“Are you walking with purpose toward the bedroom because of something you heard on the news, or do you really have to go to the bathroom?” - my Wife, this morning.
Being married is fun, and occasionally embarrassing.
If any of you are fans of the I’m Not Allowed to Watch the News podcast, you know that I’m not allowed to watch the news.
Because my wife forbade it, being married is fun.
What I heard on the news this morning was that inflation was back up, despite a few big rate increases by the Fed. These rate hikes increase the interest rate at which lenders can borrow money from the Fed., so all these higher costs get passed along to us.
If you have a mortgage or home equity loan or credit card where the interest rate is tied to the Fed rate, then the cost of that money you ALREADY borrowed just went up.
Let’s say you have $100,000 in your home equity line or mortgage. Back in November, the rate was 5%. The Fed raised rates by 2.5%. So instead of a $500 per month payment, now it’s $750. If your credit card was at 16% APR, now it’s 18.5%.
So why in the name of all that’s holy is the Fed raising interest rates to curb inflation?
Because American’s debt finance their lives. Very few of us buy things with cash we have on hand. We borrow so we can shop, if borrowing costs more, theoretically, shopping will slow down. This is why all the major retailers posted catastrophic profit reports and are laying off tens of thousands of workers after the Fed rate increased.
But it wasn’t enough. If inflation is up, it means spending is up.
This means Americans have made peace with debt and the high cost of carrying it.
Why?
Because we’re an optimistic people. We believe that if we have what we think is a good job, then more debt is okay because as long as we can work, we can pay it back. At the same time, though, we have no clear strategy to do so other than to pay what our creditors ask for every month.
Except for your mortgage or any other fixed-term loan, which has no choice but to go down over time. Most minimum payments are not designed to be paid off any time soon. Certainly not before you run up more debt.
Having a good job isn’t the same thing as being financially secure. It’s not what you make that determines your financial status; it’s what you spend and what you owe. You could make a million dollars a year, but if you spend a million dollars a year, then you’re no better than a minimum wage earner who spends every penny they make in order to survive.
Debt is bad. Not only are you spending money to have debt, but it puts you in a precarious position. You may have all your bills paid and your debt payments serviced, but then your water heater breaks or you total your car. Now you’re in trouble. Our government has the same problem, with its thirty trillion dollars’ worth of debt. Everything is okay until Montana catches fire or it snows in Key West.
Rate increases hurt average people, and enrich those who own money. Banks and credit card companies love rate increases, for a while. But with national economies being interconnected, if the rate increases work, spending goes down, businesses contract and stop spending and fire people. Suddenly no one wants to borrow money or get new credit cards.
The only thing that makes the banks and credit card companies and big businesses happy is that we don’t seem to care about fiscal responsibility even when it hurts. So, we keep borrowing and spending.
The bottom line is inflation is up, profits are down, layoffs are coming, and the Fed will continue to raise rates some more.
Who loses? We do because we allow it.
What do we do about it? Work hard, spend less, pay off debt, and save money.
Will we? Stay tuned.
For more about the debt, public and private, check out this episode of I’m Not Allowed to Watch the News.