This is Why You're Feeling Broke in 2023 (You're Not Alone!)

Over the past year or so, you've probably been feeling like you've got less money to spend. But what if I told you this is happening to almost everyone around the world? And what if I also told you that your government is deliberately taking money away from you to squeeze you financially? Now, I'm certainly no conspiracy theorist, but funnily enough, what I just said is actually true. So in this video, let's talk about the three key reasons why this is happening and whether it's going to get better anytime soon. Thank you.

Reason number one starts back at the pandemic. Now, while this was a terrible time for people in general, it was also an unprecedented economic event. People were locked down, factories closed, ports shut, and productivity nosedived. Generally, what this meant was that the production of goods dropped, but as humans, we obviously kept consuming. When you have the supply of goods and services low but demand staying the same, you start to get— you guessed it— inflation.

Initially, inflation actually reduced at the onset of the pandemic. But as lockdowns and the supply bottlenecks continued into 2021, we started to see inflation really ramp up. This was due to a few key factors: the U.S. government doing an unprecedented stimulus program, where a lot of new money was printed by the Federal Reserve and then gifted to the citizens by the treasury. Then, on top of that, we had the manufacturing powerhouse of the world, China, being completely locked down. And then finally, we also had Russia invade Ukraine.

In terms of stimulus checks, more than 476 million payments totaling $8.814 billion went to households impacted by the pandemic. While consumer spending was low during the early months of the pandemic, once the stimulus checks were handed out, spending bounced back fast, as the average American had a massive spike in their savings. The problem was, this all happened at a time where many factories around the world were still shut. Like in China, believe it or not, China is responsible for about one-third of the total manufacturing output of the earth. As we know, they went through a very strict lockdown that lasted a long time, and that severely restricted the flow of goods around the world.

I remember the pictures of the world's biggest port in Shanghai being completely clogged up with ships, all just waiting there hoping they'd soon be able to load up with goods and deliver them around the world. They just couldn't. Then, just to add insult to injury, you add a European land war on top of everything else. This particularly disrupted energy supply to Europe and for a time also greatly reduced the world's supply of wheat, sunflower oil, corn, and barley, as Russia blockaded Ukrainian ports.

Long story short, these three factors caused a very low supply of goods, but there was very high demand, and that spiked inflation. At its worst, U.S. inflation hit 9%, and while it's currently cooling down, it still sits at double the Federal Reserve's target. Now, inflation is measured by the rise or fall of the Consumer Price Index, which is essentially an index that tracks a basket of household goods and services. It includes things like housing, transportation, food, health care, and so on.

But if you see where the CPI sits now versus before the pandemic, this basket of goods now costs 17% more. So in just three and a half years, if your living expenses used to be, say, $3,000 a month, now the exact same expenses will cost an extra $510 per month. Unfortunately, that basket of goods is still getting 4% more expensive every year at current inflation rates. So that is the first very real reason why in 2023, it feels like we have less money, because realistically, everything costs about 17% more than what we were paying for it about three and a half years ago.

But that then leads us right to the second big reason why you feel like you've got no money at the moment— that is, of course, interest rates. Now, in a country or region, you'll tend to have a government, obviously, and then you have some sort of central bank. While these two are technically independent of one another, there is a very close relationship between them, as they work together to do the best for their country's economy.

Now, when inflation rises, the central bank has the power to raise interest rates. The higher you raise interest rates, the lower inflation goes. But the thing they don't tell you is this: Raising rates literally means raising the interest rate that you have to pay on your loans— things like your mortgage or your car loan. This is what I was getting at right at the start of the video. By raising rates, the central bank is literally forcing your mortgage repayments higher; they are forcing your car payments up because they're actually trying to take your disposable income away from you.

There's no actual direct link between interest rates and inflation. The way it works is that they make your debts and the debts of businesses more expensive to service. So you have less money and thus you have to cut your spending. When everyone's citizens and businesses alike cut their spending, the demand for goods and services drops. If we look at our inflation equation from before, if you can lower the demand for stuff, then that is deflationary and naturally prices fall.

