Bye-Bye Miss American Pie

Middle Class are the New Poor

For many Americans, to be middle class was aspirational: a good paying and secure job, new cars, college education for the children, a comfortable retirement in a home that was close to paid off and lots of shopping along the way.  Rather than addressing how to bring the 50 million Americans living below the poverty line into the middle class, tomorrow’s election is more focused on how to save the middle class from falling into poverty.  The subtext is that the American dream is at risk.

What’s Your Number?

The Fed’s recently completed Survey of Consumer Finances reported that the median net worth of households fell 39% from $126,400 in 2007 to $77,300 in 2010. The mean fell only 14.7%. The middle class had taken the hit. After steadily rising since measurements began in 1967, real household median income peaked in 1999.  Meanwhile, the average share of the federal deficit by household will be $140,000 in 2012 compared to $80,000 in 2007 and $50,000 in 1999.  Remarkably, GDP has gone up every year since 1949, except for 2009.  In 1999, GDP averaged $93,000 per household, in 2007 it was $130,000 and in 2012 it will be $138,000.  The business of America seems to be in better shape than the middle class.

Shop ‘Til You Drop

As the credit crisis began to unfold, both the Treasury Secretary and the Federal Reserve Chairman preached that the economy would fail without widespread intervention.  Only then did the American consumer lack the confidence to spend.  The Great Recession ensued.  In order to stimulate growth, the Fed lowered interest rates dramatically, eventually getting close to a rate of zero, and pledged to keep rates that low through mid-2015.  Yet GDP growth remains sluggish.  The Fed has aggressively added to the money supply.  Yet the M2 velocity of money, the frequency of the flow of funds spent on new goods and services, is now at its low since 1962, well down from its high in 1997.  Despite the questionable benefits of the Fed’s policies, the American consumer’s ability to keep the economy strong is unassailable – as long as the middle class has the resources and the confidence to spend.

There You Go Again

The US is now guaranteeing or funding essentially all new conforming mortgages since taking over Fannie Mae and Freddie Mac.  The Fed buys a lot of those same mortgages.  Homes are especially affordable as prices hit bottom five months ago and mortgage rates are at record lows. The largest institutional investors in the country are buying up many of the homes for sale, outbidding owner-occupant buyers.  Many homes are being deliberately held off the market by banks and government agencies.  From a glut of houses in 2007 that set off the credit crisis, the inventory of homes for sale is back at low levels.  These efforts to increase home prices may end up benefiting bank balance sheets more than those of the average household, whose home equity represents only 12% of net worth.

Get a Job

The Fed has announced a policy objective to reduce unemployment, even though it is a lagging indicator.  Meanwhile, the employment numbers in the private sector have gone up for the last 32 months in a row.  At the current unemployment rate of 7.9%, the Fed has only a 2% to 3% reduction in unemployment left to reach its goal, which some economists are predicting can happen by 2014, potentially causing a conflict with the Fed’s promise to keep interest rates low.  Employment is improving despite the headwinds of job automation, recession-tested businesses using fewer employees, government jobs shrinking, and expanded relief programs targeting the poor and unemployed.

Let Them Eat Cake

The biggest drought in recorded history in the Midwest has moved the price of wheat to an all-time high.  Since June, international prices for agricultural commodities have risen almost 30%.  Growth policies that increase demand and create shortages can impact lower-income households as they need to devote a larger portion of their disposable income to inelastic expenses.

Can the Patient Survive the Medicine?

We can only speculate if a free market would have sorted out how to distribute and protect capital, services, products and wealth without interventions and regulations that benefit the status quo.  If the American dream is at risk, hopefully the risk is not from the policies and programs designed to save it.

About Nick Stonnington

Nick Stonnington has been a wealth advisor since 1983. He founded Stonnington Group in 2004 to better serve clients by offering them a platform for independent fiduciary advice. The Stonnington Group team manages client investments and advises on their businesses. Nick was ranked #1 in Los Angeles by Registered Rep Magazine in 2002 for "America's Best Wealth Advisors." Nick's expert commentary has been featured in such publications as the Wall Street Journal, Los Angeles Times, New York Times, Investment News, and Investment Advisor. His research has been published in the Family Wealth Report and he has written articles on investing for numerous industry journals.
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