We’ve always said it’s not psychologically healthy to obsess over the daily news or fret about how the country is “going to Hell in a handbasket.” But there is also something to be said for staying informed enough to take appropriate action for yourself and family in the interest of long-term financial self-preservation. Now is one of those times to pay closer attention.
Recent events have made it increasingly clear to Jason Hartman and other forward-thinking investors that the US economy is in the process of shifting toward one where massive government debt and dependence comes to define the citizenry. The political class is reluctant to reduce subsidies for the dependent class (because they tend to vote in large numbers), and is unlikely to significantly end the tax reduction strategies that they utilize to shelter their own income from high taxation. These factors are making it apparent that the emerging economy will have three distinctly different classes of citizens:
These are the people who depend on government entitlements and subsidies for their regular existence. They will be highly resistant to any proposed changes in entitlements because of fear over losing benefits, and will mostly consume basic services. This class of people are likely to transition into an ‘underclass’ that perpetually subsists in near-poverty because they are conditioned to expect subsidies instead of producing something of value. This conditioning will eventually create an abandonment of entrepreneurship as the conditions of near poverty are accepted by successive generations.
Income Producing Class
These are the people who were formerly considered the ‘middle class’ and produce sufficiently to pay for their consumption. Many of these people will be ‘income affluent’ but will see the power of their income diminished by taxes and inflation, which are both likely to increase in the coming years. This class of people is likely to shrink over time as people become disillusioned with the notion of continuing to work long hours only to be rewarded with a higher tax bill and diminished purchasing power from inflation.
Wealth Ownership Class
These are the people who own income generating assets that benefit from inflation, since it increases the value and cash flow of the asset, but does not impact the interest payments on its financing. Since most in the Wealth Ownership class are also business owners, they will have a much lower tax burden as a percentage of cash flow than those in the Income Producing Class. This class of people may grow slightly as some people in the Income Producing Class purchase wealth creating assets. However, any increases in this class will be extremely small in comparison to reductions in the Income Producing class. The most likely outcome of our current economic situation will be an increase in the power of people in the Wealth Ownership class as the influence of their wealth grows and inflation pushes more resources toward them.
It’s not hard to figure out that the people in the middle are who will be squeezed. The dependent class is being conditioned to subsist on government programs. This is resulting in its becoming a (relatively) permanent under-class with very little economic mobility, and a wealth ownership class that have income generating assets that are financed with fixed-rate debt.
Our current environment is one where income producing assets can be purchased for historically low prices. This is affording a historic opportunity for people to move themselves up into the “wealth ownership” class. The hitch is that these opportunities will not last indefinitely, and that the squeeze will not fully materialize until after the opportunity has passed. Ultimately, it means that people must act now if they want to gain ownership of wealth before the grip of government closes. (Top image: Flickr | charlesfettinger)
The Heroic Investing Team