Spending more while falling further behind
Despite inflation-adjusted incomes falling dramatically since January 2021, Americans are buying more than ever. That may sound like a contradiction, but it’s perfectly possible, at least in the short run. Americans today, especially the young, are just “bougie broke.”
That’s a fancy way of saying people have given up on saving, investing and planning for their future, so they spend every last dime in hedonistic pleasure-seeking. Ironically, the sky-high cost of living is what drives people to spend frivolously.
Between higher home prices and higher interest rates, the monthly mortgage payment on a median price home has doubled since January 2021. Prices for other necessities like food and vehicles have increased more than 20% in that same time.
Americans have raided their savings and gone deeply into debt to try and maintain their standard of living. Credit-card debt is at an all-time high, costing families over $240 billion a year just in finance charges, while hardship withdrawals from retirement plans are also setting records.
Unable to make ends meet without going into debt, many Americans have simply stopped saving altogether. Three-quarters don’t even have an emergency fund. The reasoning is sad but simple: Why save for retirement if you’ll never have enough to retire?
Likewise, many young adults have given up on the American dream of homeownership and have stopped saving for a downpayment. What money would’ve been set aside for a house or retirement is just being spent instead.
One survey found 60% of Gen Z choose to buy “experiences” (spend profligately) instead of saving for retirement. They often record those experiences and flaunt them on social media, as if these occasional luxuries are a status symbol.
Of course, many Americans cannot afford what they’re buying; they can barely make the interest payments to finance their purchases with 60% of them living paycheck to paycheck.
This has caused consumer spending to greatly outpace incomes over the last several years, but it’s not at all sustainable. Eventually, the bills people are racking up will come due, and then there’ll be the devil to pay. At that point, Americans will be forced to cut back, maybe even trimming necessities.
All the while, the shift from saving and investing toward consumption is hamstringing long-run economic growth. The savings rate today is less than half its pre-pandemic level and has absolutely plummeted since January 2021, dropping by more than four-fifths.
Less savings also means less investment, which translates into a lower capital stock. That’s bad news since capital is where we get machines and tools that increase worker productivity. It’s where we get advances in AI and medicine. It’s where we get homes and apartments.
In short, the driver of economic growth is private investment, and it is turning anemic as savings dry up from consumers spending their entire paychecks. How did we get to this place of economic malaise and hedonism?
The culprit is actually excessive government spending. Over the last several years, Congress and the president spent trillions of dollars we didn’t have, and the Federal Reserve created the money to finance those deficits. That created 40-year-high inflation and caused the cost of living to skyrocket.
What followed were steep interest rate hikes, which in turn greatly increased borrowing costs for the American people. Those who already possessed large stores of wealth, like equities and housing, saw their portfolios appreciate in price, while those who only had some cash in bank saw the value of that cash drop by more than a fifth in four years.
Thus, a two-tiered society quickly developed where many families now view retirement and homeownership as fantasies enjoyed only by a wealthy elite, not the average American whose financial situation is still deteriorating.
If the excessive government spending that caused this problem isn’t rolled back, today’s “bougie broke” phenomenon will soon be “basic broke.”