent on letting them own it in the long run.

 

These guys are longterm thinkers, in the order of decades and centuries.  Most people are focused on the short-term.

 

 

Cthonic's picture

Will Bernanke be knighted as well?  Or was that too overt with Greenspan?

Incubus's picture

I doubt it would cause much of commotion outside of the "kook" circles because the rest of the world is concerned about miley cyrus, justin beiber, and kim kardashian.

FredFlintstone's picture

I would venture that the middle class is much bigger today than it was in 1912.

OC Sure's picture

 

 

"It's well known that a major reason why the middle class is in decline is the stagnation of wages"

Balderdash!

Employer is not to blame for stagnation of wages.

What is the cause of the wage not maintaining purchasing power?

Chuck Knoblauch's picture

To increase wages now when the currency is being devalued monthly will not help anyone long-term.

The Fed better raise rates soon before it's too late.

It may already be too late.

Fuck the banking institutions.

It's time for major banking reforms anyway.

Fix the leak or else.

OC Sure's picture

That's right.

The creation of currency is dilutive to both the worker and the employer. It is only accretive to the thief.

Chuck Knoblauch's picture

Why is this so hard for smart people to understand?

Unless they do understand, and do not care?

Unless they are the thieves.

It's not the fault of the employee, employer, or consumer.

It's the Fed's fault for devaluing the currency.

They are failing badly.

OC Sure's picture

 

 

Well, if anyone would like to understand, I explain it clearly here; ironclad and uncontested.

http://ocsure.blogspot.com/2014/06/tyranny-of-modern-economics.html

DOGGONE's picture

If asset price histories are shown inflation-adjusted

http://www.showrealhist.com/yTRIAL.html
http://patrick.net/forum/?p=1230886

bubbles are VERY evident!
SO, these histories are kept out of sight, and the people can be more easily SUCKERED!

Dre4dwolf's picture

The only High Risk Asset(s) I can think of that have the potential for gains:

 

-Bitcoin

-Silver/Gold/Metals

-Medical Stocks involved with weed

-Distressed Real-Estate (in 10 years it might pay off buying up 10 blocks worth of land in areas like Detroit/Buffalo New York haha) when houses are practically being given away . . . because the area is a ghost town.... you dont even have to pay the property taxes on time, I bet the offices that handle receipts are firing people left and right and probably wont even know if you are paying the taxes on time for the next 5 years.

 

What High Risk assets is the article referring to?

Racer's picture

30m

There are only 2 countries that have not ratified the UN Convention on the Rights of the Child. Somalia and the United States of America."

 

Seems children's rights in the US are also overlooked and ignored!!!

Racer's picture

Seems US paedophiles didn't like that comment bringing attention to the lack of children's rights in the US!

kareninca's picture

You are a moron. There's nothing easier than signing into law some right, and then not enforcing it.  In Mexico everyone has a Constitutional Right to free medical care.  Big fucking deal; the poor shmuck illegal immigrants who are on dialysis in the U.S. (through charity programs) who get sent back to Mexico, promptly die because they can't get dialysis.  Since the "constitutional right" is just cheap talk.  So what if some hellhole claims it supports children's rights; look at what they do.