5 ms·

Monetary Policy Is the Root Cause of the Millennials’ Struggle

52 points by joshuafkon 7y ago

joshuafkon 7y ago
Short version of the argument: The constant low (but steady) inflation that we now see as normal under the 2% inflation targeting in a major contributor to the significant rise in prices for interest-rate sensitive assets. (Interesting tangent: John Taylor on why he selected 2% as a target: https://economicsone.com/2018/01/09/the-feds-inflation-target-and-policy-rules/ https://economicsone.com/2018/01/09/the-feds-inflation-targe... )
- rdtwo 7y ago
  Except inflation is actually significantly higher the basket is just poorly assembled and exclude major drivers like food gas real rent and most importantly medical costs
  - toomuchtodo 7y ago
    I am curious what inflation would be with universal healthcare, a healthy amount of affordable housing, primarily renewables for energy, and EVs negating the need for gas/oil. It feels like central banks are going to lose against technology deflation, but I'm not an economist so I can't say for sure.
    - blevo 7y ago
      I suppose it depends on how those programs are funded/achieved. If they are funded via something that acts as monetary stimulus (just print the money to pay for it) then I imagine there would be a heavy burden of resulting inflation.
      - deleted 7y ago
        [deleted]
  - MiroF 7y ago
    The inflation marker does what it is designed to do - if it didn't, markets would properly price in that information
mywittyname 7y ago
The USA benefited economically by taking over from Great Britain & France control of world trade, then economically subjugated the other countries involved in the agreement. It was going to break down eventually. The fact that Bretton Woods lasted as long as it did is rather impressive. The USA was the only country to benefit from the agreement. It was only begrudgingly signed by the other participates.
- lazerpants 7y ago
  Bretton Woods ended in 1971. Edit: More info: https://www.imf.org/external/about/histend.htm https://www.imf.org/external/about/histend.htm
tryitnow 7y ago
I think this gets a lot right, but it's poorly reasoned. For example, the author talks about a "massive labor supply shock", but doesn't really address why this massive increase in labor supply wasn't offset by an equivalent increase in demand for labor. That's crucial. Otherwise, the labor supply shock would not put downward pressure on wages. He also mentions the effect of floating exchange rates but doesn't bother to write even a single sentence on why that's directly relevant (maybe because it increases global competition driving down wages and driving up expected profits? I honestly don't know). The author also conflates asset inflation with consumer inflation, implying that moderate consumer inflation somehow helps the rich at the expense of everyone else, when in fact, it's just the opposite. In general, I would say that monetary stimulus does increase inequality, but fiscal stimulus can have the opposite effect. However, the author mysteriously doesn't question why governments have preferred monetary stimulus over fiscal stimulus. That would be far more revealing. This analysis is superficial at best. It gets enough right to be mildly interesting, but misses some pretty key points. Nice to have a reminder why I don't waste my time reading financial analysis newsletters.
- blevo 7y ago
  >implying that moderate consumer inflation somehow helps the rich at the expense of everyone else, when in fact, it's just the opposite. it is? so: Moderate consumer inflation helps 'everyone else' at the expense of 'the rich?' How? I always figured: 1. inflating the money supply[0] has a usual consequence of price inflation[1]. 2. rising prices disproportionately affects the poor who must spend a greater percentage of their income on needed goods. --- to sum: Monetary Stimulus = highly regressive tax --- [0] "monetary stimulus" [1] assets and consumer goods edited: formatting
  - gnode 7y ago
    > rising prices disproportionately affects the poor who must spend a greater percentage of their income on needed goods. Inflation has a cause, and often that cause is beneficial to the working class. For instance, a rise in the minimum wage or increased workers' union power would increase prices, and disproportionately benefit the poor. If assets don't increase in value, inflation erodes the wealth of the investor class.
thedudeabides5 7y ago
Kinda. It's true that monetary policy is pushing up asset prices, so that while there is little to no inflation in consumer goods and wages, the real costs of education and housing have increased. This is kinda like a pincer movement on the well being of the millenial generation. That being said, being part of a depression isn't that great for welfare either. At the moment, there just aren't many credible alternatives to 'zero interest rates forever' monetary policy, and so the phenomena described in this article is likely to get worse before it gets better.
bwanab 7y ago
It's worth pointing out that concurrently with the breakdown of Bretton Woods agreements were the OPEC oil price hikes. The change in price of energy contributed a huge amount to the change in price of everything else. In addition, in the US, we had the "guns and butter" years of the Great Society and the Vietnam war. One can only pump so much fiscal stimulus into an economy before one gets inflation. All these things mattered.
plaidfuji 7y ago
> This constant inflation helps to explain much of the rising inequality in the United States, as well as the rising costs for interest-rate-sensitive assets like education and housing. This goes against my current understanding of inflation. I thought that high inflation benefits _borrowers_ (ie not the upper class) because it reduces the effective interest rate of loans. Is this taking that a step further and saying that the reduced cost of borrowing money actually increases asset prices because of inflated demand, resulting in increased wealth for asset-holders and unobtainable prices for asset-purchasers?
- pram 7y ago
  It only benefits borrowers with outstanding loans, created prior to the inflationary period. Most of what would be considered the millennial generation most likely didn’t buy houses and such prior to the recession and the start of quantitative easing etc.
  - wahern 7y ago
    s/housing/college/ Millennials would benefit from higher inflation, so long as that inflation was reflected in wages.
    - blevo 7y ago
      wages seem to be the last thing that rise with general inflation, and as such don't rise as much as other prices, especially the ones mentioned: housing, schooling. I think the data bears this out, looking at 'real wages' vs inflation-adjusted cost of housing/schooling. I could see how other sorts of stimulus would be preferable in this case though. All depends on who gets the benefit of spending new money on old prices. Going back a comment, it depends on if you got into the loan (school, house) before the inflation. Or locked in a low rate. Always nice to pay back money that's worth much less.
- imtringued 7y ago
  When I went to the bank to get a small loan for home remodeling I got an offer with a 10% interest rate. The idea that low 0% interest rates actually influence consumer behaviour feels like a joke to me now.
zcw100 7y ago
There are a massive number of boomers who saved a big ol’ pile of money. You can’t save money without someone else willing to borrow it and they still want it to be worth something when they go to retire. They are a large voting block so they pushed policies to make that happen. My guess is that boomers on the tail end are going to get screwed when they no longer have the political power to support those policies and the millennials cast off the yoke but the boomers on the leading edge will do fantastic.
westurner 7y ago
Volatility works out for people who save (who park capital in liquid assets that aren't doing work in order to have wheat for the eventual famine). These guys. They save, short like heck when the market is falling, and swoop in to save the day. What a great time to be selling 0% loans. Personal Savings Rate (PSR) stratified by greatest generation and not greatest generation is also relevant. Are relatively fixed living expenses higher now? Yes. Is my generation just blowing what they could invest into interest-bearing investments on unnecessary stuff from Amazon? Yes. And expensive meals and drinks. How have corporate profits and wages changed? In their day, you put you gosh-danged money aside. For later. So that you have money later. And that is why you should buy my book, entitled: "Invest in things with long term returns: don't buy shtuff you don't f need, save for tomorrow; and other financial advice" Which brings me to: the cost of college textbooks and a college education in terms of average hourly wages. By the way, over the longer term, index funds are likely to outperform funds. Gold may be likely to outperform the stock market. And, over the recent term -- this is for all you suckers out there -- cryptocurrencies have outperformed all stock and commodities markets. How much total wealth is being created on an annual basis here? Payday loans have something like 300% APY. How does 2% inflation affect trade when other central banking cabals haven't chosen the same target? "Devaluation"! "Treachery"!

