FedUpUSA

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Middle class dysphoria – What does the new American Dream look like? Inflated college tuition, lower home ownership rates, and compressed wages.

The American Dream was always tied to economic prosperity.  The ability to work and save for a respectable retirement seemed cornerstones to this vision of middle class success.  The idea that future generationswould have it better seemed to also be part of this vision of economic prosperity.  The last two decades have seen a dramatic shift to this vision.  The struggle to stay in the middle class is getting more difficult since more are being pushed into the poor or working poor categories.  The recovery has been largely an odd accounting function courtesy of bailouts to the banks and massive government spending.  Today, we have the largest number of Americans on food stamps.  Those seeking to follow their desire to get a better education are saddled with a minefield of student debt and subpar institutions that simply look to steal their money and give them a piece of paper that is hardly recognized in any professional context.  The home ownership rate, the symbolism of the American Dream is drifting further into the shadows.

The consequences of the housing bubble

The current home ownership rate across the country is now back to levels last seen in 1996:

What does this mean for the middle class that once relied on housing as the cornerstone for the American Dream?  At the core, it has shaken the faith of many because housing was supposed to be a sure bet.  Every year, your home value would go up and you subtly built equity.  That assurance has been wiped away in the current aftermath of the housing bubble.  The housing market had been a steady investment for many decades providing this bedrock of stability.  This all changed of course when investment banks in conjunction with government backed guarantees co-opted the market and turned it into just another commodity to speculate and destroy.  Keep in mind many of these investment banks and government cronies sought to increase home ownership across the nation and have only done the opposite.  Glass-Steagall was repealed back in 1999 and here we are with a home ownership rate now back to 1997 levels and an economy that is still in disarray for working and middle class Americans.

The Case Shiller Index reveals a lost decade in home values:

Yet this destruction in illusory and real wealth in real estate has impacted the net worth of most Americans.  The biggest asset most Americans have is in their property and it has been one of the worst performing items in the last decade.

Read the rest at My Budget 360

NEW YORK (Bullion Bulls Canada) — In writing about the relentless collapse of Western economies, I frequently point to “40 years of plummeting wages” for Western workers, in real dollars. However, where I have been remiss is in quantifying the magnitude of this collapse in Western wages.

On several occasions, I have glibly referred to how it now takes two spouses working to equal the wages of a one-income family of 40 years ago. Unfortunately, that is now an understatement. In fact, Western wages have plummeted so low that a two-income family is now (on average) 15% poorer than a one-income family of 40 years ago.

Regular readers will recognize the chart below on U.S. average wages.

Using the year 2000 as the numerical base from which to “zero” all of the numbers, real wages peaked in 1970 at around $20/hour. Today the average worker makes $8.50/hour — more than 57% less than in 1970. And since the average wage directly determines the standard of living of our society, we can see that the average standard of living in the U.S. has plummeted by over 57% over a span of 40 years.

There are no “tricks” here. Indeed, all of the tricks are used by our governments. The green line shows average wages, discounted by inflation calculated with the same methodology for all 40 years. Obviously that is the only way in which we can compare any data over time: through applying identical parameters to it each year.

Then we have the blue line: showing wage data discounted with our “official” inflation rate. The problem? The methodology used by our governments to calculate inflation in 1975 was different from the method they used in 1985, which was different than the method they used in 1995, which was different than the method they used in 2005.

Two obvious points flow from this observation. First, it is tautological that the only way in which data can be compared meaningfully is to use a consistent methodology. If the government thinks it has improved upon its inflation methodology, then all it had to do was take all of its old data and re-calculate it with their “improved” methodology. Since 1970 there is this invention called “computers” which makes such calculations rather simple.

This brings us to the second point: the refusal of our governments to adopt a consistent methodology in reporting inflation statistics can only imply a deliberate attempt to deceive, since it is 100% logically/statistically invalid to simply string together disconnected series of data — and present it as if it represents a consistent picture. More specifically, we can see precisely what lie our government was attempting to get us to believe.

