Why it has become more challenging for younger generations to become wealthy and what they should do about it

Written by Andrew Cassar Overend

#PersonalFinance #Beginner

11 min read
Last Updated on October 12, 2021



Intergenerational Inequality

When speaking about inequality, people usually refer to variations in the standard of living between the rich (the haves) and the poor (the have nots). But a less evident and often underappreciated form of inequality is intergenerational inequality.

Intergenerational inequality essentially refers to inequality between generations, namely when a particular generation enjoys specific benefits, opportunities or incurs certain costs, which another generation does not.

The textbook case of intergenerational inequality is when we compare the experience of baby boomers (born during 1946-1964) to that of their kids - millennials (born between 1981 and 1996). The baby boomers were the largest cohort to ever roam the planet. They were the offspring of the Greatest Generation (born during 1901-1927) and the Silent Generation (born during 1928 to 1945), who celebrated survival from the World War by having many kids.

But the economy which the boomers grew up in was radically different from today's economic conditions. After World War II, global economies prospered and the boomers inherited a rich post-War economy. As these baby boomers started to mature, a larger consumer base emerged which were able to work, spend and generate economic growth. More people joined the labour force and landed jobs, increasing their aggregate income and improving their spending ability.

But baby boomers also fueled the rapid debt growth since the 1970s. Once the dollar was decoupled from gold in 1971 to alleviate constraints on economic growth, baby boomers were incentivized to take on credit to satisfy their needs and wants. Although the ability to take on credit allowed for more economic growth, global debt skyrocketed.

global debt

Debt is simply a means of bringing consumption forward and deferring repayment obligations to the future. But unless a borrower takes on debt for productive purposes, i.e. with the intent to generate a stream of cash flows that is able to pay off the debt, then the debt is not sustainable. And boomers relentlessly borrowed money regardless of the burden they were inflicting on future generations.

The spending habits of the baby boomer generation continued to fuel the strong economic growth and inflation of the 1970s-1980s. This spending was channeled into both consumables (which led to consumer price inflation), as well as assets, (which led to asset price inflation).

chart2 - asset inflation

By the time baby boomers were of age to become parents, the cost of living increased significantly and work commitments intensified to a point that females felt the need to work and earn an income. And this resulted in a substantial decline in the birth rate.

The new generation of millennials is thus much smaller in size compared to that of their parents. And this means that when the baby boomer generation retires, the notably smaller pool of millennials in employment must somehow generate sufficient social security payments to sustain the pension of the retiring baby boomers. What this means is that unless the gains in productivity (output per worker) offsets the reduction in output caused by the retiring baby boomers, there will be an imbalance between the present value of future social security contribution inflows and pension payment outflows.

This ultimately means that millennials will face pressure to work harder, longer and more efficiently. Although today there are substantially more work opportunities than there were in the past, and the ability to start a business is much easier thanks to technology and access to information, competition is intense and the pressure to be productive is huge. And this partially explains why work-related stress and anxiety have skyrocketed over the past decades.

chart3 - google trends

Moreover, job requirements have become even more stringent than they were in the past. Jobs which once required a simple University Degree now require a Master's Degree. And the cost of education has soared in some advanced economies leaving millennials with no choice but to take on debt to finance their college education. To make matters worse, studies show that the incremental wage earned as people complete their education levels are marginal, both because there is significant competition in the labour market, and also because of companies' preference for substituting labour with capital.

chart4 - education wages

One more problem the current generation is facing is, that it seems the entire education system is purposely designed to leave people ignorant about basic money management, investing and wealth creation. Arguably the two most important things which we should be taught from a young age are personal finance and good nutrition. This will enable individuals to live long healthy lives without living from paycheck to paycheck. Ultimately, a lack of knowledge on basic financial management may lead to inferior economic decisions, which continues to exacerbate the rich-poor divide.

