oftwominds-Charles Hugh Smith

Generation X: An Inconvenient Era

2013-05-22T21:55:00.000-07:00

A data-based look at the financial context of the past 30 years from the perspective of Gen X.

I am honored to publish an insightful essay by longtime contributor Eric A. on the inconvenient financial era Generation X finds itself in. What sets this essay apart from most other generational analyses is its focus on data and charts.

(Eric's most recent essays here were A Brief History of Cycles and Time, Part 1 and Part 2.)

In The Brewing Generational Conflict (May 15, 2013), I mentioned the Cultural Monster Id (CMI) that arises whenever inter-generational emotions are freely expressed. Every generation-- the Baby Boomers, Gen X and Gen Y/Millennials--is slammed for its supposed character flaws.

Personally, I don't find much value in these outpourings of Cultural Monster Id, for several reasons. One is that generations do not naturally divide into crisp cohorts; people are shaped by the events and shifting myths/worldviews of their culture. As a result there is an inescapable arbitrariness to bright lines between generations.

There's also a bit of intrinsic falsity in defining generational characteristics. Were the draftees of the Vietnam Era any less heroic than the draftees of World War II? Were the volunteers of World War II and Vietnam any more heroic than the volunteers of Desert Storm?

We can while away many a night around the campfire lambasting or lauding various supposedly generational traits, but I don't think that gets us anywhere useful. Ultimately, there is an element of luck in history, and it doesn't neatly favor generations evenly.

For example, the Silent Generation (born 1925-42) got stuck with a thankless war in Korea (1950-53), but was handed a golden opportunity to buy housing in the late 1960s before Boomer demand and geographical constraints sent it skyrocketing. Homes in high-demand areas purchased in the late 60s (before most Boomers could afford to buy a house) doubled in value in a few years and went on to rise 10 or even 15-fold in the ensuing 35 years.

Luck matters, timing matters, but so does context.

There are four Grand Narratives at work: demographics, resource extraction/pillaging, geopolitical conflict and the nature of the economy. The last two are heavily influenced by the first two; some studies suggest that large cohorts of unmarried, under-employed males are precursors to war, as political leaders channel that restless and potentially disruptive force against external enemies.

Economies based on endless resource extraction founder when the resources are found to be less than endless.

The Grand Narrative of the U.S. economy is a global empire that has substituted financialization for authentic, sustainable economic expansion. In shorthand, those people with capital and access to credit can take advantage of the many asset bubbles financialization inflates. They have a chance to do very well for themselves, if they have the presence of mind to exit the asset bubble before it deflates.

Those people who do not have capital or access to credit become poorer. That is the harsh reality of neofeudal, neocolonial financialization. Neofeudalism and the Neocolonial-Financialization Model (May 24, 2012)

Large cohorts generate their own self-referential feedback loops. A large cohort of home buyers drives up real estate as demand exceeds supply, and those who get in early are handsomely rewarded. Those seeking similar returns provide the fuel for further advances. This is the basic story of housing from 1970 to 2006 and the stock market from 1981-2013, as the Baby Boom cohort bought houses and saved for retirement via stock and bond mutual funds.

As the Boomer cohort sells its homes and stocks, supply will exceed demand and prices will decline, especially if household capital and access to credit are also declining. This selling cycle will also be self-reinforcing.

In my view, the reality Eric describes is part of the larger destructive narrative of financialization. Those people who are prepared for the inevitable collapse of the financialization era of debt, centralized manipulation and fantasy will do well for themselves and their families.

My position on the entitlements promised to the Baby Boomers has been clear since 2005 (Boomers, Prepare to Fall on Your Swords June 2005): demographics, the changing job market and the destructive consequence of financializing the U.S. economy render the entitlements promised (Social Security and Medicare) unpayable.

Here is Eric's essay:

Lately there has been some talk about Generation X and retirement.

“The typical Gen X couple, born between 1966 and 1975, only has enough savings to replace half of its pre-retirement earnings. Married Americans born during the first part of the baby boom, from 1946 to 1955, can expect to retire with about 82 percent of their income.” (Gen X Has New Reason to Resent Boomers as Retirement Looks Bleak).

The response from some circles has been that the net worth of GenX is half that of their parents because they’re slackers who blew the money. Really?

Setting aside how the Boomers have been the most spendthrift generation in American history, quadrupling personal household debt and doubling US Federal debt in a single lifetime, I’d like to focus on something much simpler: 6th grade math.

