Baby boomers are the big winners from the Federal Reserve’s policies, Larry McDonald said.
Years of low interest rates boosted asset prices, and now they can earn 5% from Treasury bills.
Younger generations are battling inflation as well as higher costs for mortgages and other debts.
Baby boomers are the big winners from the Federal Reserve’s policies in recent years, while millennials and Gen Z have been badly burnt, Larry McDonald said.
“The Fed made the baby boomers really REALLY rich – then figured out a way to make T-Bills yield 5% so the boomers could ride off into the sunset risk-free,” the founder of “The Bear Traps Report” wrote in a post on X Wednesday.
“Everybody in the younger generations just gets screwed because they can’t finance anything,” he added.
McDonald, the former US head of macro strategy at Société Générale, was referring to the central bank keeping interest rates close to zero and boosting the money supply during the 2008 financial crisis and pandemic, which pushed up the prices of stocks, real estate, and other assets to record highs.
The Fed’s loose monetary policy, coupled with supply shocks including Russia’s invasion of Ukraine last year and supply-chain disruptions during the pandemic, drove inflation to 40-year highs last year.
The central bank responded by hiking rates to more than 5%, which has lifted mortgage rates above 7%, sparking an affordability crisis in the housing market.
The upshot is that many young consumers are facing a brutal combination of inflated food, energy, and housing costs, as well as bigger monthly interest payments on their credit cards, car loans, and mortgages.
Older people who own their homes outright, or have locked in 30-year mortgages at rock-bottom rates, have been less affected by that double-whammy. Moreover, many of them were able to buy stocks and homes at far lower prices in the past, and have enjoyed substantial appreciation in the value of their assets.
McDonald’s X post made the point that higher rates have lifted yields on Treasury bills to more than 5%. As a result, baby boomers have the option to cash out their profits, invest in short-term government debt, and collect a solid, guaranteed return.
The former Lehman Brothers trader, who wrote a book about the investment bank’s collapse at the start of the financial crisis, has flagged wealth disparities between generations before. He’s noted that at the age of 40, baby boomers had paid far less for college and their homes than millennials, a larger percentage owned homes, and they generally had higher net worths and smaller debts.
“Baby boomer party, then left the check in the lap of Millennials,” McDonald tweeted in early 2019. He’s also noted that boomers were worth an estimated $78 trillion, or about half the US total, at the end of last year. That’s despite the cohort making up just a fifth of the US population.
While baby boomers are under fire for hoarding wealth, their spending in retirement could prove crucial in sustaining the economy and preventing a recession, market veteran Ed Yardeni argued this summer.
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