Is the huge indebted middle-class more due to spending beyond their means or stagnating income with rising inflation crimping their ability to save?

This question contains enough obvious assumptions as to verge on the rhetorical, but I'll go ahead anyway. "living beyond one's means" is inherently a value judgment. Additionally, there is a spectrum from people living frugally but being overwhelmed with medical bills (the most common reason Americans file for bankruptcy) to someone gambling their life savings in Las Vegas.  It is unlikely to therefore to be a precise enough metric to measure usefully.  Wages have stagnated over my lifetime and this has prevented wealth accumulation for many in the middle class.  Income has been steadily becoming more concentrated at the very top of the economic ladder, making it difficult for the middle class to afford education, retirement savings, and other tools for long term accumulation of wealth further eroding their economic standing. The tax structure in the USA favors the rich due to a much lower rate of taxation on capital gains compared to income, resulting in a situation where working is taxed far more than investing.  Thus those wealthy enough to live off investments gain an ever larger share of the economic pie, while those who work for a living  struggle to get by. On inflation: I'm old enough to remember the inflation of the 1970s and early 1980s but inflation has not been a significant factor in daily life in America for many years now.  It's worth remembering that inflation, while destructive in general, does have its silver lining for debtors; you're repaying loans with money that is easier to accumulate due to rising wages, and the falling value of the currency's purchasing power per currency unit.  Since the middle class tends to have a much larger debt to wealth ratio than the wealthy inflation could thereby be construed to advantage the middle class over the wealthy.

TL;DR: I blame interest-rate manipulation by the Federal Reserve Bank. (This is the Austrian school's explanation.) ------------- First: Savings When someone is paid, they have a choice between spending that $1, and saving it. The rate of interest influences this because it's a choice between $1 of what you can buy today, and $1 * (1 + interest) of what you think you'll be able to buy tomorrow. The higher the rate of interest, the more likely you'll put that $1 in savings, because you'll be able to afford more tomorrow. The lower the rate of interest, the more likely you'll decide to spend it now. So, everything else equal, lower rates of interest shift consumption from the future to the present. As the interest rate falls, individuals draw down their saved cash balances to afford present-day consumption. This is one source of "stimulus" from lowering interest rates: dis-savings channel funds away from investment goods and towards consumption goods. Second: Debt Interest rates also influence the decision to take on debt and invest in longer-term projects. These projects can be anything from new building construction, to housing mortgages, to business start-ups; a 30-year mortgage with a 3% APR is cheaper, both monthly and over the term, than a 30-year with a 4% APR. As these debt instruments become cheaper, more people purchase them. This is not necessarily a bad thing: there are some very nice things about owning equity. But it also means you're at risk if you become unable to make the payments; this risk depends partly upon the security of your income stream. Third: Income Your income is tied, more than to anything else, to your labor productivity. If you make things few others can, that other people really really want, you'll get compensated more than someone who has a common skill making something people are lukewarm over. Because other's consumptive preferences directly influence your productivity, others' willingness and ability to pay matter to your income. So see how they begin to interrelate: those goods that are driven by investment spending become more in demand as interest rates fall; folks in the construction industry see rising incomes as others take on more debt to afford their product. But consumption goods also become more in demand as interest rates fall, funded not through debt, but dis-saving. As the interest rate falls, the incomes of people in both investment and consumption industries rise. ---- So... why not drive the interest rate as low as possible? Why, indeed. The answer is that the funds available for investment are the self-same funds that people are saving. When Smith borrows for investment, he's borrowing the money Jones saved. If Jones begins to dis-save to purchase consumption goods, there's less money available for Smith to borrow next month. [Incidentally, JM Keynes disagreed with this relationship between savings, investment, and the interest rate. It's the source of the conflict between Keynesian and Austrian/Neo-classical economic theory.] Long-term investment depends upon the interest rate to remain profitable; there comes a point where, if the rate rises any more, it's a better decision to leave the project unfinished and cut your losses. So the building does not get built; nor the highway; nor the homes. And here we have the bust part of the cycle: Jones had dis-saved because borrowing was cheap and his construction job was paying well. But because the project was cancelled, he was laid off. He can no longer afford the monthly payments as he once could, so he has to cut back on his consumption-goods spending and build his savings back up. But because he cuts down on his consumption and effectively reduces his demand for those goods, this negatively affects the productivity (and thus the income) of the workers in consumption-good industries. And here we are today. One person doing this will have little influence on the economy in general. It's a problem when everybody does it. What solution, then? Think of it like a wildfire: putting out every instance of fire in the 70's in the Western US led to a build-up of brush and dead wood. Eventually it will catch, and the amassed fuel will burn beyond the ability of firemen to control. So controlled fires are a good thing, which is what we do nowadays. Monetary policy can indeed stop Jones' construction business from halting the project: it just has to inject money in the banking system to keep the rate from rising. But the underlying problem hasn't been solved: the disjoint between individual savings and investment spending. If this expansionary policy perpetuates, then, just as in wildfires, the potential downside becomes worse and worse. And this is what happened between ~1994 to 2005: for various reasons, partly in response to the savings and loan crisis of the late 80's, partly Dotcom bubble, partly desire to increase home-ownership rates, partly 9-11, interest rates were kept low to enable borrowing and goose investment spending. And the present-days' middle class' ratios of debt/savings/income is the inheritor of those monetary policies private individuals had no control over. Worse, from my perspective, is that this theory of monetary-driven boom and busts is the minority view, and the institutions that have responsibility for it, particularly the Federal Reserve, have few incentives to cleave to it, or to identify and promote those who would enact its policy recommendations.

Some combination of all for most people. Why does it have to be exclusively this or that? In fact, the question points out three different issues Inflation Wage Stagnation Living beyond their means I am not saying that every middle class (the term is often ambiguous) family is guilty of overspending. But where exactly someone falls in the spectrum of these three causes extremes (the reasons described) varies from case to case.

First off you can't go into debt just because of inflation. And the amount that we spend per dollar earned has been dropping sence the recession. Americans are just bad with money. Whether its loans, retirement savings, insurance, or taxes. Just finance it is the middle class montra. How many people keep a budget? How many people could tell you how much they spent on going out to eat last month? Very few. People are ignorent about how money works, and that is the big issue. We have more people telling us to finance the car or get a store credit card then telling us how to be smart with money. It is also a lot like dieting. You can tell a person how to be smart and then they see that chocolate cake.