How Squeezing the Middle Class Can Ultimately Lead to a Revolution

It’s unfortunate to be the bearer of bad news, but for the middle class in America, we’re probably on the downside of the mountain. That doesn’t mean that the economy still won’t be cyclical. We’ll have ups, as well as downs, but there are a number of factors moving into place that are likely to beat the middle class in America down long-term.

The first is inflation.

Right off the bat, keep in mind that the real level of inflation is much higher than the government claims because politicians are heavily incentivized to claim that inflation is low and those numbers are very easy to manipulate.

Similarly, there are all sorts of efforts to obfuscate how much money the Fed created out of thin air in 2020 to float the economy during the COVID shutdowns in 2020. The best real estimate (the M2 money supply) is about 18% of all American money was created from scratch in 2020.

After that sort of massive increase in the money supply, it shouldn’t surprise anyone that massive inflation followed soon behind. This is going to become ever more commonplace over the next few decades as a way to cheapen the cost of paying back the 34 trillion-dollar national debt.

We’ve been financially irresponsible for far too long and are still accumulating debt at a rapid rate with no hope of balancing the budget. That means inflating the currency is going to become a necessity for the government, which is very bad news for the poor and middle class.

You see, inflation isn’t necessarily good news for anyone, but if you have the money to put into hard assets like gold, real estate, art, Bitcoin, etc., you are much better able to weather periods of high inflation. The rich will at least have the opportunity to pull that off, although history tells us that in times of consistently high inflation, many of them fall by the wayside as well. However, the poor and middle class tend to rely much more on a salary that is highly unlikely to keep pace with high levels of inflation.

That puts people in situations where they feel like they’re always getting further and further behind, even if their paycheck is getting bigger because the dollar isn’t retaining its value. This is considerably more dangerous for society than it seems because of a phenomenon that the late, great philosopher Eric Hoffer identified:

“Discontent is likely to be highest when misery is bearable; when conditions have so improved that an ideal state seems almost within reach. A grievance is most poignant when almost redressed.”

It’s not the people who’ve always been poor and never really had hope of a better life who are most frustrated, it’s the people who’ve had some success, but who end up feeling stuck, like a hamster on a wheel, unable to ever move forward and grab their piece of the American dream. These are the sort of people now retired conservative economist/columnist Robert Samuelson referred to fifteen years ago as people destined to be gripped by “affluent deprivation”:

Our new economic era may lapse into a state of "affluent deprivation." That's an unfamiliar term. It doesn't mean poverty. The United States will remain a wealthy society. Rather, "affluent deprivation" signifies a state of mind. People feel poorer because their sluggish income gains get siphoned off into higher taxes, energy costs, and health spending. Though these all involve benefits, they don't pay everyday bills or cover people's routine pleasures. ...The closer the economy comes to stagnation, the more Americans will succumb to distributional struggles—not just between the rich and the poor, but also between the young and the old and between immigrants and natives. Down that path lies "affluent deprivation."

To use an old but apt cliché: people will fight over pieces of a fairly fixed economic pie rather than sharing ever-larger pieces of an expanding pie. The winners may be pleased, but the losers will feel short-changed—and so the conflicts may intensify, with yesterday's winners possibly becoming tomorrow's losers. Politics, which is often about rewarding some and punishing others, may become more so. Nor is this prospect merely theoretical. Already, Americans face far more claims on their incomes than can be easily met.

Traditionally, Americans have always expected the next generation to do better than the last and it has generally worked out that way. However, that is not written in the stars.

As inflation reduces the value of your salary, endless government regulations drive up the cost of healthcare, energy, and everything else, taxes get higher, jobs are replaced by AI, illegal immigrants who can work cheaper because they don’t have healthcare and don’t fully pay their taxes take jobs, jobs move to cheaper labor forces overseas, and our cultural, moral and intellectual declines lead to less innovation and business growth, you have to expect American lifestyles to decline as well. It just goes with the territory.

You don’t get the small government, hardcore capitalist, protestant work ethic lifestyle improvements with a big government and an increasingly socialistic, “you should thank me for showing up at all” population.

So, what happens if you’re making way more money than mom and dad, but you don’t see any hope of ever having the same kind of lifestyle as mom and dad? People, myself included, have rightfully savaged the WEF for promoting this whole concept:

However, it is certainly possible to see things going in this direction with the average person living in a pod or tiny house, RENTING a self-driving car when they need it instead of owning one and resentfully feeling broke as they read about the ultra-wealthy living in ludicrously expensive mansions and scarfing up hundreds of thousands of acres of farmland.

On top of all of this, it seems highly unlikely that Social Security and Medicare will exist in their current form two or three decades from now. Granted, there may be programs with those names still around, but contrary to the deliberately deceptive happy talk you hear from politicians, both programs are running in the red and there is no account somewhere with that money sitting in it. Every dime that has been collected for both programs has been spent and without income taxes and borrowed money, neither program would be fully funded right now. How do you feel about only getting your Social Security and Medicare payments as long as nations like China and Saudi Arabia keep loaning us money? Yeah, that’s what I thought.

As Ray Dalio has noted, these are exactly the sort of conditions that destabilize and cause radical, potentially dangerous shifts in societies:

… When there are very bad financial conditions and intense conflict, (it) leads to . . . big internal conflicts that consist of 1) the country and the people in the country (or state or city) being in bad financial shape (e.g., having big debt and nondebt obligations), 2) large income, wealth, and values gaps within that entity, and 3) a severe negative economic shock.

….Those places (cities, states, and countries) that have the largest wealth gaps, the largest debts, and the worst declines in incomes are most likely to have the greatest conflicts. Interestingly, those states and cities in the US that have the highest per capita income and wealth levels tend to be the states and cities that are the most indebted and have the largest wealth gaps—e.g., cities like New York, San Francisco, and Chicago, and states like Connecticut, Illinois, Massachusetts, New York, and New Jersey.

In other words, a system that leads to most people feeling like they “own nothing” and never will isn’t going to make them happy, it’s likely to make them demand change, either via the ballot or the bullet.

The solution to that problem isn’t more welfare programs and government intervention. It’s small government, lower taxes, and fewer regulations. It’s a government that takes the needs of the rich and poor into account, but that puts the interests of the middle class first. A government that doesn’t reward people for coming here illegally or for not working. A government that prioritizes cheaper healthcare and lower energy costs over the interests of healthcare lobbyists and environmental activists.

Trump was on the right track when he renegotiated some of our trade deals and we need to start asking whether our current immigration policies benefit America’s middle class. It’s also worth asking if it’s a good idea to allow massive corporations to scarf up large numbers of single-family dwellings. High taxes and big government are not the fix for “income inequality” or ordinary people could afford to live in places like Manhattan and San Francisco.

Theoretically, it’s not too late to start looking out for the middle class in America and get the country back on track, but realistically, turning things around would require liberals to acknowledge the failure of their policies and change direction. It would be great if they did that before it was too late, but asking liberals to care about the results of their policies is a little like asking a leopard to change his spots, so it’s not something we can be hopeful about.

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