This past week the Fed has been making the news with speculation of a rate hike, and once again Janet Yellen and gang are stuck between a rock and a hard place.
Investors are so “keyed in” that any rise in rates will be a mistake.
The main objectives are:
1) Raising rates will increase the cost of our debt load.
2) Will hurt consumer lending.
3) Will slow the global economy even more (if overseas countries are adding more stimulus to their economies, why can’t we?).
4) Will *insert reason here*…
You get the point.
But what the Fed actually does or doesn’t do is not the problem we face here in the US.
The problem is you and me.
For decades, the US has been a consumer driven economy. Pre-2008, individuals had decided that they get greater happiness by purchasing all the newest and shiniest “toys” they can get their hands on.
This of course sounded better than saving — and watching all their friends and neighbors have fun playing with those new toys.
But something has shifted since 2008 in the minds of consumers — what they think makes them happy.
First, let’s take a step backwards to understand “us”, the consumer a bit better.
In The Secret Of Selling Anything by Harry Browne, which was recommended to me when I first opened the doors to my investment firm a decade ago, the author talks about selling as finding and addressing the happiness of the customer.
Instead of buying because of aggressive and over enthusiastic sales cycles, consumers are really just focused on what will make them happiest.
“Will this new sports car make me happy — or will I be happier if I save that money?”
Pre-2008, the answer was to buy the sports car.
But now, what makes consumers happy has changed. People are happier to save the money, or get a deal on a more practical car.
We can even see evidence of this in the TV shows we watch. In the early 2000’s, the shows that were popular on networks such as MTV, TLC and HGTV focused on flipping houses quickly, making money, and the “bling”.
Now let’s look at what is popular:
Shows like Duck Dynasty and Pawn Stars dominate the tv listings now — an 180 degree turn from MTV Cribs, My Super Sweet 16 (where parents throw over the top sweet 16 birthday parties) and every curb appeal show on HGTV.
(note for Kardashians, the reason your ratings are down may be due to the glitzy feel the show now has.)
If happiness in the mind of the consumer is now being measured by frugal spending, practical family trips (think camping), cheaper/streaming entertainment, and less focus on name brands, then no amount of Fed intervention will jump start the economy.
What is needed is something to motivate the consumer back into believing that they will be happier spending vs saving.
How to do this, I don’t really know.
– A new cycle of amazing products (weren’t we suppose to have Back to the Future-like hover-boards by now)?
– The millennials spending more as they enter the work force (remember spending freely in your 20’s?), but will college loan debt suppress this?
– Incentives for consumers to spend vs save, like negative interest rates?
Whatever does spark a change won’t happen at the next Fed meeting. We need to stop hoping the Fed will magically fix the economy, and start figuring out how to make spending fun again.