Millennials: Not Part of the Club
Many millennials are saddled with crushing student loan debt,are unemployed or underemployed and are unable to purchases homes of their own. The culprit? Quantitative Easing.
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“You know, a lot of people say, this is just helping rich people. But it’s not true. Our policy is aimed at holding down long-term interest rates, which supports the recovery by encouraging spending. And part of it comes through higher house and stock prices, which causes people with homes and stocks to spend more, which causes jobs to be created throughout the economy and income to go up throughout the economy.” Janet Yellen, the newly appointed head of the Federal Reserve defending its quantitative easing program in Time Magazine
The RecovQEry That By Passed Gen Y
Let’s drop in to see what condition the Millennials’ condition is in: Welcome to The RecovQEry
We have been covering the plight of the millennials* and their lack of economic opportunity since the start of Smaulgld.com. This lack of economic opportunity impacts not just the millennials but also the real estate market and the overall economy.
Much of Gen Y’s lack of economic opportunity has been caused by the excesses of what came before them- the Nasdaq .com bubble, the housing bubble and the current attempts to reflate the housing and stock markets via the Federal Reserve’s quantitative easing program (QE).
In 2009 The Federal Reserve embarked on a “temporary” $4 trillion asset purchase program whereby they print money in order to buy U.S. Treasury bonds and mortgage backed securities. The ostensible purpose of QE is to keep interest rates artificially low in order to spur economic growth. In reality, QE is nothing more than an ongoing bailout of the too big to fail banks and the U.S. government which needs low interest rates in order to afford its massive deficit spending.
Five years of QE has delayed the inevitable consequences of mal investments and purchases that need to be faced. Bad debts need to be liquidated and assets transferred to more prudent stewardship. Instead the Fed has enshrined financial mistakes by providing initial bailouts in the form of direct dollars and for the past five years through the continuing bailout via QE. The current economic “recovery” has been reflected in the form of rising home and stock prices and other speculative assets like fine art, but not in wage or job growth.
While the Fed has signaled its intention to slightly cut back on its QE program, it has also pledged to keep interest rates low for years to come. (under the faulty assumption that interest rates may be kept low without QE)
When the cost of money (interest rates) is cheap, asset bubbles are created. Artificially low interest rates send signals to entrepreneurs and consumers that the economy is fine and there is no point in saving as the returns are negligible. Without savings there can be no long term investment. In an artificially low interest rate environment cheap capital flows towards existing enterprises (via stock market purchases), existing homes (driving prices higher) and speculative assets (i.e. social media stocks and bitcoin). A bubblecovery doesn’t provide sustainable economic expansion, it merely creates higher asset prices that benefit those that hold them….until their prices plummet.
QE Prevents Creative Destruction
Failure provides opportunity for new entrants. QE and bailouts, on the other hand, keep economic losers entrenched. It is this dynamic that has kept economic opportunities from millennials.
Whether the Fed eventually ceases its QE program, the damage to a generation has already been done. Five long years of Fed money printing to keep the system entrenched has not created a thriving economic environment for millennials but rather a playground for the older, richer generation to maintain and increase its wealth.
Fast Future or Slow Reverse?
David Burstein, a twenty something writer and filmmaker has produced works extolling the virtues of his generation. In his book “Fast Future” and in speeches David Burstein presents a futuristic view world of immense technological change. Millennials, he argues will be best suited to lead the creation and adoption of these world changing technologies. The future of Alvin Toffler’s Future Shock is here and millennials were born into it. While Mr. Burstein is correct that the pace of technological change is rapid, the economic advancement of millennials is not. Indeed the rate of economic advancement of millennials appears to be stagnant and represents a decline in the standard of living that their boomer parents enjoyed. Putting a positive outlook on it doesn’t change that reality.
Unfortunately, the message to Gen Y is simple:
It’s a Big Club And You Ain’t In It (caution: strong language and profanity)
Welcome to the revocery.
How Gen Y Fits In Economically:
Health, Education and Welfare
Even though the current economic system does not provide millennials with much opportunity, it does impose a burden on them. Millennials are expected to help fund massive government programs like the Affordable Health Care Act, Medicare and Social Security while they may never see the benefits from those programs. Millennials can avoid paying Social Security and Medicare fees simply by being unemployed as those programs rely on payroll tax deductions for their revenues. Millennials employed or not, however, are required under the Affordable Health Care act to purchase a qualifying health plan or pay a fine. Some suspect that many millennials will opt to not purchase insurance and to pay the fine instead as it may be more economical to do so, especially for the unemployed or part time workers.
