The American Dream May Be Beyond Your Reach... Here's Why

The America that was, President Nixon, Lenin, inflation and the unraveling of everything

"The best way to destroy the capitalist system is to debauch the currency."

~ Vladimir Ilyich Ulyanov

Last week, I wrote to you about just how expensive it has become for most Americans to live the American Dream and the dire state of the U.S. middle class.

You might have found some of the facts I laid out in that piece eye-opening… Like how chasing the “American Dream'“could set you back about $3.4 million over your lifetime. Or the fact that a family needs to bring in nearly $130,000 a year just to afford an average home.

Today, I'm shifting gears to delve into what went wrong and the underlying reasons behind the ongoing decline of the American middle class.

Without further ado, let's dig in.

The America of Yesteryear

The post-war era until the 1970s was the golden age of the American middle class. The cost of living was low, economic opportunities were plentiful, and people were friendly.

Now, I didn't witness it firsthand, but my grandpa used to talk about his time visiting the U.S. for a track and field competition back in the 1960s. He’d reminisce about the vibrant American streets, bustling businesses, and those classic American cars that left a lasting impression on him, a Soviet citizen. Every time he shared these stories, he'd often proudly gesture to an old Zenith portable transistor radio he brought back from the trip.

Now, bringing back a Western-made good from a trip was akin to committing a crime, and there were obviously risks involved. So, why did he take the chance?

Well, because back then, American businesses were on top of the world, both at home and abroad. That "Made in the USA" label? It was like a badge of honor, a guarantee of top-notch quality that made the U.S. stand apart from other nations.

It’s no wonder that the U.S. stock market held the bulk of the world’s total stock market capitalization.

In America, all this translated into a straightforward path to success: work hard, make more money, and move up in life.

Here’s Doug Casey:

I like to look at things from a long-term point of view. If we look at the United States as a civilization, I’d say it reached its peak in the late 1950s. That was probably best characterized by the 1959 Cadillac, the most extravagant car ever made for the common man. Those twin bullet taillights, the opulence of it… In terms of then-current technology, things couldn't get much better. That was our economic peak, relative to the rest of the world.

Take a look at the next chart... it perfectly illustrates this trend (at least until the 1970s). It shows how wages, adjusted for inflation, and productivity rose side by side during the heyday of the American middle class. The harder you worked, the more you earned. It was the key to social and income mobility. And it nurtured a healthy middle class.

Then something major happened in 1971. It caused an ever-widening split between work and wages. The chart clearly shows how the real wages of the average person have essentially remained stagnant since the early 1970s.

And here’s an even more dramatic way of looking at the same process.

Since the 1970s, we've seen wages getting a smaller slice of the income pie in the U.S. economy. Back in 1970, they made up about 52% of the total, but by 2022, that had dropped to just 43% – a 17% decline.

So, while the economy has been growing overall, wages haven't been keeping up.

And here’s another graph that you might find intriguing.

The chart above shows that wages for the top 1% surged by 138%, while those of the bottom 90% only grew by 15%. The difference is striking.

To be clear, inequality itself isn't the problem here. As renowned economist Thomas Sowell once wrote, “Nobody is equal to anybody. Even the same man is not equal to himself on different days.”

The issue is that this “inequality” wasn’t what you would call natural. If it were, you'd expect the wages of the top 1% to grow at a pace similar to those of the bottom 90%. Instead, the top 1% wages grew 9.2 times faster. That’s anything but “natural.”

Unraveling the Dream

Now, you’ve probably noticed that all of the charts I’ve shared above have one thing in common: they show things starting to go downhill in the 1970s.

That’s no coincidence.

In 1971 – or more precisely, on August 15, 1971 – the U.S. government made a historic move, setting off the gradual extinction of the middle class. What happened was on par with the 1929 stock market crash, JFK’s assassination, and the 9/11 attacks. Yet most people know nothing about it.

This is the date President Nixon killed the last remnants of the gold standard.

I say "remnants" because while the U.S. had already left the gold standard in 1933 for domestic dealings. But non-U.S. people and governments could still exchange dollars for gold at the U.S. Then, in the late 1950, it became only foreign central banks. That was the last discipline against wild borrowing and spending.

It also allowed the U.S. to reconstruct the global monetary system around the dollar (leveraging its status as the holder of the largest gold reserves worldwide and its victory in the war).

The new system, created at the Bretton Woods Conference in 1944, tied almost every nation's currency to the U.S. dollar at a fixed rate. It also tethered the U.S. dollar to gold at a fixed rate of $35 an ounce.

This arrangement made the U.S. dollar the world’s premier reserve currency, effectively forcing other countries to hold dollars for trade or redeem them with the U.S. for gold.

But, by the late '60s, splurging on welfare and the Vietnam War, along with printing money to cover the deficit, pumped tons more dollars into circulation compared to the gold reserves backing them.

Other countries weren't too thrilled about holding all these dollars, so they started cashing them in for gold, draining Uncle Sam's gold stash from 574 million to about 261 million ounces by 1971.

To plug the drain, President Nixon “suspended” the dollar’s convertibility into gold in 1971. This ended the Bretton Woods system and severed the dollar’s last tie to gold.

The next chart paints a picture of what came next: the explosion in the U.S. money supply since the early 1970s.

Now, unsurprisingly, when more dollars are printed, prices tend to rise. That's the definition of inflation: an increase in the money supply.

The predictable result?

The basket of goods and services used to calculate consumer price inflation (CPI) cost 41 cents in August 1971. By August 1981, that same basket cost 92 cents. This means the dollar lost 56% of its purchasing power in just 10 years.

Today, the dollar we use can buy 90% less than its equivalent from the early 1970s.

That's truly astonishing.

Here’s Doug again:

Inflation is one of the most misused words; few even think about its actual meaning. What is inflation? “Well, that’s prices going up.” No, it’s not. To say that is to confuse cause and effect. Inflation is an increase in the money supply. You inflate when the money supply is increased by more than real wealth increases.

Prices go up as a result. People have forgotten about that. They believe inflation comes out of nowhere, like a freak storm. No cause. Or they blame the butcher, the baker, or an evil oil company. Few people think it’s a central bank – the Fed in the US – that actually creates more money and causes inflation.

Once again, the data I've laid out in this essay and the one prior shows that the middle class started to deteriorate in the 1970s... right around the time the Fed broke free from the gold standard.

Since then, the cost of living has skyrocketed, while incomes have stagnated, leaving Americans to bridge the gap with debt.

Yet, it's not just about finances and economy. In reality, almost every aspect of life has taken a turn for the worse. From soaring incarceration rates to more divorces and out-of-wedlock births, and from the sheer volume of laws to the ever-expanding government, all the worst things have exploded since 1971.

There are plenty more hair-raising charts I could throw your way, enough to make you want to hurl your device across the room. But I'll spare you for now. The point is, they'd all drive home the same message: When you break the underlying measure of value, everything seems to unravel.

This brings me back to the quote by Vladimir Ilyich Ulyanov, better known as Lenin, that I mentioned at the start: "The best way to destroy the capitalist system is to debauch the currency."

Now, as a kid growing up in the final days of the Soviet Union, I dodged the bullet of having to slog through Lenin's writings like my parents did. But this quote I stumbled upon at some point has stuck with me. For one of the rare occasions in his life, Lenin was right. The fate of the American middle class in the post-1971 fiat money era is a testament to that.

Until Next Time,

Lau Vegys