The teaching deficit in basic financial management is a major setback for people to understand the importance of building wealth. This causes some people to pursue rash spending decisions and others to put undue weight on saving as opposed to investing. To make matters worse, since the 2008 Financial Crisis, Central Banks have been expanding the money supply to sustain the overleveraged private sector, indirectly devaluing the value of people's savings in the process.

But it is no coincidence that asset prices have surged since these "easy money polices" have been introduced. The money which was 'created' ended up in the hands of those who bought the assets - the baby boomers - making them even wealthier. This widened the intergenerational inequality gap, as assets are no longer affordable for the average millennial burdened by college debt. What is most frustrating is that millennials are baring the brunt of the excessive leverage and bad policy decisions taken on in the past.

Equity prices in particular have soared due to a number of factors:

  1. Firms' performance improved as technology advanced and the large baby boomer consumer base demanded more goods and services;

  2. The secular decline in interest rates coupled with the easy money policies adopted by Central Banks since the Great Financial Crisis drove bond yields lower, inducing investors to construct portfolios with riskier assets;

  3. Management of publicly traded companies prefer to engage in share buyback decisions to artificially inflate their company’s share price instead of productively investing earnings.

However, with the global economy at record levels of debt and having just experienced the largest global recession in history, equity valuations in 2021 remain close to all time highs. But before buying into the narrative that stock prices can only go up over time, it is important to understand that even the capital markets are designed to put the average millennial in a disadvantaged position.

Indeed, over recent years, technology has made access to the capital markets cheap and easy for young investors. Zero-fee trading platforms and the ability to transact using fractional shares have been enormous breakthroughs in making investing affordable for all.

But although investing has become increasingly affordable for the average retail investor, there are other notable players which benefitted to an even greater degree.

These innovations continued to enhance the wealth of those who are already wealthy:

  1. Investment brokers - the fixed costs of providing access to the capital markets are now distributed over a wider audience, enabling economies of scale. Besides, the ability to buy fractional shares encourages more frequent trading which generates further commissions;

  2. Institutions like big banks and hedge funds on Wall Street - these benefit from more liquid markets and are able to take advantage of inexperienced market participants via price manipulation;

  3. Social media companies, like TikTok, Twitter and Youtube - amateurs making a quick buck get a dopamine boost by sharing their success story on social media and enticing others to get involved in the "next 100x trade".

Moreover, many investors are unaware that when a new stock is available to be traded on the secondary market in what is known as an Initial Public Offering (IPO), a significant amount of the early gains on the stock price would have already been reaped by the venture capitalist investors in the private markets. These big money investors make the bulk of their gains well before the company goes public, an opportunity which is not available to the average investor.

But if equities are not your cup of tea, you can always borrow money from the bank to buy property right? Well, nowadays, banks put you through hell to take out a loan. The degree of paperwork involved is mind-blowing! Besides, unless you get some financial assistance from your family, you'll probably be damned with a loan till your retirement! Indeed, some of the intergenerational gap between boomers and millennials will eventually narrow as the latter inherit the wealth of their parents. But this will come with significant inheritance taxes and, if any of the assets are disposed of, capital taxes.

To make matters worse, savings accounts earn zero interest! The sheer amount of debt in the financial system has caused global Central Banks to progressively lower the cost of borrowing over time.

chart5 - short term interest rates

This is a clear manifestation of the intergenerational inequality. In the past, baby boomers had the opportunity to earn interest on their bank savings, but today's zero interest environment completely denies millennials from compounding their savings. If wages fail to keep up with inflation, savers may even end up becoming poorer over time. Therefore, an education deficiency, bad spending decisions, and the inability to earn interest on savings have put millennials' future prosperity at risk.

