The American dream is drowning in debt, says Andrew Gordon. The middle class are being squeezed as tumbling asset prices hack away at household wealth. And things won’t change unless the government steps up to the plate.

More from Andrew at Investor’s Daily Edge:

We’re in a “damned if we do, damned if we don’t” economy. And there’s not a damn thing we can do about it.

Our economy floats on the whims of the American consumer. When they feel confident about the future, they spend. The more they spend, the better the economy does. This is oddly true even if 80 percent of the spending is on goods from Asia.

Right now the American consumer isn’t feeling so confident and the economy is suffering as a result.

But if we spend more, we go more into debt. We’re already spending more than we make. And the more we go into debt, the more money goes to paying off that debt…

Money the country doesn’t have. Money we as consumers don’t have. Money that should be going into productive assets, not into the hands of our cash-rich lenders in Asia.

We’ve been spending beyond our means for a while. But nobody cared much as the economy was booming and people were profiting from multiple bubbles.

The rich were getting richer. But the middle class was also seemingly enjoying the fruits of an expanding economy - moving into bigger houses and spending more on everything.

But their incomes had become stagnant. It couldn’t last. And it didn’t.

Conspicuous consumption has retreated under mountains of debt and growing doubt about the future.

Several forces are at work, not the least of which has been the economy’s inability over the last three-and-a-half decades to appreciably reward households with growing income.

Annual Growth Rate of Real Income Across the Family Income Distribution: 1947 to 1973 versus 1973 to 2005

Source: U.S. Census Bureau, Historical Income Tables, Tables F-2, F-3 and F-6. Downloaded from http://www.census.gov/hhes/www/income/histinc/ incfamdet
on Feb. 26, 2008

The 50’s and 60’s brought great economic growth to the country. But it also benefitted Americans across the entire spectrum of economic classes - from the very poor to the very rich. The slowest-growing group back then? It was the top five percent. Their income grew by 2.3 percent - about a third slower than how the poorest fifth of the population fared.

From 1973 to 2005, the top five percent maintained the income growth rate they had managed in the previous couple of decades. Problem is, the other income groups fell way behind - led by the poorest income group whose income didn’t grow at all in real money terms.

The middle income group also saw a real slowdown in income growth from annual rates approaching three percent to rates of 0.4-1 percent.

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This clash of trends - stagnant income verses rising medical, education and housing expenses - should have ended the economic good times far before it did. It lasted this long because…

• The women. They entered the work force in increasing numbers beginning in the 70’s. It took a double-income family to maintain the lifestyle that a single-income family had so recently been able to afford.
• Deflation from imports. Very cheap gas from the Middle East (thanks to an undisciplined OPEC) and cheap goods from Asia (thanks to low wages that must have had Karl Marx rolling over in his grave) kept things affordable in the 80’s and 90’s.
• Credit card nation. Before there were credit cards, there were lay-away plans. If you couldn’t afford it, the store would take it off the shelves and “lay it away” until you saved up the money. Credit cards let people buy what they couldn’t afford. It also established a consumer mindset about cash which facilitated the housing boom, bubble and then crash.
• The housing equity windfall. Americans, especially the middle class, avoided facing their diminished status brought on by decades of underwhelming income growth by turning their houses into cash machines. Easy credit greased the way. Thank you, Alan.

It is a great irony that as the U.S. grew into the undisputed richest and most powerful country in the world, its middle class turned into an endangered species.

The prerogatives of a middle-class lifestyle are a nice home and car, medical care, and education for your children. This is not greed. This is the American Dream. The best thing about it is that supposedly you don’t have to be rich. A ticket into the middle class is all you need.

That dream is now drowning in debt.

Spending beyond your means isn’t some freakish trait of the American middle class. It scares the hell out of the Europeans or Chinese. The notion that American households don’t mind debt is preposterous.

Have you ever had a conversation with somebody who said, “Sure, I’m buried in credit card debt and under water with my mortgage but I don’t mind. I’m going to continue to spend to my heart’s content.”

It’s precisely because the middle class is deeply worried about its debt (and the economy) that they have substantially reduced spending. And it’s going to stay that way until the value of the houses they live in and the incomes they make start to go up again.

Politicians of both political parties have turned a blind eye to the fate of the American middle class for too long. It’s time the government steps up to the plate.

They should do so because the fate of American retailers relies on reviving the middle class. Except for low-end retailers like Mickie D’s, Wal-Mart (NYSE:WMT) and the super stores, the entire sector is suffering mightily from the wanton disabling of the American Middle Class.

Then there’s this: the American Dream will die if they don’t do something and do it sooner rather than later.

Harvard political scientist Samuel Huntingdon wrote: “Critics say that America is a lie because its reality falls so far short of its ideals. America is not a lie, it is a disappointment. And it can be a disappointment only because it is also a hope.”

There’s still hope for the American Dream. But it’s getting late.

Source: Is the American Dream Fading?