The Modern-Day Poverty Syndrome

As living standards in the U.S. alter (dare we say ‘improve’?) and the trappings of the middle class grow more and more elaborate…bankruptcy is becoming alarmingly prevalent. Could the American middle class be disappearing?

I have just returned to Thailand from several trips, which took me to the Middle East, Europe, Argentina, the U.S., and Japan. It struck me during my travels that there are very few bargains at present in the various investment markets, and that in most Western industrialized countries, the prices, or the cost of living, are very high indeed. It is true that for most manufactured goods prices have come down, but the cost of the basket of goods that people have become accustomed to, and in many cases actually require, in order to work and to function in today’s modern society has risen considerably.

While I was growing up my family had just one car, one television set, one radio, record player, camera, refrigerator, toaster and cooking stove. Readers will know what kind of arsenal of electrical appliances and electronic gadgets today’s households are littered with, especially if they have children. My point is that, as technology has progressed and as standards of living have changed (I am doubtful that they have risen much in the Western world), the cost of the basket of goods that one requires in order to participate in this "new economy" has vastly increased, so that, along with soaring healthcare, education, and insurance costs, there is a very heavy burden placed on anyone who isn’t seriously rich.

In this respect I have just read a recently published book, The Two Income Trap, by Harvard Law School professor Elisabeth Warren and Amelia Warren Tyagi (Basic Books, 2003) who explain "why middle-class mothers and fathers are going broke."

The Two Income Trap: Children Bring Collapse

According to Elisabeth Warren, who conducted extensive research on the subject:

"The families in the worst financial trouble are not the usual suspects. They are not the very young, tempted by the freedom of their first credit cards. They are not the elderly, trapped by failing bodies and declining savings accounts. And they are not a random assortment of Americans who lack self-control to keep their spending in check. Rather, the people who consistently rank in the worst financial trouble are united by one surprising characteristic. They are parents with children at home. Having a child is now the single best predictor that a woman will end up in financial collapse.

"Consider a few facts. Our study showed that married couples with children are more than twice as likely to file for bankruptcy as their childless counterparts. A divorced woman raising a youngster is nearly three times more likely to file for bankruptcy than her single friend who never had children.

"Over the past generation, the signs of middle-class distress have continued to grow, in good times and in bad, in recessions and in booms. If those trends persist, more than five million families with children will file for bankruptcy by the end of this decade. This would mean that across the country nearly one in seven families with children would have declared itself flat broke, losers in the great American economic game.

"Bankruptcy has become deeply entrenched in American life. This year [Ed note: 2003], more people will end up bankrupt than will suffer a heart attack. More adults will file for bankruptcy than will be diagnosed with cancer. More people will file for bankruptcy than will graduate from college. And, in an era when traditionalists decry the demise of the institution of marriage, Americans will file more petitions for bankruptcy than for divorce."

The Two Income Trap: Not Overconsumption, the Lack of a Safety Net

According to the authors, it is not over-consumption that is driving many middle-class families into bankruptcy, but the lack of a safety net. Middle-class families don’t qualify for all kinds of programs that are available to the poor. Moreover, the family safety net no longer exists for the modern two-earner couple, which makes them "actually more vulnerable than the traditional single-breadwinner family."

Professor Warren explains that a generation or so ago, the typical family consisted of the father being responsible for the economic health of the family, while the mother fulfilled roles such as homemaker or helpmate. The mother’s role was, in the words of the authors, the one of a "careful guardian of what her husband brought home" and "if her husband was laid off, fired, or otherwise left without a paycheck, the stay-at-home mother didn’t simply stand helplessly on the sidelines as her family toppled off an economic cliff; she looked for a job to make up some of that lost income. Similarly, if her husband had a heart attack and was expected to stay home for a while, she could find work and add a new income source to help the family stay afloat financially. A stay-at-home mother served as the family’s ultimate insurance against unemployment or disability-insurance that had a very real economic value even when it wasn’t drawn on."

The problem with the two-income family is that it doesn’t plan its financial commitments geared to a single income by saving the extra income that is derived by the mother. According to Warren, "millions of two-income families used that second income to purchase opportunities for their children – a home in a safe neighborhood with good schools, a comprehensive health insurance policy, two reliable cars, preschool, and college tuition. They made long-term commitments to ongoing expenses – and they counted on both incomes to make ends meet."

So, when one of the members of a two-income family loses his or her job, the safety net (the mother entering the workforce) that was available to the single-breadwinner family is no longer available. And once the combined income of the two-income family collapses as a result of one member losing his or her job, "the modern couple doesn’t have a prayer of making ends meet."

