The Bermuda Triangle of Wealth | Conrad Bastable
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Three points motivated me to write this — forming a Bermuda Triangle in which the average American’s savings disappear without any apparent cause.<br>1. Considerations on Cost Disease — the observation that certain costs (Education, Medical Care, Housing) have increased many times faster than inflation, while wages in those same industries (and in all the other industries too) have remained mostly stagnant
2. Second, and on a more personal note, I’m fortunate enough to be a graduate of MIT who has worked in both finance and technology for 5 years since graduating. I’ve had fantastic employment opportunities. Nonetheless, any meaningful purchase in any of those categories above would wipe out all my liquid assets and savings and potentially require additional loans or financial assistance.<br>Education<br>For example, consider the cost of continuing my education with an MBA at the nearby Stanford (shoutout to my friends who are going / have gone already).<br>Note, this $120,000-for-10-months budget helpfully excludes the cost of the required “Experience Abroad” program, for which Stanford suggests reserving an additional $2,000 to $4,000 — practically chump change at this point.
Medical Care<br>I’m lucky in that I don’t anticipate any significant medical expenses in my future, but Google tells me that the most common reason for hospitalization in the US is childbirth. Thankfully, here in San Francisco, that would only set me back $15,000, unless of course we needed a C-section, in which case it’ll be a casual $30,000. More of an “undergraduate education” than an “MBA”-level sticker price, but certainly a meaningful percentage of my savings.
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Housing<br>And of course, not that it needs to be said, but if I wanted to buy “Shelter” near my place of employment I’d be looking at a bank-breaking $1,358,600 purchase at the median, growing 8-10% per year:
Since I can’t afford that, I’ll just settle for renting and saving my money!
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Oh. Right. The Consumer Price Index for Rent in this town is up 30% since I moved here 4 years ago. Nice. In all transparency, my rent only went up 8% this year, which doesn’t sound quite so bad. Until I do the math on another 4 years of 8% rent increases (100 * 1.08^4 = 136%) — and realize that I need a 36% increase in income over that same period just to stay flat on nominal take-home savings.<br>Per my first point on Cost Disease, real median household income in the US has only just clawed its way back to what it was in 1999. Certainly it hasn’t grown 36% in the last 4 years. But maybe there’s some way I can get ahead of the median? Maybe there’s some way I can keep my income going up more than 36% every 4 years and actually build wealth too?<br>How much was that MBA, again?<br>3. Third and finally , o fficial inflation rates in the United States continue to hover at or below their target of 2%
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Which is pretty good news for the people at the Fed, and they should feel good about managing the money supply, which has increased pretty smoothly over the same time period.<br>Now, that seemed strange to me at first because I remember reading a bunch from 2008 to 2013 about Quantitative Easing and how the Fed was “going to print a ton of money.”<br>And it seems like it’s true, they did “print a ton of money”:
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But unlike the prophecies of talking cartoon bears, all this money didn’t drive inflation through the roof and crash the stock market. It doesn’t seem to have really gone…anywhere. It just hit the banks’ deposit reserves and sat there (right-hand graph above). Two trillion dollars, perhaps slowly winding its way down now, in excess of what banks are required by regulations to hold onto.<br>From all appearances, on every metric, any way you can slice the macroeconomic data, this whole process seems to have been managed…if not perfectly, at least as well as any person could have reasonably accomplished.<br>Champagne all round for the people who work there, and I really do mean that. No sarcasm, no cynicism.
The Problem<br>There’s just this one problem I can’t get away from, and it doesn’t seem to be anyone’s fault but my own.<br>The problem is that the full cost of continuing my education wipes out almost 5 years of my earnings, and is increasing from year-to-year faster than those earnings. It’s not that it’s expensive (although it is), it’s that the expense captures the whole balance of my savings. But maybe that’s okay, these things are supposed to be investments. I should be willing to trade savings now for higher earning potential in the future, right?<br>Well, yes. There’s something different between savings and earnings that I’ll get to later (spoiler: compounding). But beyond that, I can’t help but notice that after this little speedbump on the road to prosperity, bigger and scarier ones loom on the horizon.<br>For example: if I want to fund an undergraduate...