Courtesy of http://nowandfutures.com/index.html

Roughly speaking, the blue line trends flat. Thus, the U.S. government (and most Western governments) has been lying about inflation for the last 40 years as a deliberate means of hiding the 50+% collapse in the standard of living for the average person. Meanwhile, the situation is more than reversed if you’re one of the fat-cats at the top. While average American workers have seen their wages plummet by 57% over the past 40 years, in just 15 years (1992-2007) the 400 wealthiest Americans saw their incomes rise by 700%.

Now we have the complete picture: wages grinding steadily lower year after year, decade after decade for the Little People, while wages go straight up for the fat cats. To say this is unfair would rank as one of history’s greatest understatements. This is economic rape, plain and simple.

To this point I have only presented the consequences of our economic rape, in a chart which is totally unequivocal/incontrovertible. The causes of that economic rape are equally obvious in terms of categories, although the actual analysis of those causes is somewhat more complex.

1) Taxation oppression. As I detailed in a previousthree-part series, income taxation is the worst possible form of taxation which could possibly be devised. The length of criticisms is virtually infinite, but at the top of the list is the fact that as a matter of basic arithmetic, all income-taxation systems must funnel all wealth into the hands of the ultra-wealthy, over time. This is precisely what we see today. Billionaires and trillionaires sit with the largest fortunes in history — while ordinary people have been turned into “the working poor.”

2) Systemic/structural unemployment. Technology always eliminates jobs faster than it creates new opportunities. This means that our economies are permanently reducing jobs (andcreating structural unemployment) every day, every week, every month, every year. For more than 200 years, our governments have dealt with this permanent structural unemployment problem by shortening the work week every few decades…until now. The refusal of our governments to shorten the work week (while we have the worst structural unemployment in history) is a deliberate attempt to maintain massive unemployment – which is the strongest downward driver of average wages.

3) Oligopolies/monopolies. It is elementary capitalist theory that monopolies and oligopolies are unmitigated evils. By definition they are 100% parasitic, and 100% non-competitive — and have absolutely no place in any capitalist economy. Yet today the global economy is totally overrun with these gigantic, non-competitive parasites. With these mega-parasites permanently blood-sucking us, the impoverishment of our societies was an inevitable result.

Having now seen the consequences of our problems and the causes of our problems, the solutions are obvious. To even halt the slide in our wages (and standard of living) we must eradicate at least one of these three problems. To reverse this trend (and restore our standard of living) requires eradicating all three problems.

Read the rest at The Street

The dwindling middle class, squeezed by higher taxes and costs, is losing its political voice.

The middle class is doomed by some very basic dynamics. Economic historian David Hackett Fischer laid out the fundamental dynamic in his book The Great Wave: Price Revolutions and the Rhythm of History.

By assembling price and wage data stretching back hundreds of years, Fischer found that cycles of economic growth spawned population growth, an expanding number of workers entering the market economy (as opposed to the non-market subsistence economy) and a demand-driven expansion of essential commodities such as grain and energy (wood, coal, oil, etc.).

In the initial phase, wages rise and commodity prices remain stable as supplies of essential goods expand and the demand for labor pushes up wages.

But this virtuous cycle reverses when the supply of essentials no longer keeps pace with rising population and demand: the price of essentials begin an inexorable rise even as an oversupply of labor drives down wages.

We like to think that modern economies have escaped this cycle, but that is hubris and denial, not reality, for the 20th and early 21st centuries have been characterized by inflation (the U.S. dollar has lost approximately 96% of its value since 1900) and wages have stagnated for the past 40 years: Soaring Poverty Casts Spotlight on ‘Lost Decade’:

According to the Census figures, the median annual income for a malefull-time, year-round worker in 2010 — $47,715 — was virtually unchanged, in 2010 dollars, from its level in 1973, when it was $49,065.Overall, median household income adjusted for inflation declined by 2.3 percent in 2010 from the previous year, to $49,445. That was 7 percent less than the peak of $53,252 in 1999.

We can see this steady decline in wages in this chart:

The more recent fall-off is depicted in this chart:

Notice that the only age bracket with rising incomes is the 65 and over cohort; everyone younger than 65 has seen their income slashed. And this is assuming “official” inflation is accurate; if it understates real inflation (loss of purchasing power), then the income declines are actually much more severe than charted here.

