We’ve all seen the headlines: the middle class in the United States (and much of Europe for that matter) has been in decline for years.
CNN May 18, 2018: “Almost half of US families can’t afford basics like rent and food”
Marketwatch June 2, 2018: “50 million American households can’t even afford basic living expenses”
Wall Street Journal February 13, 2018 : “US households shoulder record $13.15 trillion debt”
This is the opposite of what we’ve witnessed here in Asia – an astonishing, almost unprecedented rise in the middle class.
In China, just 4% of the population was middle class in 2000 according to consulting firm McKinsey. By 2012, China’s middle class had exploded to 68% of the population.
Vietnam’s middle class has nearly doubled just since 2013. And there are similar trends across the region.
This is a pretty big deal, signaling not only a game-changing shift in global wealth and power, but also trouble ahead for millions of households on the edge.
My team and I have spent time combing through Federal Reserve data trying to explain this trend. And it’s worth starting with an obvious question: what does it mean to be ‘middle class’ ?
This varies from country to country. To be middle class here in Thailand is something entirely different than to be middle class in Denmark.
But in general, being middle class means you’re neither rich nor poor.
You earn enough money to be able to pay the bills without want or worry, enjoy modern conveniences and recreation, and still have some funds left over for savings and investment.
This a very delicate balance. And maintaining it depends heavily on the rate of inflation.
If wages rise faster than prices, the middle class thrives. If prices rise faster than wages, the middle class perishes. And that’s what’s been happening in the west, especially in the US.
Here’s a great example: housing. For the vast majority of people it’s their biggest expense. Most of us spend more on rent or mortgage than anything else.
Housing prices have obviously increased over time. But what’s really interesting is how much more rapidly home prices have increased over wages.
In late 2011, for example, the average home cost around 3.56 times the average salary in the US, according to data published by the Federal Reserve Bank of St. Louis.
By the end of 2017, the average home cost 4.73 times the average salary, even though mortgage rates were essentially unchanged.
In other words, even when you adjust for the fact that people are earning more, housing became 33% more expensive in just six years– and that doesn’t account for...