The Two Income Trap, which is, incidentally, a highly readable book and saddening at the same time, struck a chord with me. As I suggested above, the high and continuously rising cost of living in the Western industrialized countries has created something I call modern-day poverty, or poverty in affluence, whereby a large number of middle- and even upper-middle-class families have very little left by the time they have paid for their mortgages, taxes, insurance premiums, food, and children’s education. These families may have a combined income of 70, or even 100, times that of my gardener in Chiangmai, who earns US$150 per month (but would do the job for US$100 per month), but, despite their relatively high incomes, they are highly vulnerable in the event that one member is laid off or can no longer work for whatever reason.

The Two Income Trap: Not in Great Shape

While I am fully aware that those of my readers who are either prospering in the financial sector or are seriously wealthy don’t have the financial problems that middle-class families have, I am mentioning this "modern-day poverty" syndrome because I simply don’t buy the argument – repeatedly advanced by economists and strategists at investment conferences – that the U.S. consumer, or for that matter any average consumer in the Western industrialized countries, is in "great shape."

This should concern all of us who are fortunate to be financially independent, because modern capitalism has created a widening wealth inequity whereby a small sector of our advanced Western societies is living in style, while most families are increasingly dependent on asset inflation (notably in real estate) which enables them to take on additional debts in order to maintain their standard of living. At the same time, it ought to be clear that the poor, who don’t own any assets, have become totally disenfranchised, since with home prices continuously rising their ability to purchase them has diminished.

The "two-income trap" is a sobering and saddening fact of our modern society. Moreover, after having recently visited Argentina and seen first-hand the decline of a formerly rich country, I am deeply concerned about the economic future of the West.

Having said that, no matter how unappealing the economy might be, for investors and speculators, opportunities for substantial capital gains will still present themselves from time to time. They are simply that much harder to identify.


Marc Faber,
for The Daily Reckoning
March 4, 2004

Editor’s note: Dr. Marc Faber is the editor of The Gloom, Boom and Doom Report. Based in Hong Kong for over 20 years and now living in Thailand, Dr. Faber has long specialized in Asian markets and advised major clients seeking down-and-out bargains with deep hidden value, unknown to the average investing public.

Dr. Faber is also a frequent contributor to Strategic Investment.

Just as there are two points of view on outsourcing – both of them puerile – so are there two opposing perspectives on federal deficits. On one side, neo-conservative Republicans tell us that ‘deficits don’t matter.’ On the other, neo-conservative Democrats tell us that we must raise taxes immediately to fill the gap.

It is hard to know which one to laugh at first.

It’s true that ‘deficits don’t matter’ – as long as creditors don’t seem to care. A man can run up as much debt as he wants. It doesn’t matter…until it matters. That is, as long as he is able to go even deeper into debt, it doesn’t matter. It’s a bit like a man jumping off a tall building; it’s even exhilarating…right up to the end. But when creditors want their money back…or refuse to lend him more money…all of a sudden, he hits the sidewalk, and the lights go out.

There was a time when America’s creditors were America’s savers. Even then, deficits mattered; but they mattered less, because the feds could rip off our own citizens easily. All they had to do was to stimulate a little domestic price inflation…which undermined the value of their bonds and savings; the lumps should have known better anyway.

But when Americans stopped saving, the nation had to turn to foreigners. Now, it takes nearly 80% of the entire world’s savings just to allow Americans to continue living in the style to which they had become accustomed. The gollywogs and krauts are probably as dumb as Americans, especially their central bankers, but they are more mobile. They can shift their money out of dollars into euros…or yen…or yuan. When the foreigners decide they’ve had enough…when they stop lending and sell off their U.S. dollar assets – that is when it will matter. U.S. government benefits will be cut whether Americans like it or not. Standards of living will fall. Jobs will be lost. Then, the U.S. economy will go into a long, dark night of recession, deflation, and financial crisis.

Raise taxes? Well, yes…why wait for the foreigners to kill the economy when we can do it ourselves? If Americans have to pay more in taxes, they will have less to spend. Consumer spending is 70% of the economy. When people begin to consume less…the consumer economy goes into reverse…and then comes the splat…and the long, dark night.

Either way, the lights are going out. Buy candles.

And now…more news:


Eric Fry in the Empire State…

– Yesterday’s trading action exhausted bulls and bears alike, while satisfying neither camp. Gold tumbled, then rallied; the dollar rallied, then tumbled; and the stock market finished the day with a split decision: Dow up, Nasdaq down.

– Stocks greeted the new trading day by continuing the selloff they started on Tuesday. But the market reversed course – as it so often does – and headed higher throughout the afternoon. The Dow closed out the session with a 2-point gain at 10,593, while the Nasdaq eased 6 points to 2,033. But the stock market was more "tail" than "dog" yesterday, wagging back and forth in response to the extremely volatile action in the foreign exchange and commodities markets.

