Economic Trends Affecting Americans

Posted on Posted in Economy

I have a pretty positive attitude toward the future.  And, I see a lot of new opportunities developing.  However, there are some very disturbing trends that seem to be gaining momentum.  These trends could have a negative effect on our ability to compete in the world marketplace.  And, they will make it harder to live in the lifestyle Americans have become accustomed to.

Disappearing Middle Class

The American Dream
Image by Wonder Mike

The middle class of America was once the envy of the world.  A working person could support an entire family and live in relative comfort from a single income.  He or she could own a house, a car and many modern conveniences.  They could expect an education, health care and possibly a small pension for retirement.

The middle class is disappearing rapidly, as labor jobs that supported them move overseas.  These jobs won’t be returning any time soon, because of globalization and the high cost of manufacturing in the U.S.

We are headed toward a two-class system, similar to what has happened in Argentina, where the rich get richer and the working class get poorer.  Real wages have been stagnant in the U.S. for quite some time, despite the steady rise in the cost of living.  That’s why there are so many boomerang children right now.  It’s getting harder for young workers to afford rent and utilities.  Even college grads are struggling.

Solutions: Prosperity lies in goods and services that can’t be outsourced or produced overseas.  Industries such as medical and accounting will have steady growth.  College degrees in Chemistry, Engineering and hard sciences will remain valuable.  Entrepreneurs will be paid better than employees.

Government Deficit Spending

The government’s deficit spending is a looming disaster for America.  Recently, the deficit topped 13 Trillion dollars, which is around 85% of our country’s GDP.  We added over a trillion dollars to the deficit this year before the end of July.  This is a massive amount of debt, which costs hundreds of billions of dollars per year in interest.  It is becoming a huge burden on taxpayers.

The reality is the government has to cut back on spending. And, nobody in office wants to face this task, because cutting back will cause a lot of problems.  Government offices must be closed, programs and benefits must be cut and government workers must be laid off.  This is nearly impossible to do in the middle of a recession.  But, it must be done at some point.

Another alternative for the government is inflation.  They can shrink the relative size of the deficit by allowing higher inflation.  Unfortunately, this will also shrink the savings of retirees and raise the cost of living for people living on a fixed income.  To increase inflation, the government only needs to print money to cover their deficits.  This is already happening.

Solutions: Keep a portion of investments in real assets, such as precious metals and real estate.  Avoid variable mortgages and revolving debt.

Aging Demographics

The aging of our population is going to cause a number of problems. America’s population has been growing steadily for centuries, but that is coming to an end.  Except for the steady growth of new immigrants, America’s population is stagnant.  We can predict what will happen by looking at Japan and Eastern Europe, since it has been happening there for quite some time.

First and most obvious, there are going to be fewer productive workers to support our large population.  This will affect our social programs, such as Medicare and Social Security, which are in danger of becoming insolvent.  It will also affect our stock market, because more people will be draining their 401Ks than contributing.  Businesses that were booming for decades will start to see continuous negative growth.

Second, demand for services and commodities will change.  For example, there are thousands of shuttered houses in Eastern Europe, because there are fewer new families to purchase them.  And, demand for health care is skyrocketing in Japan as their population ages.  In parts of our country, schools are closing and small towns are dying, because of negative population growth.

Solutions: Plan and budget for your own retirement, without counting on pensions and government programs.  Shift emphasis to create income from alternate sources, in addition to generating income from investments.

The Bottom Line

The bottom line is the corporate ladder has become very slippery.  Workers can no longer count on loyalty or respect from their employers or from the government.  The surest future lies in creating your own paycheck.

“In the new economy, information, education, and motivation are everything.”

Bill Clinton – 42nd President of the United States

Recommended Reading

This post was featured on the Carnival of Personal Finance over at Miss Thrifty. If you aren’t familiar with the Carnival of Personal Finance, it’s the premiere carnival of its kind. If you want to read informative articles from knowledgeable bloggers, this is the place.

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17 thoughts on “Economic Trends Affecting Americans

  1. The issue of aged workers is definitely going to be a serious one to contend with, as well as the problem of deficits. SS was always meant to be an emergency backstop measure, not a standard retirement plan. UI was meant to be for those in distress, not for anyone and everyone who ever lost their job.

    It’s tough, because voters simultaneously demand more government and lower taxes. They want to have their cake and eat it too. Unfortunately, you can only borrow so far to pay for things before you are left inflating in the end.
    Invest It Wisely recently posted..Save More Money with Indexed FundsMy Profile

    1. Kevin,

      The retirement age has to be raised again, but it’s not going to be popular. Especially for workers who are nearing retirement and then they have to wait. But, people are living way longer and the retirement age hasn’t kept pace with life expectancy. They just raised the retirement age in France and I expect we will see this all over Europe.

