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On the Problem of the Impoverishment of the Middle Class

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AUSTIN, TEXAS – February 6, 2019

This article is about poverty. More precisely, it’s about the problem of a sharp drop in the standard of living and the transformation of the middle class into the class of the new poor. This problem is not new. Everyone sees it. It is actively discussed at the highest levels. For example, in Davos, much was said about how to fight poverty. And this is not by chance. World elites consider this issue as a social danger. They're afraid that the poor will rebel. However, everyone prefers to talk about the consequences instead of talking about the reasons. And the reason for this situation is the current economic model.

The current model of the world economy is based on the distribution of money through financial institutions. And these financial institutions are not going to share their legitimate, as they believe, profit share. This is a real and a very serious problem. What to do with it is unclear. Because as soon as you try all sorts of reforms to redistribute money from the rich to the poor, you will still be rested into the fact that the financial sector will again redistribute this money to their advantage for 2, 3 or 4 of their turnover.

If we look at the dynamics of the middle class change over the past 40 years, we will see that if before 1981 the middle class were people who had savings enough to maintain a certain standard of living, then with the start of Reaganomics (1981) it was decided that it was important to have a large number of people who can maintain a high standard of living, but not by their own money, but money taken on credit. In other words, before the beginning of Reaganomics, the middle class differed from the current middle class in that it existed not at the expense of its own savings but at the expense of constantly growing debt.

Reaganomics began in 1981 and this means that now already two generations have grown up who do not know how to live in another economic model. In order for these two generations of the middle class to be able to exist and maintain the necessary level of consumption, money was being issued for their debts. But the assets (debts) eventually went to the financial sector anyway.  Today we are in a situation where this scheme no longer works. Why? Because the revenues that the middle class receives are no longer sufficient to repay the debts that have already been accumulated, and not to take on new ones. In this situation, this mechanism has stopped. What does this mean from a business perspective?

From a business point of view, it is clear that a rapid decline in demand is beginning, and markets are falling. For business, it's a disaster. Nothing can be done, because if the support for demand is reduced, the number of people willing to buy something is also reduced. People’s psychology is gradually changing too, moving from the psychology of consumption to the psychology of savings. That is, even if people have free money, they prefer not to spend but to save, because there is no confidence in the future. For business, this is very bad.

In addition, for a particular business, such as car sales, if the previous model of consumer behavior could be roughly described as buying just what you want at the same time on credit, then almost the entire middle class, and this is the majority of the population, were potential customers. Now everything has changed. People save. They have no money, and they cannot take a loan. No one understands how to work with consumers who have no money. At the same time, people still have some money. They're buying anyway. Not like before, but buying. How to find your buyer? Continuing to advertise your product to everyone is a waste of money. What to do?

So, today the key task is to create mechanisms for finding consumers who might be interested in your product.  That’s why digital technology takes on great importance, allowing to identify specific consumers and organize them into groups and design local economic models including using social networks. Business understands this and is trying to adapt to new realities that are constantly changing. Therefore, all phones, TVs, and computers and other electronics will eavesdrop and spy on you. Nothing personal, just business.

But this is just the tip of the iceberg. The trouble is that this process - the emergence of the new poor instead of the middle class - began and it is an avalanche. All attempts to stop this process in Davos or elsewhere are meaningless.

Under the current economic model, the situation cannot be changed. Because the system of redistribution of money through financial institutions allows them to take the share of income that they consider necessary. As a result, everyone else falls. The mechanism for the maintenance demand does not work. Making banks share is impossible. That is, if you force financial institutions to give more money to people, then in this case they inevitably begin to take more to themselves. And then it causes inflation.

What we are seeing in the world (Trump in the US, Brexit in London, etc.) is an attempt to change this model. But, as experience shows, it is impossible to change the economic model without changing the political model. In other words, if we want to correct a model in which the main beneficiaries of the economy are financiers, then we must first take the political power away from financiers. And financiers are very strongly holding this power and do not want to give it away. In continental Europe, they hold it so tight that nothing happens. There are no major political forces left that could raise this issue explicitly. All parties that try to talk about this are declared either communist or fascist and they do not know what to do in this situation, as a result of which we have a crisis of the modern political model of the EU.

And in the UK and in the US, this decision has already appeared. In the UK it led to the need to withdraw from the EU. And in the US, the Republican Party, which the financiers could not take under complete control, put forward a person who belongs not to the financiers, but to the industrialist-isolationists. But we see that Trump cannot not provide his economic model for obvious reasons. Therefore, Trump must continuously engage in political battles.

At the same time, for him a big problem lies in the fact that the destruction of the old model could harm him. Because within the framework of propaganda it will be explained that since he is the head of state, he is to blame for everything. And we have to understand that problems will arise inevitably, since these problems are objective. It is not clear what to do. In order to change something, a change of political power is needed. And since there is no other model, the profit is formed within the framework of the old model and its beneficiaries are still financiers and they still take the lion's share of this profit for themselves.

Thus, from the current situation, there are only two ways out: Either someone will make some kind of sharp movement, or the crisis will reach such a level that it becomes obvious to everyone that this system is completely destroyed. This is scary. And so neither Trump nor other political leaders really want this, because they are very afraid of awakening marginal strength.

As a result, we see that despite the local improvement in the situation of the middle class in the US associated with the redistribution of world profits through existing mechanisms, the situation of the middle class in other countries is deteriorating.  At the same time the share of the rich is growing. The rich are mostly financiers. And their wealth is the capitalization of financial assets. This process is intensifying. As a result, if we do nothing, very soon we will have a situation of a classical oligarchy, in which 2% of the population is oligarchs, another 10% will be their attendants, and the rest are poor, who are at the level of survival.

Such a society is unstable and usually ends with a revolution, as a result of which people of not the highest moral qualities can come to power — as happened with Germany in the 30s, when only Hitler was able to give people a clear and understandable picture of the way out of the crisis. Not the best example to follow.

These processes are objective. The familiar environment in which we have lived for 40 years is changing. In other words, all our experience, habits and skills no longer work. Managers who will try to sell your products according to the old rules will stop selling them. If you are looking for a job, you will not find a good job without understanding how the environment changes. In this context, any businessman, and not only a businessman, but also any person who does not want to enter the class of the new poor, must clearly define for himself what he can personally do in order to adapt to the new conditions.

Author: USA Really