The economic theory that rising asset values boost spending is flawed. It ignores 'mental accounting'—people treat different types of wealth differently. A rise in home value leads to almost zero increased spending, while a cash windfall from a stock sale or lottery win is spent freely. The source of wealth dictates its use.
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The wealth divide is exacerbated by two different types of inflation. While wages are benchmarked against CPI (consumer goods), wealth for asset-holders grows with "asset price inflation" (stocks, real estate), which compounds much faster. Young people paid in cash cannot keep up.
The resilience of consumer spending, despite weak employment growth, is driven by affluent consumers liquidating assets or drawing down cash. This balance sheet-driven consumption explains why traditional income-based models (like savings rates) are failing to predict a slowdown.
The idea that a billionaire can "spend" their net worth is flawed. Their wealth is primarily in company stock; liquidating it would crash the price and signal a lack of confidence. This misunderstanding of wealth versus income fuels unrealistic proposals for solving global problems.
Homeownership is the primary vehicle for intergenerational wealth creation in the United States. The average household has four times more wealth tied up in their home than in stock market investments, highlighting the severe economic impact of declining ownership rates.
When money is tight, people desire material possessions. However, once they achieve true financial freedom, the desire for 'stuff' often vanishes. The focus shifts entirely to non-material assets like experiences, health, and quality time.
Schools teach us to earn a salary, not own equity. The home you live in is for making memories, not money, and is an inefficient way to build wealth. True financial independence comes from owning equity in assets that generate income and appreciate in value, a concept rarely taught.
While stocks or crypto are more efficient investments, a house is an intuitive, tangible asset that people understand emotionally. It acts as a forced savings account. This unique psychological position makes housing affordability a cornerstone of social and economic stability, unlike any other asset class.
People don't treat all money as fungible. They create mental buckets based on the money's origin—'windfall,' 'salary,' 'savings'—and spend from them differently. Money won in a bet feels easier to spend on luxuries than money from a paycheck, even though its value is identical.
A key driver of future AI-fueled inequality is that most people hold their wealth in their homes. Unlike financial assets, home equity provides no direct exposure to the massive productivity gains and capital returns generated by automation. This structural issue means the benefits of AI will disproportionately flow to capital holders.
The majority of the $7 trillion COVID-19 stimulus was saved, not spent, flowing directly into assets like stocks and real estate. This disproportionately enriched older generations who own these assets, interrupting the natural economic cycle and widening the wealth gap.
