June 24, 2012

Squeezed At Both Ends

If you are looking for a little light at the end of the tunnel ... well, keep looking. Today we have a tale of two generations who did the right thing and got screwed over for their trouble. For baby boomers and echo boomers alike, what was supposed to be the best of times has become the worst of times.

We hear a lot about reducing debt, but the truth is that any economic recovery stems from more spending, not less. A growing economy is an economy where people are buying things. That stimulates new investment, which in turn stimulates job growth, which in turn leads to more people buying more things. But what if  people can't buy more? How do we grow our way out of our problems then?

Baby boomers are just beginning to cash in on those pensions they have invested in all those years of working. But thanks to policies designed to lower interest rates on government bonds as part of an overall scheme to stimulate the economy--not to mention the occasional stock market meltdown--people who depend on savings and pension funds are earning dramatically less money. Add to that the fact that many state and local pension funds are underfunded because money that was supposed to go towards pensions was used for other things--the assumption being that yields from the stock market and bonds would make up the difference ... oops!--and you have an even bigger problem. This means scaled-back pension benefits for retirees, which in turn means scaled-back consumption from one of our largest population groups.

At the other end of the generation gap, students coming out of college are burdened by tens of thousands of dollars of college loans that have to be paid back. Growing up, these kids had it pounded into their heads that you had to have a college education to get ahead. But the costs of getting that education grew faster than anyone could have imagined twenty or thirty years ago. The upshot is that many young people graduating from college today are not going to be looking for that first home to buy for a long, long time. In fact, they will not be making any large purchases of anything. They don't have the disposable income to do it. Not when a quarter or more of your paycheck--assuming you have a job--goes to pay off student loans.

So you have seniors facing reduced pension benefits and their grandchildren stuck with enormous student loans to pay back. Hard to see how an economy is going to expand dramatically when two significant groups of consumers can't ... well, consume. As someone once said, "That light at the end of the tunnel may be another train coming at you."

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