Thursday, June 13, 2019

Misplaced Pride: Most of the "Middle Class" Is Actually Working Class

If we look at these charts, it looks like only the top 10%, or perhaps the top 20% at best, might qualify as "middle class" by the metrics described below.
The conventional definition of working class is based on income and education:the working class household earns between $30,000 and $69,000 annually, and the highest education credential in the household is a two-year community college degree or trade certification.
The definition of the middle class is also based on on income and education, but adds financial security as a metric: the middle class household earns $80,000 or more, holds 4-year college diplomas or graduate degrees, owns a home, has a 401K retirement account and so on.
(My own definition is much more rigorous, as I reckon "middle class" today should have the same basic assets as the "middle class" held 40 years ago: What Does It Take To Be Middle Class? (December 5, 2013.)
But in some key ways, income and education are misleading metrics: the key attributes that actually define the working class are:
1. Stagnant incomes: incomes that over time barely keep up with real-world inflation or even lose purchasing power.
2. Income insecurity: wages, benefits and pensions are not as guaranteed as advertised.
3. Not enough ownership of financial capital to be meaningful. Financial capital excludes household items, vehicles, etc. Financial capital includes stocks, bonds, certificates of deposit, ownership of a profitable business, equity in real estate, precious metals, bitcoin, etc.
By meaningful I mean enough to:
-- augment Social Security benefits in a way that greatly improves the household's lifestyle and retirement options
-- equity that is significant enough to fund college educations so one's children do not have to become debt-serfs to attend college
-- enough capital to fund (or help with) a down payment for a house, i.e. inheritable wealth that transforms the children's lives while the parents are still alive
-- income from capital, i.e. income isn't dependent on a government agency or government transfer.
How many U.S. households qualify to be middle class if that means:
-- the household income has outpaced real-world inflation over the past 20 years
-- the household's financial capital/assets have grown to become meaningful (as defined above) in the past 20 years
-- the household doesn't depend on government transfers for much of its income / spending
-- the household income and wealth are not dependent on financial bubbles, corporate guarantees, local government pensions on the verge of insolvency, etc.
While tens of millions of households qualify as "middle class" based on college diplomas and income, far fewer qualify when wealth and financial security are the key metrics. Plenty of households earn well in excess of $100,000 annually, but their financial status is as precarious and threadbare as any working class household.
They don't own enough assets or capital to move the needle, and what they do own is generally dependent on financial bubbles or speculative gambles.
Feeling like we belong to the "middle class" because we have a college diploma and make a good income offers up a false sense of pride and progress.If we're realistic about the financial wealth and security of "middle class" households, most qualify as working class: stagnant incomes, precarious financial circumstances, very little meaningful wealth and even less meaningful wealth that isn't dependent on the bubble du jour or promises that might not be kept.
If we look at these charts, it looks like only the top 10%, or perhaps the top 20% at best, might qualify as "middle class" by the metrics described above.
What sort of society do we have if the bottom 20% of households are poor, the next 60% are working class/precariat and only the top 20% (at best) have any of the core attributes of "middle class" financial security and wealth?
If we take off our rose-colored glasses, we have a much more stratified economy and society than we might like to believe: there's the top 1%, the next 4% "upper middle class," the next 10% "middle class," the next 65% working class, and the bottom 20% poor, those largely dependent on government transfers.
The "middle" has eroded away, leaving the top 15% who are doing very well in the status quo and the bottom 85% who are struggling to maintain a meaningful sense of prosperity and progress.
Personally, I'm proud to be working class in terms of my skillsets and values. Labels mean nothing. What counts is having skills, drive, agency, curiosity, frugality, integrity, self-discipline and kindness. Those forms of wealth cannot be taken from you when the bubble du jour pops and all the phantom "wealth" vanishes like mist in Death Valley.


Pathfinding our Destiny: Preventing the Final Fall of Our Democratic Republic ($6.95 ebook, $12 print, $13.08 audiobook): Read the first section for free in PDF format.


My new mystery The Adventures of the Consulting Philosopher: The Disappearance of Drake is a ridiculously affordable $1.29 (Kindle) or $8.95 (print); read the first chapters for free (PDF)
My book Money and Work Unchained is now $6.95 for the Kindle ebook and $15 for the print edition. Read the first section for free in PDF format.


