In case you’re in a hurry:
- The middle class is shrinking, but the extent of the decline needs clarification—an earlier estimate overstated the severity.
- One key metric, the Velocity of Money (VoM), highlights this trend.
- Money velocity is at historic lows, signaling economic stagnation.
- RMHI% has declined significantly, but revised calculations show it’s not quite as catastrophic as previously reported.
- FRED data can be tricky, and interpreting it accurately requires expertise—mistakes can happen, even when working with solid data sources.
- The middle class is still under pressure, facing wage stagnation, rising costs, and economic restructuring.
- History is clear—when the middle class collapses, societies destabilize. But solutions exist if we act now.
The Hidden Signals of Economic Decline
Alright, buckle up, folks, because this is huge (YUGE)! It’s the start of a brand new podcast series: The Gray Files! (Cue dramatic music). Yours truly is your host, diving deep into the stuff that makes you go “hmmmmm.” Think of this article as the appetizer, a tasty little treat before the main course. For the full, juicy, mouthwatering meal, you absolutely have to check out Episodes 1 and 2. Seriously, they’re like peanut butter and jelly, Batman and Robin, this article and those podcasts. They just go together. So, grab your headphones, perhaps a beer (because you are gonna need it), and let’s get gray!
So, the American middle class has long been the engine of economic growth, the foundation of political stability, and—let’s be honest—the reason Black Friday brawls at Walmart even exist. But for decades, that engine has been sputtering.
This isn’t just about personal struggles to afford a home, save for retirement, or pay off student loans. There’s data-backed evidence that the middle class is shrinking. One economic indicator tells the story:
- Velocity of Money (VoM) – Measures how fast money moves through the economy. When money circulates quickly, it fuels jobs, wages, and spending. When it slows down, it signals economic stagnation.
Since the late 1990s, this indicator has been in freefall. And if history is any guide, that’s a big problem. Societies don’t do well when the middle class collapses. They break—politically, economically, and sometimes violently.
So, let’s dig into what’s happening, why it matters, and what can be done before history repeats itself.
Money Velocity: The Economy’s Circulatory System
As covered in episode 2 of The Gray Files, which you can find in the Podcast button on the top menu, think of money velocity like your body’s circulatory system. When blood flows freely, every organ gets the oxygen it needs. But what if circulation slows? Extremities go numb, organs fail, and things start shutting down.
The velocity of Money (VoM) is calculated by dividing GDP (Gross Domestic Product) by the total nominal (accounts for inflation) money supply (M2). It shows how many times money changes hands within the economy over a given period.
The economy works the same way. When money moves quickly, it creates jobs, boosts wages, and keeps businesses thriving. But growth slows down when cash sits in stagnant pools—like corporate stock buybacks, real estate speculation, or offshore accounts.
Tracking the Decline
- Peak (1997): Money velocity (M2) hit its highest recorded level.
- Today (2025): It has plummeted to historic lows, meaning money barely circulates.
What Happened?
A few key shifts fundamentally changed how money moves through the economy:
- The Death of Pensions
- In the past, defined-benefit pensions guaranteed retirement income, encouraging stable spending.
- The shift to 401(k)s put the burden on individuals, leading to higher savings and lower spending—which slows money circulation.
- Wealth Concentration at the Top
- The rich don’t spend money at the same rate as the middle class.
- Instead of circulating money through wages and consumption, it gets parked in stocks, real estate, and private equity—assets that don’t generate the same economic activity.
- Globalization and Automation
- Manufacturing jobs were outsourced; automation replaced many middle-class careers.
- Fewer high-wage jobs = weaker consumer spending.
- The Rise of Financialization
- Central banks responded to economic crises by injecting trillions into financial markets (quantitative easing).
- While it prevented total collapse, it mainly inflated asset prices—helping Wall Street, not Main Street.
Why This Matters
A declining VoM means an economy where:
•Fewer jobs are created.
•Wages stagnate.
•The cost of living rises, but earnings don’t keep up.
•Financial speculation replaces real investment.
In short, it’s not just an economic technicality—it’s a warning sign!!!
RMHI%: Measuring Middle-Class Stability (Correction & Clarification)
Alright, let’s talk about relative middle-class household income (RMHI%) and clear up a mistake from my previous analysis posted here in this article. The middle class is still declining, but after double-checking the data (thank you, Josh Hawn on Blue Sky), I realized I used the wrong FRED variable in my original calculation.
The Correction:
- Earlier Estimate: RMHI% had fallen to 41.7% of its 1986 peak.
- Updated Calculation: According to the Pew Research Center, the Middle Class contraction is more like 61% in the 1970s to 51% in 2023.
- Why the Error? If you’ve ever worked with FRED data, you know it’s an absolute goldmine—but also a bit of a labyrinth. Unless you’re a PhD economist who navigates these datasets daily, it’s easy to misinterpret variables, especially when adjusting for inflation and real-dollar comparisons over multiple decades.
What This Means for the Middle Class
Even with the corrected numbers, the overall trend remains the same: the middle class is under severe pressure. Wages have stagnated, living costs have surged, and economic opportunities are not what they used to be. But it’s essential to be precise with the data—things are bad, but not apocalypse- now bad (yet).
That said, the broader point stands: If the middle class continues to erode, history suggests instability will follow.
The Historical Pattern: When the Middle Class Shrinks, Societies Break
History is full of examples where a collapsing middle class led to political and economic upheaval.
NOTE: While we have great tools and precise metrics to know exactly where modern economies sit, we did not so much back then so these RMHI numbers are around a ballpark based estimate on the best data I could gather for these time periods. This may be debatable, but one truth remains that is uncontested: A shrinking middle class is a clear indicator of a collapsing society.
Historical RMHI% at Crisis Points:
- Rome (30-40%) → Middle-class farmers squeezed out → Republic collapses into Empire.
- France (20-30%) → Aristocracy hoards wealth → French Revolution.
- Russia (15-25%) → Extreme inequality → Bolshevik Revolution (1917).
- Weimar Germany (10-20%) → Middle-class collapse → Rise of authoritarianism.
Where Does the U.S. Stand Today?
At 51%, the contracting middle class is increasingly shrinking, and the U.S. is drifting toward dangerous territory. If the middle class keeps shrinking, history suggests instability will follow.
Breaking the Cycle: What Needs to Change
To reverse these trends, structural reforms are needed:
1.) Wage Growth Policies
- Tie the minimum wage to inflation.
- Ensure wages rise alongside productivity.
2.) Strengthening Labor Protections
- Rebuild unions to increase bargaining power.
- Enforce labor laws to prevent exploitation.
3.) Tax Restructuring
- Close corporate loopholes that allow tax avoidance.
- Raise capital gains taxes to balance the playing field.
4.) Investment in the Real Economy
- Expand infrastructure projects that create middle-class jobs.
- Subsidize higher education and reduce student loan burdens.
Each of these steps would increase money velocity, stabilize RMHI%, and rebuild the middle class.
Final Thought: History Offers Warnings—But Also Choices
The numbers are clear: The U.S. economy is structurally unbalanced, with wealth concentrated at the top while everyday workers struggle.
History tells us what happens next if we do nothing, but it also shows that change is possible.
The question isn’t whether the middle class is shrinking.
It’s whether we will act before history repeats itself.