Financial people should easily recognize this chart:

This is your standard net worth chart, starting with an income of $20,000 at age 20 and increasing income by 3% a year to a pleasant $40,000/year at age 43. This person saved a standard 10% of their income, and invested at the standard 6%/year compounded.

Standard lifetime incomes have a tendency to rise from your 20s to your 50s and level off, so your real income-generating years are strongly back-loaded. This earnings chart from Canada is pretty standard:

As for 6% compounding markets, this is what portfolios from 1980-2000 looked like:

Wow, this investing stuff is easy! But we know what happened after that. The Dow has since gone sideways for a brutal 13 year Bear market:

Oh well, those are the breaks. Markets tend to have a periodicity that rise for >20 years, but then reverse or at least stall in a bear market for <20 p="" years.="">
So what does this have to do with GenX?

Everything. Investing is an exponential function. One of the interesting aspects of the exponential function is that interest compounds very slowly at first, then increasing the amount contributed by interest ever-faster as time goes on. This is why Brokers are adamant about people beginning to invest when they are young: no realistic level of interest can make up for the compounding effect of time. Here is the same assumption as above—3% income rise, 10% savings with 6% compounding -- taken from age 20 to 65, halting peak income at a reasonable $55,000/year:

Note it takes 21 years to reach the first $100k, but only 8 to reach the $200k and 4 to reach $300k. This compounding-made-real actually happened from 1980-2000.
Here is a matrix of the 4 Generations:

Note anything on this chart? The Boomer generation had a rough start in the bear market of the 70’s, but were only about 25 when it ended, so the Bull run coinciding with 20 of their core income years. Very nice.

Quick look to the right and you’ll see GenX. When did they come into their equivalent earning years? Year 2000, just as the market was cut in half:

Why should that matter? The Dow has now recovered and gone to new highs of 14,000.
Well, let’s run the charts and see. Again assuming $20k starting income, 3% income growth, 10% savings, and full investment in the Dow as a proxy, let’s compare GenX income theory to reality:

Wow! Right at the 10-year compounding point in 2000, the X-er’s market clock was re-set to zero. Then in 2008, the next 10-year compounding point, they were re-set to zero again!

Remember what we said about compounding being strongly back-loaded? The difference in 6% compounding vs the market stalling at the critical 10 year mark has cut GenX net worth in half! And if this chart was inflation-adjusted their net worth would be another 30-50% lower!

This is even assuming the massively optimistic assumption that GenX incomes are neatly rising from $20k to $55k. They’re not:

What did the Bloomberg article say again, that GenX has half the retirement savings of their parents? That reality is exactly what we predicted given the math. Anybody want to argue about how Boomers worked hard to succeed but GenX and Y are slacking wastrels? Or does math trump all?

But okay, maybe despite advertising to the contrary GenX should have known better than to trust a 19 year-old bull market. Maybe they should have gone short. If so, when? Going short in 2001, they would have to have reversed and gone long in ’03, then short in ‘08, then long in ’09, and possibly short again sometime soon? Is asking a whole generation to pick 5 exact tops and bottoms reasonable? Perhaps not. If not, where should they have put their money?

Bonds? Interest has averaged under 3% since 2000:

The chart of 3% vs 6% interest: a 25% difference over 10 years:

Maybe they should have invested in houses. Here’s your table of average buying ages:

Severely burned by stocks, GenX statistically became first-time homebuyers at the age of 32, not much older than when their parents did. However, they bought their first home in 2005, not 1985. How did that work out?

Whoops! Sorry, suckers, stole your money again: your peak home-buying years coincided with another bubble! Housing was no safe-haven. Not only that, but again, the catastrophe is not the up-front losses but the 10 years of lost compounding that can never be re-made. The math says that if GenX worked until they were 80, they will NEVER recover.

But there is only one national economy, all the same houses, same stocks, same companies: to some extent it’s not a matter of national wealth, but the DISTRIBUTION of wealth in the nation. So if GenX was systematically disenfranchised by engineered stock and housing bubbles plus low interest rates, who was their expected slice of GDP transferred to?

Again:

That’s right, the Boomers, in allegiance with the financial elite, engineered a transfer of all other generations’ income to themselves. This, plus being born in an expanding demographic, was the totality of their investing genius.

Why should anyone protest this observation? What do you think the decades-old phrase “the national debt has enslaved our children” means? It means that the Boomers, who were in power at that time, took all the wealth of the nation for themselves and left their children with the bill.

