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September 28, 2023 - 4:40pm
With the yield on 10-year US Treasuries at its highest level in 15 years, borrowing costs for Americans are rising sharply. That’s certainly not the kind of news President Joe Biden wants to see as he ramps up his campaign for re-election. Borrowers shopping for mortgages or auto-loans are experiencing sticker shock. New 30-year fixed-rate mortgages today carry rates of around 7%, up from 3% two years ago. That increase can mean a homebuyer has to pay hundreds of dollars more a month compared with two years ago. Rates on car loans have also shot higher. Add to that the threat of a government shutdown this week, and the prospects for 2024 appear gloomy.
In theory, the deflationary impact of these higher borrowing costs should dampen consumer demand, slow down the economy and drive inflationary pressures lower. In fact, inflation has dropped considerably over the past year from a high of 9% in 2022 to just over 3% today. But recall that inflation merely measures the relative change in price levels, not the absolute cost of living, which remains exceptionally high, especially food and energy.
Here’s the conundrum: while deeply debt-stressed Americans (mostly those in the middle and working class) are experiencing a deterioration in their standard of living, there is also a smaller, but politically significant cohort of savers (mostly upper income) who are benefitting.
Why? Because for every borrower hurt by rising rates, there are savers who benefit from the additional income derived from higher rates. Unfortunately, though, there is little overlap between the needs of workers, who need lower borrowing costs to sustain their standard of living, and the elites, who have already benefitted significantly from a hitherto strong economy. That’s a recipe for social dislocation.
The interest rate weapon, as deployed by the Federal Reserve, is very diffuse in terms of its economic impact: using interest rates to fight inflation is akin to using a meat cleaver, rather than a scalpel, to conduct surgery. The former might help remove the offending tissue, but there are adverse collateral effects that may offset the benefits.
Likewise with interest rate hikes: they crush the living standards of those who are already heavily in debt, even as those higher rates generate more income for wealthy savers (and thereby exacerbate inequality, which continues to rise). Over time, this process could lead towards economic instability and, hence, substantially more political volatility.
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SubscribeSeems out elites keep misreading the reactions to their actions.
I agree, workers are NOT gonna get more compliant, they are getting fed up and enraged. They want to fight and my sense of it is that they are willing to lose in a game of chicken so long as they hurt the bosses in the process.
(One more reason I think Trump wins next year)
PLUS…the fools in charge have failed to figure out a couple of things. First, a large part of GenX and the younger Boomers have figured out that they are never gonna be able to retire and that they are never gonna get the big boy seat at work. So, they are gonna ride it til the end doing what they have to and not a bit more.
GenZ? Those kids are, in an odd way, smart. They are not marrying. They are not buying homes. They avoid owning cars or even driving. No kids. They have none of the commitments that the Boomers and GenX had at their age which means that they can generally afford to lose a job or walk away from a job and just go do something else. These kids do not have ambitions for the corner office. They watched their parents be miserable chasing those things and they want no part of it. Their ambition is to go travel with friends or some other experience. In short, unlike my generation that had a song about telling the boss to take his job and shove it, these kids actually can and will do it. Only, these kids will just quietly walk away. They wont even bother getting mad about it. Bosses have no leverage with them cuz bosses have nothing to offer that they want beyond a paycheck today but these kids are perfectly happy to go a bit without one and get a different paycheck from someone else in a month.
Oh…and this is a global phenomenon. Not just the US and the west. Heck, it kinda started in China. You are not gonna just be able to hop over to another culture and get a much different result. Maybe Japan.
That’s the kind of comment i hope to see more of with Unherd, coming from a perspective that offers hope that the new generations, while different from those current and past, retain the intelligence and the ability to be able to think independently and express themselves clearly.
Thanks for that. In a way, it doesn’t therefore matter how accurate your perspective proves to be: that it can be acquired reassures me that human beings continue to be just incredible, when we give them chance to be.
True story…
I had a cyber security, junior analyst, quit on me the other day. Young guy. Smart. Good at his job.
I wanted to retain him and I was giving him a raise and sending him for some expensive training that was gonna be a real boost on his resume.
He told me that was all nice, but he was quiting to go work on his tattoo artist business and he was doing web development work on the side. Just no interest in the money or the opportunity. He just wanted to go do what makes him happy.
No wife. No kids. No mortgage. The guy is just free to go do what makes him happy.
What the heck could I say to that?
I know this is a rather chicken and egg argument, but do you think the attitude you describe is the reason they’re not buying houses and settling down, or do you think high house prices mean many being priced out of owning a family home as well as growing up in a time of poorly paid insecure employment is the reason they’re clocking off as it were?