If you found value in this content, please join me in seeking solutions by becoming a $1/month patron of my work via patreon.com. New benefit for subscribers/patrons: a monthly Q&A where I respond to your questions/topics.

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Tuesday, June 11, 2019

The Self-Destructive Trajectory of Overly Successful Empires

It's difficult not to see signs of this same trajectory in the U.S. since the fall of the Soviet Empire in 1990.
A recent comment by my friend and colleague Davefairtex on the Roman Empire's self-destructive civil wars that precipitated the Western Empire's decline and fall made me rethink what I've learned about the Roman Empire in the past few years of reading.
Dave's comment (my paraphrase) described the amazement of neighboring nations that Rome would squander its strength on needless, inconclusive, self-inflicted civil conflicts over which political faction would gain control of the Imperial central state.
It was a sea change in Roman history. Before the age of endless political in-fighting, it was incomprehensible that Roman armies would be mustered to fight other Roman armies over Imperial politics. The waste of Roman strength, purpose, unity and resources was monumental. Not even Rome could sustain the enormous drain of civil wars and maintain widespread prosperity and enough military power to suppress military incursions by neighbors.
I now see a very obvious trajectory that I think applies to all empires that have been too successful, that is, empires which have defeated all rivals or have reached such dominance they have no real competitors.
Once there are no truly dangerous rivals to threaten the Imperial hegemony and prosperity, the ambitions of insiders turn from glory gained on the battlefield by defeating fearsome rivals to gaining an equivalently undisputed power over the imperial political system.
The empire's very success in eliminating threats and rivals dissolves the primary source of political unity: with no credible external threat, insiders are free to devote their energies and resources to destroying political rivals.
It's difficult not to see signs of this same trajectory in the U.S. since the fall of the Soviet Empire in 1990.
With the primary source of national unity gone, politics became more divisive. After 9/11, new wars of choice were pursued, but the claims of a mortal threat to the nation never really caught on. As a result, the unity that followed 9/11 quickly dissipated.
I have long held that America's Deep State--the permanent, un-elected government and its many proxies and public-private partnerships--is riven by warring elites. There is no purpose in making the conflict public, so the battles are waged in private, behind closed doors.
Competing nations must be just as amazed as Rome's neighbors at America's seemingly unquenchable drive to self-destruct via the in-fighting of entrenched elites and the battle for supremacy between various parasitic elites who hold the power and privilege to squander the nation's resources on needless self-destructive wars of choice and on domestic in-fighting.
I suspect this trajectory of great success leading to self-destructive waste of resources is scale-invariant, meaning it works the same on individuals, families, communities, enterprises, cities, states, nations and empires.
It reminds me of former Intel CEO Andy Grove's famous summary of this dynamic:"Success breeds complacency. Complacency breeds failure. Only the paranoid survive."
An empire weakened by self-inflicted internal conflicts may appear mighty, but it becomes increasingly vulnerable to an external shock. The Eastern Roman Empire (Byzantine Empire) may well have collapsed from the devastating effects of the extreme weather circa 535 AD and the great plague of Justinian in 541 AD had it been weakened by internal in-fighting. But despite the staggering losses caused by these external catastrophes, the Byzantine Empire survived.
Rome, on the other hand, burned while self-absorbed factions jockeyed for power.
My book Money and Work Unchained is now $6.95 for the Kindle ebook and $15 for the print edition. Read the first section for free in PDF format.


