Register for Free
Post comments, receive updates via email, gain access to exclusive content, and more.
Spam Safe!
What if a 'gentle crash'...
...is going to happen?
Whether 'planned' or just happenstance?
The way the US economy is set up, the middle class is going down in droves. It doesn't seem to me that there's much to be done to prevent that. The downward spiral of the economy won't support (IMO) a middle class of the sort that has existed since shortly after WWII. Too much of the economy is illusory money-moving, or the outright extraction of wealth from overseas -- and, increasingly, from domestic sources (like your 401-k etc.) -- and as such not enough value is produced here to support a middle class.
It wouldn't surprise me at all to see the MC sliced and pared down to a tiny fraction of its former size, leaving a miniscule (if dominant) upper class, a very small middle class, and everyone else relegated to the lower class (say, 1%, 9%, 90% respectively). Other than the tip-top of the heap, everybody's life/lifestyle crashes down (or gets 'rightsized'?) until some sort of stasis is reached. Millions of former white-collar workers end up farming (probably not on their own land) and so forth.
Seems to me that without major intervention in the housing market, its crash is inevitable in the face of persistently high unemployment and low or no growth. Big housing crash would lead to further unemployment, leading to more downs in RE, and so forth in a self-perpetuation spiral.
With major government intervention, housing gets propped up and current conditions continue (keeping the downward spiral in slow-mo, unless crazy inflation sets in which could lead to a crash [see previous paragraph]) but if international investors bail out of the dollar or government debt (because of continued QE), we end up in a crash anyhoo.
Barring a miraculous event (new energy source?) that would provide employment and give internationals a new/better reason to hold dollars -- which I give a 1 in a million chance of happening -- I don't see a way out of this predicament. I know, I'm no uberscholar, but my momma didn't raise no dummies, neither. 
I'd be thrilled to be enlightened.
Just some thoughts on a gorgeous November afternoon.
Viva -- Sager
"Show some !@#$%^ ADAPTABILITY!!" -- Sergeant Jack Shaftoe, USMC ("Cryptonomicon")
"It's all goin' *down*, man! Martha Stewart's polishing the brass on the Titanic!" -- Tyler Durden
"Have the courage to use your own understanding!' -- Immanuel Kant
"Dreams are the seedbed of the possible." -- William Greider
"One day you finally knew what you had to do, and began, though the voices around you kept shouting their bad advice." -- Mary Oliver
Print
Email
Heres a case study of a lower class suburb: Pomona, California.
INCOME
From wikipedia:
The median income for a household in the city was $40,021, and the median income for a family was $40,852. Males had a median income of $30,195 versus $26,135 for females. The per capita income for the city was $13,336. About 17.1% of families and 21.6% of the population were below the poverty line, including 27.4% of those under age 18 and 11.7% of those age 65 or over.
The national median household income is around $50,233. So Pomona is roughly 20% below the national average.
CRIME
POMONA NATIONAL AVERAGE
Murder .14 per 1000 .06 per 1000
Robbery 2.35 per 1000 1.41 per 1000
Assault 5.25 per 1000 2.91 per 1000
Car theft 10.5 per 1000 4.17 per 1000
Average home in Pomona with the typical bar cages on the windows.
The gangs in Pomona roam around and tag things up.
The cholos on youtube.
<img src="http://farm3.static.flickr.com/2132/1780622398_d67ccb2e69.jpg?v=0">
Point of the post is what will happen with these cities across the country. The only reason the crime rate isnt 3 times higher is because the cops arrest everyone who even looks like a gangster and throw them in jail. Now with California prisons and jails releasing prisoners early the streets are starting to fill up again. Also, as more businesses shut down and unemployment rises expect the gangsters to become more powerful as people go to them for money. I know Pomona very well as my family has a business there. During the bubble crime rates continued to fall as people were working and HELOCS were flying. Now that the crash has hit this town hard im curious to see how much worse it will get. God forbid we have a currency crisis as towns like this and others across the county blow up.
If anything I consider this situation the MOST likely for the US. There are so many people, rich and poor, who have a lot vested (mentally and materially) in this economy and the status quo. Most or all of them aren't likely to give up on it overnight. And I seem to remember CM making the case that this very large economy has a lot of "inertia" for lack of a better term, and that despite all its failings the economy will probably take some time to reach bottom. There are outside events that could precipitate a faster, harder collapse (war, huge natural disaster, etc), but I'd say that's a less likely, though still possible, scenario.
