THE BLOG
18/11/2013 06:34 GMT | Updated 23/01/2014 18:58 GMT

Why is the Middle Class Becoming Poorer? Because of the Transfer Economy!

Since 1950, with few pockets of exceptions in 1970, worldwide middle class salaries have been stagnating ever since. In simpler words, the purchasing power of the working class has never matched the galloping prices of inflation. If skilled workforce used to be well compensated and salaries were enough to support the needs of a family (single earners) this is not longer possible. Many middle-classers are now dual income earners, with very small families, (the number of children per family has decreased significantly in the past 20 years), but we struggle more today than ever before. Why is that?

One of the possible reasons behind the increasing pressure on the shoulders of the working class may reside in something we hardly notice, because distant from where our attention goes. We will call it the "Transfer Economy" to represent where wealth is really going.

The Transfer Economy

In the past 30 years, if we look at a country like the US, which can be considered the most visible democracy on earth, about 50% of the country's GDP was transferred from the bottom 90% of the taxpayers to the richest 1% of the Americans. This happened in front of everyone's eyes, in popularly elected governments and freedom of speech.

Have we realized what was the mechanism behind this?

We haven't really realized about this as we have spent decades of illusionary growth and perception of increasing welfare. But while this has created the storyline of many of the events of the 20th Century, we got distracted and never realized of where wealth was shifting.

This is what we mean by "transfer economy". Middle class has not become poorer because of financial crises and austerity or because of harsh competition coming from emerging economies but mainly because wealth has been transferred in the hands of the richest ones, worldwide, creating major infrastructural inefficiencies.

How do we know this?

Let's look at some data extracted by the Wealth X and UBS Ultra Wealth Report for 2013. This report, as per their own statement on their website, attempts to capture those individuals with net assets of US$30 million and above, globally.

Well, guess what? In our suffering Europe, where the plague of socio-economic decline is evident to everyone, the number of individuals who have increased their wealth to what we could consider the "Wealth X" level, is on the rise, with a EU average of 10%.

Mind for some more numbers?

In Italy, it has grown of 7% just last year, in a country which has been in a permanent status of economic limbo. In Greece, which is the country with significant losses of prosperity, we have an increase of 11% of people who crossed the X line of millionaires, accompanied by Portugal, with 10.8%. The dance of the numbers could continue and the same trend is to be found everywhere.

2013-11-14-Moreorlessequal.png

Source: http://www.economist.com/node/21564414

What does it all mean?

This means that we continue to be looking at the wrong foundations of the problem. As much as the debate demonstrates sophistication in the dialectics, we are not addressing the structure responsible for the transfer of wealth, upwards.

Our economic systems function by an intrinsic infrastructural asymmetry, because of the natural distance among players in any "econ-system"

Our strategic economic modeling and foresight though, continue to portray the free market theory, as the agency for perfect competition and harmonization of the economic value creation and growth, serving the greatest good. Well, it aint' working and we need to recognize its failure, without dramas or political manipulation. We need to migrate our model to one that would honor the way things really work, distancing our economic development strategies from the "finance-based economy", towards a more territorial economy, or real economy.

The Transfer Economy will always generate more benefits to those who are closer to the money ( namely the network of financial institutions), through the mechanism of "making money out of money". It is no secret and it can only continue to work that way, because it is co-relational to population growth and the emergence of developing economies.

The disruption of this process is necessary if we want to reverse this inevitable transfer to the top 1%. This has nothing to do with re-distribution but with efficiency. Any system which does now equally support its elements, is meant to collapse and if we do not raise awareness about this, an irrevocable Shift will happen...

References:

-Wealth X World UBS Wealth Report

-The Flaw (the movie)

-The Economist, Oct 23rd, 2012