5 ms·

Where did all the wealth go? To our kids.

31 points by robg 18y ago

bkbagel 18y ago
I appreciate the rosy outlook, but this is sheer absurdity. Sure, assets like homes and stocks can be purchased at a lower price for roughly the same actual value as before. But that assumes that a) people still have the money or the fortitude to buy those things and b) that the economy will rebound entirely. Sure the latter is likely true, and the author makes some good points. But as a young investor myself with parents who have lost much, I'm not inclined to be so optimistic about the future. If nothing else, hopefully this all teaches us to be accountable for our own money and know what we're doing with it.
tyn 18y ago
"Because the future earnings of GE, and for that matter most U.S. corporations, are essentially the same today as they were two years ago.." Are they?
- cameldrv 18y ago
  Certainly not. The current earnings of the S&P 500 are down about 70% from 18 months ago. Obviously the market expects earnings to bounce back, since on a current basis, with the P/E of the S&P 500 about 28, stocks are a bad investment if you think things will continue. A dollar of earnings today is worth more than any future earnings, and near-term (five years or so), I think we can expect earnings to be less than they were eighteen months ago, so I don't think that the children have necessarily made out -- it's some combination of wealth destruction and wealth that was never really there.
  - rationalbeaver 18y ago
    I suppose that 'future earnings' holds a pretty nebulous value. Still, to the writer's point, how long do you think today's children will be working/investing? My bet is that it's more than 5 years. IMO, now would be a good time to start a child's college fund.
    - cameldrv 18y ago
      The question is really that if you buy stocks now, what is the discount rate necessary to make the current valuations reasonable, and how does that compare to what the boomer generation enjoyed? The theory of the article is that the children who are buying stocks right now are going to enjoy a superior rate of return at the expense of the retirees. I don't think that's true. Corporate profits expanded to an unusually high percentage of economic output in the past decade and a half, and I would expect that to go down. Even if you anticipate that the corporate profit fraction remains constant, and that earnings will be twice their current level in a couple of years, the stock market still would have a 14 P/E ratio, which is historically a bit high. Even at the current depressed valuations, I think that you have to be a pretty big optimist to expect big gains in the market over the next decade or so.
  - defen 18y ago
    Exactly. Significant amounts of wealth were never there (e.g Madoff, Stanford), and significant amounts of wealth were destroyed due to the fact that people/businesses made plans & investments that were based on a perception of reality that is now known to have been wildly off the mark. Think of all the half-done construction projects that are now sitting idle because they were intended to satisfy demand that no longer exists.
dant 18y ago
The amount of wealth in the world is roughly the same, but the perceived value of cash has risen relative to everything else. The "wealth" has gone to the people who happen to be sitting on a lot of cash at the moment while people with lots of Plasma TVs in storage (for example) are finding they're not as wealthy as they thought they were. I expect our kids are still going to have to work as hard as we did in order to buy those Plasma TVs. Even if they cost less, they'll probably be getting paid less too.
josefresco 18y ago
I don't understand how the wealth is being passed to the kids of baby boomers? I'm a child of a baby boomer, 28 years old and on my second home that was purchased at the height of the real estate bubble (first in 2004, second in 2007). Both homes I purchased were owned by baby boomers. Looks like it's the kids who are passing the wealth on to the boomers to me. If your kids are lucky, they either held off on purchasing a home or were too young to buy in. Otherwise they're probably like me, young and with a mountain of debt and while we're a long way from retirement, most likely there will be no SS benefits for us. Enjoy your retirement boomers!
sdurkin 18y ago
WHAT? This from the generation that just borrowed a trillion dollars from us?!
- furburger 18y ago
  don't forget the fifty trillion or so to pay their entitlements til (avg) age of death. or the extra three trillion they'll peel off of the stock market when they are forced by law to start liquidating their 401ks faster than we can make contributions to ours.
tarmac 18y ago
It's hard to believe this article when some UN groups are pitching out the Dollar is the world's prime currency. If future generations are indeed richer, the value of what they hold isn't going to be the same.
