I have discussed the arguable value of understanding the big picture when contemplating solutions to the daily issues that we all face as we journey throughout our lives. There is value to understanding the broad trends when we ask questions like “Why is everything always so hard?” or “What direction should I go in for the next twenty years?”.
One interesting thing about the big picture is that ‘big’ is a variable. In my original article I discussed big picture themes like understanding housing market trends versus trying to sell your house. Some housing market trends that can be explored are metrics such as quarterly mortgage rates, or number of loan defaults. On a higher level you can look at the last decade and plot the amount of capital that went into the market as well as all the machinations involved with getting subprime heavy mortgage securities new past the credit rating agencies. That of course lead to the housing and economic meltdown in the last decade. If you really wanted to look at the big picture you can look at housing over the last century including transitions from small urban and rural housing to the creation of suburbia that was enabled by things such as the needs of post war industry, the family car and government tax subsidies. Each of these broad viewpoints has valuable information, but not necessarily information that’s pertinent to the current challenges of the individual. As I said in my first article, understanding bond defaults may help answer questions like “Why is it so difficult for people to get approved for a mortgage?” but it may not help you find a bank approved buyer if you are trying to sell it. Yet sometimes it’s valuable to step back and ask the big question to see if a big picture answer will help with a little picture question.
My Big Question
Much of my writing has to do with the challenges of everyday life. I talk about education infrastructure and culture and the bachelor black hole. I’ve discussed retirement and the loss of pensions and the need for a more comprehensive retirement plan because our expenses will be higher due to helping the next generation. Other areas at the intersection of work and life that I regularly comment on include medical needs, technological impact, work environments, and the impact of the changing culture in the next generation. These subjects and others have all been the focus of my critical eyes. There is a pervasive theme that is a common thread through all of my writing, and that theme is that things are more challenging for the professional then they have been for the generations prior. For the most part, throughout history, each generation made things better for the following generation. Considering that perspective, I thought it would be a good exercise to ask the big question of “Why is life more challenging?”. The answer that I came up with was that we are the generational equivalent of a market correction. We experienced the end of a boom and bust cycle that played out over 60 years. It’s not that things are getting better, it’s that there was a boom in productivity and quality of life, especially in the United States of America. That boom resulted in a couple of generations really having exceptional lives where each generation got demonstrably higher qualities of life. Now things have to bust before equilibrium is restored. Unfortunately, when it comes to this big of a picture the correction lasts an entire generation.
The economist Hyman P. Minsky identified five stages in a typical credit cycle – displacement, boom, euphoria, profit taking and panic. After the panic things return back to a new normal. I think if you step back and look at the big picture, Generation X, the current generation that makes up the bulk of the mature workforce is living in a world that has experienced something akin to ta credit cycle bubble. Investopedia, an online financial information source has a great overview of the five steps of a bubble. There are five stages: Displacement, Boom, Euphoria, Profit Taking, and Panic.
Displacement: A displacement occurs when investors get enamored by a new paradigm, such as an innovative new technology or interest rates that are historically low. Displacement when it comes to the quality of life with the different generations can be clearly identified as the United States position after World War II. The US had factories, it had cash, and it had the social infrastructure in place to not only help our own citizens transition back to the workforce, we were able to help the rest of the world slowing the growth of communism and avoiding World War III. The historical reality of a somewhat balanced world wide competitive environment was temporarily replaced with American supremacy.
Boom: Prices rise slowly at first, following a displacement, but then gain momentum as more and more participants enter the market, setting the stage for the boom phase. The Boom phase of a bubble sounds a lot like the quality of life explosion for the world war II generation and the baby boomers, who were clearly well named. The WWII generation had a slowly increasing quality of life. They had the first subdivisions and the were the first generation to adopt color televisions for use in those beautiful shiny new subdivisions. These are a few examples, and there are others, but boom cycles are an acceleration, and in this case we are talking about an accelerating quality of life. Boom’s aren’t necessarily going to be the cause of a crash, that only comes from the next phase of an economic cycle.
