Daily Archives: 06/11/2012

Wealth Transfer: Quick Note

This an unusual perspective, as Karl Smith often provides.

Something which I don’t see talked about anywhere but I am pretty sure will be a significant story over the next decade or so is the massive wealth transfer now occurring in the United States towards the young middle class and the young upper middle class in particular.

Its hard to see and so counter intuitive that I think this will be one of those long cases with bunch of “ctd” posts but the basic idea is this.

The young middle class is incurring long term debts at extremely low interest rates, this includes education and housing debts. And, many of them are acquiring assets at extremely high yield rates, this includes housing and equities.

While right now, things look horrible because the return to their primary asset – labor – is very low, that will likely turn around. Yes, we face lots of challenges and yes it is theoretically possible for the Fed to screw this up royally on a Japanese style scale.

However, odds on bets is that this for the middle class this period will continue to be a moderate rather extreme disaster. The working class is another story.

Then once this is over and things begin to normalize, it will still be the case that millions of families will be paying 3.5% interest on house they acquired for $75 – $125 a square foot. Yes, housing are going for that in parts of the country.

This will mean that some folks will continue to live in the house they bought at 22 for the rest of their life. Indeed, I know just out of college regular Janes (not as many Joes) who bought foreclosed three bedroom houses with dirt cheap FHA loans.

Its entirely conceivable that they could live in these places for the rest of their lives. Giving up 3.5% is going to be awfully hard, if interest rates normalize. If inflation and wage growth normalizes this will mean a type of asset security that I am not sure if we have seen in American history.

Not, only are we talking about being mortgage free at 52, but mortgage payment as a fraction of income should decline to a basically nominal cost around age 40.

If you want to know where your bailout money went, ultimately that’s were its going to go – college educated young people who are lucky enough to have a job and cheap home.

Wealth Transfer: Quick Note
Karl Smith
Fri, 08 Jun 2012 18:35:30 GMT