We Squandered Cheap Money and Now It’s Gone

There have only been a handful of documented financial events in the last hundred years. Perhaps the most known event is The Great Depression which occurred between 1929 and 1939. It was a bad time that would eventually lead to World War II.

Arguably, The Great Depression is one of the worse economic downturns in history (so far). By 1933, 15 million Americans had lost their jobs. Over 20,000 companies went bankrupt. Most US banks failed.

And then we have the Global Financial Crisis from 2007 to 2008. While not as long-running as The Great Depression, it was considered the worse singular financial event since The Great Depression.

In the decade that followed the GFC, things were still grim in terms of metrics. Wage growth across OECD countries was unusually weak. In the UK, real wages grew an average of 33 per cent a decade from 1970 to 2007 but didn't grow at all in the 2010s.

Sadly, if you bought a home in the last couple of years and didn't get a long fixed-term rate, you feel the sting of central banks increasing interest rates to fight inflation. For many homeowners, the lower mortgage repayments allowed people to borrow more. It also meant that people didn't feel the effects of weak wage growth as much.

And during the pandemic, if you were lucky to get a house, you might have noticed a weird trend where the value of houses was going up faster than your wage. And I don't mean a little gain. I am talking about ridiculous increases in the price of a property. Subsequently, rents also went up as supply dwindled.

For perspective, my wife and I bought land in 2021, intending to build but sold it a year later because of the construction industry woes. We made a $300k profit in 12.5 months. There was no house, just land. We had no intention to sell, but when the builder kept saying the price was going up despite them delaying things, we decided to bail on the idea.

Low-interest rates also rushed money into startups that promised to grow quickly, fuelled by pandemic growth. As we know, once pandemic restrictions lifted, people left their homes, and many of these big promise startups saw a huge drop in value. At the time, investors thought the good times would last forever.

Also, during this time of cheap money, we saw buy now, pay later services grow rapidly. Even banks started offering their pay-in-instalment type offerings to customers. At the time, these BNPL services were a great way to prevent economies from flatlining during uncertain times. They were the next big thing.

A survey by the US Federal Reserve in 2021 found that while 78 per cent of BNPL users did it for convenience, 51 per cent also said it was the only way they could afford their purchase.

Let that sink in. Fifty-one per cent of US consumers were using these services to buy items they couldn't afford. They are using these services as credit cards, buying now and dealing with the burden later.

It's sad to think that people during an era of historically cheap money were squandering it away on BNPL purchases they didn't need. While money might have been tight for some, as many lost their jobs during the pandemic, BNPL services allowed people to spend when they couldn't afford to.

And while property investors and landlords enjoyed record-low interest rates, rents started to climb. Soon all of that spare money was disappearing as people had to spend more on rent.

You know society is in a bad place when families are sleeping in their cars because they can't find an affordable rental property.

The event that will mark this sad era of cheap money is that you can now use BNPL services to buy food. PayPal now offers a BNPL offering called Pay-in-4, which means you can now pay for things not using traditional services. You can buy Uber Eats gift vouchers using AfterPay. Now you can split up your $30 meal purchase into four repayments!

If the fact you can pay for food deliveries using loan-type services isn't a concerning and sad state of modern society, I don't know what is.

Anyway, I have to go. My Uber Eats delivery is here.