Tag Archives: Income

America’s Bottom 50% Have Nowhere To Go But Down, by Charles Hugh Smith

Once upon a time you could support yourself and a family with a steady job that paid low wages. Those days are long gone. From Charles Hugh Smith at oftwominds.com:

One might anticipate that the bottom 50%’s meager share of the nation’s exploding wealth would have increased as smartly as the wealth of the billionaires, but alas, no.

America’s economy has changed in ways few of the winners seem to notice, as they’re too busy cheerleading their own brilliance and success. In the view of the winners, who just so happen to occupy all the seats at the media-punditry-Federal Reserve, etc. table–the rising tide of stock, bond and real estate bubbles are raising all boats. What’s left unsaid is except for the 50% of boats with gaping holes below the waterline, i.e. stagnant wages and a fast-rising cost of living.

The truth the self-satisfied winners don’t include in their self-congratulatory rah-rah is there’s no place for the bottom 50% of American households to go but down. All the winnings flow to those who already owned assets back when they were affordable– the already-wealthy–whose wealth has soared as assets have shot to the moon while the the burdens of inflation and debt service hit the bottom 50% the hardest.

Meanwhile, the Federal Reserve is whining that inflation isn’t high enough yet for their refined tastes. Boo-hoo, how sad for the Fed–inflation isn’t yet high enough. Oh wait–didn’t they each mint millions by front-running their own policies? No wonder they’re not worried about inflation.

The reality few acknowledge is that globalization and financialization have stripped the American economy of low-skilled jobs that don’t demand much of the employee. The reality is that a great many people don’t have what it takes to learn high-level skills and work at a demanding pace under constant pressure–the description of the average job in America.

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Why It’s so Hard to Escape America’s “Anti-Poverty” Programs, by Justin Murray

Even those whose work ethic isn’t destroyed by poverty assistance often find it economically disadvantageous to  accept gainful employment, it costs them money. From Justin Murray at mises.org:

One of the most common debates that has occurred in the United States for the past six decades is the discussion of the poverty rate. As the narrative goes, the US has an unusually high poverty rate compared to equivalent nations in the OECD (Organisation for Economic Co-operation and Development). Although it’s true that the measure of poverty is flawed, especially when compared cross-nationally, this piece addresses the reasons why the poverty rate in the US in particular has not improved.

If we look at the graph below, we see that official poverty rates fell 44 percent between 1960 and 1969 then spent the next fifty years fluctuating between an 11 and 15 percent poverty rate. It’s this lack of improvement over a five-decade period that is interesting, especially considering that poverty rates had consistently been dropping for over a century.


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The U.S. Economy In Two Words: Asymmetric Gains, by Charles Hugh Smith

Gains in income and wealth have become very concentrated in the US. From Charles Hugh Smith at oftwominds.com:

The Status Quo is in trouble if the bottom 95% wake up to the asymmetric gains that are the only possible output of our hyper-financialized economy.
The core dynamic of the U.S. economy in this era is asymmetric gains: the gains in income, wealth and power are increasingly concentrated in the top slice of the economy and society, while the income, wealth and power of the majority stagnate or decline.
The Status Quo must paper over this widening gulf with threadbare narratives that no longer match reality: for example, we’re an ownership society. We sure are: the vast majority of the nation’s productive assets are owned by the top 5%.
The U.S. economy has changed, but the transformation is largely invisible to the average participant and conventional economist. The previous iteration of the economy expired in the 1970s, an era of stagflation (stagnant growth and rising inflation that eroded the purchasing power of most households), higher energy costs and increasing global competition, an era in which the “external costs” of industrial-scale pollution finally came home to roost and the early stages of digital technologies began impacting human labor.
Stocks and bonds were destroyed in the 1970s. Investing capital in industrial production no longer generated outsized profits.
The 1980s ushered in a New Economy based on financial magic: the outsized profits flowed to those with access to credit and the tools of financialization: buying assets with borrowed money, selling the assets off in the global marketplace and reaping enormous gains by producing no goods or services.
We now inhabit a hyper-financialized economy in which the only way to get ahead is to speculate. For the middle class, this means speculating in housing: if you hit the jackpot and your house soars in value, then leverage this new wealth into the cash needed to buy a second property–or extract the equity to fund a more luxe lifestyle.
Entrepreneurs seek to generate “value” only as a means of cashing out via an initial public offering or selling their company to a global corporation. The “value” sought now is the perception of value–the magic of future promise that boosts valuations into the millions, or better yet, billions.

