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Young Generations Are Now Poorer Than Their Parents And It's Changing Our Economies - YouTube
Channel: Economics Explained
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a society grows great when old men plant
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trees who shade they know they shall
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never sit in a greek proverb from a time
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well before the problems of our modern
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economies or the study of economics
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itself is as true today as it was
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thousands of years ago but do we really
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live by this idea for the first time
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since the industrial revolution
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successive generations are not becoming
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wealthier than their parents while there
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have certainly been setbacks and
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historical outliers from this trend it
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has remained true in aggregate for the
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populations of most developed economies
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for a long time it was simply the
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expectation that people's children would
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have a better lifestyle in their
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adulthood than they did but today that
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really is no longer the expectation in
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fact most young professionals can only
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aspire to live the lifestyles that their
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parents did younger generations are
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finding it harder and harder to get
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reliable jobs afford comfortable homes
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start a family and save for retirement
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this is despite the fact that the world
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is a much richer place today than it was
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at any point in the 20th century when
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baby boomers were busy building their
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now unassailable fortunes
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so what is going on here how is it that
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a world that is richer overall producing
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generations that are poorer than the
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ones that preceded them is there some
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underlying cause to this if there is is
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there some way to reverse it and if
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there isn't does that mean that we can
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only expect every generation going
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forward to be poorer than the one that
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came before it from now on oh and i
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suppose it's probably also worth asking
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does this even matter since everyone is
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eventually going to die and pass down
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their wealth anyway
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here's a question for you all is it
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better to be born into a large cohort
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with lots of people the same age as you
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or a small cohort with not a lot of
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people the same age as you traditional
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economic theory would suggest that a
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small cohort is preferable it means less
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competition for jobs housing social
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programs spots in good schools and on a
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macro level less competition for things
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as basic as natural resources but how
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then do you explain the baby boomers
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which despite being part of the largest
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population explosion ever are an
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aggregate very wealthy
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well lord david willets a british
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politician demographer and author
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suggests that the opposite may be true
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and that in a democratic system being
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part of a larger cohort is actually
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preferable because it gives that group
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more voting power on generational issues
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and more sway in marketplaces when the
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boomers were young they voted for
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policies that benefited them low-cost or
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free higher education family support
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systems and strong social welfare when
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they got to the peaks of their careers
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their voting patterns changed again and
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now this large block of voters was in
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favor of lower income taxes less
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business regulation more domestic
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industry protections to avoid
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outsourcing and global competition and
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on a smaller scale things like zoning
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laws which would protect the value of
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their homes the push towards suburbs
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with mandated single-family building
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requirements meant that houses got
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bigger and good locations got more
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desirable because only so many family
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homes could be built there in the 50s
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houses were basically a commodity the
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majority of the expense was in building
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the structure itself and it wasn't
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unreasonable for the family cars to cost
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more than the family home fast forward
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50 years and those houses are now
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investments as much as they are places
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to live in old age the boomers have now
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started voting to support retirement
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benefits pension schemes medical
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infrastructure and to remove wealth
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taxes even if that comes at the expense
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of all the schemes that serve them well
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in their young age of course david
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willett's work focus specifically on the
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uk and yes i know there are certainly
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people that vote for the greater good
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rather than their narrow self-interest
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but on average it is easy to see this
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trend throughout the past half century
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in most advanced economies in my own
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home of australia for example the 2019
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federal election was more or less
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decided by a policy decision that would
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reduce the tax effectiveness of
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australian retirement accounts the party
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that advocated for keeping the favorable
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tax structure ended up winning primarily
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thanks to older australian voters we
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recently just had another election where
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that opposition party backed down on
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their plan to change retirement account
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taxes and they won very convincingly a
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2017 british election study found that
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over time votes for conservative parties
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have shifted from being divided by rich
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and working class to being divided by
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young and old a lot of what i've
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discussed so far came directly from
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willett's book the pinch and a lecture
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he ran at the royal institution it's
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definitely worth a read if you are
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interested in these demographic
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processes now a lifetime of favorable
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government policy can be hugely
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beneficial to building wealth imagine
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how much better off the average
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millennial would be if they got free
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college or secondary schooling even all
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other things being equal this would be
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the difference that a lot of young
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people need to be able to put a deposit
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on a house and that's the next big issue
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to consider the housing divide
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david willett's small cohort theory
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probably omits or at least doesn't
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emphasize one important detail that gave
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baby boomers another advantage over
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successive generations and no it's not
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simply that they were able to buy houses
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when they were cheap certainly that
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didn't hurt but it's more a symptom of a
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bigger issue they were a big cohort in a
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small world they had all the voting
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power and hardly any of the competition
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in the 1950s and 1960s the global
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population was roughly a third of what
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it is today and not to start a whole
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thing here but if you were a white man
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and the countries that we are mostly
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focusing on your competition was even
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less severe so this added back all of
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the apparent trade-offs that we thought
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of earlier there really was less
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competition for basically everything
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including jobs because employers had a
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smaller pool of labor to choose from
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labor force participation amongst women
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was very low which further reduced the
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supply hence the bargaining power of
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workers but it also meant that domestic
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duties were normally taken care of which
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reduced household expenditures on things
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like child care food and general
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maintenance these higher relative
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incomes combined with lower outgoings
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meant that houses could often be paid
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off with as little as one year's income
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yes they did have to endure higher
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interest rates especially in the 70s and
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80s which were their peak home buying
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decades but it didn't really make the
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difference it would today
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the median home in the usa in 1985 was
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82 000
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that's median so 50 of homes like the
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ones first home buyers would be looking
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at would be cheaper than this but let's
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keep it simple and stick with 82 000.
