17 January 2013, 17:47

The death of the middle class

The death of the middle class

It seems that the main victim of the economic crisis is the middle class of the developed economies. Strangely, both in Europe and the US the middle class is worse off in spite of massive economic stimulus that helped the banks more than the common people.

According to a study cited by the Washington Post, 23% of Americans are raiding their 401k accounts in order to pay for current expenses. Not only are they diminishing their future income, they are also paying interest for using their own money, because the most common way of tapping a 401k account is a special bank loan. For the middle class, the world is ending. We tell you why.

The whole concept of “middle class” is a creation of the post WWII political thought. The “red menace” was real and the West had to come up with a way to make communism unappealing to the masses. So, the “middle class” was born. Mikhail Khazin, a renowned and controversial Russian economist, described the western middle class as “a social stratum with typical behavior in consumption and in politics”. The “politics” part was the most important. A middle class citizen was not interested in a radical redistribution of wealth proposed by communists so, this kind if citizen became the staple of western society and a “collective epitome” of western prosperity. Given the sizes and scopes of European and American entitlement programs, it is safe to say that a considerable part of the debts of the Western states was generated by the necessity to finance the existence of this illusion of prosperity. If this theory is correct then it becomes clear that the end of the Cold War was also the end of the middle class, which was no longer needed. Of course, this conclusion is taboo for the mainstream media, but what if this conclusion fits the economic reality of today?

One of the main “selling points” of Reagonomics was the increase of the middle class’ purchase power, but this increase was mostly financed through retail credit. The current indebtedness of the American middle class has its roots in the ‘80s, when the seeds of the middle class’ destruction were planted. In the following years the purchasing power of the middle class had been supported by the ever increasing level of private and public debt. One of the non-mainstream theories that explain the current economic woes of America and Europe states that the limits of this kind of support have been reached. Consumption can no longer grow and even the current level cannot be maintained due to indebtedness of the public and private sectors.

So, there are few political reasons left for supporting the existence of the middle class and there seem to be no financials options left for doing it. Of course, politicians will continue to pay lip service to the interests of this social stratum but the results of the stimulus programs both in Europe and the US show little to no improvement of the state of the middle class. The Federal funds rate went from 19% to almost 0% in less than 30 years, there no more room for additional stimulus. Although some politicians and economists are toying with the idea of negative nominal interest rates it is abundantly clear that further reducing the cost of credit cannot be the solution to the economic crisis.

What is the future of the middle class in a world where states are overburdened by debt, banks are unwilling to lend to indebted creditors and entitlement programs are being cut? Most likely, the middle class of the developed countries will experience a gradual decrease of purchasing power and living standards. It remains to be seen how the death of this social stratum will change the political landscape of the US and Europe.

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