The Illusion of Prosperity, by Michael Lebowitz

Current prosperity is nothing but a debt-fueled illusion. From Michael Lebowitz at 720global.com:

For the last 50 years, the consumer, that means you and me, have been the most powerful force driving the U.S. economy. Household spending now accounts for almost 70% of economic growth, about 10% more than it did in 1971. Household spending in the U.S. is also approximately 10-15% higher than most other developed nations.

Currently, U.S. economic growth is anemic and still suffering from the after-shocks of the financial crisis. Importantly, much of that weakness is the result of growing stress on consumers. Using the compelling graph below and the data behind it, we can illustrate why the U.S. economy and consumers are struggling.

Data Courtesy: St. Louis Federal Reserve (FRED) and Lance Roberts

The blue line on the graph above marks the difference between median disposable income (income less taxes) and the median cost of living. A positive number indicates people at the median made more than their costs of living. In other words, their income exceeds the costs of things like food, housing, and insurance and they have money left over to spend or save. This is often referred to as “having disposable income.” If the number in the above calculation is negative, income is not enough to cover essential expenses.

From at least 1959 to 1971, the blue line above was positive and trending higher. The consumer was in great shape. In 1971 the trend reversed in part due to President Nixon’s actions to remove the U.S. dollar from the gold standard. Unbeknownst to many at the time, that decision allowed the U.S. government to run consistent trade and fiscal deficits while its citizens were able to take on more debt. Other than rampant inflation, there were no immediate consequences. In 1971, following this historic action, the blue line began to trend lower.

By 1990, the median U.S. citizen had less disposable income than the median cost of living; i.e., the blue line turned negative. This trend lower has continued ever since. The 2008 financial crisis proved to be a tipping point where the burden of debt was too much for many consumers to handle. Since 2008 the negative trend in the blue line has further steepened.

You might be thinking, if incomes were less than our standard of living, why did it feel like our standard of living remained stable?

One word – DEBT.

To continue reading: The Illusion of Prosperity

The Two Charts That Dictate the Future of the Economy, by Charles Hugh Smith

Debt and asset bubbles can’t hide the fact that real incomes have gone nowhere for over two decades for the bottom 80 percent of the US population. From Charles Hugh Smith at oftwominds.com:

If you study these charts closely, you can only conclude that the US economy is doomed to secular stagnation and never-ending recession.

The stock market, bond yields and statistical measures of the economy can be gamed, manipulated and massaged by authorities, but the real economy cannot. This is especially true for the core drivers of the economy, real (adjusted for inflation) household income and real disposable household income, i.e. the real income remaining after debt service (interest and principal), rent, healthcare co-payments and insurance and other essential living expenses.
If you want to predict the future of the U.S. economy, look at real household income. If real income is stagnant or declining, households cannot afford to take on more debt or pay for additional consumption.
The Masters of the Economy have replaced the income lost to inflation and economic stagnation with debt for the past 17 years. They’ve managed to do so by lowering interest rates (and thus lowering interest payments), enabling households to borrow more (and thus buy more) with the same monthly debt payments.
But this financial shuck and jive eventually runs out of rope: eventually, the rising cost of living soaks up so much of the household income that the household can not legitimately afford additional debt, even at near-zero interest rates.
For this reason, real household income will dictate the future of the economy.If household incomes continue stagnating or declining, widespread advances in prosperity are impossible.
The Masters of the Economy have played another financial game to mask the erosion of real income: inflating speculative asset bubbles to boost the illusion of wealth, a form of financial sorcery called the wealth effect: households that see their stock and bond funds swelling by 50% to 100% in a few years are emboldened to believe this phantom “wealth” is permanent and thus can be freely spent in the present.

How the Elites Betrayed Working-Class America, by Bill Bonner

Perhaps the saddest part of the working class’s plight in America is that most don’t know how badly they’ve been betrayed by the elite. From Bill Bonner at internationalman.com:

Win-win deals get people more of what they want. Win-lose deals – usually imposed by government – bring them less. The few (the insiders) use government to exploit the many (the rest of us).

Win-lose deals also depress economic progress for everybody. Partly, this happens for an obvious reason.

Dropping the atom bomb on Hiroshima was a technical milestone, but not the kind of progress we’re talking about. Progress only makes sense if it means that people are able to get more of what they want.

By definition, when a person is forced into a bad deal, he gets less of what he wants.

Progress is also a learning process. You try something. You see what works and what doesn’t. As people experiment in this way, they learn… and the economy accumulates knowledge and wealth.

They learn to get to work in the morning, for example… to say please and thank you… to save their money… and to invest it wisely.

Win-lose deals interrupt the learning process. That’s why welfare programs fail: People get money without learning.

Temptation to Cheat

That is the real reason the Soviet Union failed, too.

Consumers were forced to buy whatever shoddy products were made available to them; producers had no way to learn how to make good ones.