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adjusted for median household incomes
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that 82
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a 000
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and three thousand
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the average mortgage rate at this time
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was fifteen percent or roughly fifteen
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thousand dollars per year it did get
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higher in certain years but most
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borrowers were fixed in at an absolute
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max of about fifteen percent so that's
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the worst case scenario the median home
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today costs 430 000 and the average
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interest rate is just over five percent
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or 21 500 per year just in interest
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payments
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again this is adjusted for median
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incomes at the time so on the surface
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these seem pretty comparable maybe the
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younger generations shouldn't be
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complaining about unaffordable housing
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after all a lot of people brush away
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this comparison by saying that inflation
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at this time was extremely high so these
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higher interest rate payments didn't
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mean anything but that's actually not
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true
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inflation in 1985 was three and a half
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percent and while it was as high as 13.5
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in 1980 this was consumer price index
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inflation not housing inflation the
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prices of houses throughout these
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decades actually grew at a relatively
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modest rate it was everything else that
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was getting expensive this is kind of
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the opposite of what we expect today
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where house price growth outpaces
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inflation but that was not the case in
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the 70s and the 80s so yeah the
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inflation argument isn't totally fair so
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is it fair to complain about how easy it
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was for baby boomers to buy a house well
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no
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they still had it easy for two other big
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reasons
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it's not what you would expect but the
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higher interest rates actually kind of
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helped them saving money for a deposit
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in an account that pays 10 interest per
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year really accelerates that savings
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goal higher interest rates also ensure
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that house prices never got too high
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because the repayments would just become
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unaffordable in our example from before
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we were looking at interest paid on the
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loans from two time periods
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but the thing with a mortgage is you
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gotta pay back the principal as well
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paying back the principal on a 430 000
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mortgage over a standard 30-year loan
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term will cost an additional 14 300 per
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year bring the total annual repayment to
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just under 36 000
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the house from 1985 would have a
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principal repayment of three thousand
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dollars per year bring the total
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repayment to just over eighteen thousand
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dollars per year half of what the 2022
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home buyer would be paying despite
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interest rates been three times higher
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put another way if the repayments were
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kept equal the person buying the home in
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1985 could have it paid off in five
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years rather than 30 years
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so why am i focusing so much on housing
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well despite being a very important part
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of our lives houses are also uniquely
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unproductive
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real estate is kind of unique as an
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asset class because it doesn't produce
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anything of value a house sitting on a
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block of land can appreciate in value
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and can provide a home to its owners or
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rental income stream to an investor but
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it doesn't make anything of course there
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are other investments today like
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cryptocurrencies that also don't produce
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anything of value but their market is
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minuscule next to the market for real
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estate around the world minuscule and
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also irrelevant if the value of bitcoin
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goes to a million dollars well that's
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great for the people that invest in it
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and it will have some minor knock-on
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impacts in other markets as people cash
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out to buy whatever crypto millionaires
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buy but it's not going to put anybody
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out on the street housing affordability
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can do that and it can also slow the
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progress of entire economies every
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economy in the world is still for better
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or worse focused around large centres of
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economic activity what a regular person
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might call a city if the real estate in
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these cities becomes too expensive then
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it becomes infeasible for workers to
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hold down jobs there because more and
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more of their income will just go to
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paying rent in the short term this can
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be offset by higher wages but then these
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centres are really just operating for
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the benefit of the landlords that are
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lucky enough to own property there the
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money that landlords make from their
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properties are unlikely to be reinvested
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into company growth or spent on regular
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consumer consumption that keeps these
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businesses in business it is likely to
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be spent on more property further
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driving up market values and the amount
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of money that gets sucked out of
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productive centres to be shoved into
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unproductive assets higher house prices
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also reduce social and geographical
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mobility a 2020 pew research study found
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that 52 of young american adults between
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the ages of 18 and 28 still live at home
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with their parents one could also
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reasonably assume that this number is
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higher after two years of covert and
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record high house price growth these
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young adults are financially bound to
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where their parents live if they get
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offered a really good job in a different
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city they would have to decide if it's
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worth the pay increase versus the
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increased cost of living on their own if
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they decide it's not then they miss out
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on a good job and a business misses out