As I have observed many times before, the middle class filled this gap between rising costs and stagnating wages with debt. This chart reflects this reality:

Household debt has soared far above wages. (Note that this chart is not adjusted to inflation; in real terms, wages have been flat for decades).

Now that the average household is heavily indebted with student loans, vehicle loans, credit card debt and mortgages, its ability to leverage a declining income into more debt is seriously impaired. So filling the gap between rising costs and declining wages with debt is no longer a possibility.

Living within their means and servicing their mountains of debt removes most families from the middle class. As a rough metric, I define middle class as any household with the following attributes:

1. Meaningful healthcare insurance, either provided by an employer or paid by the household

2. Significant equity (20%+ of home value) in a home or other real estate

3. An income and expense sheet that enables the household to save at least 6% of its income

4. Significant retirement funds, either employer-provided or self-funded 401Ks or IRAs, family business, etc.

5. The ability to service all debt and expenses over the medium-term if one of the two primary household wage-earners lose their job, i.e. either the household has significant savings or its debts are modest compared to the household income.

Anything less than this basket of attributes is too precarious to qualify as middle class. These basics of financial security were standard-issue for the middle class in the postwar era.

A household could have all of the above attributes on an annual income of $40,000, or they may not have them with an income of $80,000, as “middle class” means some measure of financial security, i.e. owning assets and carrying a debt load that isn’t large enough to crush the household balance sheet if income declines.

We can further understand the precariousness of many American households by examining IRS tax data. The top 25% of taxpayers–34 million workers out of a workforce of 160 million and 140 million wage earners–pay almost 90% of all Federal income taxes. Where Do You Rank as a Taxpayer?

An adjusted gross income (AGI) of $66,193 or more puts you in the top 25% of earners. The top-earning 25% of taxpayers reported 65.81% of all AGI and paid 87.30% of total federal income taxes ( $755.9 billion).How much do you need to make to be in the top 50% of earners? Just $32,396. Fall below that level and you are in the bottom half, along with nearly 70 million of your fellow taxpayers. All told, that group earned just 13% of the income reported on 2009 tax returns. And they coughed up 2.25% of all the income taxes paid.

All these numbers mask the sobering reality that 38 Million Workers Made Less Than $10,000 in 2010– Equal to California’s Population (The Atlantic magazine)

If we dig into the data, we find that the top 25% (34 million workers) is really the top 33%, as only 104 million tax returns actually pay any Federal tax–and as noted above, the bottom 70 million paid a scant 13% of all Federal taxes while the top 34 million paid 87% of all income taxes.

Many Unhappy Returns? (America’s aggregate 1040, from IRS tax data).

In 2009, the IRS reported 140.5 Million personal income tax returns were filed. From this starting point, 36.3 Million returns (or, one quarter of the total) are lost to the tax base because of losses, exclusions or deductions. By line 43, taxable income, only 104.2 Million returns survive. In aggregate dollar amounts, total income from all sources falls from $7.7 Trillion to $5.1 Trillion — a decline of more than one-third. This latter amount is what truly constitutes the tax base, since it is the income ultimately subjected to tax.

Of course Social Security taxes are paid by low-income workers, but this amounts to 7.6% of income–not zero, but not too punishing compared to Federal tax rates.

What all this reveals is that the middle class has lost its political power. Roughly 40% of all households receive a check or equivalent from the Federal government, while at the top Power Elite crony capitalists skim capital gains and pay an average of 17% of all income.

The 100 million dependents on the Federal government (Central State) vote to support their share of the largesse, regardless of the consequences to future generations, and the Power Elite crony capitalists buy political protection for their cartels and financialization scams. The dwindling middle class ends up paying most of the taxes even as their percentage of the population falls to the point that their political voice is drowned out by more numerous dependents and Elites that both favor the Status Quo.

The Federal government is supporting its dependents and its crony-capitalist Elites with borrowed money: $1.5 trillion every year, fully 40% of the Federal budget. It is in effect filling the gap between exploding costs and declining income, just like the middle class did until they ran out of collateral to leverage.

