- By Bill Bonner
There is a spectre haunting America...and all the developed nations of the world. It is the spectre of a debt revolution.
We left off yesterday talking about how the economy of the last 30 years - and especially that of the last 6 years - has favored the old over the young.
'Rise up, ye young'uns,' we as much as said, 'you have nothing to lose but your parents' debts.'
We showed the equity assets of old people multiplied by 28 times since 1981. That was no honest bull market in stocks, it was a market sent soaring by an explosion of credit. But what did it do for young people whose only assets are their time and their youthful energy? Alas, the economy of work and wages only increased 5 times.
And when you look more closely at work and wages, the spectre grows grimmer and more menacing. Because hourly wages have barely budged in the last 30-40 years. And household incomes have actually fallen, from $57,000 to $52,000, in the 21st century.
But as our fingers came to rest yesterday, there was one question hanging in the air, like the smoke from an exploded handgrenade: why?
Was this huge shift - of trillions of dollars' worth of wealth from young working people to old asset holders - an accident? Was it just the maturing of a market economy in the electronic age? Was it because China took the capitalist road in '79? Or because robots were competing with young people for jobs?
Nope is the answer.
First, old people control government, not young people. Sheldon Adelman was born in 1933. The big money comes from him and people like him, eager to buy candidates early in the season, when they are still relatively cheap. Lobbyists too are funded by old companies with their own agendas. And, finally, old people decide elections; there are a lot of them and they vote. They know where the money is.
Second, the government - doing the bidding of old people - restricts competition, subsidizes well-entrenched industries, raises the cost of employing young people and directs its bailouts, cheap credit and contracts to the greybeards.
Third, the credit system increases the profits and prices of existing capital. It encourages borrowing and spending, which rewards the current generation while pushing the costs into the future.
None of this was an accident. None of it would have happened without the active intervention of the old folks, using the government to get what they could never have gotten honestly.
This is not the same as saying that they were completely aware of what they were doing and what consequences it would have. We doubt the Nixon Administration had any idea of what would happen after it changed the money system in 1971. It was behind the 8-ball, fearing that America's gold would be called away for foreign governments. Few people thought it made a mistake when it ended the convertibility of the dollar into gold.
And yet it created a world in which parents and grandparents could prey on their own children...for the next 44 years. And it's still not over. The new credit money - which could be borrowed into existence with no need for any savings or gold backing - was just what old people needed. We have estimated that it increased spending by about $33 trillion - over and above what the old, gold-backed system would have allowed. That spending lifted the value of the geezers' assets and increased their living standards.
Meanwhile, a 25-year-old, reporting for work in 2015, can't expect a single dollar more in real, hourly wage than his father did in 1980.
In the corporate sector, bonds outstanding were only 17% of GDP in 1981. Now, they're $11.6 trillion, or 65% of GDP. What was that money used for? Some of it went into real capital improvements that make companies more productive and more profitable. But much of it went where you would expect - to buy back shares, to buy other companies, and to pay bonuses to executives when their share prices went up! Who did this benefit? Mostly people over 50.
Government debt is even worse. Unlike personal debt, it doesn't go to the grave with the person who contracted it. It sticks around to burden the next generation - who got nothing from it.
Federal debt in 1980 was less than $1 trillion. Today, it is $18 trillion. That money was used to fund federal programs - few of which provided any benefit to young people.
An accident? A mistake? Partly. But old people must have known what they were doing. Their lobbyists asked for the spending. Their politicians voted for it. Their companies enjoyed the revenues. And they, personally, pocketed much of the money.
When the economy threatened a correction, they demanded more credit on easier terms to keep the money flowing. And when the credit balloon popped in '08, they whined to the feds to protect their ill-gotten gains.
Honest capitalism? Not if they could prevent it. Creative destruction? Not on their watch. Pay for what you get? Not if they could put the bills on the next generation.
Young people of the world, unite!
Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.