One Overlooked Reason Why the Middle Class Is in Decline

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 Tankthe 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 are 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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  • B Wiseman

    This points to the missing link in political/economic discussions of our day. The problem is not simply how do we produce more good-paying jobs, it is how do we create more wealth for those in the middle. Which means ownership. ‘Equity’, in financial speak.

    If you are a gentleman or lady of a certain age, you may well remember that in your youth, the ‘rich’ were those families in your town who owned grocery stores, department stores, banks, hotels, small factories, ranging down to restaurants, hardware or office supply or any of a large number of retail outlets, and so on. This wealth, and the skills to build or manage it, was possessed by families in your town, and got handed down from one generation to the next. The people in your town quite literally owned the local economy.

    And your local elected officials got elected by knowing and serving these folks. Things more of less worked for the benefit of all.

    Now the ‘rich’ are the 1% who control massive nationwide corporate rollups of all these industries. The ownership, or equity share of the economy has been largely transferred from the broader middle class to those who own the stock market. Our local enterprisers now own franchises, which is a business model where the crucial equity – the branding – is owned elsewhere. More likely, they manage the local outpost of the kind of store their parents used to own, whether it’s a hypermart superstore or a barber shop.

    Your local economy is owned by people you don’t know, will never meet, nor even know their names.

    Not surprisingly, the power has followed the money. The elected officials get elected by knowing and serving the plutocrats. So things work better and better for fewer and fewer.

    No economic solution can work without acknowledging this problem, and solving it.

  • I said this before, I think capitalism is a PONZI SCHEME. I LAUGH when my rightwing friends say, whenever I post something about social security, they say like trained parrots, “SOCIAL SECURITY IS A PONZI SCHEME”. I always shoot back: “CAPITALISM is a ponzi scheme”. lol Or at least “crony” capitalism is a ponzi scheme. But I’m thinking real capitalism isn’t possible by design, it’s pie-in-the-sky, theoretical, not put into practice in reality, etc…etc…
    Also, rightwing parrots say this same exact thing when raising minimum wage comes up: “MINIMUM WAGE RAISES PRICES”. Logically, then, ANY raise raises prices, not just minimum wage magically only raises prices. How much does a CEO’s $50 billion salary raise the prices? Oh, that magically does NOT raise the prices, I forgot. So THAT’S a ponzi scheme, too: raises & prices going up. So no one should ever get a raise, ANYONE, not just minimum wage, or “prices will go up” and we all have to do our part so prices don’t go up so everyone should refuse a raise next time it comes up.
    Oh, wait a second, I forgot, prices go up all the time whether there’s raises or not. Sorry. They just keep going up. In fact, they go up even when peoples’ pay is CUT. Whoops!!!

  • Robin

    “Middle class”: the concept itself is a red herring. The whole thing was intended by the very rich (with the help of a few servants — no sorry, friends — in the government). It is meant to trick you that you can be “part of the club”, that you too can be moderately wealthy. In fact the middle class has never existed. Seriously. Think about it.