Unwanted Expense Hogs

As pointed out by @Trevornoren and @FX_Button on Twitter, Axios published an outstanding piece on what 25-34 year olds spent their money on in 2015/16 versus those of the same age group in 1988/89.

The original article can be found here.

082618 axios 25-34 yr old spending change

Economic progress is a far cry from being on the rise for younger generations, despite being more educated and more productive than given credit. The policy departure from sound money is showing its face in the long term generational spending data and it isn’t a pretty one.

The Free Lunch Club of Keynesian sacrifice-free paradise is pulling the economic levers for both major US political parties and all key global central banks. This will have lasting, powerful political consequences, including a continued rise in populist ideas gaining favor by those left behind by the inflationary financial asset melt up.

In my view, the data carry statistical evidence implying a clear reduction in the standard of living for the highlighted younger age group. The current generation of young adults is spending more of its resources on big ticket essentials and servicing debts while having less leftover for the fun stuff.

The Axios article takes a fairly deep dive into each data point. Some items, such as tobacco consumption, changed mostly due to a shift in health preferences and cultural tastes. The overarching message, however, is quite clear to me; millennials are not as well off economically as the generation before it was at the same age and this will continue to impact future political currents and markets because the underlying structural causes are still not being addressed.

Here are some potential impacts I see coming down the pike:

  • Political pressure will build under the surface for enacting feel-good easy fixes on Uncle Sam’s credit card (ie. put it on the tab, will ya) such as “free” higher education, sold with vague, glossed over assumptions that the costs of said actions can disappear by tapping the sky with a Keynesian magic wand.
  • Populist policy expectations will reduce confidence in US Treasuries and pressure interest rates higher than the consensus expects.
  • Higher deficits from a culture of populism will compel the Fed to chase even higher inflation in order to minimize the real debt burden. This will make the original underlying problem of major item affordability worse in a feedback loop leading back to more populist answers until a clean break in the feedback loop is initiated as it was by Paul Volcker in the early 1980’s. It will be even harder this time because debt-to-GDP is markedly higher and the structural rot is deeper.
  • More unfunded populist mandates and subsidies will be enacted just in time for significantly less foreign investment in US Treasuries.
  • The percentage of the younger population with a traditional higher education is going to decline sooner rather than later. That is not a good thing, though some new innovative education alternatives could emerge. Let’s not forget the social aspects and networking benefits of traditional universities that may become less common if this occurs.
  • Higher education will become more fragmented, specialized, and vocational. In other words, debundled. All encompassing education degrees are at risk of going the way of the 394 channel cable package for the same reason–an unsustainable increase in cost for the typical person.
  • The US will move in the direction of a Medicare-for-All basic healthcare plan within a decade in my view. How to pay for it? That’s an adorable question few in Washington bother to ask anymore. Which leaves us with the de facto government billing method of higher inflation inflicted on the citizenry via newly created money to cover the financing gap. Again, another big headwind for government bonds, particularly during the next changing of the guard in the rotating political party duopoly.

My assessment of current day human behavior in the public sphere leads me to believe voters will ultimately seek to offload the burden of spiraling costs for education, healthcare, and housing on the federal government. These areas are at risk of becoming increasingly nationalized. This is not my policy prescription. I am not a political operative–I am a macro trader who analyzes likely outcomes and how they are priced in markets.

I see a society that has departed the logic of sound money for the false promises of free lunch economics. Peter Pan Economics, as I call it.

The typical citizen has been steadily conditioned into believing the greatest economic lie of the post-2008 financial crisis: “there is no inflation.” The academic fairy dust magicians posing as celebrated salt water economists have convinced us all that compelling inflation higher is now a good thing using a slight of hand argument inferring to people that it is needed for their wages to rise, when the exact opposite effect occurs in reality.

Only real wages count. By the way, not all wages are closely tied to generalized inflation and many segments of the population do not or cannot participate in the workforce, thus they are especially harmed by it.

What we have is a populace that has become naive and complacent about the potential for a destabilizing inflationary bust because the past few busts have been deflationary.

The 2008 financial crisis is still fresh on the mind for most adults. Financial pundits have been calling for a bigger, badder 2008 repeat for what 8 years now without realizing we are in a far different political environment with central planners emboldened to push the bounds of monetary and fiscal experimentation (probably tied together) much further next time.

Do you really think the Fed, ECB, and BOJ will sit around twiddling their thumbs as crude oil crashes to $10 per barrel as I’ve heard from several prominent deflationary bear theses lately? I don’t.

The inflationary 1970’s are a distant (or nonexistent) memory for many and societal cohesion is quite a bit more fragile now than it was even then by most measures. Ongoing inflationary bust currency crises happening as we speak around the world are thought to be an abstract problem reserved only for emerging markets. Is that so?

Is it that spectacular of a leap to think a given group of central bankers might downplay “temporary” well-above target inflation readings down the line with the justification that additional rate hikes could “cause” another great depression (sound familiar)?

Can one not imagine a loyal cabal of die-hard political partisan surrogates fear bating out in the media about the need to move up the inflation tolerance goal posts due to the debt burden, rather than engage in the politically unsavory task of addressing the actual debt burden with spending cuts? The public has proven countless times it will accept financial repression out of fear just as it accepts unconstitutional surveillance out of fear. It’s a particularly fearful bunch these days, unfortunately.

I have no doubt that highly indebted millennials could be sweet talked into “inflate away the debt” arguments. What would really be inflated away is what is left of their living standards but that is beside the point about how falling victim to flawed economic models or even self-serving political propaganda is easily conceivable.

It is unlikely that supporters of the current government of Turkey anticipated the severity of its ongoing inflationary currency and bond bust even as recently as one year ago.

If you can not envision any of the above scenarios broadening from EM’s to DM’s, I urge you to remove the substantially large rock from under which you must have been hiding.  Turn on your Politics Twitter feed for five minutes. It is already happening and neither major US party is above throwing away Fed independence for political expediency during a future debt crisis should they have the chance.

Fearing a future deflationary bust is fearing the past. The millennial generation is taking practice swings with a heavy Louisville Slugger in the on-deck circle preparing to have outsized political influence very soon.

The economic statistics suggest a millennial generation in student loan debt up to its eye balls with health insurance premiums growing rapidly as far as the eye can see right at the moment it is entering peak child rearing years and desiring home purchases in an inflated housing market. It can’t be happy about the current political or economic status quo left to it by previous generations.

This sounds like a recipe for an influential generation that may embrace the romantic idea of collectivism. People with a lot of debt like the idea of sharing resources astoundingly more than people with a lot of cash do.

You invest in the markets of the future not the markets of the past. It is time to start expecting a more inflationary future led by both left and right populist political leaders.