Yesterday I wrote about Tyler Cowen’s semi-apocalyptic vision (if semi-apocalyptic is possible) of the US in the upcoming years. His bottom line is that a small minority of tech-savvy Millennials will prosper while everyone else stagnates, distracting themselves all the while with their smartphones and video games.
A bit over the top? …probably. But maybe I should be nicer to my children, just in case.
There is, however, a much more straightforward way in which the economic environment since 2008 has been damaging to the Baby Boom and beneficial to Generation X and to Millennials.
It’s monetary policy.
When times are good, savers/lenders get a positive real return on their money. That is, they receive interest income that compensates them for the effects of inflation + an extra percentage point to three or more, depending on how long the loan is or how creditworthy the borrower is. When times are bad, the central bank steps in and pushes interest rates down below the rate of inflation to encourage borrowing and spending. So returns on loans shrink, both in real and nominal terms.
Put another way, the central bank stimulates economic activity by taking money out of the hands of people who are loathe to consume and putting in into the hands of ardent spenders. Senior citizens and the wealthy get dinged; the young and the willing-to-become-indebted have a field day.
That’s just the way macroeconomics works. The elderly suffer for the greater good of the overall economy.
Three things are unusual–and unusually damaging to the Baby Boom generation–about the Great Recession:
1. the biggest is the length of time fixed income yields have been depressed. In a garden variety recession, the pain lasts a year or so. But we’re now in year five of depressed interest interest rates, with the prospect of normal returns not reappearing until 2018. Ouch!!! That’s a decade of the old subsidizing the young.
2. there’s also the amount by which yields have been depressed. On the 10-year bond, it’s 300 basis points; on the 2-year note, it’s 350+bp.
3. finally, there’s the fact that short-term rates have been reduced to zero.
Yes, arguably a real return of negative 2% is a real return of negative 2% whether the nominal return achieved is 3% (meaning inflation is 5%) or zero. But there’s at least a sharp psychological difference between getting a monthly check for $2500 and one for $20. And I’m not sure how people generally feel or behave when they’ve got to sell assets to meet living expenses–whether people can mitigate the negative effect on well-being by making substitutions. Certainly you can’t substitute your way into making $20 go as far as $2500.
The money policy consequences of the Great Recession are just one more factor hastening the changing of the guard, in economic and stock market terms, away from the Baby Boom, and toward younger consumers.