The Devaluation and Fight for Survival of the American Middle Class – How Three Decades has Shifted the Concentration of Financial Wealth to the top 1 Percent.
The American middle class ideal is lionized around the world. It is the core of what has made this country great. The land of opportunity and endless wealth so long as people worked hard enough. It was an implicit contract workers made with this country. Well that vision is now quickly coming under attack by the corporate structure with banks being the main culprits leading the American middle class to the edge of financial ruin. The average American is looking at their current economy and wondering what ever happened to the security that was once provided to the “greatest generation” era. The Wall Street crowd after devouring their bailouts is telling Americans that this is simply how the market corrects. Yet at the same time, they are offering record bonuses to their elite. The same banking crowd that led this country to the financial edge is now rewarding itself with massive bonuses (taxpayer funded) while jobs are being lost and no industry is emerging to provide work to the middle class. As tough as it may be for many to swallow we are in a class warfare struggle. That is why you are seeing populist rage growing in both of our entrenchment political parties.
If you are wondering why those on Wall Street have a hop to their step, it is because the stock market wealth is concentrated in the hands of very few:
The top 1 percent control 42 percent of financial wealth in the United States. Now think about that fact. Let us assume you have saved diligently for a few years into your 401k. Before the crisis hit, you had amassed $100,000 (much higher than the median amount for Americans but we’ll just use this to highlight our point). At the low, that $100,000 was probably down to $50,000 even being diversified. With the major run up, the amount might now be back to $75,000 to $80,000. Has the life of the average American really changed? This money is actually retirement funds and this amount is not going to make a big difference in the way people live on a day to day basis. Yet those in the top 1 percent with the current shift have seen billions go their way and this does make a big difference since many draw off capital gains on a yearly basis.
The 401k structure is problematic in many ways. It is a method to lure in money from people to give them a taste of the Wall Street money machine. Most of these funds are designed for retirement. And with massive baby boomers retiring in the next few years, billions of dollars in funds will be sold into the market (which ironically will add pressure on prices because of demographic shifts). This will push prices down right when people will start drawing from their nest egg. The notion that you can garner 7 percent each year into infinity is a fallacy that has been exposed in this market crash.
We have been getting richer as a nation overall. This is true. But why is it so hard for average Americans to now get by with two incomes when one income seemed adequate 40 years ago? The income gains have largely gone to the top 1 percent from 1979 to 2005:
Source: Wikipedia
The above gains are inflation adjusted over three decades. While income did increase across categories this distribution was not even. It was largely shifted to the top of the pile. Now it would be one thing if the top was being run by companies that actually provided jobs for a large part of America. But it isn’t. You have CEOs of Manhattan banks that are trading derivatives on toxic mortgages and betting up oil futures all so they can skim the system for money. How has that added value to our country? It hasn’t. All it has done is transformed part of our economy into one subsidized taxpayer casino at the expense of the working middle class.
If you want to visualize this class division, it would roughly break down like this:
But even here, the top 1 percent isn’t even reflected. Even working families with say a nurse and an engineer can bring in $100,000 to $150,000 a year. But with things like the AMT even this tranche is feeling the burden. The big transfer of wealth is going to the top 1 percent:
“(Wikipedia) As of 2005 there are approximately 146,000 (0.1%) households with incomes exceeding $1,500,000, while the top 0.01% or 11,000 households had incomes exceeding $5,500,000. The 400 highest tax payers in the nation had gross annual household incomes exceeding $87,000,000. Household incomes for this group have risen more dramatically than for any other. As a result the gap between those who make less than one and half million dollars annually (99.9% of households) and those who make more (0.1%) has been steadily increasing, prompting The New York Times to proclaim that the “Richest Are Leaving Even the Rich Far Behind.” Indeed the income disparities within the top 1.5% are quite drastic. While households in the top 1.5% of households had incomes exceeding $250,000, 443% above the national median, their incomes were still 2200% lower than those of the top .01% of households. One can therefore conclude that almost any household, even those with incomes of $250,000 annually are poor when compared to the top .1%, who in turn are poor compared to the top 0.000267%, the top 400 taxpaying households.”
So we see where the money is really going. Even if we break down a family in California earning $100,000 you can see what was once considered rich is no longer the case:
And for those out in high cost states they will realize that a $350,000 home does not buy you much even after the tremendous crash in housing values. The cost of healthcare is rising and college costs are going up so with one child, they will want to set aside some money if they want to see their child have a decent college education when they are ready to go. And keep in mind that making $100,000 puts you in the top 17 percent of households in the U.S.:
So in reality, we should look at household that brings in $65,000 per year to get a more accurate feel of what the middle class is going through:
So after taxes, this family is taking home $4,240 a month. With rising taxes, higher food costs, healthcare rising, and wages stagnant you can see how the middle class is falling behind on a daily basis. We can further breakdown the class distribution as follows:
We do have class in our system and the biggest misnomer that has been perpetrated is that somehow, our goals are aligned with those of the banking Wall Street elite. How much longer do people need to realize that both political parties seem to serve one master and it has an address on Wall Street? The debates and battles seem to amount to this charade because once it comes time for policy, nothing gets done. Even Elizabeth Warren who is fighting for basic consumer rights is finding it even hard to get through because of banking lobbyist:
“It is impossible to buy a toaster that has a one-in-five chance of bursting into flames and burning down your house. But it is possible to refinance an existing home with a mortgage that has the same one-in-five chance of putting the family out on the street — and the mortgage won’t even carry a disclosure of that fact to the homeowner.”