Toward the end, products available for purchase in the Soviet Union were worth less than the raw materials and labor that went into them.

What do you need for win-win deals?

Three things:

1) People must be free to make choices with their time and money.

2) They must have money they can trust.

3) They must trust each other to respect their rights and property.

These things don’t happen smoothly and without interruption.

Progress is cyclical. Win-win deals add wealth and move society forward. But they depend on trust. And as trust increases, so does the temptation to cheat. When everyone leaves his liquor cabinet open, for example, who can resist having a drink?

Then trust declines. Barriers go up. Costs increase. Win-win gives way to win-lose. Progress goes into reverse.

To continue reading: How the Elites Betrayed Working-Class America

The Inevitability Of DeGrowth, by Charles Hugh Smith

Charles Hugh Smith argues that current trends in debt and energy use are unsustainable. From Smith at oftwominds.com:

Debt-dependent consumption in a world in which wages stagnate for the bottom 90% and energy costs increase as demand outstrips supply is a system with only one possible end-point: collapse.

Even though we don’t know precisely how the future will unfold, we know a few things:
— Of the 7.5 billion humans on the planet, virtually every individual wants to enjoy a high-energy consumption “middle-class” lifestyle. As a generous estimate, 1.5 billion people enjoy a high-energy consumption lifestyle today; the remaining six billion are aspirants hungry for all the goodies enjoyed by the 1.5 billion—all goodies based on affordable, abundant energy.
Our dependence on debt to fuel growth—more extraction of resources, more energy, more manufacturing, more consumption and more earned income to pay for all this expansion of debt and consumption—has built-in limits: debt accrues interest and principal payments, which reduce the remaining income available to spend on consumption.  Our dependence on fast-rising debt just to maintain low rates of growth eventually limits our ability to pay for more consumption/growth. When most income is devoted to servicing debt, there isn’t enough left to buy more stuff or support additional debt.
–The debt needed to move the growth needle is expanding at a much higher rate than the growth it generates. While growth is stagnant, debt is expanding by leaps and bounds to unprecedented levels. (Global Debt Hits A New Record High Of $217 Trillion; 327% Of GDP)
Wages are stagnating for the bottom 90% of the workforce. We can quibble about the causes, but there is no plausible evidence to support a belief that this trend will magically reverse.
–The cost of the most valuable energy–high-density, easy to transport—will slowly but surely become more expensive as the cheap, easy-to-extract energy sources are depleted, notwithstanding the temporary boost provided by the fast-depleting wells of the fracking “miracle.”
–There are limits on our exploitation of resources such as fresh water and wild fisheries. Humans can print currency (money) but we can’t print fresh water, energy, wild fisheries, etc. If one unit of currency currently buys one liter of petrol, printing 10 more units of money doesn’t create 10 more liters of fuel.
To continue reading: The Inevitability Of DeGrowth

He Said That? 10/20/15

Consumption, in the long run in which we are all dead, ultimately cannot be greater than production. Who knew? From David Stockman:

In short, the affliction of Keynesian economics brought many ills to the modern world, but repeal of Say’s Law was not among them. You can have a one-time credit party, but when it inevitably ends, consumption spending defaults to that which can be financed from current incomes. Consumption is the consequence of production and income, not its cause.

Red Swan Descending

Why We Feel So Poor, In Two Charts, by John Rubino

Can you guess the two culprits John Rubino fingers as to why we feel so poor? A hint: they are the two sectors of the economy in which the government has most deepened its involvement since 1990. From  dollarcollapse.com:

Among the many things that mystify economists these days, the biggest might be the lingering perception, despite six years of ostensible recovery, that the average person is getting poorer rather than richer. Lots of culprits come in for blame, including the growing gap between the 1% and everyone else, negative interest rates (which starve savers and retirees of income) and the crappy nature of the new jobs being created in this recovery.

But one that doesn’t get much mention is the changing nature of the bills we’re paying. It seems that Americans are spending a lot more on health care, which leaves less for everything else. Here’s an excerpt from a MarketWatch report of a couple of weeks back, with two charts that tell the tale:

Share of consumer spending on health hits another record

The percentage of money U.S. consumers spend on health care rose in 2014 for the third straight year to another record high, according to one government measure.

Some 20.6% of total consumer spending in 2014 was devoted to health care, including prescription and over-the-counter drugs, annual figures from the Commerce Department report on personal expenditures show. That’s up from 20.4% in 2013.

Health-care expenses has been rising for decades regardless of government efforts to control costs. The percentage of consumer spending on health care rose from 15% in 1990, topping 20% for the first time in 2009.


To continue reading: Why We Feel So Poor