YOLO: Human answers to crises and what they mean for policymakers

While the YOLO crowd still sits on ample amounts of cash to help them stay out of the traditional workforce, the US Federal Reserve (Fed) has started to dry up all other funding pools by tightening money supply massively. Hence, the Fed is signalling YOYO (‘You are On Your Own’) and not YOLO. The resolution will determine whether the economy can expect a more rewarding era, like the 1950s, or a devastating one, like the 1970s.

What always fascinates me are the diverse ways in which humans react when dealing with panic, i.e. fight, flight, or freeze. The latter two responses are the obvious and unsurprising human behaviours when facing crises.

Yet the alternative of fighting (or facing problems head on) is the most surprising one. “Panic can be a balm for the brain. When adrenaline shoots through our body, the brain gets washed out. We do not function any longer, do not understand anything, and are new human beings thereafter.” This is what a friend of mine, a former hedge fund manager, said in a media interview. He must know what he is talking about, for he went through plenty of crises, some of which almost cost him his fortune. Lucky for him, the balm of panic in his brain turned him into a new man and an ever more successful investor.

YOLO during the health crisis

During the Covid-19 pandemic, I was fascinated to see that many people reacted in unexpected ways. In a positive sense, the most intriguing statistic concerns business formation in the United States. After an initial breakdown of the economy, the founding of new businesses only briefly collapsed. Then, during and after the first lockdowns, this activity jump-started and doubled. Furthermore, following reopenings, new-business formation continued and has held up until today.

While looking for answers as to why a scary crisis like a pandemic kick-starts new businesses, I came across the New York Times article by Kevin Roose entitled ‘Welcome to the YOLO Economy’. He deals with the post-pandemic normal and heard many (in particular risk-averse) employed millennials say, in reaction to the lockdown experience in the months before: “You only live once” (YOLO).

According to surveys quoted by Roose, 40% of workers around the globe considered leaving their well-paid and secure jobs after the pandemic. This was especially fuelled by the economic recovery and the normalisation of remote work. Another aspect of this shift seems to be that employees learned to appreciate a better work-life balance.

I find it necessary to mention the two reservations I had from early on about the analysis set out by Roose. First, the reported change in individual behaviour could be seen long before the end of the lockdown months. Second, Roose’s focus on the younger generations may be too narrow. Most of the baby-boomer generation (birth years 1946–1964), if still professionally active, felt a need to catch up after pandemic restrictions were lifted, and they overcompensated for all the consumption they had missed out on.

What effect does this have on labour markets?

It is hard to estimate, but some economists claim that there are still three million workers missing in the US labour force compared to the pre-pandemic situation. What we can measure is that the labour shortage in 2022 is at historical extremes.

This tightness dwarfs anything in the past few business cycles. In fact, according to the ratio in the above chart, this tightness is the most extreme it has ever been and is only comparable to the post-World-War II period and the late 1960s. You could claim that both periods (the early 1950s and the late 1960s) were YOLO-like. The first was about a shortage of labour in an economy that was trying desperately to get back into a civil mode after the wartime efforts. Serious labour constraints were caused by a generation that was keenly aware that ‘you only live once’.

The second, in the late 1960s, took place during the hippie movement, when the younger generation was not so keen on going shopping but rather preferred to expand its consciousness on all imaginable levels elsewhere. However, this attitude eventually changed, as we all know, and it turned out to be the most successful generation in terms of wealth creation in the post-war history of industrialised economies. So never lose confidence in the next generation.

Where are we at today?

Nowadays, labour is tight, inflation is up, and the Fed is keen on bringing both back to normal. Yet given the changes in workforce behaviour, it may be a more controversial call. The jury is still out on who will blink first, the Fed or the YOLO crowd.

The Fed has become increasingly worried about the structural mismatch in the labour market. Such tight situations are inflationary, as a wage-price spiral looms. And if labour participation does not pick up soon, the inflationary pressure may become self-feeding. On the other side, there are private individuals who are still sitting on record amounts of cash. The Fed wants to thrash the YOLO crowd back into the labour market.

Hence, a showdown appears to be imminent. The Fed keeps tightening the monetary aggregates, but, ironically, it cannot effectively reduce the cash piles. To the contrary, to do that it would need to go the other way and slash rates into negative territory, possibly spurring another bubble in all other assets. Instead, the Fed’s relentless interest-rate hikes have massively increased the attractiveness of cash. But by hiking rates, the Fed has started to deflate all other financial assets.

From YOLO to YOYO

It seems as though the Fed is trying to move public perception from YOLO to YOYO (i.e. from ‘You Only Live Once’ to ‘You are On Your Own’), so that crisis-stricken individuals longing for a better work-life balance or wanting to ensure that they get to see things in their lifetimes will flock back into the safety net of corporate employment. This would indeed be a relief for labour markets. Yet for policymakers like the Fed, it is a very tricky situation.

First, it is difficult to ascertain to what extent proven policy tools will still work, and, finally, there is a risk of causing more harm than good by applying outdated policy tools. It is more than just being about whether a recession is looming or not. It is about whether the Fed will do lasting damage to the financial system, the business system, or any other key system in society.

Hence, it remains to be seen whether the historic parallels mentioned above apply in terms of the labour shortage, i.e. whether the resolution comes in the form of an echo to the economically volatile but generous 1950s, or whether it will be something similar to the economically devastating 1970s. For investors, the adage is “Do not fight the Fed”, but for the Fed itself, the adage may rather be “Do not fight the people.”