The chart above shows what’s happening to the middle class.
A few years ago, TV journalist Lou Dobbs wrote a book on this middle class decline, The War on the Middle Class: How the Government, Big Business, and Special Interest Groups Are Waging War on the American Dream and How to Fight Back. His point: If the middle class is in decline, the United States is in decline, since the middle class is the engine of the U.S. economy.
During the 2012 Presidential campaign, both candidates Barack Obama and Mitt Romney promised to save the middle class. An inquiring mind might ask, “Why does the middle class need saving?” As most of us know, if the government is promising to save you, you have already lost.
Inflation Steals Wealth
The monetary system steals our wealth through inflation. The chart below explains why the poor and middle class are struggling, regardless of how hard they work.
Q: How does the monetary system cause inflation?
A: The primary cause of inflation is the printing of money. When money is printed—by banks or governments—two things happen: inflation kicks in and taxes goes up. When prices and taxes go up, people struggle financially.
Q: How do people survive when prices go up?
A: When prices go up, people use their credit cards to survive. Many are forced to cut expenses… like healthier food or dental care. Many become slaves to debt. And many more become little more than indentured servants, or slaves to their paychecks.
Debt Slaves
As middle-class income declined, and taxes and prices went up, many turned to their credit cards to survive, becoming slaves to debt.
The chart below tells that story.
Today, taxes, debt, and inflation are the iron shackles that bind modern-day slaves.
Two Types of Rich
Q: How are the rich getting richer, if the poor and middle class are growing poorer?
A: There are two types of rich people. One type of rich is the truly rich. They are getting richer. The other type of rich is getting poorer. The chart on the next page tells that story.
Figure 2U Cumulative change in real annual household capital income, by income group, 1979-2007
Q: I can see that the rich, the upper 1%, are getting richer. But what is happening to the 90-95%? Why is their income going down? Are those the rich that you’re talking about, the rich that are growing poorer?
A: Yes. This chart tells a tale of two different types of rich people. As you can see from the chart, the real rich, the top 1% of all Americans, became extremely rich—with a gain of 309% in income since 1979.
Yet, the top 95-99% are losing ground. Their income is not growing.
Q: Is this why you said earlier about some of the rich becoming the new poor?
A: Yes. Notice the chart we just looked at only takes us to 2007. That was the year the Great Recession began. After 2007, many millionaires were wiped out in the subprime mortgage fiasco and the stock market crash.
Q: So this chart would look worse today?
A: Yes. The upper 1% of Americans has gotten richer. Many of the others, the other type of rich I’ve described, are now poorer. Many slid from rich to poor in less than a year. Many were wiped out when they lost their high-paying jobs, their homes, and their wealth as stock portfolios collapsed.
Of the rich who survived the crash and remain in the upper 20%, many (thanks to inflation) are becoming poorer. Some have already slid into the middle class.
Q: Tell me again… what’s the difference between the two types of rich?
A: One type of rich is people with high-paying jobs, such as corporate executives, professional people such as doctors and lawyers, athletes, and movie stars. They are high-income rich.
The other type of rich is the person who does not need a job to be rich. Most of these people are asset-rich.
The Millionaire Next Door
In 1996, The Millionaire Next Door was published. It was a great book for its time. Written by Thomas J. Stanley and William D. Danko, the book described how ordinary, middle-class citizens had become millionaires. They did it without being Donald Trump, Steve Jobs, or Gordon Gekko from the movie Wall Street. They were not millionaire movie stars, rock stars, or professional athletes. They had become middle-class millionaires by having a good education, living in a modest home in an upscale neighborhood, driving sensible cars, saving money, and investing steadily in the stock market.
Many were “net-worth millionaires,” people who had become rich as a result of the rising value on their homes and retirement portfolios. They had become middle-class millionaires through inflation, by being part of the rising U.S. economy. They were living proof of the American Dream.
The September 11, 2001 terrorist attacks signaled the start of the new millennium and end of the American Dream.
The chart below shows that, since 9/11, life for the millionaire-next-door has not been easy.
In 2000, the NASDAQ or dot-com crash triggered a series of booms and busts, shaking many millionaires-next-door out of the millionaire category.
The Foreclosure Next Door
In 2007, when the subprime-mortgage bubble burst, many millionaires-next-door became the foreclosure-next-door.
Figure 4: U.S. Homes Foreclosed
June 2012
Prior to 2007, housing prices had been rising steadily for years. As home prices rose, millions of homeowners began taking out “home-equity loans,” which many used to pay off credit card debt or go on vacation. Using their homes as ATMs… they learned the hard way—when they were upside down—that their “house is not an asset.”
When housing prices crashed, credit card use went down. When homeowners stopped using their credit cards, the economy slowed because the economy depends upon consumer spending and use of their credit cards. When consumers slowed their spending, retailers began to suffer, and when retailers suffer the world economy suffers.
Today, in 2014, there are approximately 115 million households in the United States. Of those 115 million households, 43 million are renters and 25 million are households or families who own their homes free and clear. Of the approximately 50 million households with mortgages, it’s estimated that over 24 million are “underwater,” which means they owe more on their home than their home is worth.
As long as homeowners feel poor, the economy will suffer.
The Lost Generation
When the middle-class millionaires-next-door lost their jobs and their homes, and began using retirement accounts to pay the bills, there was another casualty: The children of the millionaire-next-door.
All over the world, there is a generation of young people known as the new lost generation. They’re the college and trade school and high school grads who cannot find jobs or