The dwindling middle class, now at best perhaps 25% of the workforce, has been reduced to tax donkeys supporting those above and below who are dependent on Federal largesse.

Fisher found that this cycle ends in transformational political upheaval. No wonder; even as the class paying most of the taxes shrinks and is pressured by higher costs, the class of dependents expands as the economy deteriorates and the super-wealthy Power Elites continue to control the levers of Central State power.

I address these dynamics in various ways in all my books:

Resistance, Revolution, Liberation (Kindle edition)
An Unconventional Guide to Investing in Troubled Times (print edition)
An Unconventional Guide (Kindle edition)
Survival+: Structuring Prosperity for Yourself and the Nation
Survival+ (Kindle edition)
Survival+ The Primer
Primer (Kindle edition)
Weblogs & New Media: Marketing in Crisis
Marketing in Crisis (Kindle edition) 

Charles Hugh Smith – Of Two Minds

The Stupid, it burns!

Personal income increased $28.2 billion, or 0.2 percent, and disposable personal income (DPI) increased $18.9 billion, or 0.2 percent, in February, according to the Bureau of Economic Analysis. Personal consumption expenditures (PCE) increased $86.0 billion, or 0.8 percent.  In January, personal income increased $26.5 billion, or 0.2 percent, DPI increased $5.0 billion, or less than 0.1 percent, and PCE increased $40.9 billion, or 0.4 percent, based on revised estimates.

Real disposable income decreased 0.1 percent in February, compared with a decrease of 0.2 percent in January.  Real PCE increased 0.5 percent, compared with an increase of 0.2 percent.

Got it?

Real disposable income went down as the cost of living (necessities) went up faster than incomes.  But spending increased faster, which means we’re spending more than we make — again.

We are again into the space where people are clawing at the edge of the cliff trying to avoid disaster.  It’s not going to work any better than it has in the past.

The result was a drop in the “savings” rate to 3.7% from 4.3% last month, both well below the “reasonable” 5% rate.  And this is not actual savings (capital formation) either since debt pay-downs are included in “savings.”  In point of fact we have not de-levered to a material degree at all and now it appears that the consumer is getting dangerously close to the “drowning, actively and now” zone, likely driven to a large degree by gas prices.

It is never good when spending is rising faster than earnings folks.

The assumption that lower home prices improves the affordability of houses ignores two critical inputs: interest rates and income.

That the U.S. housing market is still in a post-bubble slump is no secret, as revealed by this chart courtesy of streettalklive.com: note that despite unprecedented intervention, including the complete socialization of the U.S. mortgage market (99% of all mortgages are guaranteed by the Federal government) and the socialization of subprime market for poor credit risks (3% down and easy credit from FHA), this chart punctures the happy-talk illusions of a rebound in housing.

Credit-asset class bubbles cannot be reinflated because they follow an S-curve.No matter how much taxpayer money the Federal government throws into the  housing market, it will not reinflate. The financialization (credit/leverage bubble) of housing  follows an S-curve as a system, and tweaking the parameters of the inputs (lowering interest rates, buying up toxic mortgages, etc.) doesn’t change the curve.

Hubris-soaked central Planners are incapable of understanding that their numerous policy interventions have essentially zero impact on the curve. But if you can’t believe systems don’t respond to frantic policy measures, then consider these factors:

1. Tens of millions of households are too poor to buy a home (the FDIC calculated 40% of the U.S. households have insufficient income and credit to buy a home)  without massive subsidies, and with no skin in the game their purchase is basically  a lease with an option to sell later for a private gain at the expense of the government.

if it doesn’t work out then it’s last one on, first one off: they default with little loss and possibly much to gain, i.e. two years living rent-free in a not-yet foreclosed house.

2. Tens of millions of other households are drowning in underwater mortgages they can afford to pay (barely) but that have crippled their net worth and borrowing power. They are out of the housing market except as potential defaulters.

3. Millions of other credit-worthy buyers have woken up to the fact that buying a house is a form of consumption and a risky “forced savings” investment, as property taxes spiral ever higher and prices continue sagging in many markets. The risk is high and the  potential gain is uncertain.

