The Federal Reserve released data on U.S. credit market debt for 2020 last week, and after putting it into charts what I found was shocking. In just one year, total U.S. credit market debt increased by 42.7% of GDP, total non-financial credit market debt increased by 38.4% of GDP, federal government debt increased by fully 23.9% of GDP. The amount borrowed by the federal government last year was equivalent to nearly a quarter of all the money earned in the U.S. economy. During the Great Depression and World War II, the national debt never increased by more than 7.5% of GDP in a single year. The federal debt alone is now approaching its level at the end of World War II, even as old age benefit programs such as Medicare and Social Security are expected to run out of money and face huge automatic cutbacks in a decade. And total credit market debt now exceeds the level of 2008 and 2009, when high debt levels led to a devastating financial crisis.
For all this debt, public and private, to be paid back, taxes would have to rise so high, and consumer spending and public services and benefits be cut so much, that the economy would collapse. The American standard of living, which has been falling gradually generation-by-generation, is set to fall much further, and perhaps much faster. And yet that isn’t the worst news. Things have now gone so far that the economy may collapse even if total debts don’t continue to increase at a rapid pace, let along being repaid.
One would think that as the end of the pandemic approaches, the question of who is going to be made worse off in what way would be on the table. Instead, the generations that reaped the benefits of selling off the country’s future, having inherited the most prosperous country in the planet, are now close enough to the grave that they have lost any last inhibitions. Four years ago at this time, referencing this data, I wrote that Generation Greed, by electing Donald Trump, was planning one last economic orgy.
And three years ago, I found that to be too consensual, because the generation that “came of age in the 1960s and early 1970s” in the words of Harvey Weinstein, excusing his sexual conduct, was still in charge.
Today, even as the suicide rate continues to rise for those in later-born generations (13 years in a row), their life expectancy continues to fall, and a shadow descends on their future, politicians of both political parties and the interests that back them seem to be in the throes of perpetual orgasm. With last year’s orgasm (like most of the federal debt binges of the prior 40 years) driven primarily by Republicans. Now it’s the Democrats’ turn. Whoever is going to become even worse off to pay for all this, Generation Greed is sure it won’t be them. The COVID-19 pandemic gives them the excuse they’ve long been seeking, for what they had already been doing (albeit not as quickly) for decades before it hit.
Federal Reserve Z1 data for 2020 may be found here.
The spreadsheet downloaded for this post is D3.
Bureau of Economic Analysis data on GDP, and real (inflation-adjusted) GDP, may be found here.
An updated version of my spreadsheet of debts and GDP, with many of the charts that will be used in this post, is here.
One factor in the rise of U.S. debts as a percent of GDP was the 3.5% decrease in real, inflation-adjusted GDP last year. That was not only worse than the 2.5% decrease in 2009, it was far worse than any prior year since at least 1953. The only year in recent history that was close to the 2009 and 2020 level was 1982, when interest rates had soared to 21.5% as a result of the rampant inflation of the 1970s. That year’s GDP decline was just 1.8%. And 1975 (when New York City went bankrupt), 1982 and 1983 (when I graduated college), and 2009 to 2012 (the Great Recession) are the only years since the Great Depression with higher annual average unemployment than 2020.
Some of 2020’s huge GDP decrease represents economic activity that was lost because it was not allowed to occur, to slow the spread of COVID-19. So a snapback is likely in 2021 and 2022. In reality, however, the U.S. economy was unsustainable, and a financial crisis had already begun, in late 2019 before COVID-19 even hit, as I discussed last year.
The Donald had claimed that another round of tax cuts for the rich and corporations would cause so much economic growth that the national debt would disappear. He had already been proved a liar. Now the Democrats might make the same claim about the latest stimulus package. But there is now no way to “grow our way out of” the debts accumulated across the economy, based on any historic rate of real (inflation-adjusted) U.S. GDP growth, let along growth against the headwinds of a massive existing debt load and an aging population whose best off members are retired. Not with U.S. credit market debt at 353.4% of GDP.
That’s up from 310.6% in 2019, and compares with a peak of 350.8% of GDP in 2009, during a global economic meltdown caused by too much debt in the economy. Back then much of that debt was financial sector debt, and regulations were put in place to reduce the level of financial sector leverage and debt as a result. The Trump Administration did all it could to reverse those regulations, in an effort to create a short-term sugar high for those at the top to take advantage of, and lots of free money to increase Trump’s popularity during his re-election campaign.
Sure enough, financial sector debt jumped by 6.2% of GDP in 2020, to 83.9% of the total annual output of our economy. And while that is less than the peak 122.4% of GDP in 2008, a level of financial irresponsibility that could have (and probably should have) bankrupted every major financial institution in the country, Wall Street is still partying like it’s 1999, matching the debt as a percentage of GDP that year.