Darmani 18y ago
A lot of this is just wishful optimism, but he's right to point out that deflation is not necessarily bad. I've been quite perplexed at Bernanke's efforts to stop the deflation that brought gas prices around here below $2 for the first time in seemingly forever.
- bprater 18y ago
  It's the deflationary spiral that's bad. A little drop in price is nice, but when a feedback cycle occurs, it becomes very dangerous.
  - nazgulnarsil 18y ago
    explain how. has deflation ever destroyed a country? no, not once in history. Inflation has destroyed MANY countries.
    - bokonist 18y ago
      The deflation of the Great Depression and the ensuing unemployment resulted in the election of the dictator FDR, the destruction of the old republic, and creation of the modern American civil service mega-state. If you could go back in time, and put yourself at the head of the Federal Reserve in 1930, would do you anything differently?
      - nazgulnarsil 18y ago
        you've got some reading to do. America's Great Depression http://mises.org/rothbard/agd.pdf http://mises.org/rothbard/agd.pdf
        bokonist 18y ago
        I've read it. Rothbard is dead right about the dangers of fractional reserve and the need to avoid inflation in the first place. But he's dead wrong about what to do once the crisis hits. I do not buy his arguments that Hoover's actions after the crisis caused the severity of the downturn. It's very unlikely that Hoover's cajoling was the cause of sticky wages. Right now we are seeing businesses across the economy choose layoffs rather than wage cuts, even in non-union, non-regulated sectors like tech. Furthermore, the major cause of the unemployment was businesses going bankrupt. Businesses went bankrupt because when the money supply shrank they could no longer payoff their debts. The debts were all nominated assuming a much greater money supply. Deflation caused the unemployment.
neilo 18y ago
"Where's my money, Lebowski?" That was inappropriate, I'm sorry. The author gave me an impression of attempted optimism, something to help people see good coming of all this crap, but perhaps he focused to much on that and not enough on more dark realities.
nazgulnarsil 18y ago
articles like this are written by people who are still ideologically stuck in the pre-2000 crash world. That wealth didn't go to someone. It is just gone because it was an illusion in the first place. The fed pumped our system full of credit. Now we act surprised when bad credit starts getting washed out. Every empire that has tried fiat currency has failed for this very reason. The people in power simply can't keep their sticky mitts off the printing press. It's just too tempting.
- miloshh 18y ago
  Perhaps there was too much currency in the system, but I think the actual, real wealth of many people did decrease too. They were better off than they are now, their wealth physically went down. They don't have things now that they did before. The output of the economy decreased, while the resources stayed roughly the same, so less wealth is being created. This is true even if you completely forget about the existence of money.
  - nazgulnarsil 18y ago
    right, but by necessity most of the wealth that disappeared was involved in non-productive economic activity. The wealth lost that actually was involved in productivity is a side effect of the massive fluctuations in imaginary wealth. If it didn't effect the productive portion of the economy we wouldn't even have to worry about the shenanigans of the fed in the first place. The real effect of this fluctuation is reflected in the fact that america has had an aggregate negative savings rate for the last 10 years. The imaginary wealth made people think that they could spend the real wealth, get returns in imaginary wealth (home valuations for example) and be net ahead.
miked 18y ago
The Social Security and Medicare systems are simply a means of making a younger generation pay for an older generation's retirement, since both of those systems are pay-as-you-go. Obama amd Congress have signed us, and especially young people, up for the largest debt burden in US history, both in absolute and relative terms. The debt accumulated in World War II doesn't even come close to what's being signed into law these days. Still, we of the 60's generation are thinking of you. And we when head out to the golf course while you're heading to work to pay for our benefits, I swear we'll wave to you.
kubrick 18y ago
It is grossly irresponsible for the baby boom generation to expect Generations X and Y to be saddled with our national debt, our trade debt, and our infrastructure debt -- and the retirement debt created by baby boomers enjoying long retirements supported by future tax increases on their children. That's one of the most responsible things I've ever heard a member of that generation say.

