-->THE MODERN-DAY POVERTY SYNDROME

by Marc Faber

I have just returned to Thailand from several trips, which took me to the
Middle East, Europe, Argentina, the U.S., and Japan. It struck me during my
travels that there are very few bargains at present in the various
investment markets, and that in most Western industrialized countries, the
prices, or the cost of living, are very high indeed. It is true that for
most manufactured goods prices have come down, but the cost of the basket of
goods that people have become accustomed to, and in many cases actually
require, in order to work and to function in today's modern society has
risen considerably.

While I was growing up my family had just one car, one television set, one
radio, record player, camera, refrigerator, toaster and cooking stove.
Readers will know what kind of arsenal of electrical appliances and
electronic gadgets today's households are littered with, especially if they
have children. My point is that, as technology has progressed and as
standards of living have changed (I am doubtful that they have risen much in
the Western world), the cost of the basket of goods that one requires in
order to participate in this"new economy" has vastly increased, so that,
along with soaring healthcare, education, and insurance costs, there is a
very heavy burden placed on anyone who isn't seriously rich.
In this respect I have just read a recently published book, The Two Income
Trap, by Harvard Law School professor Elisabeth Warren and Amelia Warren
Tyagi (Basic Books, 2003) who explain"why middle-class mothers and fathers
are going broke."

According to Elisabeth Warren, who conducted extensive research on the
subject:"The families in the worst financial trouble are not the usual suspects.
They are not the very young, tempted by the freedom of their first credit
cards. They are not the elderly, trapped by failing bodies and declining
savings accounts. And they are not a random assortment of Americans who lack
self-control to keep their spending in check. Rather, the people who
consistently rank in the worst financial trouble are united by one
surprising characteristic. They are parents with children at home. Having a
child is now the single best predictor that a woman will end up in financial
collapse.

"Consider a few facts. Our study showed that married couples with children
are more than twice as likely to file for bankruptcy as their childless
counterparts. A divorced woman raising a youngster is nearly three times
more likely to file for bankruptcy than her single friend who never had
children.

"Over the past generation, the signs of middle-class distress have continued
to grow, in good times and in bad, in recessions and in booms. If those
trends persist, more than five million families with children will file for
bankruptcy by the end of this decade. This would mean that across the
country nearly one in seven families with children would have declared
itself flat broke, losers in the great American economic game.

"Bankruptcy has become deeply entrenched in American life. This year [Ed
note: 2003], more people will end up bankrupt than will suffer a heart
attack. More adults will file for bankruptcy than will be diagnosed with
cancer. More people will file for bankruptcy than will graduate from
college. And, in an era when traditionalists decry the demise of the
institution of marriage, Americans will file more petitions for bankruptcy
than for divorce."

According to the authors, it is not over-consumption that is driving many
middle-class families into bankruptcy, but the lack of a safety net.
Middle-class families don't qualify for all kinds of programs that are
available to the poor. Moreover, the family safety net no longer exists for
the modern two-earner couple, which makes them"actually more vulnerable
than the traditional single-breadwinner family."

Professor Warren explains that a generation or so ago, the typical family
consisted of the father being responsible for the economic health of the
family, while the mother fulfilled roles such as homemaker or helpmate. The
mother's role was, in the words of the authors, the one of a"careful
guardian of what her husband brought home" and"if her husband was laid off,
fired, or otherwise left without a paycheck, the stay-at-home mother didn't
simply stand helplessly on the sidelines as her family toppled off an
economic cliff; she looked for a job to make up some of that lost income.

Similarly, if her husband had a heart attack and was expected to stay home
for a while, she could find work and add a new income source to help the
family stay afloat financially. A stay-at-home mother served as the family's
ultimate insurance against unemployment or disability-insurance that had a
very real economic value even when it wasn't drawn on."

The problem with the two-income family is that it doesn't plan its financial
commitments geared to a single income by saving the extra income that is
derived by the mother. According to Warren,"millions of two-income families
used that second income to purchase opportunities for their children - a
home in a safe neighborhood with good schools, a comprehensive health
insurance policy, two reliable cars, preschool, and college tuition. They
made long-term commitments to ongoing expenses - and they counted on both
incomes to make ends meet."

So, when one of the members of a two-income family loses his or her job, the
safety net (the mother entering the workforce) that was available to the
single-breadwinner family is no longer available. And once the combined
income of the two-income family collapses as a result of one member losing
his or her job,"the modern couple doesn't have a prayer of making ends
meet."

The Two Income Trap, which is, incidentally, a highly readable book and
saddening at the same time, struck a chord with me. As I suggested above,
the high and continuously rising cost of living in the Western
industrialized countries has created something I call modern-day poverty, or
poverty in affluence, whereby a large number of middle- and even
upper-middle-class families have very little left by the time they have paid
for their mortgages, taxes, insurance premiums, food, and children's
education.

These families may have a combined income of 70, or even 100,
times that of my gardener in Chiangmai, who earns US$150 per month (but
would do the job for US$100 per month), but, despite their relatively high
incomes, they are highly vulnerable in the event that one member is laid off
or can no longer work for whatever reason.

While I am fully aware that those of my readers who are either prospering in
the financial sector or are seriously wealthy don't have the financial
problems that middle-class families have, I am mentioning this"modern-day
poverty" syndrome because I simply don't buy the argument - repeatedly
advanced by economists and strategists at investment conferences - that the
U.S. consumer, or for that matter any average consumer in the Western
industrialized countries, is in"great shape."

This should concern all of us who are fortunate to be financially
independent, because modern capitalism has created a widening wealth
inequity whereby a small sector of our advanced Western societies is living
in style, while most families are increasingly dependent on asset inflation
(notably in real estate) which enables them to take on additional debts in
order to maintain their standard of living. At the same time, it ought to be
clear that the poor, who don't own any assets, have become totally
disenfranchised, since with home prices continuously rising their ability to
purchase them has diminished.

The"two-income trap" is a sobering and saddening fact of our modern
society. Moreover, after having recently visited Argentina and seen
first-hand the decline of a formerly rich country, I am deeply concerned
about the economic future of the West.

Having said that, no matter how unappealing the economy might be, for
investors and speculators, opportunities for substantial capital gains will
still present themselves from time to time. They are simply that much harder
to identify.

Regards,
Marc Faber

-->