Excluding the debts that financial companies owe to each other, total U.S. debts never really fell. After peaking at 250.4% of GDP in 2010, total non-financial debts never fell below the 247.9% recorded in 2015, and even that tiny reduction required an extremely weak economic recovery that left later-born generations poorer and poorer. There was a big debt increase in 2016, perhaps due to an attempt to temporarily goose the economy in an election year, but that was one-tenth the size of 38.4% increase in 2020, during King of Debt Trump’s re-election campaign.
Every kind of debt increased as a percent of GDP last year, although federal debt increased the most – by 23.9% of GDP, to 112.8% of GDP. It only a year ago that economists were fretting about the long-term consequences of the Trump tax cuts and Baby Boomer retirements driving the national debt up to 100.0% of GDP. We’ve already left that level in the dust, with another massive increase in federal debt guaranteed for 2021.
State and local government debts had been falling as a percent of GDP, or at least that was true of the debts we could see. Hidden debts were being run-up in infrastructure disinvestment, public employee pension increases and underfunding, and in the case of New York State, rolling a Medicaid deficit from one fiscal year into the next fiscal year (the way New York City’s Lindsay Administration did in the 1960s, and early 1970s, culminating in the city’s near bankruptcy). But last year’s on-the-books state and local government debts also increased by 0.8% of GDP.
Household debt increased by 4.9% of GDP, to 79.5% of GDP. There are some economists claiming that consumers now have so much money saved, money that they were not able to spend last year, that we are at the start of a boom similar to the 1920s. But consumer credit market debt also increased during the pandemic. And then there are off-the-books debts – rents and mortgages that were not paid – in addition to those being measured.
Non-financial business debt was already heading for a crisis before COVID-19 hit, as a decade of interest rates near zero induced desperate savers to overlook irresponsible and self-serving bond and loan terms. Over-indebted businesses that had had their assets stripped by private equity firms and others were already starting to go bankrupt in 2019. In 2020, however, the debt of non-financial businesses increased by another 8.9% of GDP. And there are off-the-books business debts as well, by businesses that are not paying their rents to landlords that are not paying their mortgages and property taxes.
As I showed here…
For decades the average compensation of U.S. workers has been falling, with the decreases working their way up the income and educational ladder from high school dropouts in the 1970s, high school graduates in the 1980s, college graduates in the 1990s, and all but those at the top thereafter. But until the Great Recession Americans still spent more, with the gap between falling worker pay and rising sales leading to higher profits, higher asset prices, higher executive pay, and greater inequality.
That gap was only possible due to ever-rising debts, public and private, to bridge it, along with more household members in the workforce and inadequate retirement savings. Inadequate retirement savings that will certainly lead to even lower consumer spending and higher poverty as disadvantaged later-born generations reach old age.
Before total U.S. debts started to soar in the early 1980s, labor’s share of GDP was believed to be fixed, since the amount that U.S. businesses paid on the labor market side determined the amount of goods and services they could sell on the consumer market side. But rising debts allowed labor’s share of U.S. GDP to fall.
Rising U.S. debts were also responsible for the U.S. trade deficit, because they allowed imports to exceed exports for four decades – with the difference paid for by IOUs (actually future generations owe you). Otherwise, imports would have had to be paid for with actual exports, and Americans would have had to produce more and/or consume less.
Basically, a financial house of cards was papering over a global crisis of demand.
While trade and inequality data is not yet available for 2020, what do you think might have happened in the Yugest debt year ever?
During the pandemic, 651 billionaires have accrued more than $1tn in additional wealth – enough to send every American a $3,000 check and then some. But so far, that prosperity has not trickled down to 26.1 million US workers, who in November were still wrestling with direct impacts from the economic downturn, including unemployment and drops in pay…
When the US economy started to rebound, it did so through a “K-shaped” recovery, benefiting the rich and leaving behind almost everyone else. The stock market – where about 80% of wealth has historically been owned by the top 10% of households – continued to surge, and CEOs projected widespread confidence in the economy, despite many of them expecting to reduce their workforce and let wages stagnate.
The Commerce Department said on Friday that the trade deficit jumped 17.7% to $678.7 billion last year, the highest since 2008. Exports of goods and services tumbled 15.7% to their lowest level since 2010. Imports of goods and services dropped 9.5% to a four-year low.
The Commerce Department said on Friday the current account deficit, which measures the flow of goods, services and investments into and out of the country, widened 10.6% to $178.5 billion last quarter. That was the highest since the second quarter of 2008…The current account gap represented 3.4% of gross domestic product in the third quarter.
So the United States of America, the world’s biggest net debtor since the 1980s (after having been the world’s largest net creditor before the 1980s), owes the rest of the world another 3.4% of the annual output of our economy.