I think the pain came first and their attitude is a result.
They watched their Boomer and GenX parents struggle through multiple recessions including the financial crisis of 2008. I think many of them watched their parents kill themselves commuting and working and trying to get ahead, putting in extra hours, going the extra mile, and ending up with broken marriages, broken health, dealing with depression, most getting into their 50’s with no savings for retirement, no real chance at a retirement.
Then, they watched the rich get EXTREMELY rich while their parents have struggled, probably cashing out 401k’s or selling homes, all kinds of things every time the Fed creates another recession.
To them, and with good reason, they think that what their parents went through is a fools game that leads to misery.
Then, they cannot afford to buy homes. They cannot afford to get married. They cannot afford to have children.
So, if you are in their shoes, if you have seen how badly the game played out for your parents, and you know that no matter what you do you will never be able to afford to have a home and family, why would you kill yourself?
It seems to me that their response is perfectly rational. If you cannot win at the game, then why play. Take your ball and go home. Go play a different game with rules you had a say in creating.
And, as I said, this means employers are going to have a lot less leverage with these kids. They will not buy into the corporate BS, they are not gonna get excited about being part of a company. They see a job as a transaction like any transaction. Boss pays you money for a given level of work. Do not work beyond what you are paid for. If you are unhappy then leave and go do something else. Boss threatens to fire you, then quit. So what, not like you have a mortgage to worry about, a spouse and kids to support. Take your savings, buy a van and go somewhere. Work as a hostess for pin money. They have very different ambitions because of the experiences of their parents and due to the conditions they face.
Now, if they thought they had a reasonable chance at buying a home and having a family? If they thought it was possible to do those things and not be miserable? If they thought that there was any chance they could get ahead and save for a decent retirement? Might they change? Probabaly, but that is not where they are and it is not what they think.
If you think about it, these kids are free in so many ways that their parents were not.
The other issue this poses for employers is that the Boomers are now old enough that they have no choice but to stop working, or at least working full time at what they used to do. They may work at 7-11 or Home Depot part time, but most are just past being able to work a full day regularly.
GenX has figured out that they are out luck. They had the Boomers sitting on their shoulders for decades kinda keeping them from advancing. They have been through multiple recessions that have decimated their savings. The cost of raising kids for them was unreal, up to and including college. They had kids later so many are facing a situation where the years they should be packing away money for retirement are spent caring for kids or adult kids that cannot get jobs that pay enough. They know that social security will at the least be cut substantially by the time they get it. For them, they just want to grind to the end. They are past the point they think they will ever get the corner office. They are where they are and it is not likely to get a whole lot better. So, what motivation do they have to kill themselves. Most could cash out of their homes tomorrow and be comfortable for a fair amount of time. Many and I do mean MANY are looking to move overseas to places like Mexico or Panama to have some hope of retiring. BTW….these people know that employers no longer have the big Boomer pool to call on and they know that GenZ is not gonna play ball and will dump them in a heartbeat, so GenX is the only place they can turn to find people young enough, with experience, and willing to stick around, so they too have a kind of leverage.
From this collection, where are employers going to get employees that will be compliant?
I get your description more than your prescription. Of course younger workers are less compliant right now. They’re also measurably more miserable (depression/suicide rates) despite the “freedom” of not being “dragged down” by a family.
As a Society, when you increase the volume of Marxism in Academia you do multiple things intentionally. First you teach people that existing society is terrible and needs to be torn down. Ideas like the family unit are considered old news. The New Man doesn’t need stability. Then you teach people to see themselves as part of an aggrieved group wronged by some more powerful entity.
Once disgruntled, people are taught to see themselves as a victim of circumstance. As a victim of circumstance, one is never at fault for their mistakes. Their mistakes are just a result of being held down by the privileged class or the bosses.
Then comes the practice of dividing of people into good groups and bad groups with the bad groups (privileged/bosses) believed to consist only of completely irredeemable people. If a group of people labels another group of people as being beyond reproach, its doubtful they will be civil or reasonable toward them. So then the act of “disrupting” the bosses operations is actually considered a “moral good” because they’re sticking it to the Man. That’s what we’re seeing now; a society constantly being disrupted by disgruntled people who’ve been told by very high minded theorists that destruction of the existing order and redistribution is the only path to a new type of just social society.
We’re creating an infinitely more entitled, unhappy workforce that thinks lower effort and output for greater benefit is totally fine and sustainable. These auto companies for instance are being forced by the State to build fleets of autos that the public doesn’t want…and it requires less labor.
