
Where did all the wealth go? To our kids. - robg
http://business.theatlantic.com/2009/03/where_did_all_the_wealth_go_to_our_kids.php
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josefresco
I don't understand how the wealth is being passed to the kids of baby boomers?
I'm a child of a baby boomer, 28 years old and on my second home that was
purchased at the height of the real estate bubble (first in 2004, second in
2007). Both homes I purchased were owned by baby boomers.

Looks like it's the kids who are passing the wealth on to the boomers to me.

If your kids are lucky, they either held off on purchasing a home or were too
young to buy in. Otherwise they're probably like me, young and with a mountain
of debt and while we're a long way from retirement, most likely there will be
no SS benefits for us. Enjoy your retirement boomers!

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tyn
"Because the future earnings of GE, and for that matter most U.S.
corporations, are essentially the same today as they were two years ago.."

Are they?

~~~
cameldrv
Certainly not. The current earnings of the S&P 500 are down about 70% from 18
months ago. Obviously the market expects earnings to bounce back, since on a
current basis, with the P/E of the S&P 500 about 28, stocks are a bad
investment if you think things will continue. A dollar of earnings today is
worth more than any future earnings, and near-term (five years or so), I think
we can expect earnings to be less than they were eighteen months ago, so I
don't think that the children have necessarily made out -- it's some
combination of wealth destruction and wealth that was never really there.

~~~
rationalbeaver
I suppose that 'future earnings' holds a pretty nebulous value. Still, to the
writer's point, how long do you think today's children will be
working/investing? My bet is that it's more than 5 years. IMO, now would be a
good time to start a child's college fund.

~~~
cameldrv
The question is really that if you buy stocks now, what is the discount rate
necessary to make the current valuations reasonable, and how does that compare
to what the boomer generation enjoyed? The theory of the article is that the
children who are buying stocks right now are going to enjoy a superior rate of
return at the expense of the retirees. I don't think that's true. Corporate
profits expanded to an unusually high percentage of economic output in the
past decade and a half, and I would expect that to go down. Even if you
anticipate that the corporate profit fraction remains constant, and that
earnings will be twice their current level in a couple of years, the stock
market still would have a 14 P/E ratio, which is historically a bit high. Even
at the current depressed valuations, I think that you have to be a pretty big
optimist to expect big gains in the market over the next decade or so.

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sdurkin
WHAT? This from the generation that just borrowed a trillion dollars from us?!

~~~
furburger
don't forget the fifty trillion or so to pay their entitlements til (avg) age
of death. or the extra three trillion they'll peel off of the stock market
when they are forced by law to start liquidating their 401ks faster than we
can make contributions to ours.

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nazgulnarsil
articles like this are written by people who are still ideologically stuck in
the pre-2000 crash world. That wealth didn't go to someone. It is just gone
because it was an illusion in the first place. The fed pumped our system full
of credit. Now we act surprised when bad credit starts getting washed out.

Every empire that has tried fiat currency has failed for this very reason. The
people in power simply can't keep their sticky mitts off the printing press.
It's just too tempting.

~~~
miloshh
Perhaps there was too much currency in the system, but I think the actual,
real wealth of many people did decrease too. They were better off than they
are now, their wealth physically went down. They don't have things now that
they did before. The output of the economy decreased, while the resources
stayed roughly the same, so less wealth is being created. This is true even if
you completely forget about the existence of money.

~~~
nazgulnarsil
right, but by necessity most of the wealth that disappeared was involved in
non-productive economic activity. The wealth lost that actually was involved
in productivity is a side effect of the massive fluctuations in imaginary
wealth.

If it didn't effect the productive portion of the economy we wouldn't even
have to worry about the shenanigans of the fed in the first place.

The real effect of this fluctuation is reflected in the fact that america has
had an aggregate negative savings rate for the last 10 years. The imaginary
wealth made people think that they could spend the real wealth, get returns in
imaginary wealth (home valuations for example) and be net ahead.

------
dant
The amount of wealth in the world is roughly the same, but the perceived value
of cash has risen relative to everything else. The "wealth" has gone to the
people who happen to be sitting on a lot of cash at the moment while people
with lots of Plasma TVs in storage (for example) are finding they're not as
wealthy as they thought they were.

I expect our kids are still going to have to work as hard as we did in order
to buy those Plasma TVs. Even if they cost less, they'll probably be getting
paid less too.

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Darmani
A lot of this is just wishful optimism, but he's right to point out that
deflation is not necessarily bad. I've been quite perplexed at Bernanke's
efforts to stop the deflation that brought gas prices around here below $2 for
the first time in seemingly forever.

~~~
bprater
It's the deflationary spiral that's bad. A little drop in price is nice, but
when a feedback cycle occurs, it becomes very dangerous.

~~~
nazgulnarsil
explain how. has deflation ever destroyed a country? no, not once in history.
Inflation has destroyed MANY countries.

~~~
bokonist
The deflation of the Great Depression and the ensuing unemployment resulted in
the election of the dictator FDR, the destruction of the old republic, and
creation of the modern American civil service mega-state. If you could go back
in time, and put yourself at the head of the Federal Reserve in 1930, would do
you anything differently?

~~~
nazgulnarsil
you've got some reading to do. America's Great Depression
<http://mises.org/rothbard/agd.pdf>

~~~
bokonist
I've read it. Rothbard is dead right about the dangers of fractional reserve
and the need to avoid inflation in the first place. But he's dead wrong about
what to do once the crisis hits. I do not buy his arguments that Hoover's
actions after the crisis caused the severity of the downturn. It's very
unlikely that Hoover's cajoling was the cause of sticky wages. Right now we
are seeing businesses across the economy choose layoffs rather than wage cuts,
even in non-union, non-regulated sectors like tech. Furthermore, the major
cause of the unemployment was businesses going bankrupt. Businesses went
bankrupt because when the money supply shrank they could no longer payoff
their debts. The debts were all nominated assuming a much greater money
supply. Deflation caused the unemployment.