While inequality within the United States (and within developing countries) has increased over the decades, inequality between the United States and developing countries has decreased. Many once desperately poor countries have advanced at a breathtaking pace, a very positive development for humanity as a whole. But that advance has become dependent on something unsustainable – Americans spending more than they earn, consuming more than they produce, and selling off the future to pay for it. During the pandemic…
Country by country, international income inequality decreased. When countries are weighted by population, international income inequality increased, more in line with the original intuition. This was largely because Indian incomes fell, and because the disequalizing effect of declining Indian incomes was not offset by rising incomes in China, which is no longer a globally poor country.
Within the U.S. rising pay and wealth at the top is a matter of politics, not the free market. It is federal policy that no matter what the consequences, asset prices must not be allowed to fall. This benefits older and richer asset holders, at the expense of younger people acquiring assets with their savings. It is income redistribution on a grand scale. One aspect of this is stock prices.
After keeping interest rates near zero for a decade, the Federal Reserve desperately wanted to “normalize” rates to provide rate cutting ammunition for a future recession. But then the economy began to stagnate and S&P 500 leveled off and started to fall. The Fed surrendered. Rate increases ceased in August 2018, and rate cuts – and increased federal debts — resumed in August 2019. Stock prices soared again.
Then in March 2020, as the pandemic hit, stock prices and bond values began to plunge. The federal funds rate was once again cut to zero, federal debts were jacked up, and stock prices once again soared. They are so high now that the average dividend yield – an indicator of the future return for anyone buying today – is just 1.48%. That is the lowest since the dot.com bubble.
Needless to say, top executives will once again be rewarded for their brilliant management – or rather their successful lobbying.
The favoured measure of performance is a company’s total returns, which combine share-price moves with any dividend payouts. As a consequence of a record bull market in equities after the global financial crisis of 2007-09, only brought to a halt by the covid-19 pandemic, executive pay in America shot up into the stratosphere. Today, after a rollercoaster ride this year, the S&P 500 is nearly back to where it was before the coronavirus struck; compensation may continue to rise.
Basically, the federal government keeps going into debt to print money, and most of the money being printed goes to the wealthiest and the retired.
The increase in federal debt is not new. Only in the last Obama Administration budget did the on-the-books federal debt decrease as a percent of GDP. The Trump Administration then cut taxes and increased spending, just as the Bush II administration and Reagan Administration had done, wiping out any prior progress.
Most of the 2021 increase in federal debt will once again be on Trump and the Republicans, despite the additional stimulus package passed half way through the federal fiscal year. Trump had called for the full payment of $2,000 per person federal payment that most Americans will now receive – even retired people and public employees who lost zero income as a result of the pandemic. The additional $300 unemployment benefit, and benefits for self-employed people who lost income, are extensions of the policies Trump and the Republicans had previously put in place.
Most of it, but not all of it. The Biden stimulus will also have the federal government borrow $86 billion that later-born generations will have to sacrifice to pay back, and hand it over to union-run pension plans in certain industries that are underfunded and unable to pay the full benefits their older members were promised. Promised in addition to Social Security, which these members also receive. Someone needs to keep the promises to these older workers, the unions argued. But why were these pension plans underfunded?
Past surpluses led to benefit increases that were not sustainable. Funding pension plans using diversified portfolios will strengthen a plan’s funding status when investment returns are robust. These investment gains may be needed to offset losses when returns are weak. However, following the large asset gains in the late 1990s, many plans became significantly overfunded, and responded by increasing benefit levels or taking contribution holidays. Both the dynamics of the collective bargaining process and regulatory policies that were not conducive to maintaining overfunded plans contributed to this trend. These benefit increases ultimately became unaffordable for many plans when their assets declined dramatically in the subsequent decade.
So during the 1990s stock market bubble, they decided to assume the bubble would increase indefinitely, and promised themselves more. And now they want someone else to pay to provide the retirees with more than they were promised when they were hired. Just as in the case of public employee pensions. This bailout took place without those retroactive benefit increases ever being mentioned. Just as PBS Frontline’s examination of the public employee pension crisis never once mentioned that retroactive pension increases had take place. Underfunding to keep taxes low was mentioned.
You all made a conscious decision to not fund your obligation. And I don’t care when you got elected or whatever. But you’ve been there during the years that it has not been funded properly. I want to know how are you going to raise the revenue to fund it properly.
But the fact that the past taxpayers who got the benefit of lower taxes were in different generations than the later-born generations who are expected to “keep the promise” is not. It is part of a broad conspiracy of silence with regard to 40 years of generational self-dealing, one that most of the media seems willing to go along with.
To bail out these plans, we the taxpayers are writing a check to the PBGC, which insures these pension plans. But the PBGC was never supposed to be supported by taxpayers. Says the 1974 law that created it: The “United States is not liable for any obligation or liability incurred by the corporation.” Oops. The PBGC is supposed to be self-funding, through premiums raised from member plans. Its liabilities are not our liabilities. This isn’t our bill.
