The Prosperity Illlusion Part 1

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Part 2 was released October 3, 2014, WATCH HERE

Transcript

American Prosperity of the last 40 years.  Everyone wants to take credit for it, the politicians, the political parties, and of course your financial adviser.

But what if all this prosperity was just an illusion, what if there was no prosperity?
Fore sure there are technological advances, but what level of quality of life?

The 1970’s Family

Let’s start with the family of 1970, long before America Online, iPhones, and, of course, President Clinton.  The 1970 family was a 1 income household saving 11% of their income, by comparison, a generation later in 2006 our more prosperous looking American has not just 1 income, but 2, and this family was putting away NOTHING!  Today that number hovers at just about 4% which is 50% lower than the savings spike we briefly saw around the 2008 (Government/FED Housing Bubble Collapse).

Revolving Debt

Revolving Debt as a percentage of annual income in 1970 was just 1.4% of a family’s income, Today approximately 12%.  Look at all that prosperity… Not only did the families of the last 40 years spend all of mom’s new income, but they got into debt up to their eyeballs! According to the Commerce Department a family of 4 (mom-dad-and 2 kids) are spending a lot less on market driven goods and services, which does add to the quality of our daily lives.

We are spending 34% LESS than they did on clothing than in 1970:

  • 14% LESS on food
  • 55% less on appliances
  • 25% less on cars and our maintenance is also down.
So if the family is spending less on food, consumer goods, clothing, and even our cars, why is a family that has 2 income earners instead of 1 still loading up on debt.  Remember we just showed you the revolving debt chart.
But the problem or…perceived prosperity spread throughout our entire lives is fueled by Total Household Debt, the National Debt, And all debt: Private, business, and government.

So where is the family who has been living in all this economic prosperity of the last 40 years been spending their money….  Let’s start with all the things we HAVE to spend money on….

  • Health insurance has risen by 85%
  • Mortgage payments, despite low rates have risen 81%
  • Child Care, well that’s up 100% since that wasn’t really an expense pre-1970
  • Taxes have gone up by 28% due to the 2 income family.
Remember, the tax rate for the 2nd income earner starts where the 1st income earner left off.

Government Involvement

What we see is that where the government is involved heavily costs have risen dramatically. The government has stretched the 7 year mortgage of the 1920’s to what is now the very common 3 decade loan. FHA backs loans private lenders aren’t willing to take due to the risk and Fannie and Freddie also come to the aid of anyone who can’t afford to buy a home, causing an increase in demand driving home prices up and making homes inevitably less affordable.

Same is true for healthcare and student loans which we’ll get into later.  The Single income family earned less money in 1970, but only spent half its money on these mandatory expenses. However the double income family of the 2000’s is spending 75% of its income on these expenses.  Research done by the Brooking Institute and the authors of Freakonomics have laid out some very scary charts for today’s family. They call it the family income volatility.

It’s pretty simple to understand, the family of 1970 had a lot of upside, they had a worker in waiting. Whether by choice or out of necessity, the family a generation ago could send an additional person to work to increase their income or provide new income if something happened to the other spouses’.  The family of the 2000’s now NEEDs two incomes, so the family of today has 2 times the risk as a family in 1970. They also have increased odds that income collapses due to the doubled health risks and job risks.

Today both adults are already working or as of lately collecting unemployment benefits and food stamps.Our young people today are suffering the most from this economic illusion of prosperity. In 1970, the minimum wage was $1.60 an hour, today it’s $7.25. In 1970 a year of tuition at a public university costs $1,207. Today that number is closer to $15,000.

1970 Student

So in 1970 a student had to work 14.5 hours a per week in order to pay for their college education. Today, they would have to work 39 hours a week, something that is simply impossible. Again, you can thank the government for supporting deferred loans for 18 year olds. Imagine ANY business where your customer doesn’t have to pay for it until they are done using it, but in the meantime the government will give them a loan. What would you charge, a lot more than you used to….In fact you would charge as much as you wanted because the consumer was not going to feel the cost of their behavior.

It’s a lot like why no one knows how much it costs to go the doctor anymore, why would we, we have been conditioned to not discuss price with our doctor, that’s been taken over by the insurance companies, a system practically mandated by the government at the turn of the 1970’s.

So where does this leave us? Well, there is a lot of unraveling that needs to take place. The illusion of prosperity over the past 4 decades, well its time pay for that…

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