Those snapping up housing for cash are either buying to rent the homes or to speculate that a resurgent housing market will arise and they can “flip” for big profits. This segment simply isn’t large enough to soak up all the millions of homes languishing in the “shadow inventory” of homes  being held off the market in the vain hope prices will bubble higher.

The general idea of lower home prices is that once prices fall to some magic threshold, buyers will jump in and liquidate the inventory.  That notion makes two enormous assumptions:

Interest rates will stay near-zero when inflation is factored in

Household income will stop declining.

In other words, there are three inputs to housing affordability, and price is only one of them.Interest rates and disposable income are equally important. Note that income in all quintiles (the entire spectrum of income–high, middle  and low) has been declining since the housing bubble topped in 2007:

Official inflation has been running at around 3% a year, and many other measures suggest that number grossly understates reality by gaming the percentages of various inputs.

But taking the official 3% as a reasonable approximation, then buyers of 4% 30-year mortgages are earning a wafer-thin 1% in real return (4% – 3% = 1%) and they are taking a stupendous risk that inflation will remain well under 4% for the next three decades. Any surge in inflation and rates would destroy much of the value of their investment.

Let’s take two examples.Let’s say a house that sold for $400,000 at the top of the bubble is now selling for $250,000, $50,000 down (20%) with a $200,000 mortgage at 4%. let’s say the household earns $50,000, so the mortgage is exactly four times gross income. The interest on the mortgage is $8,000 annually (principal, property taxes, insurance etc. are added to make up the total mortgage payment).

Now let’s say the house declines in price to $225,000, so the down payment drops to $45,000 and the mortgage is $180,000. But let’s say investors are now demanding 3% above nominal inflation and mortgage rates are now at the historically moderate level of 6%. Meanwhile, the household income has slipped to $45,000 annually as bonuses and hours are trimmed and workers transition to lower paid positions.

The ratio of income to mortgage is still 4-to-1, but the annual interest payment is now $10,800, $2,800 higher–a 35% increase. By any measure, the house is less affordable despite declining $25,000 in price.

This is how affordability can decline even as home prices continue to slide.

Charles Hugh Smith – Of Two Minds

This recession has been unmercifully brutal on younger Americans.  Many are entering the most difficult employment market in generations with a flood of low wage jobs saddled with record levels of student debt.  Many have never even witnessed how it is to live in a bull stock market.    Of course this is assuming they had money to invest since 37 percent have no net worth or even worse, a negative net worth.  Even for the cautious minded, they are only able to garner a 0 percent savings rate as the Federal Reserve continues to implement a quantitative easing policy to rescue the banking sector.  The data on net worth for US households is disturbing since it highlights a deterioration of the middle class.  It is no surprise that this recession has caused many younger Americans to move back home with parents primarily because of the inability to find work and many that do find work find that it is part of the low wage growth sectors.

The young get dramatically poorer

This recession has been particularly tough for younger Americans.  Adjusting for inflation, those under 35 are worse off today financially than those in 1984:

From 1984 to 2009, the median net worth of younger households declined by 68%.  Older households did better seeing their net worth rise by 42%:

Source:  Pew   

The above is somewhat skewed however because it includes home equity.  The first chart we highlighted excludes home equity.  What this shows is that many younger Americans don’t own homes and for those that do, many have zero to negative equity.  So not only did they enter the worse employment market in a generation, they entered the worst housing market ever.  Yet excluding home equity for older Americans we see that they didn’t do as well either:

This is an interesting point to the 42 percent rise.  What we find is that excluding housing, many are doing worse off.  It just happens that they bought at the right time during a boom and even with the bust, they have netted out a gain.  Yet removing housing from the equation, net worth has fallen by 32 percent for those 65 and older as well.  What does this mean for the middle class?  What we can gather is that most Americans that bought in say the 1970s and 1980s (and even 1990s) still benefitted from the home equity they built over the years.  Younger Americans that likely bought in the 2000s have seen no equity gains and in fact, might have seen their equity disappear.

Read the rest at My Budget 360