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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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Wed, 06/11/2014 - 11:14 | 4844710 RacerX
RacerX's picture

so Middle class = Muppet class

Got it.

Wed, 06/11/2014 - 11:19 | 4844731 wallstreetapost...
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.

Wed, 06/11/2014 - 11:20 | 4844733 RacerX
RacerX's picture

On a long enough timeline..

Wed, 06/11/2014 - 12:10 | 4844994 TruthHunter
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.

Wed, 06/11/2014 - 13:11 | 4845262 mrdenis
mrdenis's picture

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

Wed, 06/11/2014 - 11:19 | 4844732 Soul Glow
Soul Glow's picture

Blankfein aggrees with your statement.

Wed, 06/11/2014 - 11:34 | 4844801 Stuck on Zero
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.

 

Wed, 06/11/2014 - 11:40 | 4844843 NOTaREALmerican
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.

Wed, 06/11/2014 - 12:51 | 4845166 Government need...
Government needs you to pay taxes's picture

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

Wed, 06/11/2014 - 12:58 | 4845200 Big Brother
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.

Wed, 06/11/2014 - 11:45 | 4844860 zorba THE GREEK
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.

Wed, 06/11/2014 - 14:40 | 4845652 snodgrass
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.

Wed, 06/11/2014 - 11:18 | 4844725 asteroids
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.

Wed, 06/11/2014 - 11:21 | 4844737 Soul Glow
Soul Glow's picture

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

Wed, 06/11/2014 - 11:18 | 4844729 Soul Glow
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.

Wed, 06/11/2014 - 11:23 | 4844747 insanelysane
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.

Wed, 06/11/2014 - 11:32 | 4844791 Soul Glow
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.

Wed, 06/11/2014 - 11:26 | 4844760 WALLST8MY8BALL
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?!

Wed, 06/11/2014 - 12:16 | 4845023 umdesch4
umdesch4's picture

Same as it ever was...

Wed, 06/11/2014 - 11:20 | 4844735 screw face
screw face's picture

what is this regurgitated crap!?

 

 

ZeroHedge #FUKU

 

fc

Wed, 06/11/2014 - 12:01 | 4844923 CaptainSpaulding
CaptainSpaulding's picture

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

Wed, 06/11/2014 - 14:12 | 4845547 JRobby
JRobby's picture

Bait for the soon to be flamed

Wed, 06/11/2014 - 11:24 | 4844751 Be_Optimistic
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).

Wed, 06/11/2014 - 11:37 | 4844820 NOTaREALmerican
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! 

Wed, 06/11/2014 - 11:50 | 4844890 duo
duo's picture

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

Wed, 06/11/2014 - 13:03 | 4845227 Colonel Klink
Colonel Klink's picture

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

Wed, 06/11/2014 - 12:35 | 4845105 silly putty
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

Wed, 06/11/2014 - 12:54 | 4845180 Government need...
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.

Wed, 06/11/2014 - 13:09 | 4845253 TruthHunter
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.

Wed, 06/11/2014 - 11:24 | 4844753 Chuck Knoblauch
Chuck Knoblauch's picture

MONEY PRINTING IS THE REASON

DEVALUATION = INFLATION

EXPECT MORE OF IT

NO SOLUTIONS

TOTAL DESTRUCTION

Wed, 06/11/2014 - 14:14 | 4845551 JRobby
JRobby's picture

And now over to Jim with the weather.

Wed, 06/11/2014 - 11:33 | 4844787 NOTaREALmerican
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! 

Wed, 06/11/2014 - 12:04 | 4844960 redd_green
redd_green's picture

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

Wed, 06/11/2014 - 11:33 | 4844794 kchrisc
kchrisc's picture

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

Wed, 06/11/2014 - 11:38 | 4844825 Incubus
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.

 

 

Wed, 06/11/2014 - 12:00 | 4844941 kchrisc
kchrisc's picture

"The middle class never had wealth."

I would argue that until 1913 they did.

Wed, 06/11/2014 - 12:10 | 4844984 Incubus
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.

 

 

Wed, 06/11/2014 - 12:14 | 4845014 Cthonic
Cthonic's picture

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

Wed, 06/11/2014 - 12:24 | 4845062 Incubus
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.

Wed, 06/11/2014 - 17:35 | 4846274 FredFlintstone
FredFlintstone's picture

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

Wed, 06/11/2014 - 11:36 | 4844815 OC Sure
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?

Wed, 06/11/2014 - 11:47 | 4844859 Chuck Knoblauch
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.

Wed, 06/11/2014 - 11:54 | 4844910 OC Sure
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.

Wed, 06/11/2014 - 14:38 | 4845623 Chuck Knoblauch
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.

Wed, 06/11/2014 - 16:57 | 4846118 OC Sure
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

Wed, 06/11/2014 - 11:41 | 4844847 DOGGONE
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!

Wed, 06/11/2014 - 11:50 | 4844874 Dre4dwolf
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?

Wed, 06/11/2014 - 11:51 | 4844897 Racer
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!!!

