• Joshua Konstantinos

Monetary Policy Is the Root Cause of the Millennials’ Struggle

Millennials Have It Tough

Everyone knows millennials have it hard. They are drowning in student loans, which are not dischargeable under bankruptcy, and are paid wages that have stagnated for decades. Even for the lucky ones who have graduated and are making enough to pay down their student loans – a moment of silence for the millions who took on student loans but never graduated – their loan payment often replaces what would have been a mortgage.


Just as well, since housing prices have increased 150% more than inflation since 1971, putting home ownership out of reach for most of the generation. And while wages haven’t kept up with rising home prices, rents have come fairly close, which means that almost half of those 18-34 are rent burdened – spending more than 30% of their income on rent. Not all millennials are so burdened with rent, as a third of millennials live with their parents – more in states with higher rents, like New Jersey, where almost 47% of millennials still live at home.

All of this means that a full two-thirds of millennials have zero in retirement savings, and 72% have less than $1000 dollars in savings of any kind. Most of the generation is living paycheck to paycheck, so lets hope the economy doesn’t fall into recession anytime soon as The Next Recession Will Destroy Millennials.


Looking at the situation broadly, as a generation, millennials have had three major problems:

  • Education is now incredibly expensive.

  • Housing costs in particular have surged well over the inflation rate.

  • Wages have stagnated for decades.


The Root Causes of Millennials’ Woes

While the issues facing millennials are discussed ad nauseum, the root causes of these issues are rarely discussed and are not as fully understood as they should be.


The Demographic Upheaval

Much of the stagnation in wages is rooted in the stunning and totally under-appreciated demographic changes of the last half century. Wages have stagnated in large part because of the massive labor supply shock caused by the population increase from the baby boom, the integration of Asia into the global economy, and the integration of Eastern Europe with the fall of the USSR.


In simple economic terms, the price for labor is a function of supply and demand – and the last fifty years has seen a massive increase in the supply of labor. Economists from the Bank of International Settlements (BIS) Charles Goodhart and Manoj Pradhan explain in Demographics Will Reverse Three Multi-Decade Global Trends that:


Between the 1980s and the 2000s, the largest ever positive labour supply shock occurred, resulting from demographic trends and from the inclusion of China and eastern Europe into the World Trade Organization. This led to a shift in manufacturing to Asia, especially China; a stagnation in real wages; a collapse in the power of private sector trade unions; increasing inequality within countries, but less inequality between countries; deflationary pressures; and falling interest rates .

The Emergence of Free-Floating Currencies

While demographics are a large part of the issue, the labor supply shock doesn't fully explain the stagnation in wages, nor does it explain the increase in asset prices. This is largely the result of a major change to the global monetary system that occurred in the early 1970s. It was after this point that the link between productivity and wages broke down, and when the costs for education and housing began to rise faster than inflation.

Between 1971 and 1973 the Bretton Woods system, which had dictated currency exchange rates since the Second World War, broke down. Nations began to devalue their currencies for competitive advantage. Many nations did this to boost exports or to stimulate their own economies (For more on the mechanics of this see: Why Did China Just Devalue the Yuan), and this was the reason for the start of the ever-increasing U.S. trade deficit.

The trade deficit, when combined with demographic changes in the massive labor force expansion, explains much of the stagnation in wages in the developed world. But the era of free-floating currencies has had a much larger impact on the world than merely creating trade imbalances.


Looking at the Consumer Price Index (CPI) for the United States over the long term shows the immediate and sustained inflationary impact of the free-floating monetary system. Most people today are used to the roughly 2% annual inflation. But before the current free-floating monetary system, such inflation only took place during wartime.


The new money from this constant ~2% inflation enters the economy through the banking system, with each new loan increasing the total money supply. Because the new money enters the economy as a loan, interest-rate sensitive assets that people borrow to purchase, like housing and education, are the most impacted.


The Root of Rising of Inequality

Interestingly, this constant 2% inflation effectively functions as wealth tax, but not on the wealthiest who are able to benefit by owning appreciating assets like stocks and real estate, but rather on the those who cannot afford to hold much of their wealth in appreciating assets, or who must pay higher costs for rent.


This constant inflation helps to explain much of the rising inequality in the United States, as well as the rising costs for interest-rate-sensitive assets like education and housing. As the renowned economist John Maynard Keynes explained:


… By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security, but at confidence in the equity of the existing distribution of wealth. Those to whom the system brings windfalls, beyond their deserts and even beyond their expectations or desires, become “profiteers,” who are the object of the hatred of the bourgeoisie, whom the inflationism has impoverished, not less than of the proletariat.


A recent paper by Mehdi El Herradi and Aurélien Leroy, Monetary policy and the top one percent: Evidence from a century of modern economic history, lends empirical evidence to Keynes analysis. Analyzing the relationship between monetary policy and income inequality between 1920 and 2015 across twelve advanced economies, they note:

The last decades have been marked by a substantial rise in income and wealth inequality across the developed world. Low-income households in advanced economies have seen their wages stagnating, while wealth has never been so concentrated since the dawn of the 20th century .


They conclude based on their analysis that:


The results obtained from both empirical methods indicate that loose monetary conditions strongly increase the top one percent’s income and vice versa. In fact, following an expansionary monetary policy shock, the share of national income held by the richest 1 percent increases by approximately 1 to 6 percentage points, according to estimates from the Panel VAR and Local Projections (LP). This effect is statistically significant in the medium run and economically considerable. We also demonstrate that the increase in the top 1 percent’s share is arguably the result of higher asset prices .


Understanding the Root Causes

If we are going to solve the issues facing millennials today, we need to understand the root causes of their problems. Demographics are about to shift strongly in the millennials favor with the retirement of the baby boomers. But reform to the monetary system is urgently needed. Not only because the system is now breaking down into currency wars but because of the negative impact the current system has on inequality. And of course, while millennials have it hard, we should keep in mind that the boomers have their own problems - like the fact that Pension Funds Are Going To Be Destroyed in the Next Recession.



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Sleeping on a Volcano: The Worldwide Demographic Upheaval and the Economic and Geopolitical Implications Makes the case the sovereign debt is unsustainable in an aging world. The book takes into account not only the rapidly changing and uncharted waters of the global economy under unconventional monetary policy, but also the longer demographic and geopolitical trends which have already begun to shift.


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About the Author Joshua Konstantinos Founder and Global Macro Strategist at Cassandra Capital LLC and author of Sleeping on A Volcano: The Worldwide Demographic Upheaval and the Economic and Geopolitical Implications, Joshua has been obsessively following global trends and collecting data for over a decade. His analysis takes into account not only the larger view of the rapidly changing global economy but also the longer demographic and geopolitical trends.

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