Boomers Are Winning From High Interest Rates
I came across a clip of BlackRock’s CIO, Rick Rieder, doing an interview with Bloomberg and I found it very interesting.
Watch…
Rick Rieder is suggesting that interest income triggers a "wealth effect," which encourages increased spending, thereby driving prices higher.
Thus, a reduction in interest rates by the Federal Reserve could mitigate this wealth effect, leading to decreased spending and demand, consequently moderating inflation.
The following chart delineates the distribution of government and municipal bond holdings based on the owner's income. Nearly 40% of these bonds are owned by the top 1% of households by income, while the top 50% of income earners possess 99% of these bonds.
Rieder's assertion holds true; a significant portion of interest income is captured by the highest earners.
And the highest rungs of the income ladder make up the majority of the country’s spending.
His idea is that the wealthiest - many of which are Boomers - have more free cashflow due the trillions in Treasuries that are throwing off high coupon - more than ever.
Meanwhile, younger Americans and those who aren’t as high on the income ladder are forced to deal with higher mortgage rates, credit card rates and student loan interest.
This isn’t supposed to be another “I hate boomers” post that many doom-type on twitter. But it’s important to understand what is happening and how the scale is tilted.
After all, the boomers have the money.
And boomers are spending.
Take a look at cruise stocks near all time. Have a look at the restaurant sector, which is also incredibly expensive.
Although the lower end consumer is weak, the boomers are thriving.
And the upper 1/3 of consumers drive 2/3 of consumers spending. Plus, household net worth is at a record high.
So, if rates stay high, you have this constant loop of…
Boomers invest their money in Treasury bills paying 5% → they spend the interest payments they receive → more spending keeps inflation elevated → Fed keeps rates higher
Rinse & repeat.
You have to understand that the Fed and US government are in a corner where they either destroy the US dollar’s value or destroy the Treasury bond market.
It’s about time I write about this quandary again because it’s incredibly important to understand where we are and where we’re going.