speech<\/a>, Jeff takes what initially appears to be a straightforward economic question and turns it into something much broader: a question about how Western civilization accumulated its extraordinary wealth and whether the monetary system we have built is now destroying the very foundations that made that prosperity possible\u00a0to begin with.<\/p>\nHow did we get so rich?\u00a0It might sound like a silly, even childish, question.\u00a0But it\u2019s a question nobody asks. Nobody cares enough to ask.\u00a0And what happens if it all goes away? Western societies rarely stop to consider\u00a0any of this\u00a0because we have become accustomed to an almost unimaginable level of material abundance. Running water, electricity, air conditioning, abundant food, modern medicine, safe cars, instant global communication and virtually the entire accumulated knowledge of humanity available through a device in our pockets would have seemed\u00a0nothing short of\u00a0miraculous to previous generations.<\/p>\n
And yet,\u00a0alongside\u00a0all\u00a0this abundance, something profoundly troubling has emerged. Younger generations increasingly struggle to afford education\u00a0and\u00a0housing. Starting a\u00a0family\u00a0is out of reach financially for a growing number of young adults. Many have lost the confidence that their lives will\u00a0ever get\u00a0better; even they do, they certainly will not be better\u00a0than\u00a0the lives\u00a0of their parents.\u00a0So, the increasingly debated question of \u201cwhy are young people still living at home, why are they not having kids of their own?\u201d\u00a0is\u00a0not just a\u00a0social\u00a0issue that boomers love to talk about as though it is a moral failing of some sort.\u00a0For\u00a0Jeff, this loss of optimism is a\u00a0sterneconomic warning sign\u00a0that needs to heeded.<\/p>\n
At the heart of his argument is the importance of saving and capital accumulation.\u00a0He\u00a0uses the experience of his grandfather, an\u00a0electrician\u00a0who lived through the Depression, to illustrate how different the economic incentives once were. His grandfather earned a modest income, lived frugally, saved what he could and benefited from the compounding of his savings. He did not need to become a sophisticated investor, speculate in financial markets or constantly\u00a0\u201cchase yield\u201d simply to preserve his purchasing power.<\/p>\n
What he calls the\u00a0\u201cGrandfather Index\u201d, is a very interesting thought experiment that highlights the contrast between the past and the present:\u00a0compare the return an ordinary person can obtain on relatively safe savings with the real rate of consumer inflation. When savings returns exceed inflation, thrift is rewarded. When inflation consistently exceeds what ordinary savers can earn, saving becomes a losing proposition. People are\u00a0instead\u00a0pushed toward consumption, borrowing and increasingly risky investments, not to \u201cget rich quick\u201d, but\u00a0simply to avoid becoming poorer.<\/p>\n
Jeff\u00a0argues that this is precisely what has happened during the era of extraordinarily low interest rates and monetary expansion. For roughly four decades, falling interest rates and abundant cheap credit encouraged borrowing and speculation while making traditional saving increasingly unattractive. Interest rates\u00a0stopped functioning\u00a0primarily as market prices for capital and\u00a0transformed into\u00a0instruments of monetary policy, manipulated by central banks attempting to manage the economy\u00a0in a way that is\u00a0quintessentially Soviet in its philosophy.<\/p>\n
The consequences\u00a0go\u00a0far beyond individual investment portfolios.\u00a0Jeff\u00a0describes the resulting financialization of the economy as a major distortion of capitalism\u00a0and it\u2019s true: the system we are operating under today, has nothing to do with a truly free market, because there is nothing \u201cfree\u201d about the monetary and economic signals transmitted by central planners.\u00a0Companies\u00a0have\u00a0become more concerned with debt structures, share buybacks, mergers, asset prices and financial engineering than with producing better goods and services. Capital that might otherwise have been accumulated and directed toward productive investment\u00a0isinstead being\u00a0diverted toward speculation and short-term financial gains.<\/p>\n
This\u00a0problem is ultimately larger than economics, because\u00a0capital is not merely money or financial assets. It encompasses the accumulated knowledge, skills, craftsmanship, institutions and cultural habits inherited from previous generations. When societies lose the ability to preserve and reproduce those things, they are consuming cultural capital just as surely as they can consume financial capital.\u00a0This is why\u00a0today\u2019s monetary and fiscal policies\u00a0are also\u00a0having profound moral and cultural consequences. A system that consistently penalizes saving and rewards borrowing and immediate consumption gradually changes people\u2019s behavior. The virtues of thrift, delayed gratification and long-term thinking become harder to sustain. At the same time, enormous government debt allows present generations to consume resources that ultimately have to be accounted for by future generations. We just keep kicking the can down the road. But that road leads to a dead-end and it\u2019s getting dangerously close.\u00a0<\/p>\n
Jeff\u2019s\u00a0controversial\u00a0conclusion, that I find myself in complete agreement with, is that this deeply flawed and problematic system cannot and will not go on forever. However,\u00a0\u201cthe crash is the cure.\u201d\u00a0Rather than viewing a major deflationary recession or depression solely as something policymakers must prevent at all costs,\u00a0heargues that a serious deflationary correction may ultimately be necessary to liquidate bad investments, reduce excessive debt and restore genuine capital accumulation. The adjustment could be painful, particularly for generations that currently own substantial stocks and real estate, but just\u00a0accepting this pain may be preferable to continually transferring the costs of today\u2019s economic model onto\u00a0the next\u00a0generations.<\/p>\n