I would agree in either case the middle class will be a fraction of its former size (if even that). I'm increasingly of the opinion that for most of us the best option in the long term is to detatch ourselves from the larger economy. Not entirely and not forever, but in the short-to-medium term the game is not going to be friendly to the middle class. Best not to play the game then, or as little as is prudent, if the odds are stacked so high against you. And don't put more of your chips back into the game until we can bring about a new renaissance that allows a healthy middle class and a sane economy and society, whether that takes 2 years or 2 decades.
- Nickbert
"An economist is a man who knows a hundred ways of making love but doesn’t know any women." -Art Buchwald
Middle class is a function of education and skill. Take the income out of it. Most of these folks are intelligent and can develop skills that will help them get by in a downturn. Many will go back to farming. Many will start small scale manufacture. It will be a shift out of service industry into more traditional industry. I don't buy the assertion that they will just sit on their asses waiting for the gov't to bail them out.
I don't believe that our middle class is well educated; high school drop-out rates are around 50%, only 25% of those who begin college graduate with a four-year degree and something like 60% don't believe in or don't know whether or not evolution as a theory is valid.
If someone has enough power and control over society to keep cable TV and sports in particular, in tact, I think a gentle landing might be possible. Governmen providing free cable and internet would keep most of us off the streets, and of course that pre-supposes electricity.
The more intelligent would probably take advantage of the free Chinese lessons that would also start being broadcast so we could try and strike a deal with our new landlords that would be somewhat favorable.
Lauren
docmims-
I agree, but what you describe would take time. Much more time for some than others, since some of their existing wealth will be lost or they will require new education or job skills training. Many of the middle class have job skills now that may have little use in whatever new economy we see; many will adapt but it will take time. When they do then the middle class will likely begin to regrow, but I don't expect a very quick adjustment for most folks.
- Nickbert
"An economist is a man who knows a hundred ways of making love but doesn’t know any women." -Art Buchwald
I agree...I think it's exactly where we're headed. China is organized that way...the ruling class, the few middle class bourgeois that are needed to work in the corporate system, and the rest are lower class proletariat. They figured out this is the stable form of top-down control that works as opposed to the Soviet version which tried to have no bourgeois.
Though this shift could happen quickly in the US, I'd guess it will shift over 20-30 years. In the US, the limited middle class will be in things like high tech, academia, consulting, banking, so I'd get into one of those industries if you want to be middle class. Other industries will continue being shipped offshore so middle class jobs there are going to disappear. Personally I have no interest in being back in the corporate bourgeois--it's a hollow existence in my view--so I'm not heading back into high tech.
That's more true than folks may realize! However it appears fannie/freddie will serve as the property managers for the Chinese, so tenants will still be able to speak english and remain in the dark about who owns them but their managers will be speaking chinese.
I agree...I think it's exactly where we're headed. China is organized that way...the ruling class, the few middle class bourgeois that are needed to work in the corporate system, and the rest are lower class proletariat. They figured out this is the stable form of top-down control that works as opposed to the Soviet version which tried to have no bourgeois.
Though this shift could happen quickly in the US, I'd guess it will shift over 20-30 years. In the US, the limited middle class will be in things like high tech, academia, consulting, banking, so I'd get into one of those industries if you want to be middle class. Other industries will continue being shipped offshore so middle class jobs there are going to disappear. Personally I have no interest in being back in the corporate bourgeois--it's a hollow existence in my view--so I'm not heading back into high tech.
I agree as well. I think Sager and you are on the mark. Given our present path, we will gradually devolve into a second world nation as Asia rises.
My take,with little room for compromise, is "Either Or",sorry Kierkegaard.
Either it'll be "The Waltons" or "Mad Max"(pardon the reference to popular
pablum)
Robie, voting for"The Waltons"
Robie, voting for"The Waltons"
Second that!
"G'night, Sager-boy!" 
"Show some !@#$%^ ADAPTABILITY!!" -- Sergeant Jack Shaftoe, USMC ("Cryptonomicon")
"It's all goin' *down*, man! Martha Stewart's polishing the brass on the Titanic!" -- Tyler Durden
"Have the courage to use your own understanding!' -- Immanuel Kant
"Dreams are the seedbed of the possible." -- William Greider
"One day you finally knew what you had to do, and began, though the voices around you kept shouting their bad advice." -- Mary Oliver
First of all, there will not be a small middle class. There will be no middle class. Second of all, I believe it is this government's intention to create a slow and gentle crash. However, they are playing a very dangerous game and the whole thing could blow up in their (and our) faces.
Check out my blog - The Investor's Tale http://investorstale.wordpress.com Follow me as I try to go from being an Average Joe to a full investor and share my mistakes and successes in real time.