Bill Clinton Notes How Important Gen Y’s Participation is For ObamaCare to Work
In addition to having to purchase insurance that will go to support an older generation’s health care, Gen Y may also be subject to “superbugs” that do not react to antibiotics as a result of prior generations’ over use.
Millennials and Student Loan Debt
Millennials have gone to college more than any previous generation and have also paid significantly higher tuition fees to do so. These higher tuition fees have often been financed with debt in the form of guaranteed student loans which themselves have contributed to the higher tuition fees. Education has become more expensive, but not necessarily better for millennials- although the campus accomodations are decidedly of better quality than those of the 60’s and 70’s.
While at college, students studying economics also get good dose of Keynesian economics which doesn’t teach how markets work but rather how governments can interfere with and manipulate markets to their advantage.
The amount of student loan debt is estimated by the St. Louis Federal Reserve to be $1 trillion of which nearly 20% is considered deliquent. Student loan debt can’t be discharged in bankruptcy so a default on a student loan will ruin a defaulter’s credit for many years to come hindering car and home purchases.
The St. Louis Fed also notes that college education has increased in price in part because of guaranteed student loans. This highlights an unintended consequence as guaranteed loans were designed to make college affordable and available to all.
Tough economic times have found many millennials on welfare or receiving food stamps, an inauspicious way to start to a career.
Millennials’ Access to Symbols of the American Dream – Out of Reach?
With crushing student loan debts, poor job prospects and costly insurance premiums, many millennials find the affordabiity of cars and homes out of reach.
QE has kept interest rates down allowing many people with bad credit to buy cars. Lower interest rates have created demand and allowed the price of cars to reach record levels. The large amount of subprime car loans raises alarms as a potential wave of defaults could hit.
Higher automobile prices, lack of solid employment and credit histories and because they simply can’t afford them has kept many millennials from owning cars
Many non millennials, however, are buying cars and it is suspected they are doing so because of confidence gained from the rising prices of their homes, thanks again to QE.
Millennials Not Buying Homes
Forget Buying Houses, Millennials Can’t Even Afford Cars or Healthcare
More expensive homes is another example of an economic barrier for millennials created by QE. Low interest rates have spurred on investor interest in real estate which has driven the cost of housing higher. Indeed, nearly 50% of home purchases during 2013 were all cash purchases. Since most people in their twenties don’t have $200,000 or so lying around we assume it wasn’t millennials making those purchases
While the media cheers on rising home prices as evidence of economic recovery, it’s not. Higher home prices are driven not by an improving economy, but by cheap credit made available courtesy of QE and low inventory due to the large percentage of underwater homeowners left over from the last housing bubble who can’t sell their homes. Underwater homeowners are being bailed out with artificially low interest rates that are pushing home prices higher. Higher home prices may be good for those that own homes, but higher home prices act as a barrier for millennials to purchase homes.
Analysts have projected that millennials will form households and that will continue to drive the housing recovery. Millennial household formation, however, has not developed at the pace expected.
Contrary to the protestations of Ms. Yellen, it’s the expensive houses that are leading the housing recovery and there are not enough rich people to sustain the false housing recovery of 2013 during which home prices rose but the home ownership rate continued to drop.
Millennials’ home ownership aspirations may eventually be helped by the home buying and selling habits of baby boomers. As boomers grow older, many will begin to sell their homes and start moving into apartments, townhouses and condos. This should put additional inventory on the market and help lower home prices.
The Labor Market and the Economy
A vibrant economy requires participation of its youngest generation. Millennials however, are underrepresented in the labor force. While the national unemployment rate is under 7%, it is over 11% for those under thirty. The current economy is characterized by stagnant wage growth, a declining labor participation rate , increasing poverty and part time job growth far outpacing full time job growth.