Finally, banks are becoming increasingly risk averse, causing them to discriminate against certain individuals who have jobs which are perceived as 'risky'. There have also been reports claiming that banks are blocking certain risky transactions "to protect their clients". Cryptocurrency transactions are a case in point. But banks are not the only bullies. Indeed, regulators in the US themselves have been recently debating how to regulate the cryptocurrency markets. They also claim that their intention is to safeguard people's wealth, because they perceive that people are not adequately informed to make their own financial decisions. But do you think that this is the real reason? The popularity of banks has been receding during recent years, and regulators are likely to be doing this to keep banks in business.

Is there light at the end of the tunnel?

It is not all doom and gloom for millennials. There is still an opportunity for millennials to secure their financial futures if they take advantage of:

  1. the democratization of information;

  2. technology; and

  3. digital assets

Free Access to Information

Distance Learning, Online Education, Remote Classes

As depicted in the chart further above, since the start of the century, education inflation has been astounding. In those countries where higher education is not heavily subsidized by the government, University a luxury which is not affordable by everyone. Then along came portable devices and the internet...

The internet has enabled education to become accessible and affordable by many. Some online courses, such as those hosted on Coursera, edX or Udemy, have developed standards which are close, if not equivalent to entire University Degree programmes, at a fraction of the cost. And employers are increasingly employing people based on skill and competence, not college reputation.

This new education model is also more efficient and effective. Students can learn anything, anytime, anywhere and at their own pace. Lectures can be played back several times at the speed they are most comfortable with, and for those who claim that social interaction is not the same, there are several online platforms which allow engagement among peers worldwide.

Millennials have no excuse - they can get educated and develop new skills in any area they want, enhance their employability and wage potential while contributing to the economy's growth.

Technology and Productivity

Man, Adult, Businessman, Laptop, Working, Desk

Technology has not only allowed for efficiency, productivity and entertainment, but also provides opportunity for all to create and innovate. Today, people have the opportunity to build and administer a business on their mobile devices. Websites can easily be built using the likes of Wix, Wordpress, online marketplaces like Amazon, Alibaba or Etsy have provided a platform for buyers and sellers to transact from any part of the globe, while social media platforms like Youtube and TikTok have allowed several people to showcase their professional capabilities and hobbies.

Starting a business has been made easy - all that is needed is an idea which solves a key problem for a particular group of people, and the willingness to follow through with the idea. Succeeding in business is another thing - it requires the development of a competitive edge, resilience, good management and the ability to sell. But nonetheless, the opportunity to thrive is there for all.

Digital Assets

As already mentioned, the relentless credit-backed spending habits of baby boomers and the bad governance by policy makers has led to the creation of a financial system which is on an unsustainable trajectory. But for the first time in history, people have an opportunity to be early participants in the ownership of an entirely new ecosystem which is being built.

The internet as we know it provides people with an interface to connect with people and create content. However, the benefits only accrued to the shareholders of the platform owners, like Facebook and Google. Similarly, in the creative industries like music and art, the artist only enjoys a fraction of the rewards since a significant portion is absorbed by intermediaries who convince the artists that they are unable to succeed without their guidance.

The new world being developed guarantees that any benefits from the value created by artists or influencers are enjoyed by themselves, while at the same time empowering their communities to enjoy certain privileges for supporting their work.

Individuals are able to participate in tokenization of assets without manipulation of markets by authorities, and people are able to identify themselves with unique digital creations. People can actually start earning yield by doing things that they enjoy, such as playing games.

Assets are being built in virtual worlds, allowing for the creation of a digital marketplace in which prices are determined purely by demand and supply.

Portal, Steampunk, Surreal, Fantasy, Art, Artwork

This is the world of the Metaverse, social tokens, NFTs, cryptocurrencies and decentralized finance. This new world relies on trustless, cryptographically secured networks which deliver value and are independent of central authorities.

While there is a huge risk that the entire space goes to zero, the risks are asymmetric, meaning that the potential for returns well justify the risk taken. And you know what the best thing is? The space is still in its infancy and it is still too risky for the liking of big players to participate. For once, the retail investor has the competitive edge. Let's be sure to make the most of it!








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