Recognizing the New "Great Divide"

I started thinking in 2005 and writing in 2008 on topics related to the sustainability of the American (Middle Class) Lifestyle.  Since much of our life style has related to home ownership in recent years, I have paid quite a bit of attention to home ownership related issues here at Unsustainabubble. What I have left out is discussion of the many other factors that have resulted in the widest gap in wealth since the last "Golden Age". Today we are truly a two class society in all but name.

It occurred to me that a good title for an entry to discuss the middle current middle class dilemma is "Going Down with the Joneses", since most of us spent so much of our time and have apparently put ourselves in unsustainable and insurmountable debt "Keeping Up With the Joneses" from the early 1950's on.  Now we must face the consequences or "Go Down with the Joneses" if you will.

My goal in writing this is to help other middle class people understand their best course of action to retain their Middle Class status or grow beyond it if possible. My belief is that going forward, this will require a renewed intergenerational approach to rebuilding wealth that flies directly in the face of American societal trends since the 1950's. I believe that in order to move forward again, we will have to go back to work closely together in family units and at the local level, where there is trust.

Recently I found an author who is new to me that has a great deal to say on related topics. David Shvartsman has a revealing look at middle current middle class values in one of his articles, "Singing the Middle Class Blues" with many relevant links. 

The Status of the Many

The primary keys to our growth as a country were abundant natural resources combined with abundant human resources in an economic system that promoted a strong middle class and upward mobility for those who could work hard and were willing to sacrifice for the future. The widespread availability of good education and access to learning for all made us a shining beacon for immigrants who found ready markets at higher than world pay in our industrial complex. Today this is far less true, although we still attract the best and brightest from many parts of the world, because on a relative scale, life is better here than in many places and corruption is less visible, with less effect on workers at the street level.

The tremendous gap in wealth has been at least partially generated by the creation of deregulated debt  and its excessive use by the middle class as our economy moved from profits generated by industrial manufacturing to the manufacturing of paper profits, or "Financialization". The leverage available in financial transactions combined with electronic trading in global markets has led to a concentration of wealth by those (large banks,hedge funds, and epic traders like George Soros) who can understand and manipulate the system and we now face the possible collapse of whole economies in part based on complex trades in currencies.

I remain concerned about hedge funds and currency manipulation strategies, given the mess in Europe and the absence of Global Regulation for complex trades.  Can it really be that a few individuals would bring down entire currencies and perhaps a continent or two for immediate gain? Is George Soros the poster boy for the next generation of “winners” in the hedge fund world? How could I have lived this long and stayed so naive about big money?

I have also realized that our collective failure as individuals to save from 1985 on (and/or our propensity to consume) has created issues that have contributed to the collapse of the American middle class, although I have not talked about this very much. (So who wants to listen to or read about such bad news?). Of course another piece of this issue is the transfer of pension and healthcare costs from employers to individuals on top of the destruction of wealth in 401k plans and Real Estate.

These cost transfers were triggered by promised Government and Corporate entitlements that were never properly funded, compounded by rising life expectancy and expansion and waste in Government spending. Another key element is wealth transfer to the top of the food chain as CEO pay rose exponentially from 40x to 500x  line workers while pay for line workers stagnated with real wages declining and cost transfers to employees soaring since 1970. All of this on top of creeping hidden and openly increasing taxes to fund waste at all levels of government.

I have tried to get average people interested in taking charge of their own financial future by Self Directing their own retirement plans at http://selfdirectioncentral.com/ . Average Americans had about $10k in their IRA and maybe $40k in a 401k if they had one before this meltdown. I routinely have calls from people with $50k I their pension at age 50 who want $5k per month after retirement from their plan and they want to retire early! The level of denial is mind numbing.

Most of the Boomer generation will be unable to retire and will work as long as they are physically able. I read recently that 40% of the allocations for future medical research are for finding ways to keep workers physically productive longer into old age. This makes sense in a rapidly aging population as we witness the load on society created by carrying unproductive retirees.

It is becoming more and more clear to average people that promised entitlements may not materialize and there is open debate on the transfer of costs for entitlements and bailouts to future generations. Pushback from younger generations will lead to civil unrest in the future as they realize the load we are asking them to bear.

Below is a chart of 2004 Government data on Social Security Payments as a percentage of income for retirees. This data does not reflect the 10,000 Baby Boomers that are daily filing for Social Security benefits now, most on the first day they are eligible after age 62.


It is interesting on many levels how individuals have historically abdicated responsibility for their own futures to third party money managers with no skin in the game and the ability to use OPM to enrich themselves at an increasingly record pace. Smart money recognized individual aversion to making financial decisions early on and created the mass financial vehicles (starting with mutual funds) that parted average Americans from their money for decades. The deregulation of Financial Institutions after the repeal of the Glass Steagall Act accelerated this process and we are now seeing it unwind. 

Most individual investors balk at any decision that involves more than two choices and we are a society that looks for the ability to sue someone if our investments go wrong (easier than taking responsibility for our own decisions). Of course there is still the illusion that funds are recoverable in the event of a meltdown because of federal guarantees from FDIC or SIPC.

I understand that less than 2% of individuals manage their own retirement funds, even after the most recent ravages of the stock market. The same percentage are financially independent after retirement.

I believe that a few more will self direct in the future and base their investments in hard assets they can see and touch. Rational people know that our current average lifestyle will change for the worse (revert to the global mean), but that may not be a bad thing for individuals except those who take no responsibility for their future. They will face a life based on unsustainable handouts.  What a prospect for the great Boomer Generation, so lovingly described as “beneficiary units” by Uncle Sam.

The Status of the Few

The other side of this coin is the improbable accumulation of wealth by a tiny fraction of our population in a historically short period between 2000 and 2006. During this time, the tiny slice at the top of the heap essentially doubled their wealth while the middle class atrophied. One of the most interesting explanations is in the book "Unjust Deserts" by Gar Alperovitz and Lew Daly, which posits that a few individuals have unjustly benefited from the aggregated profits that rightly belong to all of society. I do not know if this is the case, but the question is worth discussing.

The book discusses the fortunes aggregated by folks like Warren Buffet and Bill Gates, both of whom are active philanthropists, but neither of whom have exactly given away the store. The popular media has brought forward the "success" of so many incompetents in the financial sector, but I am more intrigued by the success of the competent and understanding the basis of that success.

I started following the story of John Paulson, the hedge fund manager of the year in 2007, “The Man Who Made Too Much”
and other hedge fund managers and think you would enjoy the resignation letter of Andrew Lahde, who made a smaller fortune than Paulson, also by betting against Subprime loans. The tone and content of the letter is truly astounding.

I was interested in the Paulson 2007 Payday mostly because I can’t comprehend the size and scope of the other side of the trades that resulted in 500+% returns in a single year and I lack the accounting skills to calculate what the losses on the other side of those trades were and how many individuals were affected in order to aggregate the gains represented by a $3B payout to a fund manager who had no downside risk on that payout and may not even have had any of his own money invested. 

I am not against the accumulation of wealth. I simply want to understand how this can be done sustainably, act accordingly and teach the next generation to do the same.