      Because politicians don’t have the backbone to do what is right, what they have done instead is to scam retirees with cost-of-living raises. They use an artificially low inflation rate to keep COLA raises low. There is a website called shadowstats.com that explains how they do it.

  2. Bret – this is an excellent post. You make some very good observations on how the middle class is being squeezed, and more importantly how it’s getting tougher these days. Realistically, my assessment is that the standard of living is declining and will continue to do so.

    I look at the national debt, the difficulty the average person has these days to live as comfortably as in days past, and it’s clear that our children are – at this rate – headed toward an adult life where it will be tougher to make a nice, comfortable life. For that matter, that’s the case with many of us.

    My approach is to take responsibility for my own future, and not count on income streams from governmental sources. Rather, it’s important to keep yourself marketable, keep learning, stay dialed in to macro-level issues and trends affecting all of us, and don’t put all your eggs into one income stream. On the money management side of the ledger, saving a higher % of income will be important, as will an intelligent approach to investments that balances preservation of capital and growth.

    Really, many of these things have been a part of personal finance advice for years, but many folks have been able to get away with a loose approach to this. Not sure it will be as easy in the future.
    Squirrelers recently posted..Making 400-000 yet living with Mom and DadMy Profile

    1. Wise Squirrel,

      I agree the standard of living will continue to decline for most of the working class. However, there will be some great opportunites for others, who are more aggressive and entrepreneurial.

      When I was writing this post, I started thinking about the movie Gran Torino. It provides such an obvious glimpse of how America and our economy has changed from the post-war years until now. And, some of those changes aren’t positive. It also shows clearly, how people have lost their sense of self-reliance. It made me sad in a way.

      1. Bret, seems you liked Gran Torino as well. Honor and self-sufficiency marked Cling Eastwood’s character throughout that film. If one looks past the colorful language, there are lessons to be learned there.

        Agree that there will likely be great opportunities for aggressive smart entrepreneurs.
        Squirrelers recently posted..Making 400-000 yet living with Mom and DadMy Profile

  3. Great post Bret. You’ve hit on some of the most important themes in personal finance right now. I think a lot of folks are starting to realize that some of the advice that seemed wise a few years ago just won’t work in today’s environment. Thanks!

    1. 2 Cents,

      Sometimes, people are so focused on their own personal finances; they don’t consider how the big picture of the economy affects them. So, I like to create posts to make them aware.

      Also, most of the common wisdom about finances needs to be challenged:

      * Student loans are considered good debt
      * Real estate is always a good investment
      * The stock market returns 10% on average
      * CDs and money markets are safe long-term

      The things that have worked so well in the past, may not work so well in the future, because the finacial landscape is changing.

  4. Hi Bret, you make some great points in this post. Have you been in my head again? 😉 I actually just wrote something on boomerang kids which touched on a lot of issues you mentioned. I will have to put it up later this month.

    Elizabeth Warren has done some great work on the shrinking middle class and why it’s so hard to save money today. I agree that the standard of living is going down in the US and isn’t coming back, although as individuals we may do well. I am a big fan of precious metals too.
    Jennifer Barry recently posted..Stranger in His Own Land- Part 3My Profile

    1. Jennifer,

      I guess brilliant minds just think alike. 🙂

      I like Elizabeth Warren a lot and I wish she had of been nominated to the Supreme Court. I think she would have been a great jurist for the people. The Supreme Court has become a shameful failure in protecting our Bill of Rights. The Eminent Domain ruling was a travesty of justice.

  5. Well said, Bret. America is on its inevitable decline, and its now time to for most people to make the best of a bad situation.

    The good news is Americans are still the undisputed kings of the hill in terms of personal wealth. I believe I saw a stat that the poorest American is still wealthier than 75% of the rest of the world’s population.

    There is no doubt most folks who aren’t entrepreneurs or who don’t have marketable degrees/skills will have to ratchet down their lifestyle expectations in the coming years.

    Best,

    Len
    Len Penzo dot Com
    Len Penzo recently posted..My 2nd Annual Brown Bag Survey- The 10 Most Economical SandwichesMy Profile

    1. Len,

      These are definitely some interesting times.

      The most pampered generation of young Americans are going to run headlong into the reality of declining opportunity. I certainly hope they are up to the challenge. Americans have always found a way in the past and I hope this new generation can carry the flag forward.

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