Washington, DC -- (ReleaseWire) -- 02/04/2016 --DAWN BENNETT: Charles Hugh Smith writes financial commentary that regularly appears on different financial sites, such as, David Stockman's Contra Corner, and on his own personal web site called Of Two Minds. Charles is also the author of seven novels, and his most recent book is Get a Job, Build a Real Career and Defy a Bewildering Economy, which gets straight to the point, and those out there who just want a good paying middle class job, like doing a factory work, or routine office data shuffling are looking backward to an area that is firmly in the past. Charles, is the middle class eroding?
CHARLES SMITH: Well, the middle class is eroding, and we're looking around, as a society, for causes. And some people look at it at politically related causes, such as tax rates or high regulatory burdens on new business, and those are definitely factors. But my thesis, which is shared by a lot of other people, is that the economy is changing in fundamental, systemic ways, and so we're forced to adapt sort of on the fly. Because no one could really predict with any accuracy the impact of technologies like the internet, robotics, software, all these forces which are automating human labor. And so for the factory worker, it happened quite a while ago that automation sort of ate a lot of factory floor jobs, and now software and technology is advancing so quickly that it's starting to erode higher level jobs, and so that's a huge impact on the middle class.
BENNETT: I was reading a research report by the Pew Research Center which came out the end of December 2015, and they said that the number of middle class is shrinking. Since 1971, it's shrunk 11%, from 61% to 50%. But it also says that the number of households that are classified as wealthier have increased from 14% to 21%. So is the middle class shrinking because they're getting richer?
SMITH: Well, Dawn, that's an excellent question, because that statistic you just quoted suggests that the upper middle class, which we can define it in a lot of different ways, but say it's people or households earning $150,000 and up, has grown dramatically. And this is generally ascribed to the difference in skill sets, that those people with the skill sets to benefit most in a rapidly changing, tech-heavy economy are being rewarded for their profitability, if you will, by their employers, where people with fewer skills and fewer tech skills, their income is stagnating, because they just can't be profitable in the same way to their employers. So I think that impact is real, and it's something that sort of forces the traditional middle class into either upgrading their skills or tightening their belts, so that they spend less and have more available cash to invest in themselves and the future.
BENNETT: A lot of people today probably think they're in the middle class, so I'm actually a little confused what the middle class should be defined as today.
SMITH: Right, and I've tried to answer this and don't claim that I've made a complete answer. But I think most media outlets attempt to choose an income level and declare somebody middle class or not. And I think the answer is a little more nuanced. I think what makes the middle class the middle class—and this is going back 50 years to the emergence of the middle class after World War II—is the ability to save money that's invested for future generations, and the creation of assets that can be passed on to the next generation. And so someone could make a quarter of a million dollars a year, and if they have no assets and are really not able to pass anything on to their children, they're not in the middle class by my standards.
BENNETT: So you're talking about back in the 1950s, when you had a family with a single breadwinner, who had a home and a car and vacations and kids going to college, that's what you would consider the middle class?
SMITH: Yes, or it could even have two primary workers in a household, but the key element there was that they were building real equity in their homes, and homes had not yet been transformed into a financial casino. And so that's part of why the middle class is eroding, is our financial and economic systems have changed and turned what used to be safe assets that the middle class could acquire, it's turned it into a financial casino, where housing prices soar and people feel rich, and then they crash. And that boom and bust is very detrimental to a middle class.
BENNETT: Charles, you've written that the Roman Empire and even the French Revolution were examples of where the middle class collapsed shortly before the country also collapsed. Do you think that any of those examples, those historical examples, bear any similarity to what's happening here in America?
SMITH: I think there's a lot of parallels. And people might say, 'Well, wait a minute. How can something 2,000 years or 200 years ago have any relevance to modern day America?' but, of course, we're still human beings and we still organize ourselves in economic and political structures, which do have similarities. And the latest issue of Foreign Affairs magazine, which is sort of considered by many people to be the talking book of the ruling class, if you will, the entire issue is on wealth inequality. And many of the commentators are speaking about the need for political engagement. What happens when you lose your middle class is you have a lower class which is often dependent on the state for welfare or social payments or medical care, and they become politically disengaged, because they don't really have any skin in the game. They get their check from the government and then they're done, and then they're going and living their private lives as best they can. And then the upper class buys political influence, so they get what they want by just, you know, campaign contributions and hiring lobbyists and so on. And so the society decays from the inside, if you will. It's hollowed out, because the middle class has no political voice and its economic standing is decaying at the same time.
BENNETT: You put out a number of predictions, and one of them is a bit controversial, I think. You've talked about this "hollow shell" of democracy that's going to continue its erosion here in the United States. Do you actually think Americans might wake up to the fact that America and its identity is just gone and completely flawed at the same time?
SMITH: I would like to think so, Dawn, but it seems to me and to a lot of other observers that the American populous in general is focusing on social issues. It might be gay marriage or legalizing marijuana or these kinds of issues that seem very important to a lot of people, but they have very little to do with the economic and financial issues we're talking about. So it seems like the American public is sleepwalking through this transformation of the American economy and this loss of political power. And there was a famous study, I don't recall the authors' names, but I think it came out a year ago, in which two political scientists studied the decisions of congress and the American federal government and compared it to the general populous' views on various issues. And they discovered that the Congress and federal government, the decisions they made were basically 90% in favor of the wealthy class that influences congress and the regulatory agencies with their money. In other words, the government no longer really cares what 90% of the people think; they just act in accordance to what the financial oligarchy, if you will, wants and what benefits that class. And so that's why our democracy is being hollowed out.