That’s not a surprise, it’s well-known fact that has been approved of by everyone in power for 20 years. I’ve been hearing it openly stated since before the National Commission on Social Security in 1983. When I was 13, my national parents said that I would pay their debts so they could get wealthy at my expense, and they have fully kept their promise. Now I am 43 and not only had the $80,000 of my net worth systematically stolen, but being unable to outvote them, have been saddled against my will with the $50,000/person of the national debt. An estimate of $130,000 per person has been transferred. From us, GenX and Y, to them. And with 10,000 Boomers a day retiring and a 1:1 worker to recipient ratio, they expect much, much more.

So think again before you so easily dismiss the 25% unemployment rate and 3rd-world incomes of Generations X and Y and start with a short lesson on the problems of exponential functions.

Yet this terrible math leaves the question of what's next? Can this unequal state of affairs remain a permanent feature of American life? Can the work of one group-- the very hours of their life--be morally claimed and transferred to another by dictate? That is to say, does one generation have the right to enslave another, whether physically with chains they never earned, or financially with debts they never accrued? And if this transfer was voted into power by a generation and enforced by government dictate, why can’t Generation X and Y vote to transfer all the Boomers’ wealth back to themselves?

We don’t know at this time, but with the Dow at all-time highs it would seem that, one way or another, incomes and prices can only revert to the mean. And brother, speaking from the bottom, it’s a long way down to here.

by Eric A.

Links:
How income varies with age
Income by age and education attainment (Canada)
generational matrix chart
Dow Jones Industrial Average historical charts
U.S. House Prices - Nominal, Real, Price-to-Rent
Median age of homebuyers chart

On a related topic: AND THE BAND PLAYED ON Jim Quinn on the Millennial Generation and the Fourth Turning.

Things are falling apart--that is obvious. But why are they falling apart? The reasons are complex and global. Our economy and society have structural problems that cannot be solved by adding debt to debt. We are becoming poorer, not just from financial over-reach, but from fundamental forces that are not easy to identify or understand. We will cover the five core reasons why things are falling apart:

1. Debt and financialization
2. Crony capitalism and the elimination of accountability
3. Diminishing returns
4. Centralization
5. Technological, financial and demographic changes in our economy

Complex systems weakened by diminishing returns collapse under their own weight and are replaced by systems that are simpler, faster and affordable. If we cling to the old ways, our system will disintegrate. If we want sustainable prosperity rather than collapse, we must embrace a new model that is Decentralized, Adaptive, Transparent and Accountable (DATA).

We are not powerless. Not accepting responsibility and being powerless are two sides of the same coin: once we accept responsibility, we become powerful.

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Present Shock and the Loss of History and Context

2013-05-21T19:58:00.003-07:00

In his new book, Douglas Rushkoff examines the telescoping of time and context wrought by ubiquitous digital technologies.

One of the few observers who is able to articulate a coherent critical account of American culture is Douglas Rushkoff. His new must-read book is Present Shock: When Everything Happens Now (print edition) and (Kindle edition).

I have long found inspiration and insight in Rushkoff's work, especially his keen understanding of the pathologies of consumerism. In my 2009 book Survival+, I wrote:

Rushkoff's reply to an interview question on the consequences of ubiquitous marketing reveals how media/marketing has created an unquestioned politics of experience in which one's identity and sense of self is constructed almost entirely by what one buys:

"Children are being adultified because our economy is depending on them to make purchasing decisions. So they're essentially the victims of a marketing and capitalist machine gone awry. You know, we need to expand, expand, expand. There is no such thing as enough in our current economic model and kids are bearing the brunt of that.... So they're isolated, they're alone, they're desperate. It's a sad and lonely feeling....The net effect of all of this marketing, all of this disorienting marketing, all of the shock media, all of this programming designed to untether us from a sense of self, is a loss of autonomy. You know, we no longer are the active source of our own experience or our own choices. Instead, we succumb to the notion that life is a series of product purchases that have been laid out and whose qualities and parameters have been pre-established."

In my view, this is a brilliant analysis of the rot at the heart of the American project.

In his new book, Rushkoff examines the telescoping of time and context wrought by ubiquitous digital technologies. We're always accessible, always connected and every channel is always on; this overload affects not just our ability to process information but our culture and the way media and marketing are designed and delivered.

The title consciously plays off the influential 1970 book by Alvin Toffler, Future Shock, which posited that our innate ability to process change was limited even as the rate of change in our post-industrial world increased. That rate of change would soon overwhelm our capacity to process new inputs and adapt to them.

In Rushkoff's view, we've reached that future: the speed of change and the demands of the present are disorienting us in profound ways.

