In March 2020, there was a major cutback in consumer spending.  A big portion of this was just the fact that people couldn’t spend.  It is difficult to spend money on your hair and nails when the hair salons and nail salons are closed.  You can’t spend money eating out when restaurants are closed for diners.  Even getting a to-go order is cheaper without the tip and possibly without drinks.

That isn’t the only reason consumers were cutting back at this time.  There was a rational fear.  When the media is advertising the plague, and businesses are shut down, and there are orders to stay at home, there tends to be uncertainty.

Many people lost their job in 2020.  Some were temporary.  Some had their hours cut back.  Even with some people getting unemployment benefits greater than their previous income, it still creates uncertainty.  You don’t know how long it is going to last.

This is why it makes sense for people to cut back their spending.  You should save money for a rainy day.  When you actually get a rainy day, you need to reduce your consumption in case it is rainy again tomorrow.

This is especially true for families or people who have others who depend on them.  If you are 23 years old and single and you temporarily get laid off from work while collecting unemployment that replaces that income, then you probably aren’t too panicked.  You can always find another job.  You can scrape by.

It is a different situation for someone, or even a couple, who has several children at home who depend on them.  They probably have a house.  They have health insurance costs to worry about.  They have to put food on the table for others who are dependent.

People react according to their environment.  They adjust as needed.  When pushed, humans can adapt and change.  In football terminology, they can call an audible.

While all of us do self-destructive things at times (some worse than others), humans do have a rational side.  It is rational to increase savings at a time of turmoil and great uncertainty.

The Irrationality of an Artificial Boom

This rationality seems to get thrown out the window when things are distorted.  There are major distortions that come from government spending and policy.  There are also major distortions in the money we use every day.  These are distortions caused by a wildly fluctuating money supply and artificial interest rates.

We are currently experiencing a bit of a boom, which is hard to believe given what has occurred over the last 18 months.  This isn’t just a rebound to where we were in February 2020.

Housing prices have exploded almost everywhere in the United States.  The price of my house is almost double of what it was 11 years ago.  It is at least 30% higher from where it was 18 months ago.

Stocks continue to roar and hit new all-time highs.  The Nasdaq hadn’t even hit 10,000 yet before March 2020.  Now it is pushing close to 15,000.  Meanwhile, speculative “assets” like cryptocurrencies and NFTS are out of control, with everyone and their brother trying to make a quick buck.

Even outside of real estate and investment markets, I see a major boom.  People are spending on lavish vacations again when they can.  I see people getting major upgrades to their home.  I see people installing pools that must cost close to six figures, and the prices are only going up.

So most people are spending money again like it’s 1999 (or February 2020).  Actually, I think people are spending more now than they were 18 months ago.

Some of it is rational.  The Federal Reserve has flooded the system with money, while it keeps short-term interest rates near zero.  It makes some sense for people to rush into real estate.  Interest rates are low, and a house on some land is a hard asset.  It is better than having your money sit in a checking account and losing 2 or more percent to inflation every year.

But sometimes it does make sense to have money sitting in a checking account losing 2 percent per year to inflation.  It can even make sense at 5 percent price inflation.

If the real estate bubble pops in 2022 and prices go down by 40%, then it certainly would have made more sense for someone to keep their money in a checking account rather than buy a house this year, even with the low interest rates.  It would be better to buy it in a couple of years at a 40% discount.

If your money is sitting in a checking account waiting to be used as a down payment on a house, then it is only depreciating if the prices for houses are going up in your area.

I think it is good that people are generally feeling good again.  It is nice to see people going to a movie theater.  It is nice to see busy malls and restaurants.  But at the same time, I am concerned that many people are going to get hurt when the boom goes bust.

The reason it makes sense to save for a rainy day is so that you aren’t miserable when the rainy day hits.  There is something to be said for continuity.

It is mentally exhausting to have to significantly change your lifestyle because economic conditions changed.  For some people, it can be dangerous.  Most homeless people had a home at one time.

It is good to set a goal that your lifestyle won’t change in any significant way because of economic conditions, assuming nothing dramatic.  Your lifestyle may change because of your personal situation of income, savings, life events, etc., but it shouldn’t be determined by booms and busts in the economy, at least to the degree that you can control that.

If you save some money and live at least a little bit below your means, then you can typically avoid having to change your lifestyle because of an economic bust.