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Monday, June 10, 2019

A Stock Market Crash Scenario

Herds get spooked and run. That's the crash scenario in a nutshell.
We have all been trained by a decade of central bank saves to expect any stock market swoon will soon be reversed by central bank sweet talk and/or rate cuts. As a result of such ever-present central bank willingness to intervene in the stock market, participants have been trained to believe a stock market crash is no longer possible: should the market drop 10%, or heaven forbid, 20% (i.e. into Bear Territory), the Federal Reserve and the other global central banks will save the day with direct purchases (The Plunge Protection Team), happy talk of future easing or, some unconventional quantitative easing measure or a rate cut--whatever it takes, in Mario Draghi's famous words.
But irony of ironies, such complacent confidence in the efficacy of central bank interventions is actually setting up a crash scenario. Crashes and melt-ups are both manifestations of herd sentiment. Though this is often simplified into greed or fear, this might better be described as confidence in near-term prospects or the lack thereof.
Confidence in the absolute efficacy of Fed intervention breeds complacency, which is the essential backdrop of stock market crashes.
Markets are said to "climb a wall of worry," that is, move higher as the market discounts potential threats to the ongoing rally. This skittishness, when coupled with ample volume (i.e. plenty of buyers), is the backdrop for sustained rallies.
Crashes don't arise from a skittish herd, they arise from a complacent herd.Crashes aren't characterized by skittish participants with low confidence in forecasts and short sellers piling into big bets on declines. Crashes are characterized by the exhaustion of short sellers who have tired of losing money betting against the melt-up, low volume and a herd milling about in complacent confidence the Fed can reverse any market decline.
This chart depicts such a scenario.
1. Bears / short sellers bet that weakening fundamentals will trigger a decline.
2. Markets climb this wall of worry, moving higher, crushing Bears.
3. Every air pocket / dip caused by skittish punters selling is bought as traders are confident in the Fed's complete control of the market.
4. Bears / short sellers bet big that various technical patterns will play out, most importantly that previous highs will hold, yielding a bearish double or triple top pattern.
5. The market surges to new highs, forcing short sellers to cover, pushing the market higher. Bears / short sellers give up and short volume plummets.
6. As volume fades and confidence is the permanence of the melt-up rises, the next sharp drop "surprises" participants, but they dutifully buy the dip.
7. This rebound reaches a lower high, and the sell-off resumes. Unbeknownst to most participants, the herd's confidence in the Fed's omnipotence has eroded. Rather than manifesting a wall of worry that the market can climb to new highs, the herd is undergoing a loss of confidence.
8. On the next decline, momentum accelerates the drop, and Fed pronouncements and emergency rate cuts do little more than reverse the downtrend for a few hours. The very fact that the Fed has to resort to emergency measures fatally weakens confidence, and selling begets selling.
Herds get spooked and run. That's the crash scenario in a nutshell.


Pathfinding our Destiny: Preventing the Final Fall of Our Democratic Republic ($6.95 ebook, $12 print, $13.08 audiobook): Read the first section for free in PDF format.


My new mystery The Adventures of the Consulting Philosopher: The Disappearance of Drake is a ridiculously affordable $1.29 (Kindle) or $8.95 (print); read the first chapters for free (PDF)
My book Money and Work Unchained is now $6.95 for the Kindle ebook and $15 for the print edition. Read the first section for free in PDF format.


If you found value in this content, please join me in seeking solutions by becoming a $1/month patron of my work via patreon.com. New benefit for subscribers/patrons: a monthly Q&A where I respond to your questions/topics.

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Friday, June 07, 2019

What Would It Take to Spark a Rural/Small-Town Revival?

