I’ve been re-reading one of my favourite books recently: Sapiens by Yuval Noah Harari. It’s not your ordinary history book, it’s just as much about human behaviour as it is history. I found this extract on lifestyle inflation particularly enjoyable:
“How many young college graduates have taken demanding jobs in high-powered firms, vowing that they will work hard to earn money that will enable them to retire and pursue their real interests when they are thirty-five? But by the time they reach that age, they have large mortgages, children to school, houses in the suburbs that necessitate at least two cars per family, and a sense that life is not worth living without really good wine and expensive holidays abroad. What are they supposed to do? Go back to digging up roots? No, they double their efforts and keep slaving away.“
This is a phenonium that affects almost everyone that earns or borrows more. Classic examples of lifestyle inflation are, unnecessary smartphone upgrades, frequently eating out, and regular wardrobe updates in an effort to appease the fashion gods. Those of us that follow FIRE are cognisant of this life trap and are trying to avoid it by living thrifty. Lifestyle inflation and thriftiness are at loggerheads, however, seeing where the global economy is heading, I envisage many more adopting thrift whether they like it or not.
The global economy ♥️ lifestyle inflation
Other than maybe North Korea, every government encourages lifestyle inflation. We are encouraged to consume more, borrow more, shop more, more, more, more! But the economy eventually becomes sick. Consumers and especially governments have been living a highly inflated lifestyle. The global economy is drowning in record levels of debt. Economists consider national debt to GDP ratios above 90% as unsafe which doesn’t bode well for most of the major economies; the USA sits at 125% (as of June ’20), UK 100% (May ’20), Italy 150% (June ’20), Japan 214% (June ’20) and the debt will continue to rise. No one knows how this experiment ends but few think it ends well.
Prepare for lifestyle deflation
In an effort to listen to someone that truly understands the economy, I found Dr. Lacy Hunt. He has a level of understanding that others don’t. Dr. Lacy Hunt outlines that its deflation we need to be concerned about. Massive debt (which is a drag on the economy), low energy prices, technology and high unemployment are deflationary forces that drive prices lower and create a spiralling effect of fewer jobs. Regardless of whether the deflationary or inflationary argument is correct, we know excessive levels of debt aren’t good for the economy.
I believe the global economy will struggle for several years with the era of decadence and lifestyle inflation to end for many of its participants. This will be a destructive phase of high unemployment, continued social unrest and craziness. As bad as this sounds, history tells us this isn’t anything special, phases of crisis show up repeatedly (approximately every 80-100 years). Eventually, the crisis ends and a positive new phase begins. As Pablo Picasso said, “Every act of creation is first an act of destruction”.
Real US debt levels could be 2,000% of economy, a Wall Street report suggests:
Problems of deflation: