The Psychology of Money Postscript

Housel’s Postscript answers the question: How did we get to where we are today (the current U.S. economy and especially the state of the American consumer)?

He answers this question with a story containing 10 scenes that take us from the end of WWII to the present:

1. August, 1945. WWII ends.

2. Low interest rates and the intentional birth of the American consumer.

3. Pent-up demand for stuff fed by a credit boom and a hidden 1930s productivity boom led to an economic boom.

4. Gains are shared more equally than ever before.

5. Debt rose tremendously. But so did incomes, so the impact wasn’t a big deal.

6. Things start cracking.

7. The boom resumes, but it’s different than before.

8. The big stretch.

9. Once a paradigm is in place it is very hard to turn it around.

10. The Tea Party, Occupy Wall Street, Brexit, and Donald Trump each represents a group shouting, “Stop the ride, I want off.”

Without retelling the stories of each section, here’s my summary: WWII left us with lots of young veterans who needed jobs, wanted to start families and buy their own homes, and had unprecedented access to credit at low rates via the GI Bill, mortgages, and credit cards. They all got to work, providing value to each other and others, all while earning relatively strong incomes to support their new families. This led to a strong growth of a middle class, where even the lower and upper class had lives that looked the same in essence if not in form—even if they weren’t the same brands or had all the same bells and whistles, they both had homes, cars, refrigerators, etc.

It became engrained in the financial psyche of the U.S. consumer that everyone’s lives should at least look similar to everyone else’s. A recession came in 1973, and the economic growth that continued afterwards began to separate the upper and lower classes. Everyone was going up, but the speed at which the upper class gained wealth was much faster than everyone else. Enter TV and other media displaying the extravagant, runaway wealth of the upper class (and those just pretending), coupled with a generation that was thought it wasn’t right for one person to be so much more wealthy than another, and the result could be expected: those who couldn’t afford it continued to go further into debt to buy bigger houses, nicer cars, and lots of toys they couldn’t afford. “We’ve spent 75 years since the end of the war fostering a cultural acceptance of household debt.” Some examples from Housel:

• During a time when median wages were flat, the median new American home grew 50% larger

• The average new American home now has more bathrooms than occupants.

• The average car loan adjusted for inflation more than doubled between 1975 and 2003, from $12,300 to $27,900

• Household debt-to-income stayed about flat from 1963 to 1973. Then it climbed, and climbed, and climbed, from around 60% in 1973 to more than 130% by 2007.

While the story of the U.S. economy and consumer isn’t over, the end of the story and this text ends with our current reality—the story we’re living right now. Many, many families are overextended financially, overspending in working years and in retirement, likely because of a belief that they should get what they want just like all the people on TV. Maybe they’re right, maybe they’re wrong, but as we’ve had to tell clients before “the numbers just don’t work.”

The good news is this: we are not a victim to national economic trends, our fickle desires, nor the negative aspects of the prevailing psychology of money. We can influence and manage what it is that we want, and, as we’ve said each week, success in our personal finances comes down to how we behave. So how should we behave?

• As one of our core values at Brockmann Financial states: Examine your life. Critically examine your desires, and try to find out if what you want is just what you think you want. Give yourself a taste or two (at a lower cost and commitment), to see if you want to order the full platter.

• Don’t expect to be able to afford to keep up with the Joneses, or the billionaires (and fakes) you see on YouTube in form or function.

Let us know

• When people have wonderful lives—strong family connections, low stress, good health, control of their time—are you happy for them? What about when someone earns more in a year or a month than you or I will in our lifetimes? What is your emotional response to seeing extravagant, runaway wealth and lifestyles that we cannot comprehend?

Until next time, happy reading!