How Australia can learn from US economic mistakes by spending its savings

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Much like Australia, the United States appeared to thrive financially during the pandemic. But now their economic reality is playing out – and it’s not pretty.

As we collectively ring in the New Year 2020, we had no idea that we would soon experience a series of life-altering events, which would divide our lives into two distinct eras: pre-pandemic and pandemic.

In the world of economics and even daily household budgets, a similar transformative event has occurred.

Whatever trended the economy or wages pre-pandemic has been irreversibly altered, replaced by something new in the whirlwind of shutdowns and government stimulus.

The split statements of economic results

In the United States, trillions of dollars of government stimulus and huge market intervention by the Federal Reserve have created two very different recoveries for the American people.

In one, much of America’s middle class and poorer households are grappling with a rapidly rising cost of living, negative inflation-adjusted wage growth and the lingering effects of the pandemic.

In the other, upper-middle-class and wealthier Americans who can work from home are generally having a good time.

With interest rates at historic lows, the wealthiest Americans have seen the value of their stock market holdings skyrocket.

At the end of 2019, the total market capitalization of all publicly traded US stocks was US$33.9 trillion. By the end of 2021, this figure had increased by 57% to over $53 trillion.

Meanwhile, the total value of residential real estate in the United States rose nearly 30% to $43.4 trillion, with many popular cities seeing higher price increases than the national average.

Relax and spend some money

Amid this explosion in the net worth of upper-class and wealthy Americans, we have seen spending on luxury items reach record highs.

In 2021, luxury car maker Rolls Royce recorded the highest sales in the company’s 117-year history. They join Porsche, Lamborghini and BMW to live their best years.

2021 also saw a record $10.1 billion in super yacht sales, an increase of more than 75% over the previous year.

Super yachts weren’t the only means of transport frequented by the wealthy to enjoy record demand. According to a recent report by Forbes, in the four weeks ending Boxing Day, the number of private jet flights around the world increased by 21% compared to the same period in 2019.

In the world of commercial aviation, however, global flight numbers remain well below pre-pandemic levels, even before the emergence of the Omicron variant.

The difficult reality of Central America

As the rapidly rising cost of living and negative inflation-adjusted wage growth continue to reverberate, Americans are increasingly optimistic about the future.

According to the University of Michigan Consumer Sentiment Survey, Americans are the least confident about the state of the economy and their household finances than at any time in the past decade, including including the initial shock of the pandemic in early 2020.

The same survey also revealed that about three-quarters of Americans consider inflation to be the most important issue facing their nation.

Amidst this winter of discontent for Central America, some key economic indicators are starting to show some rather ominous warning signs.

For example, core retail sales were expected to rise 0.2% in December, but in reality they fell 2.3%.

Poor retail sales join the Markit Services Index and ADP Private Employment Report in surprising lower.

An economy that runs on the spending of the rich?

In a way, the past few months have been a test for the US economy, to see if a developed country’s economy could be strongly driven by the spending of the rich and the explosive growth in asset prices.

So far it doesn’t look good.

Despite producing strong overall GDP growth in the fourth quarter of 2021, once you remove the expected build-up of business inventories, the US economy only grew a fraction of more than 0.5 % for the quarter.

According to projections by the Atlanta branch of the US Federal Reserve, the first quarter of 2022 is expected to produce just 0.1% growth on an annualized basis, or just 0.025% growth for the quarter if measured from the same way as the Australian National Accounts. .

It’s not like the US economy isn’t still benefiting from the headwinds of ongoing stimulus and infrastructure spending.

During the first quarter of 2022, the US economy is estimated to benefit from stimulus measures worth 3% of GDP, an amount well above the maximum level of stimulus that followed the global financial crisis.

Lessons for Australia

In Australia, we have arguably enjoyed a much higher level of stimulus than in the US relative to our respective experiences with the virus.

With $507 billion pledged by the Morrison government and additional billions from individual state and territory governments, the Australian economy has been boosted by an unprecedented cash inflow.

Now that the impact of this support is expected to fade significantly in 2022, the economy will look for other engines to build on as the recovery from the pandemic continues.

One factor that has often been put forward as a potential driver of future growth is that households are spending the $245 billion in savings they accumulated during the pandemic.

However, according to data from banking regulator APRA, there is still little evidence that households are dipping into their savings.

As in the United States, the lion’s share of this huge household savings is held by the wealthiest households.

Whether we will be more likely than Americans to rely on wealthier households to drive growth in 2022 remains to be seen.

At the end of the day, Australia is not America and our experience may differ significantly, but there may be a lesson here too.

Tarric Brooker is a freelance journalist and social commentator | @AvidCommentator

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