Recent research supports the idea that this under-the-radar migration is already under way.
The decline of rural regions and small towns is a global phenomenon, and the causes are many but boil down to two primary dynamics:
1. Cities and megalopolises (aggregations of cities, suburbs and exurbs) attract capital, infrastructure, markets and talent, and these are the engines of job creation. People move to cities to find jobs.
The San Francisco Bay Area megalopolis of roughly 8 million people in 9 counties and 101 cities offers an example of this dynamic. The region added over 400,000 new jobs since the 2008-09 Global Financial Crisis and over 1 million additional residents since the early 2000s.
In effect, the region absorbed an entire new city with 400,000 jobs and 1 million residents. Roads and public transport did not expand capacity, and housing construction lagged. As a result, traffic is horrific, homelessness endemic and housing costs are unaffordable to all but the favored few.
Rural / small town regions cannot match these employment opportunities and so people move, reluctantly or enthusiastically, to overcrowded, horrendously costly urban zones to find jobs.
2. Globalization has lowered the cost of agricultural commodities by exposing every locality to globally set prices (supply and demand).
The relatively low cost of fuels has enabled produce from thousands of miles away to be shipped to supermarkets virtually everywhere.
These mega-trends have slashed farming incomes while costs have risen across the board. This squeeze as revenues decline and costs increase has driven even the most diligent and devoted farmers out of business.
What would it take reverse these trends?
1. The price of agricultural commodities and products would have to triple or quadruple, so that farming would become lucrative and attract capital and talent.
Imagine an economy where ambitious people wanted to get into agriculture rather than investment banking. It's a stretch to even imagine this, but if energy suddenly became much more expensive and crop failures globally became the norm due to fungi, plant viruses and pests that can no longer be controlled and adverse weather patterns, this could very rapidly change the price of ag products to the benefit of local producers.
Another potential dynamic is the decline of global trade due to geopolitical issues and domestic politics, i.e. the desire to reshore "strategic industries" such as food production regardless of the higher costs such a trend might cause.
The repudiation of finance as the engine of economic "growth" (or pillage, if we remove the gloves) and the prioritization of real-world production are also trends that could arise as the financial bubbles pop and cannot be reinflated with the usual trickery.
2. Wealthy owners of capital tire of cities and move to small towns, bringing their capital and entrepreneurial drive with them.
There are many historical models in which the spending/investing of wealthy families drives the expansion of local economies. Colonial America and the Roman countryside are two examples of this dynamic.
When capital flows to small towns, jobs are created as the wealthy hire people to serve their needs. These new jobs create new markets for small businesses, and these new opportunities attract new capital.
Some owners of capital are passive owners, collecting rents from afar and spending this income in the local small-town economy. Others are restless entrepreneurial types who will fund new local businesses as a challenge or as an opportunity that's been ignored in the mad rush to sprawling cities.
Both kinds of owners bring new spending and investment.
Wealth enables this class to bring its luxuries and desires with it, and so cultural activities favored by the wealthy get funding they never had before.
Wealthy types follow leaders just like everyone else, and once they hear of wealthy people extolling "the good life" in a small town, they investigate this option in a way they would never have done before.
Thus capital attracts capital, opens market opportunities, increases employment and starts attracting talent which is frustrated by the high costs and competition of the megalopolises.
Why would wealthy owners of capital move from places like Los Angeles, San Francisco, Seattle, Atlanta and New York City to small towns?
Any urban dweller in an overcrowded megalopolis can give you the answer: the traffic is unbearable, homeless is expanding, costs are skyrocketing and so on. The cultural benefits the city offers are increasingly outweighed by the friction, even for the wealthy.
What would cause the trickle of wealthy people leaving cities to swell into a mini-flood? A recession that guts tax revenues would cause cities and counties to raise taxes and fees, many aimed specifically at the rich, while limiting spending on the intractable problems of traffic, homelessness, public education, etc.
Most city dwellers cannot leave for lower cost climes because they need the higher income of city employment and they have a stake in the real estate market via a home they own and a mortgage to pay.
The wealthy, whose income is derived from capital rather than solely labor, have the financial freedom to leave the city but retain much of their income.
If both of these trends manifest, we might see those who can abandoning increasingly unlivable cities for lower cost, safer and more livable small towns.
Recent research supports the idea that this under-the-radar migration is already under way. The Rise of the Rural Creative Class (via Kevin M.) A growing body of research shows that innovative businesses are common in rural areas, and rural innovation gets a boost from the arts.
A series of studies from Tim Wojan and his colleagues at the U.S. Department of Agriculture’s Economic Research Service documents the drivers of rural innovation. Their findings draw on a variety of data sets, including a large-scale survey that compares innovation in urban and rural areas called the Rural Establishment Innovation Survey (REIS). This is based on some 11,000 business establishments with at least five paid employees in tradable industries—that is, sectors that produce goods and services that are or could be traded internationally—in rural (or non-metro) and urban (metro) areas.
The dominance of urban regions in tradable goods and services is visible in this map. We can imagine an economy in which rural / small town areas prosper within their local regions and within the domestic economy in a form of vibrant autarchy, without needing overseas trade as an engine of well-being.
My book Money and Work Unchained is now $6.95 for the Kindle ebook and $15 for the print edition. Read the first section for free in PDF format.


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Wednesday, June 05, 2019

Is the Tech Bubble Bursting?