Very few of the taxpayers paying for this rescue are lucky enough to have defined-benefit plans at all. We’re all on “defined contribution” plans. If our 401(k)s and IRAs leave us underfunded in retirement, nobody is going to bail us out.
Actually, since most later-born Americans, at least those in the back end of the Baby Boom and Gen X, did what the advertisers told them and kept spending even as their incomes fell, they will be facing retirement with little or nothing in 401(k)s and IRAs either. All they will have coming is Social Security. After the bailout…
It’s going to be even harder for them to argue that they shouldn’t bail out the stricken Social Security trust fund that is actually their responsibility. Social Security’s deficit: $16.8 trillion, or about $50,000 for every person in America.
It would be ludicrous to hope that shame or embarrassment would constrain most politicians. But right now Social Security beneficiaries could be looking at a 25% benefit cut in just over a decade…When the time comes for Congress to address the matter, they’d better give us the same terms as the unions, or we’re going to want to know the reason why.
And where would the money come from to pay for that bailout? From the richer generations, born before 1958 and now age 64 or more, those who were far more likely to get pensions, those whose pensions are now being bailed out as a matter of “fairness?” Wrong. They’ll be going and gone, having left the United States $trillions in debt and spent the proceeds.
“Congress” is either going to let future seniors eat Alpo, or jack up taxes on the even less well off generations to follow to levels far above what prior generations were required to pay. Read this and see that the politicians, and the older generations that supported them, have known about the future of Social Security and Medicare all along. They did what they did anyway.
Retroactive pension increases to benefit politically powerful and entitled unions in places such as New York, along with pension underfunding in other states where rich people don’t want to pay taxes and have gotten their way, are the reasons the state and local government debt burden is far greater than what we can see. Nationally it is at least as large as bonded debt, and perhaps more.
And as for that bonded debt, it was supposed to pay for infrastructure, since states and localities are in theory required to balance their budgets, but has instead been used for other things. From “economic development” boondoggles to the “unanticipated” arrival of recessions. Especially the early 2000s recession, when state and local governments went on a borrowing binge in 2004 that was similar the federal borrowing binge in 2020, with much of it in the form of tobacco bonds.
Since then it has been one service cut after another in some states. And one tax increase and service cut after another in New York City.
Cities and states got $350 billion from the stimulus package, but their fiscal problems pre-date the pandemic, and will remain after it is gone.
Dormant offices, malls and restaurants that have turned cities around the country into ghost towns foreshadow a fiscal time bomb for municipal budgets, which are heavily reliant on property taxes and are facing real estate revenue losses of as much as 10 percent in 2021, according to government finance officials…
The extent of the fiscal pain facing municipalities will be clearer in the coming months as commercial property assessments come in and owners, who view the values as inflated, contest their tax bills.
Desperate for money, states such as Florida and Texas – two with the largest revenue decreases at the state government level – have been willing to risk people’s lives during the pandemic to get the sales tax money rolling back in.
In most states, however, the risk to heath and well being in pursuit of state and local government tax revenues (that have already been spent) has long been underway. Concerns about the consequences of temporarily pleasurable but potentially addictive substances and activities – from gambling to mind altering drugs to prostitution – have given way to arguments over how to milk them for as much money as possible.
And yet despite all the tax increases, all the fee increases, all the service cuts, all the infrastructure disinvestment, and all the foisting of activities that are potentially ruinous to health and household stability on later-born generations – all to pay for the burden of costs from the past. Somehow today’s seniors expect to be exempted from paying anything at all.
In Illinois, where all retirement income is exempt from state income taxes. In New York, where all Social Security income is exempt, all public employee pensions are exempt, and a share of private sector pension income is also exempt. In Connecticut, where an income tax exemption for the retired recently passed – despite later born state residents being much poorer than earlier born generations were 30 years ago, and being forced to pay for that state’s underfunded pensions.
And in Michigan, a state where the richest and earliest retired generation of blue collar workers in history have been replaced by temps earning $15 per hour without benefits, and where the current Governor is Governor because she promised the same.
The fairness of this is never questioned, and the fact that later-born generations, who are inheriting all these burdens, are already much worse off is seldom discussed.
Adjusting for inflation, the median male worker born in 1958 earned just 1 percent more during his career compared with the median man born 27 years earlier, in 1932. In fact, the median male born in 1958 earned 10 percent less during his career compared with the median male born 16 years earlier, in 1942. The lack of progress of mid-level male earners is not a surprise, of course. We know the median real hourly wage received by men reached a peak sometime in the 1970s. It has not surpassed that peak in any year since the 1970s, and in many years it has been far lower. At the same time, labor force participation among prime-age men has edged down for the past five decades. This means a career male worker is now likely to work fewer years between ages 25 and 55 than was the case in the 1950s through the 1970s.
