Will there be a Middle Class in 10 Years?

Going Down With the Joneses

Recognizing the New "Great Divide"
By Lance W. Newton

I started thinking in 2005 and writing in 2008 on topics related to the sustainability of the
American (Middle Class) Lifestyle. Since much of our life style has related to home
ownership in recent years, I have paid quite a bit of attention to home ownership related
issues here at www.Unsustainabubble.com . What I have left out is discussion of the many
other factors that have resulted in the widest gap in wealth since the last "Golden Age".
Today we are truly a two class society in all but name.

It occurred to me that a good title for an entry to discuss the middle current middle class
dilemma is "Going Down with the Joneses", since most of us spent so much of our time
and have apparently put ourselves in unsustainable and insurmountable debt "Keeping Up
With the Joneses" from the early 1950's on. Now we must face the consequences or "Go
Down with the Joneses" if you will.

My goal in writing this is to help other middle class people understand their best course of
action to retain their Middle Class status or grow beyond it if possible. My belief is that
going forward this will require a renewed intergenerational approach to rebuilding wealth
that flies directly in the face of American societal trends since the 1950's. I believe that in
order to move forward again, we will have to go back to work closely together in family
units and at the local level, where there is trust. I write about this at
http://sustainedabundance.com .

Recently I found an author who is new to me that has a great deal to say on related
topics. David Shvartsman has a revealing look at middle current middle class values
in one of his articles, "Singing the Middle Class Blues" with many relevant links.

The Status of the Many

In my view, the primary keys to our growth as a country were abundant natural resources
combined with abundant human resources in an economic system that promoted a strong
middle class and upward mobility for those who could work hard and were willing to
sacrifice for the future. The widespread availability of good education and access to
learning for all made us a shining beacon for immigrants who found ready markets at
higher than world pay in our industrial complex. Today this is far less true, although we
still attract the best and brightest from many parts of the world, because on a relative
scale, life is better here than in many places and corruption is less visible, with less effect
on workers at the street level.

The tremendous gap in wealth that currently exists in this country has been at least
partially generated by the creation of deregulated debt and its excessive use by the
middle class as our economy moved from profits generated by industrial manufacturing to
the manufacturing of paper profits, or "Financialization".

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Will there be a Middle Class in 10 Years?

The leverage available in financial transactions combined with electronic trading in global
markets has led to a concentration of wealth by those (large banks, hedge funds, and epic
traders like Paulson and Soros) who can understand and manipulate the system. As a
result we now face the possible collapse of whole economies in part based on complex
trades in currencies and the use of supercomputers and algorithimic programs that
generate tiny profits on millions of shares traded each day for the brokerages and the
exchanges they work with, even when share values for stocks traded stay the same.

I remain concerned about hedge funds and currency manipulation strategies, given the
mess in Europe and the absence of Global Regulation for complex trades. Can it really be
that a few individuals would bring down entire currencies and perhaps a continent or two
for immediate gain? Is George Soros the poster boy for the next generation of “winners”
in the hedge fund world? How could I have lived this long and stayed so naive about big
money?

I have also realized that our collective failure as individuals to save from 1985 on (and/or
our propensity to consume) has created issues that have contributed to the collapse of the
American middle class, although I have not talked about this very much. (So who wants
to listen to or read about such bad news?). Of course another piece of this issue is the
transfer of pension and healthcare costs from employers to individuals on top of the
destruction of wealth in 401k plans and Real Estate.

These cost transfers were triggered by promised Government and Corporate entitlements
that were never properly funded (think GM and Chrysler Defined Benefit Plans),
compounded by rising life expectancy and expansion and waste in Government
spending. Another key element is wealth transfer to the top of the food chain as CEO pay
rose exponentially from 40x to 500x line workers while pay for line workers stagnated
with real wages declining and cost transfers to employees soaring since 1970.

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Will there be a Middle Class in 10 Years?

All of this on top of creeping hidden and openly increasing taxes or monetizing future tax
revenues to spend them today, all to fund waste at all levels of government.

I have tried to get average people interested in taking charge of their own financial future
by Self Directing their own retirement plans at http://selfdirectioncentral.com/.