There are two other trends that don't attract quite the media attention that soaring profits do.
Is the decade-long tech bubble finally popping? Tech bulls are overlooking the fundamental reality that the drivers of Big tech's phenomenal growth--financialization and expansion into mobile telephony-- are both losing momentum.
A third dynamic--Big Tech monetizing privately owned assets such as vehicles and homes-- has also reached saturation and is now facing regulatory barriers.
Let's start with market saturation: of the 5.3 billion adults on earth over 15 years of age, 5 billion now have a mobile phone and 4 billion have a smartphone: The end of mobile (Benedict Evans). As for teens between 10 and 15, only the truly impoverished don't have a mobile phone of some kind.
As I discuss below, the primary dynamic of the past decade has been the integration of web-based services into mobile telephony. By any measure, that cycle is now complete.
I recently explored technology's ties to financialization and deflationary trends in prices and profits: Two Intertwined Dynamics Are Transforming the Economy: Technology and Financialization
The basic idea here is that the tech bubble has been inflated by a unique set of circumstances:
-- financialization, one manifestation of which is unprofitable Unicorn companies going public at lofty valuations (see chart)
-- the establishment of quasi-monopolies that have become immensely profitable.
These conditions are changing.
1. Many tech giants (Microsoft and Apple) are moving to monthly services, in effect becoming profitable utilities. These may be profitable but they are no longer fast-growing in terms of revenues or profit margins.
2. Calls for regulation of lightly regulated data-based corporations (Facebook and Google) are rising.
3. The weakness of Lyft and Uber stocks after their IPOs suggest a weakening appetite for betting on growth at any cost as a business model.
4. The profitable build-out of the past decade has been integrating web services with mobile telephony and data-mining social media and search. These have now been built out, so the tech cycle has reached stagnation in the S-Curve--a reality visible in Google's recent earnings disappointment.
There are two other trends that don't attract quite the media attention that soaring profits do:
1. Previous tech cycles / bubbles were founded on technologies that had the potential to greatly boost productivity. This cycle ( integrating web services with mobile telephony) is more about consumer convenience and distribution of services such as AirBNB and Uber than productivity.
To the degree that entertainment and the addictive distractions of social media are now at everyone's fingertips, and people are checking their phones hundreds of times a day, productivity has suffered rather than increased.
2. The services that are now distributed to mobile telephony are tremendously deflationary to revenues and profits. To note just one example of many, with a smart phone in hand, there's no longer any need to buy a camera or portable music player.
More pernicious is the deflationary impact on revenues and wages. The number of Uber drivers who earn the equivalent of what taxi drivers once earned (no great sum in most cases) is small.
In effect, Uber monetized an under-utilized asset--individuals' privately owned autos-- and stripped out the labor overhead that accompanies employment(and makes it expensive to employers).
These moves transfer income to the owner of the distribution network (Uber, AirBNB, etc.) while offering a slice of income to the owner of the asset being monetized (the privately owned auto or flat).
Whatever income security exists in this distribution of income goes to the owner of the distribution network (Uber, AirBNB etc.) rather than the owner of the asset that's being monetized.
The labor component of the service is poorly paid and stripped of income security and other standard benefits: Uber drivers don't qualify for unemployment, disability, healthcare etc. unless they pay those very costly labor overhead expenses out of their own pocket.
This model is under pressure on multiple fronts. Municipalities are starting to push back against the monetization of housing that's zoned for residential use only, and against the low wages and zero benefits paid to "gig economy" workers.
In other words, it isn't just absurd IPO valuations that are suggesting this tech bubble is about to burst--the fundamentals of the business models and the deflationary impact of technology are about to reduce the cash flows and profits of tech companies.
As for the fantasy that AI and machine learning will generate trillions in profits: as I explained in Is the World Becoming Wealthier or Poorer? (March 27, 2019) there is nothing intrinsically profitable about machine learning, robotics or AI. Rather, each is extraordinarily deflationary to profits as each is readily commoditized.
My book Money and Work Unchained is now $6.95 for the Kindle ebook and $15 for the print edition. Read the first section for free in PDF format.


If you found value in this content, please join me in seeking solutions by becoming a $1/month patron of my work via patreon.com. New benefit for subscribers/patrons: a monthly Q&A where I respond to your questions/topics.

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