But the results also revealed that, in the U.S. and U.K. at least, this generational pairing still holds much more faith in traditional investments such as stocks and bonds. The data suggest a cohort of crypto dabblers, not outright converts.
What will take this all-important group of digital natives to the next level? How might they see crypto and blockchain technology as diehard believers do, as the driver of an entirely new paradigm for money, investing and wealth accumulation?
I have two Gen Z daughters. One is entering her second year of college just as she ended her first: homebound, learning virtually. The other is starting her critical junior year of high school in the same situation. It’s hard not to feel they are being denied some key rites of passage in their journey into adulthood.
Meanwhile, many millennials, the youngest of whom are 24, are facing life-defining decisions about marriage, children, home-buying, career paths and long-term investment strategies in a uncertain economic environment. COVID-19 has barged into this defining period of their lives. It seems inevitable it will reset their expectations of the future.
Even before this tragedy, these two generations were primed for a major attitude shift toward digital money. Growing up with the internet, they’re more inclined to its DIY ethos and notions of autonomy, as the lines between user and publisher blurred online and gave everyone the sense that they had their “own voice.” It might not be that much of a leap for them to embrace the “be your own bank” mindset of bitcoiners.
Expectations and attitude shifts provide a potential cultural impetus for these groups to change how they think about money. Now there’s also a financial motive, as stocks and bonds, pumped by unprecedented central bank quantitative easing, are delivering stubbornly low yields – their earnings as a percentage of price.
The two-decade fall in bond yields that got us here was a positive development for those who owned them because a decline entails a rise in price delivering a capital gain. Very few of those owners were millennials and even fewer, if any, Gen Zers. Rather, the benefits accrued to older Generation Xers and baby boomers.
If the Federal Reserve, the European Central Bank and the Bank of Japan could keep up the trillions of dollars of new money creation ad infinitum, maybe this treadmill could go on forever. P/E ratios would go into the stratosphere and millennials and Gen Zers would just hitch themselves to the ongoing stock market inflation, passing the risk onto whatever generation is coming up behind them.
If younger generations can accept bitcoin’s promise of digital scarcity and censorship resistance and value its protection against currency debasement, political uncertainty, confiscation and economic dependency, it will look increasingly valuable relative to the low yields on overvalued fiat-based assets.
Ultimately, it’s the millennials’ and Gen Zers’ prerogative. Do they throw their lot in with the old monetary system of the boomers and Gen Xers, or build themselves a new one that serves their interests?
Doing research for this week’s column, I took a look at a long-cycle trend for 10-year bond yields. Fifty years seemed like the right time frame, given that next year around this time the world will mark the half-century anniversary of the “Nixon Shock,” the moment when President Richard Nixon removed the dollar from its peg to gold and single-handedly created the fiat money era.
What we see in the first 10 years of the chart below (courtesy of the Federal Reserve Bank of St. Louis’s fabulous FRED service) is the initial impact of that dramatic change. Coupled with the OPEC oil embargo, the arrival of floating currencies triggered a frightening surge in inflation, which ultimately forced Fed Chairman Paul Volcker to jack up interest rates to nose-bleed levels. That meant the yield on the 10-year Treasury note also soared as the cost of borrowing money climbed. Volcker’s painful move triggered two recessions in quick succession – recessions are marked in gray on FRED charts – in the early 1980s. But once he’d broken the back of inflation and established a sense of solid trust in central bank independence as a principle, a period known as the “Great Moderation” began. Inflation fell and yields came down. And it didn’t stop for 40 years.
For a long time, this was, quite reasonably, seen as a good thing. Killing inflation and lowering borrowing costs established the conditions for a long period of U.S. economic growth. It paid for the United States’ victory in the Cold War, which in turn paved the way for a new American-modeled version of global capitalism, which poured money into emerging markets.
Now, amid a new crisis, we’re back there again, with the Fed issuing even greater amounts of new money, propping up the stock market, and wondering what more it can do to stop things from falling apart. Why the concern? Why not just let the market retrace? Because it could trigger a reversal in that 40-year rally in bond prices – the flipside of the slide in yields – a situation that some see as the biggest, most dangerous bubble in the world. Those U.S. government bonds are held by all the world’s central banks and commercial banks in huge quantities, where they provide sought-after collateral for all sorts of secondary loans. If that house of cards was to fall, it might have a bigger impact than even the Nixon Shock.
BE CAREFUL WHAT YOU WISH FOR. During one of the finance industry’s most heavily anticipated speeches, Federal Reserve Chairman Jerome Powell dropped news of a significant policy shift. From now on, the Fed will not just target inflation around 2% but will do so on an average basis over longer periods. In other words, to compensate for periods in which inflation is too low, it will tolerate a rate above 2% for a longer period. While Powell was clear that the Fed can dial up monetary tightening at any time, that it will prioritize employment goals over those of inflation, and that it’s not bound to a fixed time frame, the key question here is what this new message does to people’s inflation expectations. Can the Fed manage them?
These kinds of announcements are often designed to manage expectations and demonstrate the Fed’s commitment to its objectives. The policy itself is not the only tool. Announcing the policy itself signals intent – like saying, “See, your fears that we are going to suddenly withdraw monetary easing are unwarranted: We’re so committed to doing all we can to keep borrowing rates low that we’re pledging to let inflation go over our target for longer.”
To be sure, it didn’t dive into proof-of-work consensus mechanisms or protocol-based monetary policy, and it inevitably attracted mockery from maximalists who complained that it glossed over their favorite bitcoin features such as digital scarcity and censorship resistance. But as something to share with newbies, to get their heads in a place to start going down the rabbit hole, this is a surprisingly useful addition to the Crypto 101 resource list. We really shouldn’t be so surprised. The IMF has had an energetic and intelligent team of economists digging into cryptocurrencies and central bank digital currencies for about five years.
OMG OMFIF! The Official Monetary and Financial Institutions Forum, a think tank commonly referred to as OMFIF, includes among its membership many central banks, sovereign wealth funds and multilateral institutions (as well as private sector entities such as investment firms and banks), which gain access to new ideas around monetary policy, including on digital currencies.
Talking about this kind of thing was unimaginable in official circles a year or so ago. Also striking: Middleton’s suggestion that, in order to get ahead of this risk, the U.S. “might do worse than commission a Silicon Valley giant to offer a digital dollar to its billions of users worldwide.” A much friendlier message than a certain Silicon Valley giant received from central bankers a year ago when it proposed rolling out a basket-based digital currency to its billions of users worldwide.
This content was originally published here.