Average Americans had about $10k in their IRA and maybe $40k in a 401k if they had
one before this meltdown. I routinely have calls from people with $50k I their pension at
age 50 who want $5k per month after retirement from their plan and they want to retire
early! The level of denial is mind numbing.

Most of the Boomer generation will be unable to retire and will work as long as they are
physically able. I read recently that 40% of the allocations for future medical research are
for finding ways to keep workers physically productive longer into old age.

The diminishing ratio of “productive” workers (over 15 and younger than 64) to
“unproductive” workers will eventually make government entitlements unsustainable. This
makes sense in a rapidly aging population as we witness the load on society created by
carrying unproductive retirees.

It is becoming clear to average people that promised entitlements may not materialize
and there is open debate on the transfer of costs for entitlements and bailouts to future
generations. Pushback from younger generations will lead to civil unrest in the future as
they realize the load we are asking them to bear.

Below is a chart of 2004 Government data on Social Security Payments as a percentage of

income for retirees. This data does not reflect the 10,000 Baby Boomers that are daily
filing for Social Security benefits now, most on the first day they are eligible after age 62.

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It is interesting on many levels how individuals have historically abdicated responsibility

for their own futures to money managers (third parties with no skin in the game) and the
ability to use OPM to enrich themselves at an increasingly record pace.

Smart money recognized individual aversion to making financial decisions early on and
created the mass financial vehicles (starting with life insurance and mutual funds) that
parted average Americans from their money for decades. The deregulation
of Financial Institutions (after the repeal of the 1933 Glass Steagall Act in 1999)
accelerated this process and we are now seeing much of it unwind.

Most individual investors balk at any decision that involves more than two choices and we
are a society that looks for the ability to sue someone if our investments go wrong (easier
than taking responsibility for our own decisions). Of course there is still the illusion that
funds are recoverable in the event of a meltdown because of federal guarantees from
FDIC or SIPC.

I understand that less than 2% of individuals manage their own retirement funds, even
after the most recent ravages of the stock market. The same percentage (2%) are
financially independent after retirement.

I believe that a few more will self direct in the future and base their investments in hard
assets they can see and touch. Rational people know that our current average lifestyle will
change for the worse (revert to the global mean), but that may not be a bad thing for
individuals except those who take no responsibility for their future. They will face a life
based on unsustainable handouts. What a prospect for the great Boomer Generation, so
lovingly described as “beneficiary units” by Uncle Sam.

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The Status of the Few

The other side of this coin is the improbable accumulation of wealth by a tiny fraction of
our population in the historically short period between 2000 and 2006.

During this time, the tiny slice at the top of the heap essentially doubled their wealth
while the middle class atrophied. One of the most interesting explanations is in the book
"Unjust Deserts" by Gar Alperovitz and Lew Daly, which posits that a few individuals have
unjustly benefited from the aggregated profits that rightly belong to all of society. I do not
know if this is the case, but the question is worth discussing.

The book discusses the fortunes aggregated by folks like Warren Buffet and Bill Gates,
both of whom are active philanthropists, but neither of whom have exactly given away the
store. The popular media has brought forward the "success" of so many incompetents in
the financial sector, but I am more intrigued by the success of the competent and
understanding the basis of that success.

I started following the story of John Paulson, the hedge fund manager of the year in 2007,
“The Man Who Made Too Much” and other hedge fund managers and think you would
enjoy the resignation letter of Andrew Lahde, who made a smaller fortune than Paulson,
also by betting against Subprime loans. The tone and content of the letter is truly
astounding.

I was interested in the Paulson 2007 Payday mostly because I can’t comprehend the size
and scope of the other side of the trades that resulted in 500+% returns in a single
year and I lack the accounting skills to calculate what the losses on the other side of those
trades were and how many individuals were affected in order to aggregate the gains
represented by a $3Billion + payout to a fund manager who had no downside risk on that
payout, special tax treatment and may not even have had any of his own money invested.

Source: www.pewresearch.org

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Will there be a Middle Class in 10 Years?

I am not against the accumulation of wealth. I simply want to understand how this can be
done sustainably, act accordingly and teach the next generation to do the same.

"Let's consider our world not as inherited from our parents, but as borrowed from our children...."

-- Kenyan Proverb

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