Saturday, January 15, 2011

What's happening to the Middle Class lately? They're being squeezed!

I thought today instead of discussing the stock market or politics, I would put up a piece on the current plight and squeeze of the Middle Class. I start with a look at their Personal Savings Rate over the past years, to where we are today, as a result of the stresses of the deepest Recession in history. Then I will look at what has happened to them the past 6 months as they are squeezed to save less and spend more on Commodities and the increase in the cost of Oil and therefore gasoline. The first chart below shows the Personal savings rate from 2000 to 2011. The data comes from the U.S. Dept. of Commerce.

Before the Recession, from about 2001 to 2005, the Personal Savings rate was about 3.5%. In 2005 and 2006 it dropped down to about 1.5%, and then moved to 2.0% and stayed there until the Sub Prime scare in 2008 and the beginning of the recession. But from 2008 to mid 2009, it reached a peak of 8.0%. Then it started to drop and settle in at between 5.0 and 6.0%. In the last 6 months, you will notice that in mid 2010 where it had reached back to 6.2%, it has steadily dropped back down to 5.0%. That's an absolute 1.2% drop. What has caused this sudden drop in their savings rate? We have been told that the economy has improved and that there is no inflation by the Fed, the government, and the media. But the data suggests otherwise. In the chart below, Crude Oil Prices have risen these past 6 months, gasoline prices have been accordingly rising and now are taking a bigger bite of our income. See the red arrow of the prices the past 6 months.

The next chart is on the Commodity Price Index from 1989 to 2011. You will notice the high peak in 2008 and that we are now back above that level now and have had a sharp increase mid 2010 to now. This coincides with the jump in Oil and the Gold price surge in the latter part of 2010.

There is no doubt that the Middle Class is being squeezed again and that it is affecting their savings rate. Many would like to pay down debt but as long as they are being squeezed, it is going to be more and more difficult.

By the way, President Obama and his Administration define Middle Class as anyone making up to $250,000/year. However they also were considering the legislation for the tax cuts up to $1 Million/year and that might be the upper limits today of where the Middle Class ends and the wealthy begin. I don't know if one can arbitrarily draw a line where one class ends and another begins, but it helps to define at least what group of people are being affected the most. If you feel empathy for the difficulties the Middle Class is facing, consider how the poor must be doing. You see it is often the Middle Class who does the heavy lifting to assist the poor by small donations to those less fortunate.

We are experiencing a Class Warfare right now unprecedented in our history. I have no idea if and when it will end, but I don't think we are going to like how it is finally resolved. These things end in other countries with revolutions and a rising up of the poorer classes. I have heard that buying a gun is easy these days and gun sales have risen very rapidly in the past decade. But they say try buying ammunition. You can't as it is all sold out! Why do you suppose so many are buying guns and ammunition is unavailable? Kind of scary, isn't it.

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