We all know what stress feels like: it often causes our view to narrow to the present stressor, and we lose perspective and the ability to "make sense" of anything beyond managing the immediate situation.

Rushkoff identifies five symptoms of present shock:

1. Narrative collapse - the loss of linear stories and their replacement with both crass reality programming and post-narrative shows like The Simpsons.

2. Digiphrenia – digitally provoked mental chaos as technology lets us be in more than one place at any one moment. As Rushkoff notes in this chapter: Our boss isn't the guy in the corner office, but the PDA in our pocket. Our taskmaster is depersonalized and internalized.

3. Overwinding – trying to squish huge timescales into much smaller ones, for example, packing a year’s worth of retail sales expectations into a single Black Friday event.

4. Fractalnoia – making sense of our world entirely in the present tense, by drawing connections between things with weak causal relationships, for example Big Data, which excels at identifying correlations but is utterly incapable of identifying cause amidst the correlations.

5. Apocalypto – the intolerance for presentism leads us to fantasize a grand finale, the cultural equivalent of a "market-clearing event."

As Janet Maslin of the New York Times wrote in her review: "How do we shield ourselves from distraction, or gravitate to what really matters?"

Studies have shown that our innate ability to remember people and identify their relationships with others is limited to around 100 people--the size of a village or combat company. We undoubtedly have similar innate limitations on how many channels of input we can absorb.

Clay Shirky (author of Here Comes Everybody: The Power of Organizing Without Organizations) calls this filter failure, his term for what used to be called information overload. Our filters become overloaded and we lose the ability to "make sense" of what's going on around us.

As the phenomenologists discovered in the 20th century, our basic coping mechanism is to separate the world (and inputs) into three basic categories: the focal point, the foreground and the deep background. Being unable to sort out which input belongs in the three spaces leads to disorientation and poor decisions.

The parallels between filter failure and stress are not coincidental, as we handle filter failure and present shock the same way we handle stress: we limit inputs and make a concerted effort to reorient our awareness and context, what some call "be still and know."

Another troubling parallel to present shock is addiction. People now respond to texts, emails, alerts and phone calls like rats in the proverbial cage with the lever that releases another tab of cocaine: they over-stimulate themselves to death but are incapable of restraining their impulse for more.

The "obvious" solution is to turn off inputs as a way of restoring our ability to live in a present without novelty and distraction. This is akin to withdrawal from a powerful opiate, and so we should not be surprised that there are now treatment facilities for kids who need to detox from digital inputs.

Rushkoff is especially attuned to the distortions in our experience of time created by digital media-communication present shock: "Time in the digital era is no longer linear but disembodied and associative. The past is not something behind us on the timeline but dispersed through the sea of information."

In effect, change no longer flows linearly like time anymore, it flows in all directions at once.

History and meaningful context are both fatally disrupted by this non-linear flow of time and narrative. Is it any wonder that we now read about young well-educated people who do not understand the meaning of "policy"? To understand policy requires a grasp of the histories and narratives that led to the policy, and the linear, causally-linked way that policy is designed to solve or ameliorate a specific problem or challenge.

If the causal chains of history and narrative are disrupted, then how can anyone fashion a meaningful context for actions and narratives, and effectively frame problems and solutions? If everything is equally valid in a non-linear flood of data, then what roles can authenticity, experience and knowledge play in making sense of our world?

These are knotty, complex issues, and you will find much to constructively ponder in Present Shock.

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Centralization and Sociopathology

2013-05-20T20:48:00.001-07:00

Concentrated power and wealth are intrinsically sociopathological by their very nature.

I have long spoken of the dangers inherent to centralization of power and the extreme concentrations of wealth centralization inevitably creates.

The Master Narrative Nobody Dares Admit: Centralization Has Failed (June 21, 2012)

The Solution to Concentrated Power: Decentralize, Diffuse and Devolve Power (June 22, 2012)

To Fix Healthcare, Let 100 Solutions Bloom (February 26, 2013)

Longtime contributor C.D. recently highlighted another danger of centralization:sociopaths/psychopaths excel in organizations that centralize power, and their ability to flatter, browbeat and manipulate others greases their climb to the top.

In effect, centralization is tailor-made for sociopaths gaining power. Sociopaths seek power over others, and centralization gives them the perfect avenue to control over millions or even entire nations.

Even worse (from the view of non-sociopaths), their perverse abilities are tailor-made for excelling in office and national politics via ruthless elimination of rivals and enemies and grandiose appeals to national greatness, ideological purity, etc.