~~~
nazgulnarsil
wow. you're the first person I've run into who has a strong grasp of the
facts. I would argue that debts nominated during a time of a much larger money
supply led to businesses that were predicated on artificial demand. when the
demand shrunk these businesses went bottom up. The great depression is an
almost perfect example of economic latency. Those workers did eventually get
assimilated back into productive industry, it just took a long time.

~~~
bokonist
The demand was not artificial. For example, before the crash people bought a
lot of cars. After the recovery, people bought even more cars. So why was it
necessary to go through 5-10 years where nobody made or bought cars, factories
sat idle, and laid off autoworkers went hungry? There are cases in recessions
where the unemployment is beneficial. For instance, "financial instruments"
have been overproduced, and it would be beneficial for Wall St. workers to be
laid off and then find more useful jobs. But a depression is marked by lots of
collateral damage - people get laid off in industries simply because of
instability in the banking and moneterary system, not because they were not
being productive.

Let me ask this question: Imagine a gang of thieves slowly slipped counterfeit
bills into the money supply for a long period of time. Eventually, half the
money supply was counterfeit bills. The thieves had long traded their
counterfeit bills for wine and women. The bills were now evenly distributed
across the economy, in every home and business. Suddenly, the crime is
discovered. Now no one will except the counterfeit bills. The money supply
drops in half. Businesses with debt and wage contracts created before the
counterfeit money was discovered start to bleed red ink.

What is the proper policy response to this scenario?

~~~
gills
I am not sure of the answer you are expecting to your question. Or if you
expect one at all. Here's my amateur take.

One way is to do nothing and let the chips fall. I imagine this as the
economic equivalent of a broken chain in the anchor room of a battleship.
Disorderly with lots of collateral damage, wailing, and gnashing of teeth.

There is the Andrew Mellon approach to "liquidate! liquidate! liquidate!" the
misallocated capital and redeploy as quickly as possible. This means accepting
that some portion of the productive capacity at peak monetary supply was based
on phantom demand and it needs to be torn down and converted to something
productive that will have real demand going forward. Yes, a whole lot of hard-
working folks literally wasted years of their lives. I don't know what the
collateral damage would be -- probably nasty. This is actually the function of
recessions, and a fierce but orderly unwind with social support for the
displaced would seem preferable to the constant terror and confusion of
attempting to delay the inevitable liquidation and redeployment.

Another option is the path we are taking (I say 'we' grudgingly because I
disagree, but I am a passenger aboard the United States of Titanic). Attempt
to keep the monetary base stable, even though half of it is based on phantom
demand. 'Legitimately counterfeit' the balance, theoretically giving
businesses and individuals enough cover to pay down debts and become net
savers again, then wind down the monetary base to equilibrium. This really
hasn't worked for Japan. I'm just speculating...without a market incentive to
liquidate and redeploy capital don't we just end up with zombie industries
serving the same old phantom demand? Everyone has a job building shit nobody
needs, and nobody has a job building shit everyone needs. The remaining
productive industries get crushed under the tax burden of supporting the
zombies, until it all ends in tears and there is nothing left to redeploy
anyway ('Ayn Rand Endgame', anyone?).

There is no policy cure for massive fraud and theft. Neither is the
tinfoilers' favorite a cure: 'gold-backed non-fractional banking'. There is no
magic economic triple antibiotic that will make the owie go away. There is
only facing the truth -- you got duped -- excluding those responsible from
society, and directing our future efforts to things that _actually_ raise our
standard of living (I may be biased, but to me this means technological
increments that help us use our limited energy more efficiently).

~~~
nazgulnarsil
_There is no policy cure for massive fraud and theft._

this is the best one liner on the economic crisis I've ever seen. Pundits
should be paying you to write.

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bkbagel
I appreciate the rosy outlook, but this is sheer absurdity. Sure, assets like
homes and stocks can be purchased at a lower price for roughly the same actual
value as before. But that assumes that a) people still have the money or the
fortitude to buy those things and b) that the economy will rebound entirely.
Sure the latter is likely true, and the author makes some good points. But as
a young investor myself with parents who have lost much, I'm not inclined to
be so optimistic about the future.

If nothing else, hopefully this all teaches us to be accountable for our own
money and know what we're doing with it.

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miked
The Social Security and Medicare systems are simply a means of making a
younger generation pay for an older generation's retirement, since both of
those systems are pay-as-you-go. Obama amd Congress have signed us, and
especially young people, up for the largest debt burden in US history, both in
absolute and relative terms. The debt accumulated in World War II doesn't even
come close to what's being signed into law these days.

Still, we of the 60's generation are thinking of you. And we when head out to
the golf course while you're heading to work to pay for our benefits, I swear
we'll wave to you.

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tarmac
It's hard to believe this article when some UN groups are pitching out the
Dollar is the world's prime currency.

If future generations are indeed richer, the value of what they hold isn't
going to be the same.

------
neilo
"Where's my money, Lebowski?"

That was inappropriate, I'm sorry. The author gave me an impression of
attempted optimism, something to help people see good coming of all this crap,
but perhaps he focused to much on that and not enough on more dark realities.

------
kubrick
_It is grossly irresponsible for the baby boom generation to expect
Generations X and Y to be saddled with our national debt, our trade debt, and
our infrastructure debt -- and the retirement debt created by baby boomers
enjoying long retirements supported by future tax increases on their
children._

That's one of the most responsible things I've ever heard a member of that
generation say.

