Over the last 2 years the political and economic climate has changed significantly. In short, the Ukraine war has destabilized the global political landscape with impact on economics in energy and supply chain. As a consequence the dream of “endless growth” in some industries has stopped and inflation is back. With an inflation as high as 7-10% year over year across all goods, our money gets less worth in reality. Therefore, interest rates are hiking and people have to pay money for a credit – the times of 0% financing are over. In reality the cost for credits are increasing massively…often from just 1% to 4-5% which is 400% times more for a private household. And finally companies are no longer hiring without limits. They are careful when and whom they hire and in cases of technology companies, they are laying off people massively. Banks as well. Airlines as well. Retailers as well. Obviously a lot of industries.
Now, when you look at all of this, I am wondering how to read a message like “TUI calls the end of last minute flights as the booking for vacations are so high than never before”. Or like “Lufthansa is back at the profit levels from the past and flights are booked out on the majority of the flights”. Or “the market of bicycles is growing by 9.7% per year as people are more and more looking to use a bike for leisure”. Or “the residential real estate market is predicted to grow by >2% per year for the next 5 years”.
In essence, my question is: Where is all this money from? For me the reality looks – at least – challenging. Prices increase, income is not growing, real income therefore declines – therefore my life is getting more expensive and I have only two alternatives: Earn more or spend less.
Earning more in my age is problematic, but also in general you are not getting a pay raise from your employer just by asking. So you have to work more – if that is possible.
Spending less is something you have under control and you can go thru your spendings and adapt where possible. In reality, I would say you first start to spend less for vacation, leisure, going out for dinner and so on. Then, you would potentially look at things like your house/apartment and car. And if you have financed some of these things in the past, you will get a massive increase in finance cost (see above), when you continue doing this. So you might want to cut the things first that you finance (not so easy if you finance your house you are leaving in).
My surprise with these headlines is, that people are going on vacation like there is no tomorrow. When I travel, the hotel costs are as high as I never (!) experienced in my life. Places where I paid <100€ in the past are now at >200€. Hotels charge 65€ for a breakfast (!) – and these are not 5 star places. As a matter of fact, I am no longer going to these places as I cant afford them no more.
In the case you are actually having money and you don’t need to finance, pretty much the same apply – your real value declines. If you take your money and bring it to the bank you now get interest rates of 3-4%. Inflation is still way above this which makes your money less worth. Stock markets at the moment are not growing – some sectors decline. And real estate is also expected to no longer grow like in the past (see above). In the past, you had the chance to take your money and get some 5% return in the stock market, with dividends or real estate. Inflation was below 2% – so your value increased. Again, today this isn’t the case any longer.
In summary, I do believe we have to be careful the coming years with the spend of our money. Especially when it is financed, as finance cost is on the rise. People need to be told, that a credit financed home with an interest rate of just 1% is no longer existing and there is no sign, that this will come back. The same applies for the new TV, the new bike, the new couch, the new whatsoever. I understand that people need vacation and time to recover and joy. But I don’t think this should happen at these price levels. Companies like TUI, Lufthansa or hotel chains are getting back to their profit levels before Corona. So why should they do as good as before, while the rest has to pay for it and lose money? Something will happen in the markets, as supply and demand – and therefore prices – are in misbalance. I am trying to be a bit more careful on the spending side going forward. I can’t afford financed money, so I have to deal with what I earn and what I have. And I have not a lot of trust that the politicians will help us to get this handled properly. They are doing something, but they are not transparent to people, as the fear the reaction of people.
Again – I keep asking where the money is from…and my answer right now? It’s borrowed. People just betting their future – most likely because they believe all will get back to where it was or they simply don’t know.
