I couldn’t agree more. Maybe because I am not American, but Argentinian and I grew up with my country submerged in one financial crisis after another, the logic of your reasoning seems so obvious to me that I just don’t understand why people don’t get it. I remember 10 years ago, I was doing an internship in NY and hearing the HUGE education loans my colleagues had (we are talking over 250K because they were lawyers)and wondering how could they start their independent lives like that, with such a huge burden of debt, how was it possible that instead of saving every penny they were buying Armani and eating out getting credit after line of credit after line of credit. I never got it. I always seemed to me that one day the big maná was going to dry out.

Anyway…great blog and I am looking forward to reading your book!
Have a nice Sunday!

Excellent! The one thing I have been shocked by is that when I look into the personal debt figures I have found that it is a higher percentage of baby boomers than the younger people who have gotten in to trouble. Does your research confirm that? If that is the case it gives me a lot of hope that the younger adults out there can do something different and better and have many more years to benefit from those choices. That’s exciting!

I am so tired of hearing some of my friends and family talk about how they are financially downtrodden because of the external factors you describe. One fellow in particular fits your example of not wanting to “sacrifice” and yet he is happy to “struggle.”

Perhaps I’ll send him your post. It’ll either make him mad or make him learn. I fear the former.

On the other hand, I am glad that more of my acquaintances seem to be figuring this all out. With good advice, or a little self-education, I see people being more wise with their money. Maybe not achieving extreme early retirement, but they aren’t drowning in the sludge of heavy debt. It bodes well for my own children. That nation as a whole: the jury is still out.

Perhaps we need to rephrase the problem to properly match reality. We are not faced with the “disappearance of the middle class”. Instead, what we have is “the unexpected appearance of the middle class during the 50’s and the return to historic mean starting in the 80’s”.

Let’s examine recent history. The outside world was either pummelled during WW1+WW2 or oppressed+exploited by colonial powers. It’s into this vacuum that the U.S. economy expanded greatly and with it the middle class arose. Basically, there was so much economic growth, the wealthy simply could not steal everything like they normally did in the past. But like in thermodynamics, economies that intermix tend to find an equilibrium and the U.S. has been in that period since the 80’s.

Humans are comparative animals. Like the studies that show people are happy if they make a little more than their neighbors and coworkers, this also applies to a global scale. The U.S. is still the wealthiest country in the world by far … it’s just no longer 10X wealthier than country X or 5X wealthier than country Y.

The comparative issue also applies to generations. Starting in the 80’s, Americans at all levels (government, corporate, private) began to leverage themselves to live a better life. The rest of the world didn’t catch on and kept refinancing our debt for 30 years.

So people what people consider middle class now is the leveraged lifestyle of 90’s-00’s instead of the simpler lifestyle of the 50’s-70’s. But returning to the simpler period flies in the face of everything we’ve told ourselves about the next generation having it better than the previous. The problem is one generation super-inflated their lifestyle using debt and now the benchmark has been corrupted.

My own prediction is the U.S. will continue to refinance and refinance until it blows up catastrophically. People simply do not change until confronted by total calamity … and no, this recession is not it.

I am a baby boomer, and I remember when you went hat-in-hand to stand on a drawn white line in front of the banker to ask for a loan to buy a house or car. The banker wanted collateral for anything unsecured. The banker needed to know your mom and dad first, but if you had money in the bank, you might get the loan. You could push though an FHA235 home loan with $500.00 down by meeting enough financial qualification. This got you a 1250 sq ft 3bd 1-1/2 ba house with carport, all brick, central heat but no air conditioning.
You might also finance 80% of a less than five year old car. This was the baby boomer “start up”. We went from there, and it was an honest and honorable start up. A male baby boomer made his move, as soon as he got back from the military. (Mandatory–join or get drafted) Do not pass go, go straight to Viet Nam. This was of course the 70’s, leisure suits and disco.
Somewhere after this things changed—for the worse. The baby boomers did go overboard later. They went overboard as soon as they figured out they could get away with it. Times changed things emerged, people got greedy. But NOT ALL of us did this. Some kept their common wits about them. Some of us are comfortably retired now.

Along the same lines, NPR is doing a series called “Living in the Middle.”

http://www.npr.org/templates/story/story.php?storyId=130324657

My take after reading a couple of the stories, is that shopping for and buying stuff is extremely ingrained and for many an extremely important factor in making life “good.”