BENNETT: There's rising inequality that's happening, but I do think it's also dominating the current election cycle, which, to me, can be seen with that unexpected popularity of socialist Bernie Sanders, who speaks almost entirely about this issue. I think you can make a compelling case that this is a rise in inequality, and I also think it's attributable to the government's broadening attempt to engineer economic growth. For those new to this argument, can you actually walk us through how that's going to work?
SMITH: Well, I guess I would take two lines of argument. One is why is inequality growing? I would say it's because the Federal Reserve and the other agencies of our central government have reinforced the mechanisms that the super wealthy use to get even wealthier. And just to give you a quick example, if I have a line of credit at 2% and I can borrow 10 billion dollars, and you can only borrow a few hundred thousand dollars at 4.5% for a home mortgage, well, who wins that battle? Who can buy multiple houses and have lower costs? And so this is partly why we see an erosion of home ownership and a rise in rentership: hedge funds can go borrow 10 billion dollars, buy dozens of houses, outbid regular people like us, who have to pay twice as much interest rates. Well, guess who's going to get richer and who's going to get poorer. I mean, it's very obvious, so if you give financiers and corporations basically unlimited free money—and actually you can borrow money, if you're a corporation, at much less than 2%--then you can buy back your stocks, and the people at the top of that corporation can reap huge benefits as stock soars and they get to cash out. There's a lot of advantages that you get as a super wealthy entity or financier that are not available to everyone else, and that's why inequality's growing. As for socialism, we can go back to 1840s and the emergence of Marx, who was the first one to put a coherent critique of inequality out there, and so that's always been the solution, is tax the rich and distribute the money to people who don't have jobs, right? And there's common sense in that, and that's sort of the basis of our unemployment. But unemployment's supposed to be temporary; the economy's supposed to bounce back and create more jobs. So what Sanders and the Swiss and a lot of people in other countries who are saying, 'Let's pay everybody $2,500 a month.' And the question there is where's the money going to come from? Because we already tax the rich. Most people don't know that, but the top 13% income, they pay, like, 87% of the federal tax already. So taxing the rich, well, at some point, you just drive the rich out of your country.
BENNETT: Charles, you're predicting in 2016 that we're actually going to see the end of debt-fueled growth. If there's a crash in 2016, which I would argue we've begun, do you actually expect the government to lay off trying to fix the economy through legislation? And I say this because on Friday, of course, the Bank of Japan dropped their interest rates to a negative interest rate environment now, and it pushed money into the stock market.
SMITH: That's right, Dawn, and that's an excellent talking point, because it shows that for all of our disadvantages, in terms of our economic structure here that's dominated by the Fed and the super wealthy, the U.S. has certain advantages. We're still paying interest rates on our bonds, and the rest of the world is sinking into negative interest rates. And so the U.S. is becoming a magnet for global capital, and that's why we see so many wealthy people from Asia and South America buying homes and condos here, is they're desperate to get their money into some dollar-based asset, because they see their own currencies weakening. As their central banks drop interest rates into negative territory, then everybody flees and wants to buy something in the dollar. So the U.S. can destroy that advantage by following that same path, or it can sort of stay the course and continue to pay interest on its bonds. And that mechanism of attracting global capital could actually help the U.S. have a milder recession than the rest of the world is going to experience.
BENNETT: Some people believe that negative interest rates are coming to America, too.
SMITH: Right, and it's certainly possible that if they're stupid enough and desperate enough to try that same failed strategy, then we may have to go through that. But you know, Dawn, I want to mention there that there is a silver lining to this whole thing, which is we can still invest in ourselves, and that means, like, solar panels on your roof. I mean, you own it. Look for assets that you control and own directly, and kind of stay away from the stock market and the casino that's been created, and there's a lot of opportunities there and I think we'll see some opportunities in energy.
BENNETT: Charles Hugh Smith. You need to get his book called Get a Job, Build a Real Career, and Defy the Bewildering Economy. This is Dawn Bennett with Financial Myth Busting.
For over a quarter century, the experienced advisors of Bennett Group Financial Services, LLC have been successfully guiding clients through the complexities of wealth management. Bennett Group Financial Services provides individual investors, corporations and foundations with holistic investment strategies using unique portfolio solutions across a breadth of asset classes. Our unique vision and insight into market trends makes Bennett Group Financial Services a much sought after expert resource with regular appearances on Fox News Channel, CNBC, Bloomberg TV, and MSNBC as well as being featured in Business Week, Fortune, The NY Times, The NY Sun, Washington Business Journal in addition to our highly regarded weekly talk radio program - Financial Mythbusting. Through attentive service and prudent, thoughtful advice, Bennett Group Financial Services, LLC strives to consistently provide its clients with the highest quality of guidance and personalized service available.
About Dawn Bennett
Dawn Bennett is CEO and Founder of Bennett Group Financial Services. She hosts a national radio program called Financial Myth Busting http://www.financialmythbusting.com.
She discusses educational topics and events in the financial news, along with her thoughts on the economy, financial markets, investments, and more with her live guests, who have included rock legend Ted Nugent, as well as Steve Forbes and Grover Norquist. Listeners can call 855-884-DAWN a as well as take podcasts on the road and forums for interaction.
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