– The dollar, which has become as volatile as a 2000-vintage Internet stock, rocketed nearly 2% against the euro yesterday morning. But shortly before lunchtime in New York, the world’s currency traders seemed to conclude that enough was enough – or more than enough. The greenback reversed course and plummeted. By the end of the session, the dollar had surrendered all of its earlier gains to finish at $1.2206 per euro.

– Meanwhile, over in the metals markets, gold dropped as much as $5.40 to $387.95 an ounce, while the dollar was in rally mode. But once the dollar headed south, the gold price sprinted north to finish the day with modest $1.10 loss at $392.70 an ounce.

– What does it all mean? We are neither sufficiently brilliant nor sufficiently naïve to provide a ready answer. We do know, however, that volatile markets – while treacherous for short-term traders – are a long-term investor’s best friend. Short-term dips often provide excellent investment opportunities…at least with the benefit of hindsight.

– To wit: While sipping my triple tall cappuccino yesterday morning in Union Square park, your New York editor overheard a guy on a nearby bench chatting into his cell phone. "I feel so stupid," he complained, "I KNEW I should have taken all my IRA money and bought Martha Stewart stock while it was tanking, and just hoped for the best. I would have made thousands."

– Alas, another buying opportunity lost…But there will be others, and a few selling opportunities as well. Mr. Market is a very egalitarian sort of fellow; every day he offers both buying opportunities and selling opportunities. The problem is that many investors confuse the two.

– And what about today? What should we make of the recent drop in the gold price? The yellow dog has fallen $21 since the February 18 close of $412.80. Buying opportunity or selling opportunity? What say ye? Is gold, perhaps, the Martha Stewart of investments – widely disdained by the masses, but ready to have the last laugh?

– Use the recent volatility in the gold market to your advantage, says Pierre Lassonde, president of Newmont Mining. "Don’t tell me that the gold bull market is over. It has hardly even started," Lassonde declared to the attendees of the 2004 BMO Nesbitt Burns Global Resources Conference in Tampa, Florida.

– "The last real gold bull market was in the 1970s," Lassonde explained. "It went on for 9 years from 1971 to 1980. What we’ve had in the past 20 years are bear market rallies. So when you read…that the average gold bull market is 40 months and we’re 36 months into it; and that’s bad…Well, you know what, they haven’t seen anything until you go back to the 1970s."

– Underpinning Lassonde’s confidence in the gold rally is his skepticism that America’s fiscal imbalances can be corrected painlessly. "We haven’t even started to correct the U.S. financial imbalance of the last three years," he explained.

– "America is currently funded through the foreign largesse of Asian central banks, who are soaking up dollars to avoid U.S. consumers from losing purchasing power that would dent their appetite for imports. There is not one central bank that needs to accumulate as many dollars as the [Asians] have, just to keep the cycle going…It’s the biggest vendor financing take-back you’ve ever seen in the history of the world."

– Lassonde predicts a "manic depressive dollar" that will become increasingly volatile as its value erodes.

– On the supply side, Newmont’s president predicts that gold production will begin to decline. "Back in the 1990s, we had huge patches of ground being opened up in Africa, South America and behind the iron curtain. We’re in a different stage in production [now]."

– The official Daily Reckoning conclusion: There are probably worse investments than gold.


Bill Bonner, back in Paris….

*** "My big wolf…don’t take useless risks; the earlier the better. Give me your instructions. Suzy"

– A personal ad in Libération

Oh là là…the War on Terror has found a new battlefield – here in France. The whole country is being held hostage by a mysterious, evil group called AZF, otherwise known as the ‘big wolf.’

Ten thousand railway workers are now searching the tracks for AZF’s bombs. The group says it has planted 10 of them along important railway lines. One has already been found on the Paris-Toulouse line. Communicating with the government – aka ‘Suzy’ – through personal ads in the leftist newspaper, Libération, it demands 5 million euros or threatens to blow up a train.

Oh dear reader…what a wicked world we live in!

*** If that weren’t enough…yesterday, bonds went down….and so did Dr. Copper, along with oil and gold. That is the problem with indeflation; it can’t seem to make up its mind. It is indecisive…and indecipherable. The dollar went up a bit. Gold went down a bit.

*** The LA Times says that executive insiders are selling more stock than ever…

*** House prices rose 8.4% nationwide in 2003, says the Chicago Tribune.

*** For more news of no importance…mortgage requests are rising…and auto sales rose 4.8% in February.

The Daily Reckoning