GDP is High, So why do Americans Struggle?

How Lower and Middle-class Americans Can Use the System to their Favor

Alex Lago
Alex Lago
Feb 20 · 6 min read
Photo by Luca Bravo on Unsplash

The United States Economy’s Gross Domestic Product (GDP) in 2018 was 20.544 trillion dollars. GDP measures the monetary value of all goods and services produced inside a nation during a specific period — in this case, a year.

So why is this important? Well because the United States GDP dwarfs most other countries’ GDP. The next few countries are China with a GDP of 13.608 trillion dollars, Japan at 4.971 trillion dollars, Germany at 3.948 trillion dollars.

This means that the United States has a far higher production capacity than the whole world.

So it is strange when

Four in 10 Americans are struggling to pay for their basic needs such as groceries or housing, a problem even middle-class households confront, according to a new study from the Urban Institute (Picchi, CBS News).

So how is it that despite record gains in the stock market, extremely low unemployment, and record-high GDP, many Americans seem to be struggling?

One of the answers could highlight the extreme income inequality in the United States. The average family income in the country grew by 25.7% from 1993 to 2015. But 52% of that growth was in the top 1% of the population.

The rich see their piece of the American wealth pie grow as the poor see it decrease. Even though there is a high GDP, most of this growth is attributed to the wealthy classes.

This could be a result of constantly increasing inflation. Inflation is the rate at which the price level of commonly purchased goods in the economy increases over time. What it means is that prices of goods are increasing and consumers’ purchasing power is decreasing because the government is printing more money. When more money is printed, the existing currency in circulation is devalued.

So let’s say you have $1,000 stored in your mattress. This money automatically loses value because the Federal Reserve decides it wants to inject more credit into the economy.

Now, the rate of inflation is the amount that this price increases in a given period. In the 70’s it was 7.06%, in the 80’s it was 5.51%, and since the 90’s it has been hovering around 2–3%. Keep in mind that this is an annual average of each year in the decade, and is not cumulative. So if you had $1,000 in your mattress in 1970, in 1971 your money would be worth $929.40 in terms of 1970’s value. In 1972, your $1,000 would be worth $863.78 in 1970’s money.

You would still have those $1,000, but you would have less purchasing power. Goods in the economy also increase in price to reflect this, causing a downward spiraling effect on your savings.

But why is this a problem for lower and middle-class Americans?

The Federal Reserve has made inflation a mainstay in our economy. Most people don’t even know what’s going on. This is why the Federal Reserve and those in power can keep doing whatever they want.

since 1913 we have seen 2275% inflation. Yes, that is right Two Thousand Two Hundred Seventy-Five percent inflation. It is difficult to wrap your mind around 2200% inflation. But that means that prices increased by 2200% or they cost 22 times more (McMahon, Inflationdata).

When inflation of 2–3% is the norm, it quickly adds up and Americans lose A LOT of value on their wealth. Constantly rising prices mean that speculative assets increase such as stocks, housing, and bonds. Lower-class Americans usually don’t have these things — or at least have less than richer Americans. Poorer Americans don’t experience the growth that inflation provides for richer Americans. What makes it worse is that basic staples such as food, gas, and necessities are constantly increasing every year. People who can’t afford assets that combat or negate the effects of inflation experience lower living standards.

So while the rich continue gaining more of a percentage of the economy, the poor and middle-class risk bankruptcy from emergency expenses.

What Can You Do?

Change the System

People who are in the middle-class should focus their attention on voting for politicians who want to reduce inflation and mitigate the credit-based economy. I would even advocate for politicians who are interested in eliminating the FED such as Rand Paul.

Outside of changing the system, there are things you can do in the meantime. Spend within your means, learn how to invest, and keep saving for rainy days.

Don’t Spend on Stupid Things

Many people in their twenties are irresponsible with money — that’s a fact. I see it with my coworkers and my friends. They spend over ten dollars on lunch every day and easily blow money on things that aren’t necessary. I don’t know about you, but I’d prefer a little more economic security rather than owning a fancy coffee stirrer or a new handbag. Heck, I’d rather be going on vacation than spending my money on this junk!

But anyway, there is more value in being able to walk away from a bad job situation with a few thousand in the bank rather than have the latest Louis Vuitton’s. Peace of mind and flexibility are so much more valuable.

We have a culture of living beyond our means. It’s ingrained. Americans want cars, homes, and goods that are beyond the scope of what they can reasonably afford — and worse — feel entitled to have them for the simple fact of being American.

Many Americans use credit at interest rates often from 15–25% to buy ridiculous things they don’t need. One of my friends justifies this because he gets points on his card to buy other things. Spending for the sake of saving isn’t a very good game plan. Stop using credit cards and buying things you can’t immediately afford unless you need them.

Invest Even if it Seems Like a Lost Cause

Another thing I would suggest for young adults would be to invest and keep building at it. One of my friends came up to me and asked me for some tips on investing. I told them to open up a TD Ameritrade or Robinhood account. For a beginner, I put them on SP500 ETF’s — a sort of mutual fund that can be traded like a stock and follows the extremely diversified market. When they asked me how much return they’d be getting in terms of dollars I asked them how much they would be putting in — to which they answered $200. When I told them they’d be averaging about 7% and making about $14 a year, they were discouraged.

The fact is that no one cares about their money declining in a bank or at home at a rate way lower than inflation, but when they hear they’ll only be making $14 off of $200 on a normal year, they reject it immediately. Unfortunately, this is how investing works. This is why the rich are rich in this system. It is a bad attitude to think that 7% doesn’t justify investing. Imagine you had $1,000,000 and you put that at 7% in the same ETFs. You’d have $70,000.00 in a year! The goal is to have this mindset when you have very little money because everything you do gets compounded. Get into the habit of being more selective with where you store your money and don’t let it go to waste.

Imagine saving $200 a month and putting that into an SP500 ETF. At the end of the year, you’d have $2,400 plus the interest of what you made each month. If you invest $2,400 at 7% you’ll make $168 a year and so on. The point is that smart investing at first seems pointless, but eventually, it will give you incredible returns.

Conclusion

American GDP is at all-time highs but Americans continue to struggle. Some of the reasons are not in their control, as we have a system that operates on the devaluation of Americans’ savings. But other things are — such as voting for a change in the system, being smarter with your spending, and investing despite the seemingly low returns.

This system is stacked against middle-class Americans but we shouldn’t despair. Use your vote and your mind to change everything you can for the better.

Follow The Personal Finance Guide and The Capital for more information about investing, finance, and current events.


The Capital

The Capital (former Altcoin Magazine) is a social financial…

Alex Lago

Written by

Alex Lago

My goal in writing is to spread useful information. I believe in using my experiences and knowledge to help people. I like economics and religion.

The Capital

The Capital (former Altcoin Magazine) is a social financial news aggregator powered by Bitcoin

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