Recently I read an article on, that argued that the savings habits of millionaires generate debt for 90% of the population. An intriguing headline, to be sure.

They made the case that in normal times, millionaires would spend their money on big, expensive, tangible products such as yachts and planes. This is, of course, talking about millionaires that are not FIRE adherents. I pretty confident that anyone reading this site who has hit their FIRE number, and is a millionaire, isn’t about to go out and buy a luxury yacht!

By buying that luxury yacht, however, that millionaire is in effect funding jobs, because to build that yacht requires hundreds of specialized tradespeople, engineers, salespeople, managers, etc.

In abnormal times, such as in the last year during the pandemic, then those same millionaires are not spending their money. Instead, they’re saving it. So far, so good and now they’re actually talking about us!

What the article (and the supporting Harvard study) goes on to conclude, is that by saving the money, these millionaires are actually causing 90% of the population to accumulate debt. How can that be, you say? I had the same question.

The argument is that by saving money, then that savings, in the bank, is used to fund loans, and because there is so much savings in the bank, the interest rates remain low meaning the rest of population has access to cheap credit and is, in turn, going in to debt.

This got me thinking about how adhering to FIRE may be having the same effect. Are we, by saving our money aggressively, inadvertently causing the vast majority of the population to go further into debt?

Considering the case of the “normal” millionaires first (those who buy luxury yachts), I have a hard time accepting the conclusion of this study. It assumes that normal millionaires are the origin of the vast majority of the economy (which strikes me as a corollary argument to the concept of trickle down economics). This is probably a good topic for another post, but suffice it to say, trickle down economics doesn’t work . There has never been any clear evidence that when the super rich have more money to spend (e.g. through tax cuts) that this results in increased economic benefit for everyone else, so conversely I have a hard time believing that when the super rich spend less money that somehow this should translate in to some detriment for everyone else (i.e. more debt). In other words, I don’t believe that the spending patterns of the super rich are tightly linked with the benefit or detriment of everyone else.

This is all fine from a opinion standpoint, but let’s talk about the data. The global market for luxury goods is about $300 Billion. This really only includes smaller items like jewellery, watches, handbags, etc, so let’s be generous and say there’s another $100 Billion for yachts, private jets and whatever else the super rich spend their money on. That’s $400 Billion total. Conversely, the global GDP is about $80 Trillion US dollars. That means that the super rich are responsible for about 0.5% of global GDP.

If the super rich were to reduce their spending below the $400 Billion, because of say, a pandemic, would that really cause 90% of the population to take on more debt? I think not. 0.5% of GDP is a very small percentage and any fluctuations in that is unlikely to have much of an impact on the remaining 99.5% of spending.

The reason why 90% of the population is taking on more debt is not because the super-rich are not spending, it’s because interest rates are low. And interest rates are low, again not because the super rich (a tiny proportion of the population) is not spending, but because most everyone has more in the bank. And most everyone has more in the bank because of stimulus payments and because of having had few opportunities to spend money over the past year. Intuitively, we all know this to be true. I have a lot more in the bank today, not because some abstract super-rich guy hasn’t spent money over the past year, but because I haven’t spent money over the past year. This is the same case for most people.

As a FIRE adherent, is there some moral quandary that by aggressively saving money we are inadvertently causing our neighbors and friends to somehow take on more debt and spend more? Again, I think not. First of all, as much as I believe in FIRE and encourage everyone to pursue it, we are a very tiny proportion of the population. Our spending habits (or technically, our lack of spending habit) has a minuscule, if any, effect on the broader economy. Secondly, whether our friends and neighbors take on more debt or spend beyond their means is entirely their prerogative. If they choose to take out a loan, partially funded by our savings, that’s their choice. If anything, by saving aggressively and rejecting a “normal” high consumption lifestyle, we actually benefit our friends and neighbors by showing them that there’s another option to their high-cost lifestyle.

Fundamentally, I don’t accept the argument that by spending less (either by the super rich or by FIRE adherents), somehow that makes everyone else less well-off. Though it’s true that our economy is primarily driven by consumption, I don’t this is the only way forward. There are other ways to improve the prosperity of everyone, without requiring everyone to spend beyond their means.

So what do you think? Are FIRE adherents causing everyone else to go in to debt?

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