Fed Policy Hits Younger Generation
NEW YORK – March 6, 2019
As we have repeatedly written, the “wealth effect,” caused by rising prices for stocks and housing, has long been the main goal of the Federal Reserve and other central banks.
It is this effect that former Fed Chairman Ben Bernanke called the “third mandate” of the Fed. He, like many other experts, was confident that higher asset prices would boost consumer welfare and help increase confidence, which would then lead to increased spending and spur a spiral of economic growth.
But, as Chris Hamilton explains in his recent essay “Economic Doom Loop Well Underway,” the “wealth effect” has enriched the already rich at the expense of young people who have not had the opportunity to buy assets, the growth of which the Fed spurred through quantitative easing programs. This privilege was largely reserved for those who bought assets ten or two years ago, before the Fed spurred asset price increases.
U.S. household wealth grew from $40 trillion in 2000 to $100 trillion in 2018, while the economy grew at a much more modest pace. The net worth of households jumped from $55 trillion in 2010 to $100 trillion in 2018 -- $45 trillion in profits for those who already owned shares and real estate.
As Chris Hamilton noted: “Non-discretionary items like homes, rent, education, healthcare, insurance, childcare, etc. are skyrocketing versus wages.”
This is evident in the second wage growth chart, which fluctuated at 2% or 3%, while stocks and housing doubled or tripled.
For young adults, this means a far greater reliance on debt to educate themselves and a far greater portion of their subsequent income to service that debt, and a far greater reliance for young adults on debt to purchase a home or a greater portion of their income to pay their rent, provide healthcare, insure themselves, or provide childcare (as both parents are more typically working full time). The net result of these federal government and central bank policies to boost the stock market and home prices and to collapse interest paid on savings is a collapsing birth rate and collapsing total births. This is diminishing present and future demand and quality of life for the young, poor, and primarily non-white in perhaps the greatest transfer of wealth mankind has seen.
The wealth effect brought benefits to the haves at the expense of the have nots— young people who can no longer afford to buy houses or create families if mom and dad do not provide capital.
The nation is losing an entire generation as a result of the Fed's wealth cult, its obsession with increasing the wealth of the haves. The welfare effect is the most sophisticated generational policy, the equivalent of a “youth tax.”
Sure, a few lucky people received prepayments from their parents to buy a home in a busy area like Seattle, Portland, or Brooklyn, in a narrow window between 2009 and 2012, but what percentage of millennials managed to buy in that short window before the second Fed-inflated housing "Bubble"? Not many.
How many millenials formed a stock portfolio (or secured options) before the S & P500 rose from 700 points to 2,800 points? Not many.
How many millennials saw their earned income meet or exceed a sharp increase in rent, college fees and health care? Not many.
Rents have increased by 30-50% since 2009.
The Fed has played a cruel joke with the younger generation of Americans. It has purposefully widened the already gaping wealth gaps between generations, the haves and the have nots.