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Welcome to the Stay Wealthy Podcast. I'm your host, Taylor Schulte, and today with the help of friend and guest of the podcast, Morgan Housel, I'm highlighting two economic stories that have flown under the radar. The first story is that Americans might be in the best financial shape they've ever been in. And the second is that a large percentage of Americans don't agree with the first story because they're in the worst financial shape that they've ever been in.
For all the links and resources mentioned today, head over to youstaywealthy.com forward slash 93.
Okay. First things first, if you don't know who Morgan Housel is, please, please, please make an effort to change that. I might argue that he's one of the best, if not the best financial writers and thinkers of my generation. To learn more about Morgan, I would suggest doing three things after you're done listening today. Number one, go back to episode number 81 of this show and listen to, or even re-listen to the interview that I did with him.
Number two, go check out and consider buying his book, Psychology of Money, which I think by far was the best finance book of 2020. It was really, really good.
Number three, go and visit collaborativefund.com, check out Morgan's blog, and sign up for his email list so that you don't miss any of the content that he's publishing. Morgan didn't ask me to say any of this. In fact, he doesn't even know that I'm publishing this episode today. I just think that highly of him, and I know that this audience, that all of you, will only benefit from his work and his writing.
So with that out of the way, I wanted to highlight a topic, actually two stories that Morgan recently tackled that are just too good not to share. Like many of you, I enjoy listening to podcasts. I consume most of my content via podcast.
However, I realized that there's a lot of great written content out there that doesn't always make it into the podcast world. So I'm making an effort to do more reading. And when I come across something like this, and I think is really interesting and may not have made its way into the podcast world or this podcast, I'm going to share it. And so that's what I'm doing today.
If you like this format, let me know. If you hate it, please let me know as well. And we'll give this a go. So here we go. So while everyone, including me right now, is thinking about the future and what we're doing next and where the economy is headed and how to identify opportunities in the stock market.
Morgan Housel makes a good point in his recent blog post by saying, the most important economic stories don't require forecasts. They've already happened. And they tend to be the most overlooked because when everyone's focused on the future, it's easy to ignore what's sitting right in front of us. And according to Morgan, what's sitting right in front of us is that we're currently in our own generation's Great Depression.
I'll explain. He kicks off this article, which I'll share in the show notes if you want to read it. He kicks off the article by sharing that 2020 was the best year for personal income in American history by a long shot, he says. And to many of you listening, including me, that probably doesn't quite feel right or sound right given what the entire world is currently up against.
As it was acknowledged in the article, some of this boost to income absolutely came from stimulus payments and unemployment. But wages and salaries are also at a new high, and so are average hourly earnings and weekly earnings. Quote, Americans made $1 trillion more from March 2020 to November 2020 than they did from March 2019 to November 2019.
As mentioned, a part of this equation is certainly due to the stimulus. And while many of us view the stimulus as a one-time thing, Morgan makes a really good point that we're missing how much people love money. And once they get a taste of stimulus money, it becomes a permanent feature of how future economic downturns are handled.
And the bailouts in 2008 are a good example of that. Americans now know what's possible with regards to government assistance and help.
Our political leaders can't say, "We can't do that." They can't say that anymore. We're past that. We already know what's possible based on what they've done in recent history. At this point, they can only say, "I'm not choosing to do that." And no political leader wants to be on record of saying, "No, I'm choosing not to allow people to lose their jobs." It's just not going to happen.
Morgan writes, quote,
If you haven't read the Great Depression, a diary by Benjamin Roth, be sure to check it out. And I'll link to it in the show notes if you want to go look at it further. But in 1934, in the middle of the Great Depression, Benjamin Roth wrote the following, quote, people are no longer worried about government spending.
End quote.
That sounds somewhat familiar, right? And as all of you guys know, the outcome of the Great Depression was Social Security. Morgan wonders if our generation's response to economic downturns is not Social Security, obviously, but a thousand dollar or more check to each American household, a stimulus check to each American household.
Quote,
So forget about whether a stimulus package is a good or a bad thing or whether the Fed is right or wrong here. This is not the podcast for that debate. But what Morgan really drills home here is that trillions of dollars have already flowed into household bank accounts in ways that we really don't understand. We haven't really been able to come to terms with because the numbers are so big. They're so big that they're hard to contextualize.
And Morgan asked us through this article, what do you do when you get a giant stimulus check and you can't use it to travel or go out to eat or go to the mall and go shopping? What do you do with that giant stimulus check?
And if you take a look at the data, you'll find that what Americans chose to do was to pay off debt. Last year, credit card balances declined by more than $100 billion. Quote, Americans have less credit card debt today than they did in 2007, despite an economy that's 48% larger and has 30 million more people affected.
As many of you have probably done in recent months, not only have Americans paid down their debt, but Americans have also refinanced their mortgages. Mortgage refinancing more than doubled in 2020 and a $500,000 mortgage today has the same monthly payment as a $200,000 mortgage did at mid 1990s interest rate levels.