52 points by joshuafkon 7y ago

Short version of the argument: The constant low (but steady) inflation that we now see as normal under the 2% inflation targeting in a major contributor to the significant rise in prices for interest-rate sensitive assets. (Interesting tangent: John Taylor on why he selected 2% as a target: https://economicsone.com/2018/01/09/the-feds-inflation-target-and-policy-rules/ https://economicsone.com/2018/01/09/the-feds-inflation-targe... )

rdtwo 7y ago
Except inflation is actually significantly higher the basket is just poorly assembled and exclude major drivers like food gas real rent and most importantly medical costs
- toomuchtodo 7y ago
  I am curious what inflation would be with universal healthcare, a healthy amount of affordable housing, primarily renewables for energy, and EVs negating the need for gas/oil. It feels like central banks are going to lose against technology deflation, but I'm not an economist so I can't say for sure.
  - blevo 7y ago
    I suppose it depends on how those programs are funded/achieved. If they are funded via something that acts as monetary stimulus (just print the money to pay for it) then I imagine there would be a heavy burden of resulting inflation.
    - deleted 7y ago
      [deleted]
- MiroF 7y ago
  The inflation marker does what it is designed to do - if it didn't, markets would properly price in that information

mywittyname 7y ago

The USA benefited economically by taking over from Great Britain & France control of world trade, then economically subjugated the other countries involved in the agreement. It was going to break down eventually. The fact that Bretton Woods lasted as long as it did is rather impressive. The USA was the only country to benefit from the agreement. It was only begrudgingly signed by the other participates.

lazerpants 7y ago
Bretton Woods ended in 1971. Edit: More info: https://www.imf.org/external/about/histend.htm https://www.imf.org/external/about/histend.htm

tryitnow 7y ago

I think this gets a lot right, but it's poorly reasoned. For example, the author talks about a "massive labor supply shock", but doesn't really address why this massive increase in labor supply wasn't offset by an equivalent increase in demand for labor. That's crucial. Otherwise, the labor supply shock would not put downward pressure on wages. He also mentions the effect of floating exchange rates but doesn't bother to write even a single sentence on why that's directly relevant (maybe because it increases global competition driving down wages and driving up expected profits? I honestly don't know). The author also conflates asset inflation with consumer inflation, implying that moderate consumer inflation somehow helps the rich at the expense of everyone else, when in fact, it's just the opposite. In general, I would say that monetary stimulus does increase inequality, but fiscal stimulus can have the opposite effect. However, the author mysteriously doesn't question why governments have preferred monetary stimulus over fiscal stimulus. That would be far more revealing. This analysis is superficial at best. It gets enough right to be mildly interesting, but misses some pretty key points. Nice to have a reminder why I don't waste my time reading financial analysis newsletters.

