Unless you are a big company CEO or a Wall Street trader, you are fairly sure about what your income will be next year and ten years from now (including raises, inflation and all that). And, we should all be fairly clear on the fact that credit does not change our income, it only changes the time path of our consumption. If we borrow today, we must repay it “tomorrow” (Federal government excepted, of course).
So, what happened in the 2003 expansion?
It appears that large numbers of us ordinary folk began spending more and more of our current income around 1995 until at some point, our savings rate turned negative (we actually spent more than our after-tax earned income). Was this because we thought our future incomes would be a lot higher? For tens of thousands of consumers, this was probably the case, as many “ordinary” folk became real estate speculators, hoping to make a killing by flipping property before actually having to even settle on the purchase. We also felt that we were becoming “wealthier”. The stock market hit a new high and, after all, house prices never fall, right? And interest rates were historically low. Owners in California were cashing in on appreciation every year as their appraised home values rose. However, this did involve ever increasing debt payments, which should have slowed down spending gains a bit.