Being middle class isn't what it was

The US economy is in a very weird state. In May, the economy added 339,000 jobs, a very strong number that almost wiped out all the job losses caused by the government lockdowns aimed at stifling the Covid-19 pandemic. The economy needs to create about 100,000 jobs per month to keep pace with population growth. The US unemployment rate is under 3.5%, effectively meaning full employment, and the best employment figure for about 50 years.

The US Federal Reserve has thus hit one of its two mandates, that of “maximum employment”. But it has failed to achieve the other mandate, that of “stable prices”. Prices haven’t been stable for the past couple of years. The Consumer Price Index (CPI) was 0.1% higher in May, at 4% year-on-year; the ‘core’ CPI rose even more, by 0.4% to 5.3% year-on-year. The US is not (yet) in a recession, defined as two consecutive quarters of negative growth, yet many Americans feel they are. About half of Americans polled by Gallup now say they feel much poorer than a year ago. Gallup has been asking Americans if they feel better or worse off since 1976; the only time half of them answered ‘worse off’ was during the Great Financial Crash years of 2008 and 2009. So Americans are psychologically revisiting those grim times.

About half of Americans polled by Gallup now say they feel much poorer than a year ago.

On top of which a recent Pew Research Center survey found that a large majority of Americans are now very pessimistic about the future; 66% of those surveyed consider that by 2050 the US economy will be weaker; 81% think that by that year the divide between the rich and poor will grow.

Middle class once signified a comfortable standard of living, the hope that one’s children would be better off, that the future would be better than the past. Being middle class isn’t what it was.

Good news is spread thinly

The US middle class has shrunk in the past 50 years, from 61% in 1971 to 50% in 2021, according to another Pew Research Center survey, which also found that the upper-income tier has grown by 7%, to 21%, over the same period. But while upper-income households saw their income rise by 69%, from $130,008 to $219,572, middle-income household incomes grew more slowly, from $59,934 to $90,131 (up by 50%) and lower-income household incomes even slower, from $20,604 in 1970 to $29,963 (up by 45%) in 2020. Between 1970 and 2021 the share of US aggregate income earned by the middle class shrank from 62% to 42%. With CPI peaking at 9% a year ago, the highest rate since 1981, most Americans (except perhaps the very wealthy) are feeling squeezed.

Yet most Americans, like most people in developed economies, are on average certainly better off today than they were 50 years ago. Technological changes have transformed our life, improvements in health care mean we live longer and with less physical pain, communication is cheaper and easier, entertainments are more immediate and widespread… Life is generally better. But the middle class is shrinking.

With CPI peaking at 9% a year ago, the highest rate since 1981, most Americans (except perhaps the very wealthy) are feeling squeezed.

But debt has exploded

One thing which has grown is debt. From $458 billion the US national debt in 1973 now stands today at more than $32 trillion. The debt to gross domestic product (GDP) ratio has grown from a tolerable 33% in 1973 to a frightening 122%. According to the World Bank if debt exceeds more than 77% in the debt/GDP ratio, every additional percentage point costs 0.017 percentage points of annual real (i.e. adjusted for inflation) economic growth. In other words, by supporting such a heavy debt the US is losing almost 1% of GDP growth every year. Never mind the massive interest payments, which the Peterson Foundation says will cost more than $10 trillion over the next decade. The US continues to spend more than it takes in tax revenues; the fiscal deficit is set to rise from $1.6 trillion (6% of GDP) in 2023 to $1.8 trillion (6.8% of GDP) in 2024. Who knows when or how this scarcely controlled train will hit the buffers? It’s unlikely to be pretty in any event.

Walking a tightrope

The only thing preventing the US from defaulting on its massive debt is the willingness of investors, which include foreign governments, pension and investments funds, and individuals, to continue holding and buying government bonds.  The US is running on trust. The Fed is wedded to bringing inflation back down to 2%/year. It will continue to push interest rates higher, perhaps as high as 6% this year, in misplaced certainty that crushing inflation requires more determined action and that the risk of throwing the US into recession is minimal. To achieve that it seems prepared to bring about a recession – to which the only policy it has is to cut rates, make credit easy again, and trust that greater spending will pull the country back towards a balance. Some argue that such a rate rise will bring about more bank failures and that the gold price as a consequence will rise to a “minimum” of $8,000 to $10,000 “over the next couple of years”. That implies a rise of around 320% from today, which seems highly unlikely. While scepticism surrounds that kind of price rise, the interest rate cuts that are surely inevitable in a year or so will help weaken the Dollar, and make gold cheaper.

At Glint, we make every effort to demonstrate a balanced conversation between gold, crypto and fiat currencies when it comes to purchasing power and, while we strongly believe that gold is the fairest and most reliable currency on the planet, we need to point out that it isn’t 100% risk free. While we have seen a steady increase over time, the value of gold can fall, which means that its purchasing power can also decline.