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The Collapse of the Middle Class

Lately I’ve been keeping up with the news in the economy, as that kind of stuff is probably useful when investing.  Yes, I’ve become more “capitalists” in a sense because of it all, but it does not mean that I like the notion of Capitalism as a whole.  Really, a lot of what motivates me to invest into the markets is not pure greed, but a defense against the risings costs of living and inflation.

This week in particular has been quite newsworthy, and has put a lot of things into perspective for me that I hadn’t really fleshed out fully with hard data.  We all know that the rich get richer, and the poor get poorer.  The disparity between the wealthy and the have-nots have always increased over time.  But what has been quite surprising is that the middle-class is slipping too.  They aren’t growing richer, they’re actually growing poorer.   Despite what the McMansions of suburbia depict, with its perfectly manicured green lawns and guzzling SUVs, the middle class are worse off than the middle class of the last generation.

Some interesting bits of information I’ve come across recently:

• I read a pretty interesting article in the Globe and Mail about a Statistics Canada report on the differences in average incomes in 1980 compared to 2005.  In a span of 25 years, the average Canadian (adjusted in today’s dollars), makes only $53 more per year.  Depending on the province, that income may actually be lower.  Those who are wealthy have become even wealthier, and the poor 25 years ago made significantly more money than the poor today.And that’s based on average incomes.  That still does not factor in the fact that today’s housing prices have skyrocketed, that sales taxes have been introduced, which further reduce the spending power of the poor, and that education costs have gone up, which is terrible as education is the vehicle for social mobility.  I don’t think the situation will get any better as time goes on.
• There was a great lecture on YouTube given by an Economics professor at Harvard Law School.  I totally recommend watching it: http://economistsview.typepad.com/economistsview/2008/04/the-coming-coll.html Basically, the lecturer had researched changes in quality of life for the average American middle class family over the past 30 years.  In adjusted dollars, the average working male made just about the same amount as he did in the 70’s.  However, the boost in total family income came about because women now work to add to the family income.  What’s terrible though, is that despite the added second income, middle class families are actually worse off today than 30 years ago when only men worked.The cost of clothing, appliances, and food has gone down, but housing prices have soared outrageously.  Tuition costs are really high too.  And medical insurance costs have jumped incredibly, even while the quality of medical care itself has declined significantly (fortunately for us Canadians, we aren’t burdened by this).  Add to the mix the cost of child care (since Mom has to now work), a second vehicle so that Mom can also commute to work, and higher utility costs and you’ve got one lousy deal.

  The middle class is spending more hours away from home for work and the commute, earning roughly the same, and they face growing expenses and a decreased quality of life.

• The price of food, which has been quite cheap over the years, is now starting to inflate.  Due to anomalies in recent weather, there has been a shortage of food produced for such things as wheat, soy beans, and corn.  The hotter summers have produced drier conditions, which have yielded smaller crops.  The US government has also endorsed an initiative for producing ethanol from crops for fuel (which is neither green nor a solution for oil dependency), which has driven up demand for a limited supply.  Because of these factors, food prices have gone up greatly within recent months.  Egg prices have gone up 30% in 3 months, wheat has doubled in price in a month as well as soy beans.  Rice has nearly doubled as well.  These price increases may not affect the wealthy, but the poor and working class definitely are affected.
• It gets worse… much worse.  Suburbia has been carved out of a dependency on cheap oil.  And now, the middle class suburban life is threatened by the rising cost of oil because of increased demand and shortened supplies.  Suburbia needs all the cheap fuel it can get to fuel the trucks that haul all the goods to the mega grocery stores and the Wal Marts.  Fuel to get people to commute 25 to 40 km’s each way to get to work.  Fuel to keep the electricity running to power all the McMansions, the air conditioners in the summer, and to water all our precious green lawns.  And when that fuel starts to jump drastically in price, living in the ‘burbs starts to become less plausible.Over the past few months, we’ve seen oil hit all time highs almost every day.  Last January in 2007, oil was selling at $60/ barrel.  Come January in 2008 it was selling for $100 US per barrel.  And last week, almost ever day had set a record high for oil prices hitting $126/barrel.  This is an incredible spike in price considering it cost less than half that 18 months ago.

  Some analysts are even claiming it may hit $150 to $200 a barrel within the year, and other institutions are predicting it will stay near the $200 price mark by 2012.  This may mean $2.00/liter of gasoline, doubled costs for food prices, and a significant increase on the cost of cheap goods at Wal Mart due to increased shipping costs.

  There is also the theory of peak oil, which claims that since oil is in finite supply in the world, we will eventually hit a point where drilling for more oil will not be as cost effective anymore, and will require more work to get the oil out.  This makes sense, as oil is not in infinite supply, and the world is consuming roughly 100 million barrels of it a day.  With supply dropping, there is also an increase in demand as China, India, Brazil, and other emerging markets continue to grow oil will be in more demand around the world.

So from all this, we can stare into the crystal ball and make the prediction that the rising cost of living will cut into the quality of our lives, as wages and salaries will not grow with inflation as quickly.

If we are fortunate enough to save our money year to year, for retirement, a new home, or for our kids’ education fund, then we are actually losing a fair chunk of the money we save due to inflation.  Sure, we can put our money in a low yielding bond or GIC, or some kind of investment vehicle that tries to offset or counter-balance inflation, but the simple fact is that such vehicles which appear “safe” holds a lot of risk because of inflation.  You may not visibly see dollars being lost in those vehicles, because it is really hard to see inflation steal from you, but it does happen.  Not only that, but the yields that bonds and GICs provide are based on factors that not necessarily offset inflation.  The consumer price index that is produced by the government, is not wholly accurate for a lot of goods.  It may accurately describe increased costs of food and goods, but for such things as tuition and education (and health care for Americans), it is misleading.

There has always been inflation, and there have always been periods of rapidly growing inflation, and very slow periods of inflation.  But I believe because of the various factors happening today, inflation is accelerating.  At the same time, it can be argued that investing in the stock market is one of the best ways of safeguarding or at least offsetting inflation.

As oil companies, agriculture, and food companies post record profits from the spike in oil prices, etc… their share prices and dividends generally grow responsively as well.  Those share holders who own and are invested in such stocks, for better or worse, profit from inflation.  It’s a terrible game, as the poor and those who are not invested in the market get left out.  Their loss is the shareholder’s gain, and so those wealthy enough to hold large investments become ever more wealthy, while the poor and middle class get squeezed more each day.

So my whole venture into investments is not just a vehicle for the dreams of becoming incredibly wealthy and retiring early in life (though I would love to be just that).  But it is more importantly a defensive mechanism to maintain a standard of living and fighting off inflation.  If you don’t play the game, then you’ll get left behind.

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