What Maimed the Middle Class?

By Harry Dent, Founder, Dent Research

harry_dentI wrote an article for Economy & Markets in late March on why a large segment of U.S. voters are so angry, and how Trump and Sanders are successfully playing on that.

It’s because our middle class has shrunk substantially since its heyday in the 1960s and ’70s.

Today, their share of wealth is the lowest in the world, at a mere 19.6%. Most of that is tied up in their home… not retirement assets. On top of that, real wages have fallen 12.4% since 2000. No wonder they’re so mad!

And our analysis of the monthly nonfarm payroll report shows us that very few of the job increases this year were in middle-class levels. The majority are for lower-wage jobs and the next big chunk for higher-wage jobs.

Again, the middle class takes it in the shorts.

The good news is…

I think it only gets better from here.

The bad news is…

That’ll only happen after a financial crisis like we saw in the 1930s… that first makes it worse for everyone; especially the seemingly bullet-proof upper class and top 1% to 0.1%.

Mark my words: we’ll see blood in the streets before this is all over.

Middle Class to its Knees

Middle-Class Destroyer #1:
Chinese and Asian workers swarmed into manufacturing jobs (and some service jobs like call centers), working for much lower wages.

Middle-Class Destroyer #2:
The flood of legal and illegal immigrants, largely from Mexico and Latin America, onto U.S. soil and into U.S. jobs.

Middle-Class Destroyer #3:
The growing wealth of the top 1% (especially the top 0.1%), and insatiable greed on Wall Street.

While all of these factors have contributed, the Asian deflation and Mexico’s rise in industrial exports has had the greatest impact because it’s these people who compete for the classic middle-class and manufacturing jobs.

The result is that we now have the narrowest middle class in the developed world! The only ones with a smaller middle class are China, Brazil and India — all emerging countries!

The U.S. middle class makes up only 38% of the country’s total population. It was more than 60% back in the 1970s — talk about shrinkage!

Australia has the broadest middle class, making up 66% of its population. That’s almost double the relative size of the U.S.!

From speaking and traveling to Australia so many times in the last three decades, I can tell you why Australia has such a large middle class. It’s because the country has a higher rate of immigration relative to its population. It’s higher than the U.S. and even Canada. But the education and incomes of their largely Asian immigrants are much higher; many are affluent.

They also have very high homeownership and appreciation to benefit the everyday household.

But perhaps most importantly, the government has a forced private retirement savings program instead of social security. That means each resident controls those assets and so they’ve enjoyed higher appreciation in the past four decades. That shows up in their household wealth, whereas our Social Security in the U.S. and many other countries does not.

Sure, this does overstate their wealth in some ways, but their returns on such retirement accounts have been much higher and our benefits are likely to be much more restricted in the decades ahead because of massive underfunding.

But look at the rest of the developed countries in this chart:

See larger image

Italy, Japan, the UK and Spain’s middle classes are closer to 50%. France, Germany, Canada and South Korea are 40% or a bit higher.

In short, the U.S. middle class has been assaulted from below, from emerging-market workers and immigrants, and from above, with the most rapid rise of the top 0.1% to 10% since the Robber Baron entrepreneurial and financial class that emerged in the late 1800s and peaked in the late 1920s.

It is actually the top 0.1% that dominates that 1%, just as the 1% dominates the top 10%, and the top 20% dominates the 80%!

Knowing this, seeing this picture, it’s clear why Americans are tired of this situation… why they’re so ready to revolt.

The thing is, this was all totally predictable. 250 years ago, the events we see unfolding today were set in motion.

Such extremes in wealth and income distribution, especially in the U.S., only occur once in a lifetime, at the top of the economic fall bubble season (this happened before in 1929, and most recently in 2007).

But this wealth and income inequality has been extended all the way into late 2016 thanks to endless QE (money printing) and zero interest rate policies (ZIRP) that continue to give the advantage to the financial services industries and the most affluent… the guys who control 90%-plus of the financial assets and wealth outside of personal homeownership.

What Happened to the American Dream?

The top 0.1% has seen their share of income go up four times since 1975.

It was 2.6% at its low. It was 10.4% in 2008. Most of that gain came from 1995 into 2007, during the bubble period.

From 1975, the bottom 90% have gone from 68% of the income share to as low as 49% recently.

When we look at shares of income in the U.S. back to 1917, in the next chart, we can see the extreme seasonal swings in income inequality… and the dominance of the top 10% into the economic fall bubble boom season.

See larger image

The first thing to note is that, in 2007 and 2012, the bottom 90% fell to the same 49% to 50% share of income they had back in 1928. Their share of income rose slowly in the 1930s and then rapidly in the 1940s. It hit a long plateau, at around the 68% level, in 1945 and stayed there until 1978.

That was the heyday of the middle class.

That is also when democrats dominated politics and the White House (78% from 1933 through 1968). The demise was slow at first in the late ’80s and then increased rapidly into 2007.

The economic summer and fall seasons bring massive innovation that favors the entrepreneurial and financial sectors. The benefits take decades to trickle down during the economic winter and spring seasons.

Trickle-down economics does work; it just takes much longer than most expect.

The innovations of the late 1800s into the Roaring ’20s (especially the assembly line from 1914 forward) were entirely responsible for creating a broad middle class in the first place.

Today, the middle class’ real incomes are actually 5% lower than they were in 1970 and 12.4% lower than they were in 2000, when they peaked.

And when we take out the affluent 10%, it shows that the bottom 90% average only $32,352 in income per year. The top 10% skew the overall average dramatically, so the $55,132 you hear about isn’t accurate.

Again, it’s no wonder so many people are so angry!

So where did most of the income gains go?

To progressively higher classes, starting with the top 10%.

Since 1970…

The top 5%-10% have grown 39%.

The top 1%-5% have grown 64%.

The top 0.5%-1% have grown 93%.

The top 0.1%-0.5% have grown 136%.

The top 0.1% has grown 375%.

And the super elite 0.01% has grown a whopping 628%!

In 2008, the average income of the top 0.1% was $4.4 million and for the top 0.01% it was $19 million. In 2014, those numbers fell a bit to $4.1 million and $17.2 million, respectively. Poor little rich people.

There are two big differences to note between the bubble boom and the Roaring ’20s:

  1. The gains were limited more to the top 5% between the 1970s and 2008, while the top 10% also saw gains during the Roaring ’20s.
  2. This bubble has been sustained past the normal economic fall boom and demographic peak in 2007 into 2015. That’s eight more years of crushing income inequality due only to QE. The everyday person ought to be most angry at the Fed, more so than at the elected politicians.

This income and wealth inequality is not, and has never been, sustainable. That’s why you must cash out of this debt and financial asset bubble now… especially if you are in the top 0.01% to 10%!

And be sure to tune in to the premier of Revolt 2016 on October 11 at 1 p.m. (ET).

Harry