Tag Archives: middle class

Why Does Money Mystify Us?

There are few things in life as universal as the concept of money. In many ways, it’s the blood of the world’s economic system. Without money constantly flowing in billions of directions at once, economies and countries would crumble, and billions of people would become quickly dislocated. Ironically though, if money is so important to modern life, then why is it the subject of so much confusion? After all, few things both enthrall and repulse us like money.

The main problem with money is that it’s often blamed for the problem of greed. Although many of us agree that greed is one of mankind’s most serious problems, blaming money exclusively for it is like blaming couches for people being lazy. In the truest sense, money is a means of exchange that allows people to acquire what they need without trading or bartering.

However, if money is just a means of exchange, then what accounts for the anger many have about it? After all, why don’t we hear more about how money allows all of us, from poor to rich, an element of freedom in deciding how to live? As many note, the advent of modern money has helped the middle-class grow by giving people the ability to make decisions about their lifestyle. Although many of us herd in common directions with purchases, we also express our individuality by purchasing items that go against popular trends. Money, and the way we spend it, is an important tool we use to define ourselves.

When life today is contrasted with medieval times, it’s clear that wealth was previously defined by land ownership and natural resources. During this time, the concept of serfdom, whereby multitudes of poor were at the mercy of rich landowners, was common. Also, as recently as 200 hundred years ago, wealth was equated mostly with land and resources. Since then, with industrialization and central banking, it’s clear that wealth as exemplified by money has become the norm.

Interestingly, it needs to be noted that till recently, the role of money in Americans lives was often seen more positively since it was equated with individual economic freedom. Whether one was rich, middle-class, or even poor wasn’t as important as the fact that America not only had upward mobility, but also respect for allowing people to stake out their own kind of life. This was shown by the fact that communitarian small business was a valuable component of American life till recently. Unfortunately, over the past 20 years, as large corporations and finance sectors have become more powerful, money as a concept is being blamed for problems associated with greed. 

Currently, since both the modern corporate model and finance industry pay close attention to the bottom line, we’ve arrived at a time when money reigns supreme. This current fixation is a reason why modern finance is often seen as disconnected from the general economy as a whole.

As proof of this, we hear from all sides of the political aisle about the disconnect arising the past 20 years between Wall Street and Main Street. When talking of this, many notice that strong stock market gains the past 20 years haven’t translated to stronger economic indicators in the broader American economy. In fact, many experts say that the relatively low amount of people now working, and our high amount of underemployment, is proof a new economic hybrid’s developing. This hybrid, whatever one calls it, is resulting in the middle-class being squeezed hard. In this evolving two-tiered society, the elite finance-corporate class is making astronomically strong gains while the middle-class appears to be stair stepping down.

In a nutshell, what’s developed the past 20 years is that it’s become harder for the middle-class to not only advance, but also to stay middle-class. Some economic experts say this trend is compounded by the fact wealth inequality appears to be growing in America.

To many Americans, an economic disconnect first became apparent during the severe economic downturn in 2008 that produced “The Great Recession.” As many remember, the bailing out of major Banks and members of the Auto Industry during this time was controversial. Previously, bailing out major industries was frowned upon since it went against free-market theory.

To middle-class Americans, the bailouts exemplified there was one set of economic rules for the average person, and another for the elite. After all, many middle-class Americans struggle with the fact that their hard work and sense of fair play isn’t recognized like it should be. Interestingly, economic experts have noted that cushioning major industries from a fall has created an increase of moral hazard. In a nutshell, moral hazard refers to how some businesses take enormous financial risks without bearing the cost if they fail.

Historically, what’s made America great in the past was a unique set of rules that created a check and balance on economic power becoming too absolute. These checks and balances created an economic system where money was mostly used as a tool of expression to create the type of life one desired. In line with this, the element of freedom that one showed with their use of money created a high level of happiness in a society with upward mobility and a vibrant middle-class.

If more of us can work on recreating the economic checks and balances we had in the past, America can escape evolving into a stagnant two-tiered economic model. If this can be accomplished, America will regain the economic vibrancy and fairness it once had.

