09 December 2009

Just what I've been saying for years.

I read an article recently that put very eloquently what I have been saying for 15 years. The American middle class has maintained its prosperity through an ever closing window. The post war economy saw the greatest expansion of the middle class in history. With wages rising quickly and the American standard of living the envy of the world.

This incredible surge was made possible by cheap and plentiful energy and the fact that America's major competitors were recovering from a war that devastated commerce and industry. This combined with the coup at Bretton Woods that replaced the then current world trading currency, the pound, with the dollar provided for a boom in manufacturing and the cold war provided a continuing war time economy (remember Eisenhower's warning about the military industrial complex) which lead to incredible middle class wealth.

In 1973, this changed with the end of cheap oil and the beginning of strong inflation. What did Tom and Sally American do then? Why they sent Sally to work to augment the family income so that they did not have to give away any of the luxuries they now felt entitled to. This worked for a while.

Well for those of you who follow my blog, you know that inflation never left, it was just hidden by successive administrations tinkering with statistics. This combined with the fact that the American middle class wage has not kept pace with even the understated inflation rate made Tom and Sally have to dip into their next best store of potential cash and mortgage and second mortgage their home for cash to keep up with the American dream. What happened when we were running out of equity in our homes? REAL ESTATE BOOM - made up equity to leverage.

Now the proverbial chickens are coming home to roost. Tom and Sally need to face the tough reality that thanks to their short sighted planning their children would not have the same opportunities as they had. Their children would be the first American generation since the depression to regress in their standard of living.

I hate to say i told you so but .....

And what about the 'New Economy'. More about that in another post.

For a good article that discusses many of these points from someone who is much brighter than I click here.

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