I don’t know how to change that other than with some kind of consciousness shift and behavior substitution.

I meant poor as in “I feel sorry for (even if it’s half their own fault)”, not as in “don’t much money for food”. Which lower classes of the US (10-15%) don’t, but that’s an even worse story.

Calling Americans stupid is meant in this specific context of consumerism and is just a ruder way of describing those people that you, Jacob, and others have reacted to here in this blog entry: Many Americans should wake up and spend less, save more. My point here was in fact that these people might be stupid as you indirectly state (in this context) but that the American system (culture, economy, politics) makes it hard for many people to see things clearly or to be able to do anything once they did see clearly.

Oppression is also a loaded word but what else can you call the unusually heavy burdens that commerce and politics places on American citizens? Each country has its freedoms and its lacks thereof but Americans have a few particularly ill-willed burdens put upon them, including planned consumerism. Americans might also enjoy particularly liberal (in the original sense) freedoms, depending on which state they live in, but that doesn’t lift those burdens.

OK, to be fair, there is also a third factor in play, along with Americans’ laziness/stupidity and parasitical power structures: many of Americans’ problems have followed automatically from many of the US’ great successes. For instance, the US has earned a mint and conquered half the world, culturally speaking, by exporting and propagating American culture like film and music, with the many American ideas therein. However, these cultural “weapons” have been used indescriminately and have boomeranged back on the US. For instance, you can convince the world that the US is the greatest country in the world but watch out you don’t believe it yourself for then you might grow complacent. Similarly, the US military is great and powerful and has made the US the superpower it is – but it’s use has not been controlled, and now it controls the US as much as the US control it. Indeed, the US military could be seen as an overall liability for the US (think Vietnam, Iraq, oil-consumption).
And so on. In other words, many of the previous successes of the US have gone on unchecked and are now burdens.

Love this reply! The binge drinking analogy and unviability as a species comments really nailed it for me.

I really don’t have sympathy for those that overspend their ways into debt, and “struggle” as you called it. The whole “Third World America” thing is pretty silly. I see it as a chance for people to publicly b*tch about the economy and for Huffington to sell books. I’d love to know what her “solutions” are.

Thanks Jacob. Step 5 is commendable, but you’re right – the rest are pretty generic and seem to clamor for a return to the glory days (spend without worry) of the 80s, 90s and early 2000s. Huffington has a rosy view of the term “Third World” if these are the worst problems we face.

@Jan – Technically, I was middle class (as measured by income). Technically, I am now living in poverty, far below the poverty line. Technically, I am wealthier than most upper class people.

As I also go on about in the book, I don’t think “spending” is the proper way to measure it, so I agree there. I don’t think anything has changed as such in terms of what most people do. The vanishing middle class is still due to job loss and wasting money on interest and going broke. Not from being smarter about money and voluntarily reducing earned income.

You write: Those of us who belongs to the saver/producer side are positively thriving in this economy

You personally may be thriving now, but as the economy goes down hill so will your community (family, friends, neighbors). I wonder how/if you can continue to feel good. At a certain point we will all be affected by other people’s choices – good or bad.

(PS its belong not belongs)

@Carol in the trenches: “The one thing I have been shocked by is that when I look into the personal debt figures I have found that it is a higher percentage of baby boomers than the younger people who have gotten in to trouble.”

Well, I think this is just a sampling artefact – the boomers have been digging longer, it’s no surprise if they’re deeper in the hole. Try the comparison in twenty years and see if it still holds up 😉 What I see of younger people, they might not have dug so deep yet, but boy… CAN THEY DIG!!! And like there’s no tomorrow. But they have time on their side if they can get real and turn themselves around.

And beyond that, I’ll step back out… I don’t really understand the American class system…. all I can see from across the pond is that much of what you call Middle Class we’d just call ‘overpaid working class’ – like auto workers… Middle Class? Not over here, but then we have rather Byzantine standards which aren’t purely correlated to the size of the pay check… oh, well, vive la difference 😎

@Macs: 🙂 Yes, the US doesn’t have any actual class(es) but the expression is useful to use about economically-differentiated layers of society, especially since their respective options and behaviours differ. I’ve only met actual class in two countries: India (caste) and the UK (where the cultural shock was bigger 🙂 ). Many I’m just so lower-middle class that I wouldn’t even recognise real upper-class if I stood on its toes.