31 points by robg 18y ago

I appreciate the rosy outlook, but this is sheer absurdity. Sure, assets like homes and stocks can be purchased at a lower price for roughly the same actual value as before. But that assumes that a) people still have the money or the fortitude to buy those things and b) that the economy will rebound entirely. Sure the latter is likely true, and the author makes some good points. But as a young investor myself with parents who have lost much, I'm not inclined to be so optimistic about the future. If nothing else, hopefully this all teaches us to be accountable for our own money and know what we're doing with it.

tyn 18y ago

"Because the future earnings of GE, and for that matter most U.S. corporations, are essentially the same today as they were two years ago.." Are they?

cameldrv 18y ago
Certainly not. The current earnings of the S&P 500 are down about 70% from 18 months ago. Obviously the market expects earnings to bounce back, since on a current basis, with the P/E of the S&P 500 about 28, stocks are a bad investment if you think things will continue. A dollar of earnings today is worth more than any future earnings, and near-term (five years or so), I think we can expect earnings to be less than they were eighteen months ago, so I don't think that the children have necessarily made out -- it's some combination of wealth destruction and wealth that was never really there.
- rationalbeaver 18y ago
  I suppose that 'future earnings' holds a pretty nebulous value. Still, to the writer's point, how long do you think today's children will be working/investing? My bet is that it's more than 5 years. IMO, now would be a good time to start a child's college fund.
  - cameldrv 18y ago
    The question is really that if you buy stocks now, what is the discount rate necessary to make the current valuations reasonable, and how does that compare to what the boomer generation enjoyed? The theory of the article is that the children who are buying stocks right now are going to enjoy a superior rate of return at the expense of the retirees. I don't think that's true. Corporate profits expanded to an unusually high percentage of economic output in the past decade and a half, and I would expect that to go down. Even if you anticipate that the corporate profit fraction remains constant, and that earnings will be twice their current level in a couple of years, the stock market still would have a 14 P/E ratio, which is historically a bit high. Even at the current depressed valuations, I think that you have to be a pretty big optimist to expect big gains in the market over the next decade or so.
- defen 18y ago
  Exactly. Significant amounts of wealth were never there (e.g Madoff, Stanford), and significant amounts of wealth were destroyed due to the fact that people/businesses made plans & investments that were based on a perception of reality that is now known to have been wildly off the mark. Think of all the half-done construction projects that are now sitting idle because they were intended to satisfy demand that no longer exists.

dant 18y ago

The amount of wealth in the world is roughly the same, but the perceived value of cash has risen relative to everything else. The "wealth" has gone to the people who happen to be sitting on a lot of cash at the moment while people with lots of Plasma TVs in storage (for example) are finding they're not as wealthy as they thought they were. I expect our kids are still going to have to work as hard as we did in order to buy those Plasma TVs. Even if they cost less, they'll probably be getting paid less too.

josefresco 18y ago

I don't understand how the wealth is being passed to the kids of baby boomers? I'm a child of a baby boomer, 28 years old and on my second home that was purchased at the height of the real estate bubble (first in 2004, second in 2007). Both homes I purchased were owned by baby boomers. Looks like it's the kids who are passing the wealth on to the boomers to me. If your kids are lucky, they either held off on purchasing a home or were too young to buy in. Otherwise they're probably like me, young and with a mountain of debt and while we're a long way from retirement, most likely there will be no SS benefits for us. Enjoy your retirement boomers!

sdurkin 18y ago

WHAT? This from the generation that just borrowed a trillion dollars from us?!

furburger 18y ago
don't forget the fifty trillion or so to pay their entitlements til (avg) age of death. or the extra three trillion they'll peel off of the stock market when they are forced by law to start liquidating their 401ks faster than we can make contributions to ours.

tarmac 18y ago

It's hard to believe this article when some UN groups are pitching out the Dollar is the world's prime currency. If future generations are indeed richer, the value of what they hold isn't going to be the same.