So the Automakers are really going to pay people more to do less work on what many customers see as an inferior product? In addition to that, battery technogies have higher material costs. Either consumer prices/inflation will continue to rise because the cost of labor increases or unemployment increases because the companies lay people off and pay a few people the higher negotiated Union rate. No sensible business is just going to “accept financial loss” for the good of society because a cadre of “experts” at University posts already think the company has too much money. The bosses duty is and should be to their shareholders unless we’re saying we want the State to literally seize the means of production and hold it for the “public good.” No way. I’d rather a business be checked by market forces than government.
The idea that bosses are always bad and workers always good is the kind of oversimplification that causes unnecessary disruption and leads to crisis conditions. Keep in mind, the same group railing on an on about how educated they are is simultaneously demanding their college debts (often incurred for obviously unprofitable degrees) needs to be waived and subsidized by taxpayers. Its not just the bosses that they’re gleefully screwing over. Its the common taxpayers. I’m not seeing the emancipating struggle that you are.
I’m not suggesting that the bosses are always bad, but if we are being honest, a whole lot of them are exploitative.
And at the end of the day, that is the point of a business, to have employees that produce more value than they are paid. That is where the profit comes from.
And, generally that is Ok when the employer is carrying the risks of financial loss and failure.
But we also have had a long long period of time where employers had the upper hand with a large labor pool, the ability to use labor arbitrage by going overseas, to essentially squeeze workers so that a larger and larger portion of the value produced, the wealth produced, went to executives, stock holders and owners. I mean the numbers are clear on that.
But, the consequence of that is what we are seeing now. People can be stupid but even the dumbest will catch on after awhile. Capital has squeezed labor so hard for so long, so much wealth has been concentrated in so few places, that the average worker no longer sees the value in work beyond simple survival. When there is no real, or realistic hope that you will ever achieve something, you stop trying. That is what is happening in the labor market today. Capital has always been dependent on the willingness of labor to put out more value than it was paid for. People were willing to do it when they thought there was hope for some good outcome. Now? They do not see a good outcome as possible so they are focused on enjoying the now. Capital had the leverage of threatening the home and family security of labor to compel that overproduction. But what happens when labor says it does not want a home, it does not have or expect to have a family? What happens when labor stops caring and stops feeling that what Capital is offering is worth the price of their time?
I mean we are talking about a generation coming up that LIKES to shop in thrift stores, wants to grow its own food, is prepared to live in a converted school bus. These kids have no ties and they have no commitments to meet.
Personally? I envy them at some level. They can get fired from a marketing job in NYC today and be working as a tour guide in Ireland a month later or volunteering at a national park the next week. They can quit a job working in bank tomorrow and be off in a plumbing apprenticeship a month later. They can be fired in San Francisco from a job coding for Oracle on one day and be working at a farmers market the next day. Of course it that is not universal, of course there are some basic constraints like a need to still have a place to sleep and the ability to get food etc. But these kids will figure out a way and they can do that because they are so willing to live minimalist and live small. THAT last is what distinguishes them from the Boomers and GenX.
BTW…to top that all off, we are producing 1 million fewer college grads a year than we were 20 yrs ago. The baby bust is upon us.
I see a lot of young adults behaving this way but what choices do they have.
I grew up in hard times but in many ways life was easier for me that it is for young people today. I would not want to be in my early 20s now.
As I see it the key driver is property prices.
But under the current deal, auto workers’ current starting pay is $18.00 per hour which, as the journalist Timothy Noah has illustrated, “is about 36% below where it would be if the 2007 starting wage had kept up with inflation”. It’s also not much more than many would receive flipping burgers at McDonald’s.
When I worked at McDonald’s fifteen years ago, I made eight bucks an hour. So we’ve had 225% wage inflation in 15 years.
Wouldn’t a 225% wage increase from $8 an hour end up closer to $26 an hour, or an $18p/h increase?
Sorry, that was phrased badly. Basically, what I meant was that wages are 2.25 times higher than they were 15 years ago.
The way the polls are looking it’s looking very likely that the war will be over by Christmas, and Ms Nuland will advise the White House to return to the Minsk Accord if with a different eastern border for the Ukraine.
The question is whether Mr Biden’s party can seriously move on their candidate, or whether the corporate media will shrug Ms Harris through as POTUS to be, accepting the Republicans will take 2028 anyway.
Although I agree that we are likely to have more strikes – you get more of what you reward – I think the author misunderstands the United States’s economy.
“America’s poorest” are not workers in any industry. Poverty is highly concentrated in households in which no adult is employed.