Euphoria: During this post boom phase,caution is thrown to the wind, as asset prices skyrocket. Asset prices when it comes to generations can be seen in government programs and government spending which is tied to workforce productivity. This is seen very clearly in the era of the great society programs. Wikipedia explains this story via the economic numbers from the time period: Unlike the old New Deal, which was a response to a severe financial and economic calamity, the Great Society initiatives came just as the postwar prosperity was starting to fade but before the coming decline was being felt by the middle and upper classes. Kennedy and Johnson era tax cuts spurred the gross national product to rise 10% in the first year after the tax cuts, and economic growth averaged a rate of 4.5% from 1961 to 1968. The numbers that Johnson’s tax cut measure triggered was what one historian described as “the greatest prosperity of the postwar years.” GNP increased by 7% in 1964, 8% in 1965, and 9% in 1966. The unemployment rate fell below 5%, and by 1966 the number of families with incomes of $7,000 a year or more had reached 55%, compared with 22% in 1950. In 1968, At the time the average income of the American family stood at $8,000, double what it had been a decade earlier. Disposable personal income rose 15% in 1966 alone. Federal revenues increased dramatically from $94 billion in 1961 to $150 billion in 1967. As the Baby Boom generation aged, two and a half times more Americans would enter the labor force between 1965 and 1980 than between 1950 and 1965. Simply stated many more Americans were working and they were on average earning much more than before. These metrics can be seen in the country’s largess of the time period. Think vietnam or the entire cold war. The money put into policing the world can be seen as a generational euphoria. There are other historically significant metrics including the number of students who went to school and the money spent on the War on Poverty among others. To keep this article from becoming a dissertation, we can agree with most historians and economists that the bottom line is that the boomers were a historically unprecedented economic front at it’s height of fury.
Profit Taking: By this time, the smart money – heeding the warning signs – is generally selling out positions and taking profits. Profit taking is quality of life for the boomers. Where grandma put money in a mattress, the boomers would buy a nice Harley or get a family RV. Profit taking can be seen in boomers getting the grants for their education sans student loans. It can be seen in most of that generations working class enjoying a pension. It can be seen in many other ways. So everyone was working hard and enjoying the benefits of their work. This was their normal, and what they promised to the next generation. Unfortunately there wasn’t a way that much could be set aside for reinvestment in the next generation.
Panic: In the panic stage, asset prices reverse course and descend as rapidly as they had ascended. When we say asset prices reverse course, what we are talking about generationally is quality of life shrinking as it has for about the last 20-30 years or so. It can be seen in our retirement system with the transition from pensions to 401K’s. It can be seen in the education system where student loans were pushed instead of grants to an entire generation of students. It can be seen in the scary rise in healthcare costs and the transition to high deductible plans. It can be seen in the suppression of wage growth for anyone of an age who had a grandpa who fought in world war II. This sell off continues as we move away from social safety net programs.
The reason for the profit taking collapsing into the panic has much to do with the competitive equilibrium of the world going back to normal. This can be seen with the rise of eastern countries. The first to come online was Japan in the 60’s and 70’s. As they rebuilt their infrastructure over the course of the baby boom generation massive Japanese companies such as Sony and Toyota whet from laughing stocks to owners of the most revered brands in the world that almost put historically dominant American companies out of business. Even today Lexus has become the standard for high-end automotive desirability and is considered head and shoulders above Cadillac, at least as least when compared through the looking glass of resale value. Moving on, China and India got on board the world stage. They started creeping up from their third world status and then things really started to change especially with the rise of the internet and world wide digital communications. Outsourcing became all the rage and jobs were shipped overseas left and right.
In a competitive environment all parties get to share in the profits of the market. That means profits are flowing out of America to the world’s newly competitive nations. These were profits that funded all the benefits and quality of life enjoyed by the American worker and the social infrastructure enjoyed by general citizens. The party is over and a bubble that took decades to put together is taking a single generation to come apart, unfortunately it’s right in the peak working years of Generation X.
There is only one takeaway from this thought experiment. In all cases, when there is a bubble burst, or a market correction, there is a new normal that will never achieve the market highs. Today’s normal is that life is tougher and not expected to improve in any great way for the mid career professional. Your employer retirement program probably won’t get better. Your healthcare isn’t going to get less expensive no matter what company you jump to. Your student loans didn’t buy you what you were promised and they won’t go away. Sadly you will most likely take on more if you are in a career where you are responsible for your own upskilling, which is all of them. This is our normal and this is today. As a generation we will do what we have always done. We will work hard with what we have and do our best. There is one takeaway when you look at our generation as the market correction of the last hundred years. After the correction things get better albeit slowly. For Generation X it may be too late, but it’s pretty clear that work and life looks different for millennials than it does for us and for them it’s looking up, at least a little bit.