Sound Money Monthly: (ed. 3) Debt’s unequal impact on wealth

Have you ever wondered why it’s challenging to buy a house and save for your family’s future? Debt and its unequal impact on wealth is the focus of this edition of the Sound Money Money. TLDR: Debt is driving wealth inequality. Society will remain at loggerheads until the short-term policies which encourage debt growth are removed. The solution is simple, but politicians have no appetite for pain, so we have to respond to their band-aid solutions. My 3 suggestions: redistribute before you’re forced to, think about alternative risk taking and invest into lifeboats.                      (15 minute read)

Inequality: a growing and dangerous challenge

Pew Research Center

Pew Research Center reports that share the of aggregate income held by upper income US households rose from 29% in 1970 to 48% in 2018. By contrast, middle income households’ share of aggregate income fell from 62% in 1970 to 43%. Generational wealth inequality is even starker than income. Millennials (born between 1981 & 1996) are the first American generation poorer than their parents. Millennials hold 5.1% of total US assets compared to Baby Boomers (born between 1946-1964) who held 25% of total assets at a similar age.

I particularly like the generational lens because it cuts across racial, gender and cultural groupings, which are more politically charged than age.

Justifiable wealth creation isn’t controversial but egregious inequality based on clearly unfair premises is a recipe for social tension. Particularly if it’s mixed with weak growth and poor job opportunities like we’re witnessing in 2020.

So, is the wealth distribution between Baby Boomers and Millennials justifiable? Were Boomers 5 times harder working and more productive than Millennials? This is difficult to believe… Our parents are titans, but there’s something amiss with this story.

Debt boosts asset prices, favouring asset holders

When policymakers implement looser monetary and fiscal policies with lower interest rates and wider budget deficits, they coerce people to load up on debt. New debt finds expression in prices somewhere. It can go into food prices, it can go into energy prices, it can go into wages, and it can also go into asset prices. A large percentage of the money and debt growth over the past 2 decades has found expression in asset prices; like equities, bonds and property. The price of these assets increased, not because they became more productive but because there was more money chasing after them.

Asset price increases are good for the people who hold the assets because they become wealthier. But the people who don’t hold the assets have a different experience. Non-holders want to buy these assets to invest in their future. Higher asset prices are detrimental to them, because it’s expensive to save for education, invest in a home or make financial plans.

Returning to our generational lens, US interest rates peaked and government debt troughed when Baby Boomers entered the workforce in the 1960s and 1970s (graph above). Boomers were able to use low interest rates and debt to purchase financial assets at cheap prices. For example, it took the average US non-supervisory worker 25 hours of work to buy the S&P500 in the 1980s (graph below). The hourly cost of the S&P500 remained below 45 into the 1990s giving Boomers plenty of time to accumulate wealth at cheap prices. In contrast to Boomers, Millennials are attempting to buy financial assets when global debt levels are heading to record highs and interest rates are near record lows.

In 2020 it takes US workers 140 hours to buy the S&P500, almost 8 times longer than in 1980.

Millennials will lead protests

18 to 34-year old’s accounted for almost 70% of Black Lives Matter (BLM) protestors in New York, Minneapolis and Atlanta in 2020. This doesn’t surprise me. Millennials are a disgruntled segment of society whose financial aspirations are being crushed by a debt super cycle. I’m not saying this is the only cause for BLM, but it’s an important undertone. I expect that Millennials will join other disgruntled segments of society in the years ahead.

I’m not saying that interest rates and debt are the only policy problems, and that other economic and political reforms aren’t required. But those who focus on redistributive policies without understanding the impact from debt are chasing their tails.

The solution is simple… but painful

To resolve we need to reject the status quo, turn away from short-termism, normalise interest rates, write-down debts and normalise asset prices. Wealth inequality will quickly undertake the most radical rebalancing you’ve ever seen as asset prices deflate. But policymakers view rapid financial adjustment and the pain this would cause as unpalatable. They prefer to push the envelope of the current paradigm, avoiding social, political, economic and financial volatility. So, society remains like a frog in boiling water as the social temperature rises.

How do we respond appropriately in this climate?

