In a recent YouTube video by Jaspreet Singh, a financial expert, he explains why “fake rich” Americans are quickly going bankrupt.
The term “fake rich” in his mind is people who bought high end luxury items in 2020 and 2021.
Those Who Purchased Luxury Items in Pandemic Overpaid
In 2020 and 2021 it was extremely difficult to purchase items like luxury watches, cars and housing was extremely competitive.
So those who purchased these items paid a premium and these assets are now depreciating rapidly.
Value of Luxury Products Are Sinking
In March of 2022, items that were previously purchased for a premium started to crash in value.
Singh goes into detail about this in his video, but explains that there is now more inventory available than was on the market so it is easier to obtain therefore dropping the value of the products.
People Continue to Spend Above Their Means
Financially responsible people normally decrease their spending to make room for interest rates that are high.
Singh explains that not everyone has this mentality and are spending way above their means.
Eventually We Will Reach a Breaking Point of Spending
In the video, he warns that if people continue on this path of overspending there will have to be a breaking point.
He says that eventually people will not be able to consume as many products and spend as much as they currently are and have it be sustainable.
Prices Will Drop When People Stop Over-Consuming
When people start relaxing their constant spending habits, this will affect businesses.
The prices of things will start to go down as not as many people are purchasing, which will diminish the price of assets.
Asset Depreciation of Cars
We saw this phenomenon with cars during the pandemic. There was a shortage in chips for cars, making it almost impossible to find the car people wanted, and if they did they paid a pretty penny.
Now, people can easily access most cars for their market value, so anyone who bought a car during that time period of them being overpriced has a higher payment on the same car as someone who bought it now and it has significantly depreciated in value.
Luxury Items Are Not Making a Profit
Americans who invested in luxury items thinking they would be good investments while the prices were sky high are struggling.
It will be incredibly hard for them to sell their items for what they paid for it, let alone for them to make any sort of profit.
Interest Rates Are Increased to Curb Inflation
In 2022, interest rates were raised for the first time in three years.
The goal behind these raises was to curb inflation.
Interest Rates Continue to Rise
Since the initial raise in March of 2022, the interest rates have been raised 11 times.
The idea behind raising rates is that if the cost to borrow money goes up, then less people will borrow and there will be a significant decrease in spending, thus lowering inflation.
Harder to Make a Profit When Interest Rates Are High
When interest rates are high it is harder to make a profit or a return on your investment.
For example, commercial property investors look at something called a cap rate. When the market is healthy and going strong, investors might be able to expect a 10-cap rate, which means they expect a 10% return on a property. This is typically good news, since in a healthy market they can borrow money for less than 10% and make a profit.
Economic Predictions for 2024
Predictions for 2024 were mentioned at the end of Singh’s video.
Since 2024 is an election year it will bring economic uncertainty. Economic uncertainty in general tends to impact consumer behavior, and we will be on the lookout for how this changes supply and demand.
