The Prodigal Parent

The Baby Boom generation may be the first generation to leave less to their children than they inherited. Or to leave nothing at all. We hear lots—often from Baby Boomers—about the propensities of their children’s generation. The millennials don’t have good jobs, don’t save, don’t buy houses in the same proportions as their parents, etc.

We have no doubt that attitudes have changed. That the millennials’ financial decision-making process is different. And that millennials don’t see things like their parents (if you’ve ever seen pictures of Woodstock, you may think that’s not a bad thing). However, we believe that the monetary system plays a role in savings and employment. And the elephant that is trumpeting in the monetary room is: the falling interest rate. Interest has been falling since 1981. That’s when the first millennial was born.

By the time the oldest millennial cohort was ready to enter the work force, the dot-com boom was blowing up. What a time to look for a job, eh? Seven years later—when more than half of millennials were still not old enough to work full-time—was an even bigger bust. And what have we had since then? Seven years of interest rates pinned at zero (on the short end of the curve). And then a tepid rise since then.

The yields of all assets are tied to the Treasury bond yield by a process of arbitrage. As goes the yield on Treasurys, so goes the yield on other bonds, bank deposits, stocks, and real estate.

As an aside, even the dollar yield on gold, known as the gold forward rate. People sometimes mistake the gold forward as a yield on gold. But look at the mechanics. You buy gold (with dollars) and sell it forward (for dollars) pocketing a spread (in dollars). It happens to use the gold market, but it’s a dollar return on dollars.

Anyways, the yield of every asset falls with the yield on Treasury bonds. And the asset price is the inverse of its yield. So to those who already own assets, this seems wonderful. What homeowner could object to seeing home values double and then double again? What shareholder could be angry at a ten-bagger?

Somewhere, Emperor Palpatine is chuckling with a dry, mirthless laugh. “Good.”

Monetary policy is working its dark magic. People see the falling yield as rising asset prices. They don’t see the life being sucked from the economic carcass. Instead, they see themselves getting rich. At least homeowners. And shareholders.

But what about millennials? They see saving, if not as a Sisyphean task, then at least as a daunting one like counting grains of sand on the beach. And as fruitful. Not only do they get no interest on their bank deposits (we won’t even get into devaluation of the dollar), but the interest rate has done something else to them as well.

People not counted in the workforce hit and remained at record highs. It’s currently about 96 million people in the US. That’s bad enough, at nearly a third of the population. Worse, while workforce participation rates increased for older workers, it decreased for younger people. That is, while almost twice the percentage of workers over 65 have jobs now compared to 1996, a smaller percentage of young workers have jobs.

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