Reflecting on the past allows us to glean insights about the present and future. What lessons do yesterday’s events offer us today? And how can today’s circumstances guide our understanding of tomorrow?
Eleven years ago, the global economy was swept up in the euphoria of an infamous property bubble. It was a remarkable era in the United States, where even the most overcast days felt bright in the eyes of its citizens.
Money seemed to pour from the skies in the form of “MEW” or mortgage equity withdrawal, enabled by soaring housing prices. Homeowners found themselves with unexpected wealth, while mortgage brokers and real estate agents enjoyed unprecedented profits. It seemed like the pinnacle of prosperity.
With newfound cash, many recipients of MEW indulged in extravagant spending. Some invested in additional properties purely for speculation, aiming to flip them for a profit to the next unsuspecting buyer. Others opted for lavish home renovations, featuring Italian granite countertops, or embarked on luxurious vacation cruises to spend their windfall.
However, the age of MEW proved to be a grand illusion. The bubble and subsequent crash were driven by reckless credit practices, leaving countless individuals to sift through the ruins of their financial lives. The country has yet to fully recover from those tumultuous times.
A Milestone from the Days of MEW
The era of MEW serves as a cautionary tale, reminding us to delve deeper when something seems amiss. A recent milestone was reported that harkens back to those days…
On January 30, Reuters announced, “U.S. consumer sentiment rose in January to its highest level in 11 years, buoyed by improved job and wage prospects.”
“The Thomson Reuters/University of Michigan’s final January index score for consumer sentiment reached 98.1, the best reading since January 2004, continuing an upward trend from August.”
Richard Curtin, the director of the survey, noted, “Consumers view the national economic outlook as the best in a decade, with half of all respondents anticipating sustained economic growth over the next five years.”
In early February, consumer sentiment dipped slightly from its January peak but remained at the second highest level since January 2007. Many hold optimistic expectations for the economy this year—hopes that resonate with those from over a decade ago.
The Perfect Time to Save for a Rainy Day
On February 13, Reuters
reported, “This year’s growth is projected to be the strongest since 2005, driven largely by consumer spending and a strengthening labor market, having added over a million jobs in the past three months—the most robust showing since 1997.”
This is indeed encouraging. A consumer-driven growth rate not seen in a decade, combined with a vibrant job market, suggests an exciting time ahead. Yet, are our expectations running too high?
Today’s economic landscape feels distinct from the euphoric days of the housing bubble in 2004. The populace does not experience the same wealth effects as before. Despite a six-year bull market benefiting primarily institutional investors, the average 401K holder remains cautious.
Prudence has not succumbed to widespread illusion. Unlike previous years, hot stock tips aren’t being handed out indiscriminately. The allure of MEW is no longer. Despite this, 2015 may not emerge as a breakout year for the economy; rather, it might resemble a year of caution.
Dark clouds loom on the horizon. Currency debasement from Japan and Europe is escalating. While a strong dollar aids U.S. consumers buying imports, the risks associated with instability persist, especially when different currency regimes undermine each other through competitive devaluation.
In the absence of a collective frenzy, it remains wise to exercise caution. The ramifications of global currency debasement are likely to manifest soon. Continued foreign investment inflating U.S. stock values may lead to increasingly severe fallout.
Now is the ideal moment to reduce debt and save for future uncertainties. When the next economic storm strikes, you will be grateful for your foresight.
Sincerely,
MN Gordon
for Economic Prism
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