Wed, 06/11/2014 - 16:04 | 4845373 Racer
Racer's picture

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

Thu, 06/12/2014 - 00:41 | 4847503 kareninca
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. 

Thu, 06/12/2014 - 00:54 | 4847514 litemine
litemine's picture

And you Trust your Government? Sorry for you.

Wed, 06/11/2014 - 11:52 | 4844900 kurt
kurt's picture

How can this asshole come to this conclusion during the biggest EXTRACTION of wealth in world history?

What a bullshit artist!

Wed, 06/11/2014 - 12:03 | 4844957 silly putty
silly putty's picture

Just got off the phone with Warren Buffett. He said were all screwed but he will be just fine

Wed, 06/11/2014 - 12:04 | 4844962 Itchy and Scratchy
Itchy and Scratchy's picture

Easy! Because ....'They Didn't Built That' - The Kenyan

Wed, 06/11/2014 - 12:11 | 4844999 fast and furious
fast and furious's picture

93 million+ Americans are not working.

More are now receiving some form of welfare than are paying into the system.

How does ANYONE accrue wealth in that scenario???  It can't happen.  We are funneling our dollars to the Santa Clause system and they are dishing it to the unproductive in our midst.  it's not effective and it will collapse.

Wed, 06/11/2014 - 12:26 | 4845070 I Write Code
I Write Code's picture

Just looking at symptoms.  The *cause* is that the middle class has lost power, the government doesn't care about them anymore, the upper classes don't care about them anymore (if they ever did) and have been selling out the middle class for fifty years.

Some of this is globalization, some of this is automation, but a lot of it is the rise of the banksters as is constantly talked about here on ZH.  Everyone, even the richest, have been forced by the Fed to take on risk since 2008, it's not a middle class thing at all.

Wed, 06/11/2014 - 13:21 | 4845301 Kayman
Kayman's picture

It all boils down to who is getting paid off. At the bottom of the market zero interest, unlimited debt is given to the TBTF banks who sprinkle it amongst their buddies. The middle class is totally illiquid at the bottom of the market and could not participate even if they wanted to.

And Obama says clean up the dirty U.S. coal industry but continues to allow unlimited imports of Chinese made products manufactured using energy from the dirtiest coal burners on the planet.

All our fearless leaders sold their souls a long time ago. The middle class is fading in the rear view mirror. 

Wed, 06/11/2014 - 12:37 | 4845111 therover
therover's picture

Bottom line....most middle class workers get their labor taxed via fed, state and local leeches as well as it being fucked via additional fees, fines, etc. as well as inflation.

On top of that, their labor is valued/tied into to a fiat currency that can be made out of thin air via a push of a button or additional debt, on top of which is purposely being debased.

Is it any wonder why the non-working subsidized zombie crew continues not to work. Why bother.

Disposable income is now non-existent for most working folks (due to not only the taxes and fees mentioned about, but also due to the necssities such as food, energy, health care and tuition costs being inflated at a much higher rate than wages).

A consumption based economy needs disposable income to grow. Yet some numbnut policitans think an addition sales tax or better yet, new lotteries and gambling venues will solve the problem. The idiots who preach that should be sent to the pyscho ward.

This enitre fuck show is in decline.

 

Wed, 06/11/2014 - 13:40 | 4845403 Shizzmoney
Shizzmoney's picture

RE

There are now three asset bubbles to choose from: housing, stocks and bonds. 

You forgot Bitcoin

Wed, 06/11/2014 - 13:58 | 4845432 TalkToLind
TalkToLind's picture

Seattle has the right idea to rescue the middle class, but why are they limiting their minimum wage increase to just $15.00/hour?  Why not $80.00 an hour?  Do something sustainable.  Make the lower and middle class extra-rich...like in Detroit...where the guy at the auto plant who slid the radio into the dashboard made $79.95 an hour.  You should see the mansions those sumbitchez lived in.  There was a Hummer in every driveway and the pork chops were smothered.

Wed, 06/11/2014 - 15:40 | 4845864 F.A. Hayek
F.A. Hayek's picture

How about we take responsibility for ourselves, spend less than what we earn and not blame the man for keeping us down? .gov is the devil as far as I am concerned, but people in general need to own their future and control what they control.

Wed, 06/11/2014 - 16:00 | 4845930 Itchy and Scratchy
Itchy and Scratchy's picture

No buddy build nuttin' .....'cept the guvmint!

Wed, 06/11/2014 - 16:40 | 4846058 telefunken
telefunken's picture

just saw that ad-"when the market goes up you make money,when the market goes down you don't lose money" Get the fuck outta here!

Wed, 06/11/2014 - 17:09 | 4846191 slotowner
slotowner's picture

What do you call a middle class person who makes many good financial decisions?  Rich.

What do you call a middle class person who makes many bad financial decisions?  Poor.

Middle class is never the same from moment to moment.  At one point Jobs & Bezeos were middle class.

What class does Bernie Madeoff fit now?

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