Americans Are Still Spending Like There’s No Tomorrow

> So... the Fed is raising rates to 5% to try and slow inflation. But now I'm earning 5% on a bunch of money to the point that it basically offsets my rent. ... doesn't that contribute to inflation?

I don't think your case is all that common. The vast majority of people don't have that much money such that they could earn say $1500+/month with rates at 5%. Offsetting you are a whole lot of people who only have a few thousand dollars available in case of emergency and many more who don't even have that.

(that said, I'm really enjoying making 5.5% on tbills.)

It incentivizes you to continue saving the principal, rather than dump it into house. For others, higher rates disincentivize taking marginal credit card debt and large mortgages. Fewer businesses will get credit and will have less to spend on employees (who might otherwise be bidding up wages against other prospective employers).

IANREE (I Am Not a Real Estate Expert) so please take the following with a grain of salt. If you want to buy a house and believe you can afford one (even at an "inflated" price) along with the cost of maintenance, property taxes, assessments, etc. then go ahead and do it. Best case scenario, real estate values continue to rise and you’re glad you made the move. Worst case, there’s a 2008-style crash and you and millions of other voters get government bailouts.

If you’re happy in your current situation, that’s great too!

There's a supply side to inflation too, of course, but "increased feeling of wealth" will definitely lead to higher spending on average.

Crypto did it too, probably on a larger scale than any money market fund - I know many people who bought a house on the proceeds from bitcoins they bought a decade ago.

But if increased demand happens in a market where: (a) new sellers can enter easily and (b) there's low startup cost to competing it will be more of a "rising tide lifts all boats" than a "compete to inflate the prices of the fixed quantity of goods" situation. (Housing is the latter - location, location, location, and construction would lag even in a zero-regulation world. And the difference between now and 2008 is that even if some of that is kinda "funny money" like crypto, there's still real money and real income involved, and less of a "a ton of people are going to have to sell in a hurry" pressure vs the wildly over-leveraged essentially-fraudulent buyers with crazy variable rate terms and such.)

Companies are buying houses at inflated rates with the expectation that cash will lose value due to further inflation. To me, this is the only explanation for mass-buying of homes at a premium price even when interest rates are high.

Slightly different side of the coin, but in Canada – and maybe the US is the same – mortgage interest costs are what is driving inflation. Excluding mortgage interest costs, inflation has been within the target range for quite some time now. So higher interest rates are responsible for inflation in that sense.

In your socioeconomic group, maybe. There are also probably a lot of groups for whom high interest rates decrease spending (those of limited means, those with extensive investments but minimal liquid cash, etc.). That's not to say that you're wrong, only that anecdotes don't make a trend :-)

(This is why the USG generally pursues a policy of low interest rates and mild inflation: it incentivizes consumer purchasing and investment to have an environment in which dollars in the bank very slowly their purchasing power over time.)

> Unrelated but Zillow says at 7.5% interest rates that house is now $750k+, weird... makes no sense... counter-intuitive, except for how tight the supply/demand situation must be)

I highly doubt this estimate is true, outside of very specific locales. Always ignore Zillow/Redfin estimates, and just look at comparable sales in the recent past.

> me having an "oversupply" of money will

So, if you were to buy a house you'd spend more for the next 5-10 years but because your payments are fixed, whereas rents will increase each year, there will be a crossover point where your mortgage+tax payments will eventually be quite low. So people who buy a house may pump more cash into the economy in the future. Plus theoretically, whoever sold you the house will be spending any extra cash they get from it (if they buy/rent in a lower cost of living area, or if the house was sold as part of estate that goes to a younger generation).

But yes, in the short term you might be pumping the economy with more cash than you would if you bought a house, depending on your ongoing savings rate vs. spending rate.

> It feels like a semi-predictable outburst of the-need-for-joy following the dour years of Covid lockdowns and travel restrictions and general down-sentiment; a society-wide emotional pressure relief valve.

According to the article, it seem more like the onset of a doomer mentality.

Why save for a tomorrow that you might not live to see? What if all your sacrifice and planning is for naught? Better to experience life now when you are healthy as you might not be in the future (e.g. long covid, dead, ...) and can no longer do so.

I think everyone subconsciously does a risk-benefit analysis. The more uncertain things are, i.e. higher risk, the more ROI you demand from your investments. If investments aren't giving you the returns you want for a certain level of risk ... you just don't invest - which is what this is about; uncertainty has reduced the attractiveness of long term investment for people and making (less risky) short term investments comparatively more attractive.

Presumably banks don’t give out loans to older people without any property.

If you are going to sell your house to go on vacations… I don’t think too many people will do that. Say you sell at 40 … well you still have a lot of mortgage left so the bank gets their part and maybe you get like 50k profit which is not debt.

If you sell your home when you’re older, it’s your money so no debt either.

Banks only give out so much credit card debt without collateral. Presumably somebody did the math with how much they are willing to lose.

So because housing is expensive, Americans are making even poorer choices by saving less for them? Make it make sense.

>Americans spent 5.8% more in August than a year earlier, well outstripping less than 4% inflation.

Emphasis mine

I know this is curt, but it's the first thing that came to my mind as well. There's a threshold of what I can only describe as mundane misery past which it is very difficult psychologically and logistically to plan long-term, and tons of people are past that line. It is not a financial line.

The majority instinct is to blame those people as personally irresponsible. But that is always unrealistic at scale. This problem in particular has progressed beyond easy answers at this point.

Oh there is and it is coming.

I had a roommate back in the 90s that spent and managed his money like a drunk sailor. Dude had tons of debt. He didn't seem to care, though. He was happy as could be, while I was stressing to pay off college loans and save every nickel I earned. I discussed his situation with him once, thinking he was just too stupid to understand. He told me his philosophy was to get what you wanted when you can because "tomorrow is not guaranteed". I still thought he was living irresponsibly, so I pressed further. Then he got really serious, told me that his older brother was his hero growing up; he was a super nice guy that everyone loved and knew he was going places in life. His brother got killed by a drunk driver on prom night (the driver's prom). I sorta understood after that.