[…] Jacob, of the excellent Early Retirement Extreme blog describes this group well: […]

Your broader point taken, but definitely the “evil banks” WERE to blame.

There is a process called credit bundling. It’s a legitimate and useful financial engineering tool. What banks (and rating agencies) did is to use the complexity to obfuscate. (Like jargon is, in conversation.)

If people go getting drunk, it is their fault, no doubt : but it is ALSO the barteder’s fault (more precisely, the fault of our policy on alcohol ).

That is why — THAT IS THE ONLY REASON WHY — heroin and other hard drugs are not made legal.

You say, drink responsibly. Well then, why not use crack responsibly ?

Sure, the heroin addict is to blame for his addiction. But the heroin pusher is far more to blame. The heroin addict should be helped to overcome his addiction : but the heroin pusher should be SHOT.

The main problem the middle class have is debt. They want everything now and are willing to pay for it later. Once their utility for the item diminishes their frustrations grows as the payments remain constant. I very bad way to live! Great post.

I do not believe that we are losing the middle class. In essence what has happened is that those who were erroneously labelled as middle class have been exposed as in far too much debt to earn the categorization in the first place.

For instance, it has been noted in recent years that some of the folks labelled as “middle class” were only middle class due to their debt rating (e.g., FICA score), income, or spending patterns. If a household income was $65K a year, they were often labelled “middle class”. However, the reality is that if you were to evaluate the debt this household carried in conjunction with their income, the picture is often quite different. Add to the mix the ability of people to appear on paper to be middle or upper class due to “assets” (e.g., cars, boats, houses, jewelry, etc) then it became a really misleading concept.

Most of the people I know who are truly middle class might not appear that way to others if they are, as Jacob notes, savers/producers rather than consumers. They might look to others as lower class or barely-hanging-on-to-middle class status but in reality they are far more stable as far as the “middle class” label goes as their wealth is not related to debt, or to assets they do not really “own”.

Sorry — that should be: “…but NEVER realized…”

Ersh… This whining argument comes up around me often. I have to gnash my teeth, “Yeah the middle class used to have two-bedroom homes, one car, went on out-of-country vacations only after their honeymoon or when they retired, and their kitchen counters weren’t topped with granite or quartz. A $500 phone for you and each of the kids? Even adjusted for inflation, that never would have flew. You spend all your money on Starbucks coffees and junk from Wal-Mart–plain and simple.”

I agree with RJ. A large part of the people labelled or claim to be middle class are not. A more accurate term might be working class. The working class term though is beneath many Americans, so they borrow/spend so they can look like they live as what they perceive the middle class does. They then claim they are MC and perpetuate the lie by complaining incessantly how hard it is to be MC. If they say it out loud enough then it must be true, right?
The Mr nor I never talked about money to others; everyone thought we were poor. Then we retired super early and moved across the country to our dream house and location. Could have knocked them over with a feather!
Great post!

“It’s curious to me how people don’t want to ‘sacrifice’ yet are perfectly happy to ‘struggle’.” <– Yes, yes, and YES!! What's up with that?

Always a very strong pov thanks for always provoking a discussion:)

Is a disciplined lifestyle that focuses on longer term goals over immediate gratification ultimately more satisfying? Yes, of course it is.

This is also coming from someone who can see this, a retired phd scientist, from another country. You have lead a life focused on pursuing a reason based process.

I count myself fortunate to have been blessed with a similar path.
I haven’t had a tv in 13 years. I deliberately control how much passive media/advertising enters into my head. I’ve traveled a little bit. I have a graduate degree acquired with no debt. I have a good job. I have no debt. I save substantially. I read. I married someone who is smarter than I am, who helps to keep our household focused on longer goals. Life is pretty good.

It’s easy to see the opportunities in this country, but I think we must also acknowledge the many pitfalls to be found as well. A tidal wave of advertising inciting anything to provoke desire and purchases? Convenience foods that are more readily available that quality produce? Predatory lending? Medical bankruptcy? Private education loans that stay with you past bankruptcy? Lessening net neutrality? And on and on…

Of course, these indebted folks are not doing it right. The greater point to be made is, what about the greater damage of America’s hyper-capitalism? Do we, the delayed gratification folks, really want to continue to see the suffering caused by a combination of culture and personality traits? Or just keep patting ourselves on the back?

Jacob, I applaud you doing outreach with your message of voluntary simplicity leading to greater personal freedom. This type of community helps to bypass much of the interference of America’s media/consumer cloud.