1) Redistribute before its redistributed for you

Politicians have zero appetite to address the cause of the current debacle, but they will respond to the latest hot button issue, clambering for popularity. Generational wealth disparities will become a massive political issue in the next 5 years as the current elderly American political elite retires. Trump, Biden, Warren, Pelosi, et al are all over 70…

I expect a policy shift towards wealth redistribution with large wealth and inheritance taxes. These won’t solve the problem. In fact, they’ll increase the cost of business which could have a detrimental impact on inequality. Nevertheless, Wealth taxes will be popular globally because Robbin hood approach is seemingly easier than solving the problem. Boomers looking to secure long-term generational wealth to their descents after they have departed this earth should consider more aggressive wealth redistribution.

Redistribution on your own terms is better than redistribution on someone else’s.

2) Unorthodox risk taking required

Millennials don’t have particularly easy choices on their plates. One thing I know for sure, is that we must look differently at the future. Generalising; many of our parents went to university, got a job, bought a house, invested in a retirement fund and that strategy turned out well. I’m not belittling their efforts, but our picture isn’t the same. University education is expensive, the job market is volatile, it’s debatable whether university prepares leavers for the job market, house prices aren’t cheap and equity markets aren’t either. I’m not saying that we shouldn’t do any of these things, but don’t expect the same results. It’s just not that simple!

We’ve got to understand the cards at the table and formulate a constructive strategy. Political demonstrations will take place over the coming years because, unfortunately, this level of wealth inequality won’t be resolved without conflict. But it’s beneficial to avoid doing the demonstrating yourself. It’s useful to respond proactively, rather than merely shouting from the rooftops at the negative outcomes. Hating an older generation just because they’re wealthy and benefited from past conditions isn’t going to help you either. Neither will wealth or inheritance taxes that transfer capital to politicians. Rather, we’ve got to find solutions, alternatives and options that work for us.

In your industry you’ll know the answer much better than me. But take the risk, bet on the innovative future and don’t sit still. The tried and tested strategy of our parent’s generation isn’t the strategy for our generation. ***I feel a little preachy at this point, so please understand that these are also notes-to-self as I build the courage to take more risk in my own life***

Take the risk, bet on the innovative future and don’t sit still

3) Get in the Lifeboat

Monetary systems based on sound money prevent unhinged expansion of debt bubbles and numerous of the consequences that we’ve covered here. That’s one of the reasons why sound money assets like Bitcoin is interesting. Obviously, these assets have their own complexities and risks. The path towards worldwide adoption is a long and volatile one. But bitcoin is a digital alternative, and that is incredibly exciting! I believe everyone needs to invest their time to understand bitcoin, but this is imperative for Millennials.

The future is uncertain, but bitcoin is a lifeboat

It’s a lot more exciting and positive than a lifeboat, actually. The positive impact from sound money on society is the reason I get out of bed in the morning!

The purpose of these articles is to provide the socioeconomic hooks to understand why you need to be more interested in alternative stores of value like gold and Bitcoin, not to explain those asset classes. I’ve written on these topics in other articles. If you’ve got specific questions, let me know and I’ll direct you. I hope that I’ve implanted another hook with this article. Numerous societal ills centre around the unsoundness of our monetary system with its short-termism, low interest rates and debt. Now add inequality and the resulting social frustration to that list.

Peace and reams of positivity. Honestly, though. I’m super positive about the future. But, as much as I want to, I’m not digging my head in the sand like an ostrich.

Have a great weekend!

Relevant links and previous editions:

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9 thoughts on “Sound Money Monthly: (ed. 3) Debt’s unequal impact on wealth

  1. Agree with all of this. I think you’re making a profound point – looking at policy through a generational wealth lens is revealing.
    What is your take on shifts in wealth redistribution *over time* vs *point in time*? I.e. the high wealth and income people are actually changing, even though the static view emphasises that they’re accumulating. Are we more okay with policies that result in inequality at a point in time, if they’re actually redistribution over time (class mobility)?


    1. Thanks for this, Blake. I’m not particularly concerned with inequality, generally. But I’m very concerned that there is a key macroeconomic mechanism driving inequality. I think social mobility is very important for society and I would prioritise it over point-in-time inequality. The way I see it, inequalities will always exist. But if there are at least opportunities for all cultural, racial, gender, social, income groups to shift into different wealth categories then this is good for social harmony. Elevated social mobility should also indicate that there aren’t significant structural barriers inhibiting mobility, which would be generally accepted as a good thing.

      What do you think?


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