 

Wealth Inequality and the Middle Class

Few issues get as much press as wealth inequality. Since the dawn of civilization and days of the monarchies, this has been a hot-button issue. As we’re seeing lately, with wealth inequality increasing in America, this issue won’t go away.

Although it’s tempting to advocate decreasing wealth inequality by just raising taxes, it’s well known that successfully raising taxes free of loopholes is very difficult to do. In addition, there are other surprising variables involved with this issue.

As noted by many, the economic strength and stability of America’s middle class, has declined the past twenty years. Obviously, factors such as globalism have played a role in this. In addition, the middle class has been strongly hampered by the Great Recession of 2008.

Our tentative recovery from the Great Recession of 2008 is shown by the fact that America’s unemployment rate is high, with many skilled workers unable to get work in their fields. Although our employment situation has definitely improved, there’s still caution about it due to the fact there now appears to be an under-reporting of unemployment. Under-reporting can arise when people give up on finding work and are no longer claimed as unemployed. When these factors combine with how record low interest rates have reduced the middle class’s ability to earn interest at banks, we see frustration.

The fact that interest accrued at banks is now so low is one reason polls have shown many Americans are thinking of putting off retirement. This is because many senior citizens are known to augment their fixed income Social Security with money earned off bank CDs. For example, if a retired couple now has a $100,000 bank CD, they’re faced with making only around $1,000 interest per year. In the past, a $100,000 CD often could generate $5,000 per year or more in interest. To senior citizens living on a fixed income, America’s record low interest rates have hampered their ability to support themselves.

Another way record-low interest rates hurt senior citizens is the fact that a primary source of revenue for pension plans has been various types of bonds. America’s current public employee pension crisis has been worsened by how low interest rates weaken bond yields. A weakened bond market adds to pension funds being depleted quicker.

In terms of economic success, the main area our economic recovery from the Great Recession of 2008 has worked is with the stock market and corporate earnings. And yes…this is good news. The reason it’s good is since many Americans work for corporations, and because much retirement wealth is in 401K-type accounts, many hope their job is secure, and another downturn doesn’t occur before they cash in their retirement.

Although average Americans are grateful the economic recovery in corporate America has helped them, there’s still controversy. Why, they ask, has middle class stability stagnated while the power of the elite has grown?

Ironically, many claim the very same policies that sparked an economic revival for the stock market have resulted in a rise of inequality. Since 2009, America’s Federal Reserve Bank, with the tacit approval of most politicians, has embarked on an unprecedented run of record-low interest rates while pursuing the debt buy-back process-QE. QE, otherwise known as Quantitative easing, is accomplished best with low interest rates. Basically, since America’s buying back it’s own debt with QE, the debt we purchase from ourselves is cheaper when interest rates are low.

QE is controversial since it can be a last ditch resort used by governments to stimulate a slumping economy. Ironically, low interest rates and QE, while effective at jump-starting the stock market, can also make the elite wealthier. Therefore, while many see rising wealth inequality as just a result of the Free Market, there’s evidence that some rise in wealth inequality is actually due to government-set economic policies that run counter to Free Market theory.

The wealthy can benefit from QE and low interest rates because they own a large portion of stocks, stimulated by these policies. In addition, low interest rates make it easier for the wealthy to borrow and profit from large sums of capital now. Although middle class house, auto, and student loans are more affordable with low interest rates, the middle class often can’t embark on the lucrative capital-growing process that low interest rates offer the wealthy.

As a result of these recent economic trends, there’s now an understandable push to raise the minimum wage. In addition, there’s rebirth of the idea that government should enforce a maximum wage. Although a maximum wage is a stretch for attainability, it goes without saying a minimum wage raise may occur soon.

In light of all this, it’s now obvious that a stable and large middle class is sustained when there’s a balance, as well as a separation, of market and government interests. Although political dogma creates an either/or mindset on economics, the reality seems more complex. Just as there’s proof that some government involvement in the economy has helped the middle class, there are also recent indicators that government-mandated economic policy can hamper average Americans. To restore America’s middle class, the elusive balance of power that used to exist between the marketplace and government needs to be considered again.