So you might be wondering, just how bad is it? Well, at the onset of the pandemic, interest rates were dropped to zero. At this time in 2020, Freddie Mac reported the average 30-year fixed rate had hit yet another all-time low and sat at 3.13%. Now, the Federal Reserve has raised the federal funds rate up to 5% to 5.25%, and the average 30-year mortgage rate has more than doubled to now 6.69%. For the average mortgage size in the United States, which is $425,000, that means you're now paying $1,260 more per month than you were in the middle of 2020. How's that for a rise in the cost of living? It's pretty staggering, and this same effect is happening not just to mortgages, but to any variable rate loans that you or a business may have.

So that's the second reason— arguably the biggest reason— why in 2023 it feels like your savings are just going nowhere. The Federal Reserve is deliberately slowing you down. But then finally, the third big reason why times are feeling tougher this year is because in 2023, chances are you're no longer getting any assistance. Stimulus checks have now stopped, but beyond that, the U.S. government itself is having to cut back, which in the short term hurts U.S. citizens.

The U.S. government runs a big deficit; they need to keep borrowing money to pay for everything. As we've seen in the news this year, the government has been bumping into its debt limit, meaning they really don't have the ability to keep spending, spending, spending. Now, yes, it's true that Congress did just suspend the debt ceiling until 2025, but in order to get that done, Republicans were able to force the Democrats to agree to reign in spending, which means citizens now won't get that benefit.

For example, as a part of the bill, unused coronavirus relief money was rescinded, extra working requirements were added for the Supplemental Nutrition Assistance Program, and for the Temporary Assistance for Needy Families program, making these programs harder to access. And let's not forget the freeze to student loan repayments is now over, so those people with student debts will now have to think about that as well.

So overall, we're stuck in a rough place right now where not only has the cost of living risen 17% since before the pandemic, but also mortgage holders are paying twice as much interest as they were just a few years ago. The government is now unable to help out like they were, and it’s those three factors that caused almost everyone to feel quite light on cash in 2023. In fact, if we look at the personal savings rate over in the U.S., 2022 and 2023 have seen some of the lowest savings rates in roughly 15 years. The data shows that U.S. citizens are really struggling to add to their savings right now.

So it's interesting; the numbers really do back up the hypothesis. But with that said, what happens next? Well, history shows that reining in spending and having high interest rates temporarily is a much better outcome than letting inflation continue to run. There are many examples of inflation becoming hyperinflation and eventually rendering a currency worthless, you know, such as Zimbabwe. Or there are also examples of inflation not being properly stopped the first time and coming back with a vengeance, and that happened to the U.S. throughout the 1970s.

So what the Federal Reserve is currently doing is watching the inflation rate like a hawk, keeping interest rates relatively high and making sure inflation does come back to their target of 2% annually. If that happens, then things will start to feel a lot nicer. But if that doesn't happen, things will get worse. However, luckily for us right now, inflation is falling. It's been steadily falling for about a year now, and in fact it's falling consistently enough that the Federal Reserve at its most recent meeting opted not to raise interest rates further, at least for the time being.

This is Jerome Powell, chair of the Federal Reserve, speaking on the topic last week: "In light of how far we've come in tightening policy, the uncertain lags with which monetary policy affects the economy, potential headwinds from credit tightening, today we decided to leave our policy interest rate unchanged." The story up until now has been pretty constant interest rate hikes, so there's no doubt it's promising that the Federal Reserve feels as though they don't currently need to raise rates. But of course, it does hinge on inflation continuing to fall.

At its worst, inflation hit 9% in the U.S. last year. It currently sits at 4% and is steadily coming down, but realistically, that's still double what the Federal Reserve is looking for. If inflation does plateau now instead of coming back down to that 2%, you can expect the Federal Reserve to do more interest rate hikes to get inflation falling once more. Looking ahead, nearly all committee participants view it as likely that some further rate increases will be appropriate this year to bring inflation down to 2% over time.

So overall, there is still a little ways to go and interest rates might get a little bit worse before they get better. But I think the real positive to take out of the situation is that at least for now, we aren't seeing that biting in inflation, and we're a lot closer to 2% annual inflation than we were a year ago. Hopefully, there's just a little bit of light at the end of the tunnel. But anyway, guys, that is the situation as it stands today. Please leave a like on the video if you did enjoy it, subscribe if you'd like to see more, and I'll see you guys in the next one.