Monday, September 10, 2012

The new normal

Victor David Hanson has a sound and discouraging piece over at PJMedia:

I’ve witnessed two of the most radical developments in my lifetime the last four years — changes far greater than those brought on by the massive new increases in the national debt, the soaring gas costs, the radical decrease in average family income, the insolvent Medicare and Social Security trajectories, or the flat housing market.

One is the fact of less than 1% interest rates on most savings (well below the rate of inflation), and the other is an epidemic of 20-something unemployment. All that is the new normal.

These two changes, as he notes, are linked.  Since older Americans cannot expect to draw reasonable return on investment, rather than retire, they remain in the workforce.  For many, this is a sound decision: it is more difficult to re-enter the job market at a later date.  Unless one is content to place one's money in a stock market increasingly dominated by robot traders, working provides the best way of ensuring a reliable stream of income.  There is a price for this decision, aside from delayed retirement, and it is being paid by younger workers, who were expecting to take the jobs of retirees.  Instead, even recent graduates must live at home or work jobs for which they would have been qualified upon graduating high school.

Interest rates have been kept low to help the struggling economy.  The theory is that lower rates of interest will spur investment, thereby causing economic growth.  This would be a reasonable supposition if Americans weren't in debt up to their eyeballs.  Indeed, the only economic actors that are taking on debt are the Federal Government and students, who must take out loans to afford a college education, so that they may go back to living with their parents while working in the service industry.  The irony is as obvious as it is crushing: the Federal Reserve's policy has made getting a job more difficult, though there are plenty of McJobs available.

VDH continues:

I don’t know where this all leads. The aging baby boomers are not going to have the retirements that they envisioned, and their children are not going to have the good jobs their baby-boomer parents enjoyed.

Neither do I.  But as long as we're in this miserable predicament, we have time for one last observation, courtesy of Roissy: this is the grim reality of a low-trust society.  Students need cheap loans to pay for education; parents need a return on investment so that they can retire.  In a high-trust society, the solution would be obvious: the youth would take out loans from their elders and pay them back with a modicum of interest.  Instead, as VDH observes, students take out loans at oppressive rates of interest while their elders, if they are savers, get miserly interest payments.  The banks are making a pretty penny off of this carry trade, at the expense of everyone else.  Which, come to think of it, nicely defines the new normal.

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