Does Investment Stimulate?
February 23, 2009
– Comments (7)
I am thinking about a conversation with my 80 something year old neighbour around 2 years ago. The conversation went something like me commenting that so much of my income went to mortgage that little of it went to stimulating the economy and that I thought the economy would grind to a halt if everyone had spending habits like myself.
His reply surprised me. He asked me what I thought happened to my mortgage money, it goes back to the bank and somewhere in the system it stimulates the economy and the whole thing gets cycled around.
This is part of the fairy tale fantasies of how the world works with this generation that frustrates me to no end. On one hand how can they be so oblivious to the difference in where they were at say at my age and now?
I was told many lies growing up. People believed them as truths, but time has proven them to be lies. Go to university and you'll always have a job and you'll make good money is one. I have seen tons of university educated people who's buying power isn't much different then what my mother's buying power was and she never finished high school. There is no question that it is still better then not going to school, but that is what I've seen in an overpriced city. The change isn't as dramatic everywhere, although the trend that way is everywhere.
So back to investment stimulating the economy. Well, consider this man. He owned 3 homes out right and got rental income from two of them. Both he and his wife retired with pensions that I am sure were more then I was making because of my poorly timed choice to go into education at the beginning of a period where student teacher ratios increased by 10%. It probably takes a new teacher 2-3 years of working full time to match his work pension, but then he also has his Canada pension, so make that about 6 years, so at about age 30 if one went straight through without any glitches. But he also has those property's making an income, and 7 figures in the stock market, well, it was 7 figures when we had our discussion.
I lived my life with the believe if you scarifice and work hard early you will do well and I also expected by my age you'd have been mortgage-free for about 10 years. I had the expectation that if I put my disposible income to my mortgage I'd have it paid off in my 30s. This is what I taught to expect. And at the rate I was going the mortgage would not be paid until I was about 60 and my entire adult life would be made of doing without things. Crump, I had 3 homes and I never put window coverings in a single one, just left the developer blinds.
So, how exactly does my mortgage money stimulate the economy? It doesn't, it goes to people with wealth and it sits there, as his money does. It doesn't get recirulated at all. And the transference of people with less paying people with more has been increasing over time.
If you want an active, vibrant economy all age groups need to have disposible income, and money that goes to mortgage does little to keep people in jobs. The house they live in is already built.
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