The battle has gotten intense. Credit card companies have been doing criminal activities by jacking fees up and setting up traps for consumers before simple regulations come into effect. Banks have pulled back on lending to average Americans while profits from stock speculation have soared. They don’t call it speculation but label it as hedge funds, proprietary trading, or some other Orwellian language that hides the true nature of the system.
With the underemployment rate at over 17 percent and bankruptcies, foreclosures, and other financial distress rising for average Americans one small chunk of our population is benefitting on the backs of bailout funding. This has been characterized as it “taking a plunder” to rip off the village:
So what you do is take from the public:
Source: It Takes a Pillage
And give to the people that created this crisis:
I completely agree with Elizabeth Warren who is adamantly arguing that we are at a cross-road in terms of defending the middle class of this country. Instead, Wall Street enjoys the fact that Americans are split down the middle on issues and fighting over petty things while trillions keep rolling into their coffers. Time to wake up and see what is really happening to our nation.
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When I look at the S&P 500 like most people do, you would expect that this wide cross-section of companies in the U.S. would reflect an accurate measure of the true health of industries in our economy. Yet the S&P 500 is fully disconnected from any historical measures of valuations. It is startling to see people talk about the wild swings in the stock market as if this were somehow standard in a regular market. The S&P 500 fell by a stunning 58 percent from the peak in summer of 2007 to the low in March of 2009. But from March of 2009 to February of 2010 the market has rocketed back up by 63 percent. This kind of massive market volatility is not indicative of a healthy stock market. This is a symptom of a system that is having a really hard time valuing assets since much of the toxic financial assets are still lurking in the murky black box of many financial institutions.
Let us first look at the S&P 500 price to earnings ratio (adjusted for inflation):
Source: Robert Shiller, www.multpl.com
130 years of data and each major financial crisis has sent the PE ratio falling between the 5 and 10 range. This crisis has kept PE ratios elevated to the point that the S&P 500 is still valued at twice of what it should be if we use moderate historical valuations. And if we measure the bubble via earnings, valuations during this bubble got even more out of line compared to those prior to the Great Depression. Yet in this crisis, valuations never made it down to a more realistic level. This is endemic of our current financial system where market alchemy is suddenly supplanting any rational analysis of earnings and actual potential growth.
Take a look at inflation adjusted earnings:
Earnings have collapsed during this market turmoil yet the market is up some 63 percent. What is the rally based on? A lot of the rally is based on easy money flowing into financial institutions that are using their black box to make trades and maneuver around accounting rules to make out with billions in profits while the real economy is mired in real fundamental problems. And this is easy to see since all you need to do is look at how consumer credit has contracted over the crisis:
Now ask yourself the following question; if we are a consumption based society and a large part of our consumption is fueled by debt, doesn’t a massively contracting credit market mean people are spending less? Of course. The above chart merely reflects what average Americans are dealing with. They are adjusting their household budgets to reflect stagnant wages or lost jobs. They are battling with the reality that their homes are not worth what they once were during the halcyon days of the bubble. Yet the stock market has rallied as if we are back to the heyday of 2007.
This rally is really something to behold:
The only other time we saw such a sharp drop and rally was during the Great Depression. Yet the depression dragged on for over a decade and here we are less than one year from the bottom of this market correction and all of a sudden we expect the market to be valued at these levels with no justification from actual earnings? It just doesn’t make any financial sense. We are back to seeing bubble like behavior.
Middle class Americans are largely not participating in this rally. Clearly banks aren’t lending anymore even though they clamored for additional funds to provide credit to Americans. The home loans banks are making are all backed by the U.S. government which only adds further fuel to the flame. If you really want to see what sector by and large has benefitted the most from this rally, just look at the financial sector:
While the S&P 500 is up 63 percent and that in itself is stunning, the financial sector index is up a stunning 173 percent in this same period. Have the banks really gotten that much better? Is credit really flowing from their doors? Not really but banks have managed to take taxpayer money and funnel it back into the stock market that is largely becoming more and more like a casino. The structure is setup for quick profits even if it means long-term destruction for our economy. Why try giving a boring 30 year fixed mortgage and earn a modest fee, even though the client will be better off in the long run when you can dish out a toxic mortgage with a high commission but will eventually lead the borrower to ruin? That is the structure of our current financial system and nothing has really changed even though we have seen the most volatility since the Great Depression.
The current stock market valuation tells us that the stock market will hit another correction. Short of incomes going sky high or earnings doubling each subsequent quarter, at a certain point valuations need to come back down to Earth. Ironically the low reached in March of 2009 actually reflected a more sensible valuation of the economy. Right now the S&P 500 is betting that things are back to the good old days but clearly this is not the case. We should now be absolutely cautious when people try to value stocks or assets on potential values and not what reality is currently reflecting.