As C.D. points out, the ultimate protection against sociopathology is to minimize the power held in any one agency, organization or institution:

After you watch these films on psychopaths, I think you'll have an even greater understanding of why your premise of centralization is a key problem of our society. The first film points out that psychopaths generally thrive in the corporate/government top-down organization (I have seen it happen in my agency, unfortunately) and that when they come to power, their values (or lack thereof) tend to pervade the organization to varying degrees. In some cases, they end up creating secondary psychopaths which is kind of like a spiritual/moral disease that infects people.

If we are to believe the premise in the film that there are always psychopaths among us in small numbers, it follows then that we must limit the power of any one institution, whether it's private or public, so that the damage created by psychopaths is limited.

It is very difficult for many people to fathom that there are people in our society that are that evil, for lack of a better term, and it is even harder for many people in society to accept that people in the higher strata of our society can exhibit these dangerous traits.

The same goes for criminal behavior. From my studies, it's pretty clear that criminality is fairly constant throughout the different levels of our society and yet, it is the lower classes that are subjected to more scrutiny by law enforcement. The disparity between blue collar and white collar crime is pretty evident when one looks at arrests and sentencing. The total lack of effective enforcement against politically connected banks over the last few years is astounding to me and it sets a dangerous precedent. Corruption and psychopathy go hand in hand.

A less dark reason for avoiding over centralization is that we have to be aware of normal human fallibility. Nobody possesses enough information, experience, ability, lack of bias, etc. to always make the right decisions.

Defense Against the Psychopath (video, 37 minutes; the many photos of political, religious and secular leaders will likely offend many/most; if you look past these outrages, there is useful information here)

The Sociopath Next Door (video, 37 minutes)

As C.D. observes, once sociopaths rule an organization or nation, they create a zombie army of secondary sociopaths beneath them as those who resist are undermined, banished, fired or exterminated. If there is any lesson to be drawn from Iraq, it is how a single sociopath can completely undermine and destroy civil society by empowering secondary sociopaths and eliminating or marginalizing anyone who dares to cling to their humanity, conscience and independence.

"Going along to get along" breeds passive acceptance of sociopathology as "the new normal" and mimicry of the values and techniques of sociopathology as the ambitious and fearful (i.e. almost everyone) scramble to emulate the "successful" leadership.

Organizations can be perverted into institutionalizing sociopathology via sociopathological goals and rules of conduct. Make the metric of success in war a body count of dead "enemy combatants" and you'll soon have dead civilians stacked like cordwood as proof of every units' outstanding success.

Make lowering unemployment the acme of policy success and soon every agency will be gaming and manipulating data to reach that metric of success. Make higher grades the metric of academic success and soon every kid is getting a gold star and an A or B.

Centralization has another dark side: those ensconced in highly concentrated centers of power (for example, The White House) are in another world, and they find it increasingly easy to become isolated from the larger context and to slip into reliance on sycophants, toadies (i.e. budding secondary sociopaths) and "experts" (i.e. apparatchiks and factotums) who are equally influenced by the intense "high" of concentrated power/wealth.

Increasingly out of touch with those outside the circle of power, those within the circle slide into a belief in the superiority of their knowledge, skills and awareness--the very definition of sociopathology.

Even worse (if that is possible), the incestuous nature of the tight circle of power breeds a uniformity of opinion and ideology that creates a feedback loop that marginalizes dissenters and those with open minds. Dissenters are soon dismissed--"not a team player"-- or trotted out for PR purposes, i.e. as evidence the administration maintains ties to the outside world.

Those few dissenters who resist the siren song of power soon face a choice: either quietly quit "to pursue other opportunities" (the easy way out) or quit in a blast of public refutation of the administration's policies.

Public dissenters are quickly crucified by those in power, and knowing this fate awaits any dissenter places a powerful disincentive on "going public" about the sociopathology of the inner circle of power.

On rare occasions, an insider has the courage and talent to secure documentation that details the sociopathology of a policy, agency or administration (for example, Daniel Ellsberg and The Pentagon Papers).

Nothing infuriates a sociopath or a sociopathological organization more than the exposure of their sociopathology, and so those in power will stop at nothing to silence, discredit, criminalize or eliminate the heroic whistleblower.

In these ways, centralized power is itself is a sociopathologizing force. We cannot understand the present devolution of our civil society, economy and ethics unless we understand that concentrated power and wealth are intrinsically sociopathological by their very nature.

The solution: a culture of decentralization, transparency and open competition, what I call the DATA model (Decentralized, Adaptive, Transparent and Accountable) in my book Why Things Are Falling Apart and What We Can Do About It.

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