Darmani 18y ago

A lot of this is just wishful optimism, but he's right to point out that deflation is not necessarily bad. I've been quite perplexed at Bernanke's efforts to stop the deflation that brought gas prices around here below $2 for the first time in seemingly forever.

bprater 18y ago
It's the deflationary spiral that's bad. A little drop in price is nice, but when a feedback cycle occurs, it becomes very dangerous.
- nazgulnarsil 18y ago
  explain how. has deflation ever destroyed a country? no, not once in history. Inflation has destroyed MANY countries.
  - bokonist 18y ago
    The deflation of the Great Depression and the ensuing unemployment resulted in the election of the dictator FDR, the destruction of the old republic, and creation of the modern American civil service mega-state. If you could go back in time, and put yourself at the head of the Federal Reserve in 1930, would do you anything differently?
    - nazgulnarsil 18y ago
      you've got some reading to do. America's Great Depression http://mises.org/rothbard/agd.pdf http://mises.org/rothbard/agd.pdf
      - bokonist 18y ago
        I've read it. Rothbard is dead right about the dangers of fractional reserve and the need to avoid inflation in the first place. But he's dead wrong about what to do once the crisis hits. I do not buy his arguments that Hoover's actions after the crisis caused the severity of the downturn. It's very unlikely that Hoover's cajoling was the cause of sticky wages. Right now we are seeing businesses across the economy choose layoffs rather than wage cuts, even in non-union, non-regulated sectors like tech. Furthermore, the major cause of the unemployment was businesses going bankrupt. Businesses went bankrupt because when the money supply shrank they could no longer payoff their debts. The debts were all nominated assuming a much greater money supply. Deflation caused the unemployment.

neilo 18y ago

"Where's my money, Lebowski?" That was inappropriate, I'm sorry. The author gave me an impression of attempted optimism, something to help people see good coming of all this crap, but perhaps he focused to much on that and not enough on more dark realities.

nazgulnarsil 18y ago

articles like this are written by people who are still ideologically stuck in the pre-2000 crash world. That wealth didn't go to someone. It is just gone because it was an illusion in the first place. The fed pumped our system full of credit. Now we act surprised when bad credit starts getting washed out. Every empire that has tried fiat currency has failed for this very reason. The people in power simply can't keep their sticky mitts off the printing press. It's just too tempting.

miloshh 18y ago
Perhaps there was too much currency in the system, but I think the actual, real wealth of many people did decrease too. They were better off than they are now, their wealth physically went down. They don't have things now that they did before. The output of the economy decreased, while the resources stayed roughly the same, so less wealth is being created. This is true even if you completely forget about the existence of money.
- nazgulnarsil 18y ago
  right, but by necessity most of the wealth that disappeared was involved in non-productive economic activity. The wealth lost that actually was involved in productivity is a side effect of the massive fluctuations in imaginary wealth. If it didn't effect the productive portion of the economy we wouldn't even have to worry about the shenanigans of the fed in the first place. The real effect of this fluctuation is reflected in the fact that america has had an aggregate negative savings rate for the last 10 years. The imaginary wealth made people think that they could spend the real wealth, get returns in imaginary wealth (home valuations for example) and be net ahead.

miked 18y ago

The Social Security and Medicare systems are simply a means of making a younger generation pay for an older generation's retirement, since both of those systems are pay-as-you-go. Obama amd Congress have signed us, and especially young people, up for the largest debt burden in US history, both in absolute and relative terms. The debt accumulated in World War II doesn't even come close to what's being signed into law these days. Still, we of the 60's generation are thinking of you. And we when head out to the golf course while you're heading to work to pay for our benefits, I swear we'll wave to you.

kubrick 18y ago

It is grossly irresponsible for the baby boom generation to expect Generations X and Y to be saddled with our national debt, our trade debt, and our infrastructure debt -- and the retirement debt created by baby boomers enjoying long retirements supported by future tax increases on their children. That's one of the most responsible things I've ever heard a member of that generation say.