The Social Security earnings records confirm a grim message from our household surveys. Prime-age men who earn average and below-average wages have experienced a decline in career earnings in recent decades.
Millennials are worse off than that – earning 25 percent less than the average Baby Boomer at the same point in life — increasingly as contingent gig economy workers. In part because women had done better as a matter of catching up from a past when they faced discrimination, had lower educational attainment, and were more likely to work part-time. Now that the catching up is over, their median wage is falling too.
And remember, those lower Social Security earnings will be the basis of lower Social Security payouts in the future. Even assuming that later-born generations will get less (and now die younger), even given the huge tax increase and later retirement age that later-born workers have faced since the 1983 reform to “save Social Security,” the program still faces an additional 25 percent benefit cut on top of that.
Until 2008, many later born Americans offset their falling incomes with rising debts. Credit card debt. Student loan debt. Auto loan debt. And mortgage debt. And in 2021, despite what you might have heard about some Americans having lots of savings to spend, the average American household has fallen deeper in debt once again. Some of that higher debt is mortgage debt.
Mortgage debt fell after the late 2000s financial crisis, from 72.3% of GDP in 2008 to a low of 48.9% of GDP in 2019. Not so much because mortgages were paid off, but rather because so many people defaulted on loans they could not afford, on houses whose value had dropped from inflated prices. And because later-born generations were too poor to pay the high prices that today’s seniors demanded for their houses, to finance their lifestyle in retirement.
During these years the federal government did all it could to push Millennials to start buying houses, and lock themselves into house poverty, to pay older richer generations more. It created a $15,000 first time homebuyer house credit, which caused the value of houses to jump by $15,000 and left Millennials no better off than before – even as they collectively now owed the $billions the federal government had borrowed to fund the program. Having taken over Fannie Mae and Freddie Mac, it increased the debt to income ratio for conforming loans – traditionally at 30 percent or less – as high as 50 percent, so Millennials could bid against each other and drive up the price, as I noted here.
It even allowed financial institutions to keep the foreclosed houses vacant for years, allowing them to deteriorate to the point of abandonment, instead of selling them to Millennials at low prices and booking the losses on the mortgages. This kept the price for the houses that did sell rising, compared with the incomes of the buyers.
I had argued that Millennials should not allow the federal government to stampede them into overpaying for Generation Greed’s used houses, and lock themselves in to that generation’s expensive lifestyle. With the help of COVID-19, however, that stampede has finally occurred. Last year, according to the National Association of Realtors…
The median existing home sales price increased by 14.9% in the United States, 20.7% in the Northeast, 15.1% in the Midwest, 14.0% in the South, and 15.5% in the West. And 17.4% in metro New York, broadly defined.
The buyers, after putting vastly more money into the sellers’ pockets, are now also on the hook for the property tax increases associated with paying for the public employee pension liabilities those sellers ran up. In metro Chicago, where property taxes were already soaring and the median existing home sales price increased 14.7%. In Texas, where they are still deferring such costs to keep taxes down, and there were increases of 17.2% in metro Austin, 10.5% in Dallas-Fort Worth, and 11.4% in Houston. Depressed Detroit had a 16.3% increase in the median existing home price last year, while the overpriced Bay Area saw gains of 15.2% in San Francisco-Oakland and 12.4% in San Jose-Silicon Valley.
The flight of Millennials out of the previously booming cities of Boston and New York jacked up housing prices not only in their suburbs, but also in the exurban areas on the fringes of those metros. With Fairfield County, Connecticut (the Bridgeport-Stamford-Norfolk NECTA) posting an increase of 39.0% in one year. And in the rural second home counties of the coasts and the mountains, from Portland ME (up 20.7%) to South Jersey (metro Atlantic City up 30.0%). With the booty from selling at inflated prices, Generation Greed could cash in and head for Florida, where the median existing home sales price increased by 29.9% in the Naples-Immokalee-Marco Island FL MSA.
Such was the gusher of borrowed money that at least according to the NAR, condo and co-op prices also increased, despite the urban exodus. By 8.8% across the country, 8.7% in the Northeast, 5.4% in the Midwest, 12.2% in the South, and 6.8% in the West. And 4.3% in metro New York, and 3.5% in metro Boston. The big price declines in the news were in the luxury segment, an indicator of falling prices for the rich amidst rising prices for the middle class – and of the smart money expecting future declines. Declines that will wipe out the savings of Millennial buyers.
The booming housing market helped stave off economic collapse in 2020. But soaring prices are starting to worry policymakers, who fear the market could lock a generation of would-be buyers out of homeownership.
