High interest rates as an explanation for the strong economy? Nonsense!
US household have become much richer, but not become of high interest rates
Financial markets and economies are often incomprehensible. As an investor, you just have to deal with it. However, not everyone is happy with that, resulting in the frequent emergence of 'remarkable' (I'm being restrained with my word choice here) arguments. The idea that a higher interest rate is a positive factor and explains why economic growth hasn't gone down the drain is a head-shaking example.
Both sides of the balance sheet
A commonly heard refrain used to explain the resilience of the American economy is that high interest rates generate a substantial income stream on the asset side of the balance sheet. Such a remark should immediately raise questions since we are constantly confronted with data and statistics proving that our economic growth model is primarily based on debt. Higher interest rates predominantly impact the liabilities side of the balance sheet. I sometimes wonder if the gurus have even considered the other side of the coin.
Bonds don't make you rich
Moreover, the asset side of the balance sheet is typically dominated by other assets. This shouldn't sound strange when one considers relative volatility. To substantiate this statement, below are the contributions to the change in the wealth of American households, broken down by stocks, real estate, bonds, and other assets.
As can be easily seen from the Federal Reserve graph, the change in household wealth is dominated by stocks and, to a lesser extent, real estate. So, even though the interest component may generate more income, it is rarely, if ever, bonds that make American households feel richer. When stocks and real estate increase in value, their magnitude far exceeds that of bonds, and when these two categories decline, total wealth usually decreases despite positive income on bonds. Not exactly a situation that encourages a spending spree.
It doesn't add up
To make the 'mini-impact' of bonds on the household balance sheet clearer, I have calculated the cumulative change of the four categories impacting household wealth, equities, real estate, bonds, and other, since the COVID outbreak. Stocks and real estate account for more than 80% of the total increase in American household wealth. Even without looking at the liabilities side of the balance sheet—think of mortgages for households, along with car loans, credit card loans, and student loans—the argument that higher interest income leads to super happy consumers eager to keep spending endlessly is simply nonsense.
Continue shopping
Nevertheless, the above graphs are very informative. It reveals that the total wealth of American households has skyrocketed since COVID. Stock prices are soaring to the stratosphere, house prices have reached record highs after the shortest dip ever following such a significant interest rate increase, and savings accounts are earning decently at the moment. It's a shame that this wealth isn't more evenly distributed, but Americans have become much richer on average in recent years. And that must be a wonderful feeling when standing in front of shop windows again.