In this episode of Retire Your Way Radio, I talk about two true and seemingly opposite stories of how American consumers as a whole are in the best financial shape they have ever been in while so many consumers are in the worst financial shape they have ever been in. Then I compare the present time to The Gilded Age in American history.
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Morgan Housel, the author of the book The Psychology of Money, wrote a blog post in early January 2021 called Two Worlds: So Much Prosperity, So Much Skepticism that I want to talk about today.
In that blog post, he describes two stories.
“One is that household finances might be in the best shape they’ve ever been in. Ever. That might sound crazy, and it’s easy to overlook because of the second story: Covid has dumped kerosene on wealth inequality in ways we’ve yet to fully grasp.”
Let’s dig into both of those stories.
Story 1: Household Finances
First, how are household finances in the best shape ever?
As detailed in Housel’s blog post: 2020 was the best year for personal income in American history by a long shot. Much of that comes from stimulus payments and unemployment income, but private wages and salaries are also at a new high.
What’s also changed is that we now know what is possible when it comes to federal aid during economic downturns. With the two major stimulus packages passed in 2020 that included $1,200 and $600 payments sent directly to households, we now have a precedent for that kind of relief for future economic downturns.
Adjusted for inflation, the two stimulus packages passed in 2020 were roughly equal to what we spent fighting World War II over four years.
So, what do you do when you get a stimulus payment, but you can’t travel, go shopping, or go out to eat due to various restrictions?
You pay off debt! At least that’s what millions of Americans chose to do.
Credit card balances declined by over $100 billion over the past year. In fact, Americans now owe less in credit card debt than they did in 2007 despite having 30 million more people now and an economy that is 48% larger.
Mortgage refinances also more than doubled in 2020 creating massive savings for American households due to the low interest rates for owning a home. At the same time, housing prices have increased to new high levels, growing by an average of 6% each year over the past decade.
We have also been saving more than ever. American households have $1 trillion more in checking accounts now than they did a year ago. For comparison purposes, we had $800 billion in checking accounts a year ago, so savings has more than doubled to about $1.8 trillion.
“When income is replaced with stimulus checks but spending doesn’t rebound, savings surges.”
This is what happened in 2020.
Story 2: Wealth Inequality
Another thing that has been magnified in 2020 is income inequality.
Now I’m not going to talk about whether wealth and income inequality is good or bad or even what we should do about it. I am just focusing on what has happened statistically.
COVID has sped up popular trends such as ecommerce and working from home. It has also sped up the already growing income inequality.
Many jobs, such as flight attendants and waiters, disappeared overnight, while other jobs, such as lawyers and consultants, kept their nice incomes while working from home. The sales of tech and cloud companies have soared while dry cleaners and restaurants have struggled to survive.
Overall, the losses have been offset by the stimulus and many businesses learning how to operate during a pandemic.
But there are 9 million fewer jobs now than a year ago, a loss of 6%. The job market has recovered for those earning over $28/hour, while a quarter of the jobs are still gone for those that were earning less than $16/hour.
The distribution of success has never been more extreme.
As another element, many workers, mostly women, left the workforce to assist with remote learning for their kids as schools were shut down.
Housel wraps up the article to say: “A hard thing to wrap your head around in economics is the idea that two opposite things can be true at once. Consumers are in the best shape they’ve been in, ever.”
“A huge portion of consumers think that’s bogus because they’re in the worst shape they’ve been in, ever. Both are true. Two different worlds.”
The Gilded Age
What’s happening now with wealth inequality could be compared to the The Gilded Age in American history. The Gilded Age was an era from the 1870s to about 1900 that experienced rapid economic growth after the Civil War.
During this time, American wages grew higher than those in Europe, and millions of European immigrants poured into the United States.
Railroads expanded rapidly and connected isolated areas to larger markets. This expanded opportunities for farming, ranching, and mining to spread to a national marketplace.
Labor unions became important in industrial areas, while the South remained economically devastated after the Civil War.
The term “Gilded Age” comes from an 1873 novel by Mark Twain and Charles Dudley Warner called The Gilded Age: A Tale of Today that describes serious national social problems as being masked by gold gilding.
The unequal distribution of wealth was high during this period. From 1860 to 1900, the wealthiest 10% of American households owned roughly three-quarters of the nation’s wealth, while the bottom 40% had no wealth at all.
Just look at the mansions built by the Vanderbilt family alone during this time period. Years ago, I toured The Breakers mansion built by the Vanderbilt family in Newport, Rhode Island. It took a staff of over 30 for it to run properly back when the Vanderbilts lived there! It would cost the equivalent of over $150 million to build that mansion today.
The Vanderbilt family also built the Biltmore mansion near Asheville, North Carolina, which is the largest privately-owned house in the United States.
Things aren’t much different now as far as distribution of wealth. In the 3rd quarter of 2020, the wealthiest 10% of American households owned about 69% of the nation’s wealth while the bottom half owned about 2%.