Home prices in January — typically a slow month for the market — were up 14 percent over the same month the previous year, while sales jumped 24 percent, despite an unemployment rate that was almost twice as high. Demand for existing homes is so strong that the average residence is on the market for just three weeks, and inventory is at a record low after seeing its steepest drop last year since the data was first tracked in 1999.
It all threatens to freeze broad swaths of the population out of the market, leaving millions of Americans in a less secure financial position, widening the racial wealth gap and forcing millennials, already lagging previous generations in building wealth and forming families, to fall even further behind.
Somehow, locking them into perpetual house poverty and losses on their housing investments is not threat. It’s a goal.
How has the housing market thrived during one of the deepest economic slumps in U.S. history?
For one thing, the crisis is unusually lopsided: White-collar employees who can work remotely have for the most part emerged unscathed, with many actually adding to their savings while reaping the benefits of higher stock prices. Historically low mortgage rates — a result of the Federal Reserve’s easy-money policy response to the crisis — nudged some of those buyers off the fence to buy a first or second home, according to analysts.
Meanwhile, a glut of millennials — the largest generational cohort in the country consisting of those born from the early 1980s to the mid-1990s — is reaching the prime age for buying first homes, and regional data suggests the pandemic spurred plenty of them to pick up stakes and head for the suburbs.
But there are simply not enough houses to meet the demographic demand, driving up the price of those houses that are for sale and potentially delaying many other millennials’ ability to become homeowners, the primary way Americans build wealth.
Another concern is that a potential spike in mortgage rates as the economy recovers could leave borrowers who rushed to buy when rates were low — and in some cases paid above asking price, given fierce competition for a limited supply of homes — in the lurch. And a sudden drop in home prices would hit sellers who have held off on listing their homes during the pandemic.
Thus the need to keep those prices high.
If there aren’t enough homes to meet that demand, though, the largest generation in the country won’t be able to start building equity, which will in turn delay other financial decisions. Despite making up over a third of the workforce, millennials own less than 6 percent of all U.S. wealth, according to Federal Reserve data.
The delays will have long-term societal impacts. Even before the pandemic struck, more than 1 in 5 millennials — 21.9 percent in 2019 — lived with their parents, up from 11.7 percent in 2001, according to a Zillow analysis of census data. Partially as a result, millennials are significantly behind previous generations in forming families.
“One wonders what is the end game, how does this play out given the heated market conditions of too many buyers, multiple offers?” Yun said. “As prices simply outpace people’s income by a large margin, people won’t qualify to get a mortgage.”
How about older sellers cashing in, once again, on unearned gains and young buyers facing future losses?
Benchmark 30-year mortgage rates have slowly but surely dropped to record lows throughout the pandemic, touching 2.78% earlier this month, according to Freddie Mac data.
This has naturally encouraged more and more homeowners to refinance their mortgages, thereby allowing them to lower their monthly payments or tap equity. With more cash in their pockets, these people have kept spending levels relatively steady while also socking money away or investing in stocks or other assets. Janet Yellen, the former Federal Reserve chair and contender to be President-elect Joe Biden’s Treasury secretary, said during the Bloomberg New Economy Forum on Monday that a “savings glut” was helping to prop up financial markets.
What she didn’t say, and what’s flown largely under the radar amid the central bank’s efforts to bolster the economy, is the Fed’s role in pushing the $6.8 trillion mortgage-backed securities market to extremes. I wrote last month that the Fed might resort to infinite quantitative easing to support the $20.4 trillion U.S. Treasury market. But if the central bank ever steps away from backstopping mortgage bonds, there’s reason to believe the consequences could be even more dire….
It’s hard to see a way out of the mortgage market for the Fed without causing at least a hiccup in the U.S. housing market and an implosion at worst. As my Bloomberg Opinion colleague Aaron Brown wrote last week, even though U.S. home prices are nearing all-time highs, the current market isn’t necessarily a disaster in the making because the high valuations are the result of rock-bottom interest rates. However, as he made clear: “It’s one thing to be a peak valuation, it’s another to be at peak valuation with no discernible upside.”
Americans treated their homes like ATMs last year, withdrawing $152.7 billion amid a cash-out refinancing spree not seen since before the 2008 financial crisis. Fueled by historically low interest rates, cash-out refinancings rose 42 percent year over year, the Wall Street Journal reported, citing data from Freddie Mac.
Mortgage rates fell below 3 percent for the first time last year, making refis a no-brainer for many homeowners. Last year, there were $2.4 trillion refinancings, according to mortgage data firm Black Knight. For some homeowners, cash-out refis were a financial cushion in a financially tough year. Others withdrew equity to be able to buy bigger homes. Many took out cash for major home renovations, particularly given low inventory nationwide.