blevo 7y ago
>implying that moderate consumer inflation somehow helps the rich at the expense of everyone else, when in fact, it's just the opposite. it is? so: Moderate consumer inflation helps 'everyone else' at the expense of 'the rich?' How? I always figured: 1. inflating the money supply[0] has a usual consequence of price inflation[1]. 2. rising prices disproportionately affects the poor who must spend a greater percentage of their income on needed goods. --- to sum: Monetary Stimulus = highly regressive tax --- [0] "monetary stimulus" [1] assets and consumer goods edited: formatting
- gnode 7y ago
  > rising prices disproportionately affects the poor who must spend a greater percentage of their income on needed goods. Inflation has a cause, and often that cause is beneficial to the working class. For instance, a rise in the minimum wage or increased workers' union power would increase prices, and disproportionately benefit the poor. If assets don't increase in value, inflation erodes the wealth of the investor class.

thedudeabides5 7y ago

Kinda. It's true that monetary policy is pushing up asset prices, so that while there is little to no inflation in consumer goods and wages, the real costs of education and housing have increased. This is kinda like a pincer movement on the well being of the millenial generation. That being said, being part of a depression isn't that great for welfare either. At the moment, there just aren't many credible alternatives to 'zero interest rates forever' monetary policy, and so the phenomena described in this article is likely to get worse before it gets better.

bwanab 7y ago

It's worth pointing out that concurrently with the breakdown of Bretton Woods agreements were the OPEC oil price hikes. The change in price of energy contributed a huge amount to the change in price of everything else. In addition, in the US, we had the "guns and butter" years of the Great Society and the Vietnam war. One can only pump so much fiscal stimulus into an economy before one gets inflation. All these things mattered.

plaidfuji 7y ago

> This constant inflation helps to explain much of the rising inequality in the United States, as well as the rising costs for interest-rate-sensitive assets like education and housing. This goes against my current understanding of inflation. I thought that high inflation benefits _borrowers_ (ie not the upper class) because it reduces the effective interest rate of loans. Is this taking that a step further and saying that the reduced cost of borrowing money actually increases asset prices because of inflated demand, resulting in increased wealth for asset-holders and unobtainable prices for asset-purchasers?

pram 7y ago
It only benefits borrowers with outstanding loans, created prior to the inflationary period. Most of what would be considered the millennial generation most likely didn’t buy houses and such prior to the recession and the start of quantitative easing etc.
- wahern 7y ago
  s/housing/college/ Millennials would benefit from higher inflation, so long as that inflation was reflected in wages.
  - blevo 7y ago
    wages seem to be the last thing that rise with general inflation, and as such don't rise as much as other prices, especially the ones mentioned: housing, schooling. I think the data bears this out, looking at 'real wages' vs inflation-adjusted cost of housing/schooling. I could see how other sorts of stimulus would be preferable in this case though. All depends on who gets the benefit of spending new money on old prices. Going back a comment, it depends on if you got into the loan (school, house) before the inflation. Or locked in a low rate. Always nice to pay back money that's worth much less.
imtringued 7y ago
When I went to the bank to get a small loan for home remodeling I got an offer with a 10% interest rate. The idea that low 0% interest rates actually influence consumer behaviour feels like a joke to me now.

zcw100 7y ago

There are a massive number of boomers who saved a big ol’ pile of money. You can’t save money without someone else willing to borrow it and they still want it to be worth something when they go to retire. They are a large voting block so they pushed policies to make that happen. My guess is that boomers on the tail end are going to get screwed when they no longer have the political power to support those policies and the millennials cast off the yoke but the boomers on the leading edge will do fantastic.

westurner 7y ago

Volatility works out for people who save (who park capital in liquid assets that aren't doing work in order to have wheat for the eventual famine). These guys. They save, short like heck when the market is falling, and swoop in to save the day. What a great time to be selling 0% loans. Personal Savings Rate (PSR) stratified by greatest generation and not greatest generation is also relevant. Are relatively fixed living expenses higher now? Yes. Is my generation just blowing what they could invest into interest-bearing investments on unnecessary stuff from Amazon? Yes. And expensive meals and drinks. How have corporate profits and wages changed? In their day, you put you gosh-danged money aside. For later. So that you have money later. And that is why you should buy my book, entitled: "Invest in things with long term returns: don't buy shtuff you don't f need, save for tomorrow; and other financial advice" Which brings me to: the cost of college textbooks and a college education in terms of average hourly wages. By the way, over the longer term, index funds are likely to outperform funds. Gold may be likely to outperform the stock market. And, over the recent term -- this is for all you suckers out there -- cryptocurrencies have outperformed all stock and commodities markets. How much total wealth is being created on an annual basis here? Payday loans have something like 300% APY. How does 2% inflation affect trade when other central banking cabals haven't chosen the same target? "Devaluation"! "Treachery"!