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on a productive worker the concentration
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of wealth in a particular generation is
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something that can have very real
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consequences for entire economies and
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these effects are only going to get more
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pronounced as populations continue to
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age places like japan are clear examples
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of this and they don't have the same
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kind of housing problems that we do in
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the west but long term does this even
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matter
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i don't want to get too morbid here but
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people eventually die and their wealth
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will get transferred down to their
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children or some other beneficiary so
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the concentration of wealth in a single
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generation is at worst a transient issue
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i actually made an entire video last
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year about the great wealth transfer
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which is the process of the baby boomers
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dying and leaving their wealth behind
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the problem we discovered in that video
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was that a lot of the wealth that is
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being passed down is coming in the form
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of private family businesses in brief
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the problem with that is that often
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these small businesses need the owner to
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continue operations and the people that
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stand to inherit these businesses are
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either unwilling or unable to run them
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small businesses are a huge part of the
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economy losing them will do a lot of
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harm now a glimmer of hope here is that
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these businesses can be sold by their
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inheritors to people that do have the
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skills and desire needed to run them
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perhaps they will sell them to people
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who have themselves got the money they
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need to buy the business from their own
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inheritances the problem here is the
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type of people that will actually be
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receiving this money
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most people don't receive money from
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their parents passing until they are
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pretty old themselves often approaching
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the end of their careers or starting
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retirement if the money gets handed down
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to them they are likely just going to
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use it to fund their own retirements and
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then just hand down whatever's left to
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their own elderly children
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money pooling in the hands of older
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people means less opportunity will be
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afforded to younger people to do all the
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things that they do to build a
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functioning economy buying a house
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getting a good job and you know starting
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a family so that there is a continual
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supply of workers to run an economy you
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can't run an economy on people waiting
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to get old enough to finally do
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something with their lives economists
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call this the intergenerational wealth
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problem i like to call it the prince
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charles paradox but it is something that
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we are going to have to address things
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like wealth and estate taxes are
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commonly proposed solutions but even if
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they did work they are going to be very
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unpopular amongst the huge voting bloc
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that got us here in the first place
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the final thing we got to ask ourselves
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is
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is this all the boomers fault
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i know a little bit of intergenerational
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bickering is all good fun but blaming
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our current economic issues on a single
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generation is not going to be very
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productive
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voting in your own best interests and
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policies been enacted in the best
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interests of the majority is the
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foundation of democracy and i don't
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think that anybody is reasonably going
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to argue that this is a bad thing i
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think it's also very important to look
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at examples of economies where this has
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not happened the second largest economy
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in the world china is a great counter
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example their generational baby boomers
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are known locally as the lost generation
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because they spent most of their working
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life in a dysfunctional economic system
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they were also too old to truly benefit
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from the rapid economic expansion that
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took place in the decades after the
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economy started opening up this meant
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that despite still being a large portion
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of the population they did not enjoy the
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same economic prosperity as their
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western peers economic prosperity was
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also something that boomers enjoyed that
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wasn't necessarily within their control
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the last half of the 20th century by
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historical standards was very peaceful
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the world also opened up to
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international trade and growth was put
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into overdrive by an abundance of cheap
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energy in the form of fossil fuels it
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was a great time to make a fortune and
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people did which is probably the final
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piece of the puzzle once people become
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extremely rich and i'm talking about
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multi-millionaires and billionaires here
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they don't normally become poor again
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the clump of billionaires that came from
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this generation will be skewing these
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figures to make them look worse than
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they really are remember in a group with
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one billionaire and 999 people who are
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completely broke the average member of
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that group is a millionaire
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most billionaires are pretty old and
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these people will be making outsized
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impacts on their generational wealth
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statistics
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again if we look at billionaires by age
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in china a country where voting by the
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general population doesn't really happen
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in the traditional sense we can clearly
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see that wealth comes from periods of
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strong economic conditions not just
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having the ability to bend public policy
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to suit you and your peers although of
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course i'm sure it doesn't hurt
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you
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