While the reversal of mortgage debt levels took center stage in 2020, other household debts also increased – by 1.5% of GDP. Lockdowns may have prevented people from running up their credit cards for vacations, meals out, and other consumer purchases. But with mass transit service already deteriorating during the 2010s as a result of Generation Greed’s disinvestment, and being abandoned during the pandemic, and more people moving to places where mass transit is not available, people borrowed more to buy cars. Used car prices soared 17.0% last year.
People couldn’t afford to pay that much. They borrowed, on increasingly onerous terms. See 2:45 to 7:00 in this video to see what was happening even before the pandemic – 36 month loans becoming 84 month loans.
Rapid inflation, to reduce the real value of all this debt, is one of the many ways that future Americans could become worse off as a result of it. Today that seems unlikely, most economists believe.
But if it is easy to ignore the prophets of doom, it may not be wise. If 2020 has a lesson, it is that problems which many in the world had broadly stopped worrying about can rear up with sudden and terrible force. And those sounding the alarm today are right to point out that the circumstances of the covid pandemic do not offer a simple re-run of 2009’s false alarm.
But for necessities, as opposed to things you don’t need, inflation may already be reducing real incomes.
The coronavirus is inflicting a price shock on low income Americans that risks further driving up inequality. In a study released this week, Bloomberg Economics estimated higher grocery and housing costs for lockdown necessities meant those households whose incomes are in the bottom 10% currently face inflation of 1.5% compared with 1.0% for the top 10% and the official 0.1% overall average recorded in May.
The suggestion the virus is less disinflationary than many economists believe poses a challenge for the Federal Reserve which is eyeing a slower inflation rate than that experienced by lower earners, who are instead facing a steady erosion of their purchasing power.
“Taken together with concerns about central banks bailing out investors ahead of firms and workers, and the benefits rich, asset-owning households gain from quantitative easing, it adds to the sense that central banks are unintentional contributors to the problem of inequality.”
The issue of differing inflation rates has been raised in the past, but not with regard to poorer later-born generations of workers. Only in the context of the demand for higher Social Security payments for today’s seniors — to be paid for by those poorer later-born generations of workers. Since seniors spend more money on health care, it is claimed. Even though for seniors, as opposed to workers, most of that health care cost is funded by Medicare and Medicaid.
Last year, it was non-financial business debt that was thought to be most likely to cause the next recession and financial crisis.
In fact, a slowdown in advance of a recession, and a financial crisis, was already underway before COVID-19 hit. And now to all the debts that had already been accumulated, there is a realization that many commercial real estate loans and mortgage-backed securities will have to be written down – or inflated away.
There is a lot of property that will likely just sit forever. Prospective tenants will be few and far between. Any bank would have the same trouble as another landlord would have when seeking tenants for an aged property during an economic calamity. A nonbank owner could walk away from a property and suffer whatever losses come, and the bank’s problems increase to the level of ownership. That means they will be responsible for the local and state property taxes and all other issues until the property has moved off their books. That is not a bright outlook for anyone…
So how do you replace the taxes from a property being removed? Are the taxes for that parcel also extinguished? In a pre-pandemic discussion, this would be addressable, in some cases, by IRS code. From my perusal, this seems to indicate, “Not so fast to the wrecking ball. You still owe those property taxes.”…
We are living in a time when the unlikely has become most likely and the viability of all properties is being brought into the light…If you have a hopeless situation with a property, perhaps demolition to grade is an option. A major out-of-the-box rethink by governments will be needed to remove the parcel, perhaps by increasing the taxes on remaining parcels, considering the stock of properties will have shrunken.
Of course that would prevent Millennials from acquiring buildings at dirt cheap prices, converting some of them (or parts thereof) to makeshift but safe and sanitary housing, and others to rock-bottom priced space for new independent businesses. And paying low property taxes based on those low property purchase prices. The way New York City artists and “artists” were able to occupy Soho lofts for peanuts starting in the 1960s, with quasi-ownership rights that were later grandfathered in.
We are in something unique: a supply-and-demand-driven recession. Specifically, service supply dried up almost overnight due to virus fears and lockdown orders. Then consumer demand collapsed as people lost those service jobs and, as we will see, those with more money started to save dramatically more, further reducing demand…
I think governments everywhere, but especially in the US prior to the election, will continue their stimulus programs. But at some point, we cannot maintain the current level of spending. I think it is likely we taper off rather than simply cut them wholesale, but no one really knows.
And remember, TANSTAAFL (There ain’t no such thing as a free lunch) is still an economic law. We may pay for it via lower growth and thus fewer opportunities for everyone, or inflation, other ways, or combinations thereof. That being said, doing nothing would mean an economy worse than the Great Depression. We have no good choices. We’re simply picking the best of some pretty bad choices. Ugh.