QE has led to higher stock prices which in turn has also hurt the labor market. In the Dark Side of Artificially Low Interest Rates we noted:
An unintended consequence of artificially low interest rates is muted job growth. Low rates encourage savers to abandon fixed income investments like Certificates of Deposits (CD’s) because the yields on these instruments are low and the stock market offers higher potential returns. Corporations also seek higher returns and react to artificially low rates by buying back their own shares (either with existing cash or with dollars borrowed at the artificially low rates) to reduce the inventory of shares available on the market and thereby increase their earnings per share. As earnings per share increase a company’s stock price often rises.
Thus, the artificially low rates encourage companies to use their cash to buy back their own shares to drive up their share prices, rather than to invest in their businesses. This explains partially why the economy is showing limited growth but the stock market is hitting record highs.
Perhaps with higher market interest rates, companies would invest in capital equipment and labor to gain a competitive advantage over their competitors. If companies, however, make the determination that they get a better and more immediate return on investment in the form of higher share prices from buying back their own shares than hiring new employees or making investments in their business, workers are not hired and additional productive capacity is not built.
To further reduce expenses and increase profits and their share prices, companies often also lay off workers.
Politics – The Era of Hope and Change is Over
As the current two party political system appears to be more interested in finding new payers and new ways to fund its entitlement schemes than to serving its younger constituients, we expect to see millennials increasingly likely to embrace less mainstream political solutions out side the Democratic and Republican parties like socialism, libertarianism and even communism.
Millennials supported President Obama by wide margins in the last two Presidential elections. In recent months, however, Gen Y appears to be souring on the President based largely on their reaction to the roll out of the Affordable Care Act.
Alternative and diverse figures like Russel Brand, Matt Taibbi, Jesse Ventura and Ron Paul hold special appeal to millennials. Political pollsters would be well advised to understand how millennials, the largest generation, view the economy, Obama Care and student loan debt and what impact those views may have on their voting behaviors in coming elections.
What’s Next for Gen Y?
Each generation thinks (or at least their self appointed spokesmen) it’s special. They are not, their circumstances are. Generations are made up of individuals whom as a group face a challenging set of economic circumstances and will, as individuals, confront them.
Time Magazine has called millennials narcisissits. This characterization of millennials is incorrect. Generations are not narcissisitic, individuals are. Millennials need opportunities, not labels. The Fed’s QE programs have screwed an entire generation out of economic advancement. Perhaps the Fed will wind down their ill advised money printing program to allow the economy to restructure and allow millennials the opportunity they have so far been denied.
In the meantime here are some of the choices that millennials who are not yet properly economically situated may make to improve their situations:
Stay at Home
Many millennials have either through choice or necessity stayed on longer in their parents’ home. Staying at home has its advantages. It’s cheaper, but it also allows adult children to form deeper relationships with their parents. Even as the economy improves, we may find that millennials will stay at home as they get used to living at home and perhaps actually like it. This may represent a cultural shift and delay household formation. This development would not be good for the real estate market but certainly, millennials can’t be too concerned about propping up the housing market after having been asked to prop up social security, medicare and Obama care! On the bright side, with low home ownership rates among millennials, many may never get to lose their homes via foreclosure, get to fix a leaky toilet or mow their own lawns.
Millennials can seek opportunities where they exist if they are not present where they live. This may mean moving out of state or even out of the country. Moves within the United States may make more sense as millennials can find more easily cultural fits and support that may help their job prospects. “Based on my subjective observations, a good portion of our movers are Gen Y, oftentimes moving to New Hampshire right after college. It’s really the perfect time to come, and with all New Hampshire has to offer–low taxes, low unemployment, best quality of living–there are exciting opportunities here for the go-getters of the future.” said Carla Gericke President of the Free State Project in New Hampshire.
While a record number of U.S. citizens renounced their citizenship last year, we don’t expect Gen Y to give up on America so easily. Afterall, the bulk of those renoucing their citizenships were wealthy and were doing so to avoid taxes and onerous tax reporting requirements. For the most part, millennials don’t have that problem.
A recent poll showed that millennials are willing to go mobile as 40% indicated that they would move for less expensive health insurance.
Go Back to School
This may be the least imaginative choice, probably the most costly and the least beneficial. Millennials might be well served taking their inspiration from the many successful people who didn’t go to or graduate college.
Unfortunately, it may take another economic crisis that can’t be bailed out that will allow millennials the opportunity to employ their skills to create and innovate towards a better future.
*Millennials, echo boomers or those in Gen Y born between 1980 and 1994.
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