This creates massive savings for American households. In fact, mortgage payments as a percentage of household income has declined to 4%, which is a new generational low. I'll say that again. Mortgage payments as a percentage of household income have declined to 4%, which is a new generational low.
The strange thing about this is that although mortgage payments as a percentage of income are at record lows, home prices, as you guys well know, have surged so much that young people have been priced out because they can't scrape up the down payment that's required. So on one hand,
Owning a home has never been more affordable due to record low interest rates and record high personal income. And on the other, owning a home is out of reach for the next generation and a lot of young people due to record low interest rates, causing a massive spike in home prices over the last decade.
And in case you're wondering, or in case you already know this, yes, student loan debt and auto loans are technically rising. However, they're rising at the slowest rate in over a decade, according to the article. So to kind of recap where we're at so far, personal income is the highest it's ever been.
Americans can't spend like normal due to the pandemic, and so in turn, they've chosen to tackle debt. And now debt as a percentage of income is at its lowest point in American history.
The last piece of all this that we haven't touched on yet is savings. As you all well know, we earn money, we spend money, and hopefully, if possible, we also save money. And when income is replaced with stimulus checks and the checks can't be spent because of the current state of the world, savings, as you might have guessed, will surge. Quote, the personal savings rate averaged 7% in the quarter century before 2020.
When COVID hit overnight, it went to 34%. It's since dropped to about 14%, which would have been a 50 year high even before COVID. So to put this into dollar terms, American households have $1 trillion more in cash today in their checking accounts than they did one year ago. Cash savings has more than doubled in one single year.
Back to the Great Depression, Benjamin Roth noted that during that time, quote, no one had any money. Yet today, in 2021, Americans have more money than ever before. But it sounds so absurd to so many people that that's the case.
So why is that? Well, Morgan thinks it's pretty easy to answer that question. But first, before I continue, we're going to venture into somewhat of a controversial topic here for a few minutes, and that is income inequality.
Morgan writes the following disclaimer, which I'm adopting for this episode as well. And it reads, whether you think inequality is wonderful or terrible or what we should do about it is another story. I'm just focusing on what has happened. So here's what has happened. According to the article, rising income inequality has been a huge story for the last four decades and then COVID hit and it threw gasoline on this fire and
In the past, the causes of rising inequality have been complex to understand. They've been tough to pinpoint. And as a result of that, it's been slow to manifest. Now the causes are becoming more obvious and more extreme, especially given COVID. Quote, a business can either operate in a pandemic or it can't. You're essential or you're not. You can work from home or you can't. You're open or you're closed.
There are flight attendants and waiters whose careers vanished overnight and lawyers, bankers, consultants, programmers who continue earning their nice salaries and benefits from their couch. Dry cleaners whose revenue has fallen 90% and tech companies whose sales have quintupled overnight.
In aggregate, consumers appear to be in the best financial shape ever, but the distribution of their success and their economic well-being has never been more extreme. And Morgan shares two recent CNBC headlines, one of which says, "...US savings rate hits record 33% as coronavirus causes Americans to stockpile cash."
The second headline says 61% of Americans will run out of emergency savings by the end of the year. Morgan says for those earning more than $28 per hour, the job market has fully recovered. It's like the recession never happened. But for those earning less than $16 per hour, one quarter of the jobs are still gone, which is on par with the 1930s.
And yet the wealthiest Americans are spending 5% less than they did last year, while the least wealthiest have increased their spending by 2.5%. The wealthy can't travel or spend like they used to, so they spend less and save more. The less wealthy, especially those that lost their jobs, are only keeping their head above water because of the enhanced unemployment benefits.
As Morgan writes, one person's spending ends up being another person's income.
What often doesn't get much attention these days is technology's role in how people might be feeling right now. Technology, as we all know, it gives us a window into how other people live. And this window is as open as it's ever been during a time when perhaps, at least in Morgan's argument, people are in more economically different situations than ever before.
Inequality has existed forever, but technology and social media has exposed a lot of what many people have just really never been able to see. Morgan highlights a quote from Benedict Evans that says, "The more the internet exposes people to new points of view, the angrier people get that different views exist."
I think we can all agree that COVID has created vastly different points of views. It's also created a lot of extra time for people to scroll through Facebook and expose themselves to these different points of views. So it really shouldn't be a surprise that there's a lot more angry people out there.
Morgan brings this all home by saying, quote, a hard thing to wrap your head around in economics is the idea that two opposite things can be true at the same time. Consumers are in the best shape they've ever been in ever. A huge portion of consumers think that that's bogus because they're in the worst shape that they've ever been in. Both are true. Two different worlds.
For the links and resources mentioned today, head over to youstaywealthy.com forward slash 93. Thank you all for listening and I will see you back here next week. This podcast is for informational and entertainment purposes only and should not be relied upon as a basis for investment decisions. This podcast is not engaged in rendering legal, financial or other professional services.