Who will be making those choices? What share of any remaining benefits, and what share of the burdens and sacrifices, will accrue to the better off, and the less well off, to the politically connected, and the not politically corrected, to the executive/financial class, the political/union class, and the serfs? To Generation Greed, and the generations to follow?
One thing we do know is who will be making the decisions. Here is something that apparently one other person, also a blogger, is willing to say.
When Baby Boomers protested the ills of society in the 1960s, we didn’t trust anybody over 30. Now that we’re in our 60s and 70s, we don’t seem to trust anybody under 70. President Trump is 74. Joe Biden is 77. Biden beat Bernie Sanders (78) and Elizabeth Warren (71) for the nomination. Nancy Pelosi is 80. Mitch McConnell is 78.
This gerontocracy, like most things in America today, reflects the aging of Boomers. So many of us were born between 1944 and 1964 that we’ve dominated America economically, socially, culturally and politically as we’ve moved into our 30s, 40s, 50s, 60s and now 70s.
Boomers will tell you that 70 is the new 50. We pride ourselves on our health, our fitness and our eternal youthfulness. We go on and on about it, like the gabby old geezers we are. Actually, we’re just lucky. We happened to be born in the greatest nation on earth at the very time it went through an unprecedented economic boom with huge improvements in health care and the greatest gains in nutrition, education and quality of life in history.
We took it all for granted. We figured it was our birthright. We expected it to go on indefinitely without us having to do much. Like when we were kids.
Instead, young Americans today face unprecedented economic inequality and insecurity, unreliable health care, an undeniable climate crisis, social unrest and an uncertain future.
We Boomers haven’t made the kind of sacrifices and investments our parents and grandparents made for us. Investments like the GI Bill, the Interstate highway system, the space program, vaccines, hospitals, science, research and, most of all, the greatest expansion of education opportunities by any nation at any time…
They were the Greatest Generation. Boomers are the Luckiest Generation. It’s time we pay it forward to the next generation.
It won’t happen, because older Americans still dominate voter turnout, and they are laser-focused on their own needs and their 1960s culture wars about sex.
The true age-demographic story of 2020 wasn’t that young people flocked to the polls in higher proportions than ever before. It was that this youthquake had no discernible impact on the makeup of the American electorate, according to Edison Research’s exit polls, because there were so goddamned many old people…
No matter how you measure it, the elderly are still very much in charge of American politics. Advertisers prize twentysomethings more highly than grandma and grandpa, and online news sites prize the Gen Z demographic more highly still. But political strategists care more about the old folks. They can’t afford not to, and that won’t change anytime soon.
Until today’s old people are gone, today’s less well off late middle-aged people are the old, and the money runs out.
So say goodbye to the “era of globalization” and brace yourself for the “age of disorder” where millennials, firmly established as the generation of ‘have nots’, take their revenge and redistribute wealth from the old to young…
“Such a shift in the balance of power could include a harsher inheritance tax regime, less income protection for pensioners, more property taxes, along with greater income and corporate taxes…and all-round more redistributive policies”, the Deutsche Bank report said.
The ‘new’ generation might also be more tolerant of inflation insofar as it will erode the debt burden they are inheriting and put the pain on bond holders which tend to have a bias towards the pensioner generation and the more wealthy.
Not as long as the 1960s generation can kick the can – and keep the reality of generational inequity out of the news so they don’t have to feel bad about it.
During childhood, they were worried about nuclear war.
In their youth, they left Yasgur’s farm looking like this, before doing the same to the United States.
In the 1980s, when Greed was Good, they were Thirtysomething.
The millions of viewers who don’t watch Thirtysomething don’t watch it for the right reasons. “Too realistic,” they say. “Depressing,” they whine. “Not entertaining enough,” they grump.
Jay Leno owns the definitive Thirtysomething joke. “The husband is saying, ‘What about my needs?’ and the wife is saying, ‘What about my needs?’ and I’m sitting there thinking, ‘Hey, what about my needs? I’m looking for a little entertainment here!”
That brings us to a nagging irony. The show lampooned as a trivial romp through the whiny world of yuppie narcissism is in fact the only hour of prime time that regularly addresses itself to the way a large portion of the population actually lives.
If historians in 2050 want to know the tabloid headlines in 1990, they should look at tapes of L.A. Law. If they want to know the way we were, they will study Thirtysomething.
And today? What about my needs?
Will they finally cash in the U.S. status as the world’s reserve currency, leading the dollar to crash and allowing the suddenly net richer rich of the developing world to buy our housing, infrastructure, commercial real estate, patents and copyrights out from under our children? With more and more of their future income paid out of the country to foreign investors? After 250 years, the United States would go back to being a colony. In the future, perhaps the near future, we may found that the most important decisions being made about the global macro economy, or even our own macro economy, are being made by those outside the United States.
And believe it or not, that isn’t the worst case scenario.