The Good, the Bad, and the Beautiful.

It has been nearly 7 years since the Great Recession of 2008. Some people have recovered, but many have not. When I say “recovered”, I mean recovered the lifestyle they had pre-2008. Whether willingly or unwillingly, there are many people who have downgraded their lifestyle.

How do I know this? Examine the below chart – the Household Debt Repayment Burden:

Household_Debt

This chart can tell us how vulnerable American households are to another recession. When the ratio is high, such as in 2007, then the risks are substantial. When the ratio is low, such as in the early 1990s, then the risks are much lower. Today, the risks are some of the lowest they’ve been: just under 10%.

In 2008, households were highly levered up on loan, mortgage, and credit card debt. When the recession hit, many of these households lost quite a bit of money, if not everything. I knew one guy, a co-worker, who lost everything. He had a McMansion in the ‘burbs, two luxury sedans, the finest Bose surround systems and largest TVs… This guy even bought Armani suits for his 8-year old, for Pete’s sake. Unfortunately, it was fake prosperity; he was living on borrowed money. He lost it all, including his own wife, who left him not long after.

The debt ratio has come down quite a bit since 2007 – nearly 4%. This is a huge difference. Americans have tightened their belts. Households have clamped down on the amount of debt they are willing to hold. This is a sign of fiscal good-sense. If another recession hits, far fewer households will likely be as severely affected as they were in 2008.

Americans have learned their lesson. This is the good news.

Unfortunately, there is more to this story. It ain’t all sunshine and rainbows. Turn your attention to the next chart – Real Median Household Income:

Household_Income

Off the bat, we can see that real household median income is the lowest it’s been since 1994. This means that American households are currently worse off now than they’ve been for 21 years. We have far less purchasing power per-household now than ever within the past 21 years.

It gets worse, if you can believe that. We have undergone huge amounts of price inflation since 1994. Price inflation pushes up wages, which is of course sort of a fake-out; wage increases don’t mean much when they’re merely to keep up with price inflation. The really dicey part about this is that the inflationary wage increases have pushed people into higher income tax brackets. People are taxed more based on higher wages that do not actually have higher purchasing power, in real terms. It doesn’t stop there; there are Social Security taxes, which are much more oppressive now than ever before. In 1989, maximum taxable income subject to the Social Security tax was $48,000; nowadays, the number is $118,000. The overall tax burden on Americans near the median income is far higher than it was in 1989; the purchasing power of after-tax income per household is far worse than it used to be.

Overall, American households have lost ground since 1994. In terms of finances, the typical American is worse off. The old American Dream, which says that the next generation will be better off than the previous generation, no longer appears to function. This is the bad news.

Examine the chart below – Real Gross Domestic Product:

GDP

Compare 1989 to today on the chart. You can see that GDP has increased nearly 100%. And yet, typical American families have only grown worse off since then. As I have discussed before, nearly everything the Federal Reserve does is only of benefit to the top 1% of earners in the economy. Conversely, the Federal Reserve has done nothing but damage the purchasing power of everyone else. Is the American Dream dead? If the Federal Reserve continues to have its way… then yes, it would seem that way.

However, in the darkness of all this muck and nastiness… there is a ray of hope.

Many people these days claim that the middle-class is disappearing. That’s not quite true. If a person says “The middle-class in America and the Western World is disappearing”, then yes; they are correct. The middle-class in the Western World is suffering. But worldwide, it’s a different story. Worldwide, the middle-class is exploding like never before seen in history.

Over the past 20 years, hundreds of millions of Chinese and Indians have moved from abject poverty into the middle-class. Huge numbers of Indians and Chinese folks have moved from the poor, rural areas into the cities. They have much better access to educational opportunities than they used to. They have more access to telecommunications, which enables them better access to competing for jobs. Furthermore, Western values have seeped into these nations; the growing middle-classes in Asia and India are becoming more like the middle-class in America, much to the chagrin of socialist intellectuals in the West. The young Chinese are rejecting Confucianism, and young Indians are rejecting much of the old Caste system. Both groups are utterly rejecting Socialism. These are positive developments.

Worldwide, the middle-class is growing. Hundreds of millions of destitute families in 3rd and 2nd world nations are finally finding their path to prosperity. It is not because of Socialism or the direction of “wise” bureaucrats; in fact, the middle-class in these poor nations have realized that Socialism and bureaucrats are what held them back for so many years. These families are beginning to embrace the Free Market. They are beginning to embrace the values of competition and production that led to the huge economic explosion of America in the 1800s. This is the beautiful news.

In America, the middle-class is suffering. It doesn’t have to be this way. The middle-class in America could explode once again if overall taxes were cut by at least 50%, if regulatory overhead were reduced by at least 50%, and if Social Security and Medicare were totally dismantled. The effect this would have on wealth accumulation in poor and middle-class families would be unbelievable. Unfortunately, these changes will not happen anytime soon. Everybody in America has their hands in someone else’ pockets. The welfare entitlement mindset has become ingrained. Nobody wants to be the first to stop stealing from someone else; we all want everyone else’ goodies to get cut first, before our own subsidies. I don’t think this attitude will change until it is forced to change by the total bankruptcy of the US government.

I say, bring it on. Bring back the Free Market. Let’s toss the federal welfare programs into the dumpster, and throw all the bureaucrats out on their cans. Bring back a dedication to competition, production, and voluntary deal-making. Let freedom ring.

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