When your investments are increasing faster than you can spend money, life is great. But then things change.... what happens?
In the last two years, we have experienced the "Trump Bump" - an artificial inflation of the economy, a bubble if you will, that was caused by mindless euphoria in the marketplace. De-regulation would free up companies to make more money! We'd all go back to burning coal! A trade war with China would mean increased profits for American producers! The new tax law would put more money into the hands of consumers, who in turn would bootstrap the economy!
Those were the theories. Time will tell if they were right. On the other hand, staggering debt, by consumers, companies and even our government, hangs over our heads like the sword of Damocles. The longer we fail to address this issue, the worse it will be when we are forced to. And no, the economy didn't grow enough to "pay for" the tax cut.
It seems the wild Wall-street party of the last two years is done and now we have to deal with the New Year's hangover. It remains to seen whether this is something that can be cured with two aspirin and bed rest, or result in power-vomiting.
One problem for the economy and markets is that so much is driven by emotion and perception. People bid up stocks during the first part of the Trump era on the notion that a "business-friendly" administration would unleash the vaunted power of American Capitalism. That sort of didn't happen, actually. But during the last two years, a funny thing happened - my portfolio, as well as that of many Americans, actually increased in value, even as we spent the money.
For me - and many other retirees of fairly modest means - this meant we had a bottomless purse. No matter how much we spent, it seemed, there was more money in our investment accounts than there was the month before. And that is a pretty fantastic thing, when it happens. You become more confident in the economy and are inclined to spend more money as a result. Hey, why not? You can drop ten grand and your net worth still goes up by twenty! Trump Bump! Yea!
But of course, to folks like me, this something-for-nothing situation just serves to make me nervous. Maybe I am a pessimist, or maybe just a realist. But the gravy train, in my experience, never rolls on forever.
In the next few months, and indeed, in the last two, we've seen the market go down. Suddenly, my net worth actually has decreased in value. If I spend money now, that accelerates the decline in my net worth even further. As you can imagine, there are probably a lot of other people in a similar boat - some being folks who are not even retired yet. Even to a working stiff, spending money seems less attractive when your 401(k) dips in value, as does the value of your house.
And that is what happened in the spring of 2009 - we panicked. Stocks went down, profits went down, and everyone pulled back from spending. "Maybe now is not the time to buy a new car - our neighbors were just foreclosed upon!" People get scared.
And for some, the coming months could get very scary. With the bankruptcy of Sears and other retailers, it is possible that an awful lot of people will see their pensions cut in half. How do you think that will affect their spending plans?
Once again, the snowball effect kicks in. Bad news causes other bad news, and it snowballs out of control until it reaches a point where folks realize they were being overly-paranoid. Even in the worst months of the 2008-2009 recession, most people still went to work, got a paycheck, and paid their bills. A lot of people didn't of course, but it hardly was the majority of the country.
The same was true in 1980, when high interest rates and high inflation strangled the economy. Unemployment was near 10% back then - but 90% of us had jobs and paychecks and managed to do all right. Well, at least I did. There are always jobs for those willing to work, in any economy.
But nevertheless, I am sure that my spending will start to shrink in the coming months, as the economic bad news starts to pile up. And my decreased spending will mean more economic bad news for the folks who sell me stuff, and the process bootstraps itself.
Of course, in a year or two, it will likely turn itself around, as it did in the past, and eventually will do in the future.
Well, that is, unless this debt thing causes more inflation and wipes us all out.