Are You Wealthy?

By SJ Spence

Are you wealthy? Or, better yet, do you feel wealthy? What an odd question as each of us probably have a different definition that would describe wealth. In America, even the most less fortunate are among the wealthiest in the world. It is hard to believe, but true and it explains why many risk their lives to come to the USA. But this blog is not about immigration. It is about a thing called “The Wealth Effect”.

My goal is to highlight to you how emotions can control the ordinary person, especially if they are unaware that they are being controlled. Knowing what these tricks are will help you see better financially on how you may be subjected to manipulation by the controlling elite.

Did you know that service type businesses like restaurants, hair salons and delivery services for example, prefer for you to use a debit or credit card instead of cash for their services? If you knew this already, you would agree that when a purchase is made and it is paid for in cash, the consumer will be a little more conservative when it comes to the tip or adding the desert or having that extra glass of wine.  Why is that? Businesses quickly learn that there is a psychological connection with money and the consumer, and they are more aware of their spending and tend to withhold from buying those ‘extras’. When a card or a form of digital pay is used, that connection with money is broken and the ‘extras’ suddenly become more likely, or the tip is bit more generous as it does not feel like money is being spent. This is also true with retail shopping as the consumer can purchase unnecessary products and this will generate more sales for the shop. Let’s don’t even get into vehicles! Would you really spend $80,000 on a car in cash? Especially if you are among the 40% of Americans living paycheck to paycheck. Think about it! Usually, it is the payment that you prefer to spend. This psychology is good for the economy, but not most consumers.

What are the emotions that control us, if we allow them to? What comes to mind is fear, greed, anger, happiness and security to name a few. Now if we apply some of this to our personal finances, like fear (inflation/loss of employment). When you experience fear, you may perhaps begin to start cutting expenses and begin saving. Conversely, when you are secure in your finances, you may be comfortable to spend a little more than you should. When you read my book “Money Plain and Simple; What the Institutions and the Elite Don’t Want You to Know”, you can recall that spending is a vital part of today’s global economy. The more you spend the greater the velocity of money. When the velocity is high, asset prices increase and when asset prices increase there is a feeling of wealth especially for those that have assets like a home and investment accounts.

The “Wealth Effect” is a psychological tool that is used to manipulate people. It happens when your home value or your investments increase and creates a security of financial wealth, even when the person never takes the gains. Their wealth is simply reported on their statements. Most don’t really question the reasoning why their values exploded and they simply ‘take the win’.

Over the past year, the wealth effect in the USA has released its seductive spending impulse as most homeowners have watched their home values increase over 20% and their 401Ks over 15%. What a financially secure feeling that can create!

We tend to never think about the downside to all of this and now, many people with investment portfolios are noticing the beginning of a downturn in the market. What will this do to spending or the velocity of money? What will that do to the economy in the near future? What should you expect to happen?

The Federal Reserve allowed inflation to leapfrog past their 2% target to over 8% and they know that the only way they can attempt to bring it back under control is to raise the federal funds rate along with Quantitative Tightening (QT). Yet they are trying to not upset the market by making very slow moves that are very insignificant to battle inflation. As I write this, the average 30-year fixed mortgage rate has already doubled to 5.44% since the Fed’s first increase of 0.25%. They are now anticipating another 0.50% in June. What will that do to the housing market? Typically, higher mortgage interest rates result in less purchasing power for the buyer. And that my friends, may begin the deflation of the housing market. If that happens, that will be one more attack on one’s financial security that came from the inflated home value and further suppressing the “Wealth Effect” that will reduce the spending behavior of the consumer and ultimately slow the velocity of money. When the velocity slows, the economy slows, and the economy is very close to triggering a recession. Many young adults have not had the pleasure of going through a recession so, may I suggest asking someone to share what they know who has? I knew plenty of people living the life in 2007, only to have everything lost because they didn’t prepare. I don’t want this for anyone.

Let me know what you think! sjspence@moneyplainandsimple.com

Get more at www.moneyplainandsimplebook.com  The book is available in English and Spanish and we just added an audio version in English!

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