I have been following the work and writings of my good friend Jeff Deist for many years, as I’ve always found his insights extremely illuminating. Just a few days ago, I had the pleasure of coming across one of his most recent speeches and I found every word of it truly compelling and remarkably timely.
In this remarkable speech, 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 to begin with.
How did we get so rich? It might sound like a silly, even childish, question. But it’s a question nobody asks. Nobody cares enough to ask. And what happens if it all goes away? Western societies rarely stop to consider any of this because 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 nothing short of miraculous to previous generations.
And yet, alongside all this abundance, something profoundly troubling has emerged. Younger generations increasingly struggle to afford education and housing. Starting a family is out of reach financially for a growing number of young adults. Many have lost the confidence that their lives will ever get better; even they do, they certainly will not be better than the lives of their parents. So, the increasingly debated question of “why are young people still living at home, why are they not having kids of their own?” is not just a social issue that boomers love to talk about as though it is a moral failing of some sort. For Jeff, this loss of optimism is a sterneconomic warning sign that needs to heeded.
At the heart of his argument is the importance of saving and capital accumulation. He uses the experience of his grandfather, an electrician who 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 “chase yield” simply to preserve his purchasing power.
What he calls the “Grandfather Index”, is a very interesting thought experiment that highlights the contrast between the past and the present: compare 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 instead pushed toward consumption, borrowing and increasingly risky investments, not to “get rich quick”, but simply to avoid becoming poorer.
Jeff argues 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 stopped functioning primarily as market prices for capital and transformed into instruments of monetary policy, manipulated by central banks attempting to manage the economy in a way that is quintessentially Soviet in its philosophy.
The consequences go far beyond individual investment portfolios. Jeff describes the resulting financialization of the economy as a major distortion of capitalism and it’s true: the system we are operating under today, has nothing to do with a truly free market, because there is nothing “free” about the monetary and economic signals transmitted by central planners. Companies have become 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 isinstead being diverted toward speculation and short-term financial gains.
This problem is ultimately larger than economics, because capital 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. This is why today’s monetary and fiscal policies are also having profound moral and cultural consequences. A system that consistently penalizes saving and rewards borrowing and immediate consumption gradually changes people’s 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’s getting dangerously close.
Jeff’s controversial conclusion, that I find myself in complete agreement with, is that this deeply flawed and problematic system cannot and will not go on forever. However, “the crash is the cure.” Rather than viewing a major deflationary recession or depression solely as something policymakers must prevent at all costs, heargues 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 accepting this pain may be preferable to continually transferring the costs of today’s economic model onto the next generations.
Claudio Grass, Hünenberg See, Switzerland. www.claudiograss.ch
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