Conversation with Gemini
Whatever happened to the money supply that used to be so important in the U
The short answer is that the financial world changed, and the old math broke.
During the heyday of Monetarism in the 1970s and 1980s (championed by economists like Milton Friedman), tracking the money supply—specifically metrics like M2—was the holy grail of central banking. The core idea was simple: if you control the amount of money in circulation, you directly control inflation.
However, two major shifts completely decoupled the money supply from the actual health and direction of the economy, forcing central banks like the Federal Reserve to stop targeting it.
1. Financial Innovation and Deregulation
Back in the mid-20th century, "money" was easy to define: it was the cash in your wallet or the money in your non-interest-bearing checking account. If you wanted to invest, you had to move that money into rigid, long-term assets like bonds or real estate. Because money was used almost exclusively for immediate transactions, the speed at which it circulated—known as velocity—was highly stable and predictable.
Starting in the 1980s, the financial system evolved rapidly:
Instant Liquidity: Credit cards, online banking, and brokerage accounts made it incredibly fast and cheap to convert stocks, mutual funds, or money market accounts back into spendable cash.
The Blur of "M2": The line between "spending money" and "savings/investment money" completely vanished. Because people could effortlessly shift money around, measuring M2 no longer provided a clean picture of how much spending power was actually hitting the economy.
2. The Collapse of "Velocity"
Because the definition of money became so fluid, the predictable relationship between the money supply and economic growth collapsed.
The Monetarist Formula: Money Supply×Velocity=Price Level×Real Output
If velocity is constant, a spike in the money supply triggers a spike in prices (inflation). But as shown below, that relationship became completely unhinged during major economic crises.
| Historical Event | Money Supply Action | The Economic Response |
|---|---|---|
| 2008 Financial Crisis | The Fed injected massive amounts of liquidity into the banking system. | Velocity plummeted. Banks chose to hoard the cash as excess reserves rather than lending it out. Inflation remained stubbornly low for a decade. |
| 2020 Pandemic | M2 money supply soared by a historic 27% as stimulus funds hit bank accounts. | Consumers and businesses initially mopped it up and sat on it, causing velocity to crash again. While inflation did eventually follow as the economy reopened, the mechanical, 1:1 textbook linkage was gone. |
How Central Banks Operate Now
Because measuring the quantity of money became a unreliable gauge, the Federal Reserve shifted its strategy entirely. Instead of controlling the supply of money, they focus almost entirely on controlling the price of money—better known as interest rates.
By raising or lowering interest rates (and paying interest directly on the reserves banks hold at the Fed), they can directly speed up or slow down borrowing and spending without needing to care about the exact number of dollars circulating in M2. Today, money supply data is still published, but it has largely been relegated from a frontline policy tool to a background economic indicator.
Well they have always used interest rates as their tool, but then supply of money as their guage.
You are spot on about that distinction, and it highlights exactly why the Fed's day-to-day job changed so fundamentally.
Historically, you used interest rates (the tool) to alter the money supply (the intermediate target/gauge) to ultimately control inflation and employment (the final goals). If the gauge showed M2 growing too fast, you dialed up the tool (interest rates) to cool it down.
The core issue today is that the Fed stopped using the money supply as a gauge because the gauge started giving false readings.
When the Gauge Broke
In a healthy mechanical relationship, when you change the interest rate, the gauge should move predictably. But as the financial system modernized, the needle on the money supply gauge detached from reality.
Look at what happened to the Velocity of M2 Money Stock (how many times a dollar is spent and re-spent in a year):
As you can see in the chart, from the 1960s through the 1990s, velocity fluctuated but stayed roughly bound to a predictable trend line. Because it was stable, checking the money supply gauge worked beautifully.
But after the late 1990s, velocity entered a massive structural decline. Money was being created, but it was sitting stagnant in bank reserves and corporate balance sheets rather than moving through the economy.
If the Fed had kept using the money supply as its primary gauge during the 2000s and 2010s, the surging M2 numbers would have screamed "Danger! High inflation coming! Raise interest rates immediately!" Yet, if they had raised rates based on that gauge, they would have choked off economic growth at a time when actual, real-world inflation was practically non-existent.
The New Dashboard
Because the old gauge started lying to them, the Fed systematically demoted it. In fact, back in 2006, the Fed stopped tracking M3 altogether, and in 2020, they changed how they report M2 because the data just wasn't telling them what it used to.
Instead of looking at the money supply to tell them whether their interest rate moves are working, the Fed now skips that middle step entirely. They look directly at financial conditions and lagging economic outcomes as their primary dashboard:
Core PCE Inflation: Their preferred gauge for consumer prices.
The Yield Curve and Credit Spreads: Watching whether banks are actually tightening lending standards and if corporate borrowing is getting harder.
The Unemployment Rate and Wage Growth: Tracking whether the labor market is overheating.
They cut out the middleman. They still use interest rates as the steering wheel, but they are looking out the front windshield at prices and jobs to guide them, rather than looking down at the money supply odometer.
So they still keep the M1 and M2 series but ignore it?
Pretty much, yes. "Ignore" is a strong word—they still track it, publish it every month, and use it as a data point in broader economic models—but it has been completely stripped of its regulatory and policymaking teeth. It's essentially treated as a "background noise" indicator rather than a guide for policy.
In fact, the Federal Reserve's relationship with M1 and M2 has gotten so disconnected that they recently had to rewrite the definitions entirely because the numbers were becoming meaningless.
The Day M1 and M2 Effectively Merged
For decades, M1 was "spending money" (cash and checking accounts) and M2 was "savings money" (M1 + savings accounts and CDs). Because checking accounts didn't pay interest and savings accounts had a strict federal limit of 6 withdrawals per month (under a law called Regulation D), the line between the two was crystal clear.
But during the pandemic, two massive structural changes happened:
The 6-Withdrawal Limit Was Scrapped: The Fed eliminated the withdrawal limit on savings accounts, legally turning savings accounts into transaction accounts. You could now spend directly out of your savings.
The Data Exploded: Overnight, the Fed had to retroactively move all savings accounts out of "savings" and dump them into M1.
Because of this reclassification, M1 instantly jumped from around $4 trillion to over $18 trillion. M1 effectively ceased to exist as a distinct, useful concept because it became almost identical to M2.
Why They Still Print It
If the Fed doesn't use it to set interest rates, why do they keep compiling the data?
Financial System Health Check: While M2 doesn't predict inflation well anymore, it does show how much liquidity is sloshing around the banking system. If M2 shrinks aggressively (as it did slightly when the Fed hiked rates aggressively), it tells them that bank deposits are leaving the system, which can warn them about stress in regional banks.
Academic & Long-term Research: Economists still look at multi-decade cycles of money supply to study the long-term history of the dollar.
Global Liquidity Tracking: It helps track how the U.S. financial system interacts with global markets.
Ultimately, if you listen to a Federal Reserve press conference today, Chairman Jerome Powell and other board members will talk endlessly about core inflation, the labor market, wage growth, and consumer spending. You will almost never hear them mention the words "M1" or "M2." They keep printing the report out of habit and institutional duty, but the steering wheel of the economy is completely unhooked from it.
An historical record should be maintained on principle. Core inflation and employment and spending. What messages are they sending now?
Right now, the economic dashboard is flashing a highly specific, complex message: The economy is experiencing a stubborn "tug-of-war."
If we look at the fresh data, the clear signals of a smooth "soft landing" have hit a bit of a bump. Instead of smoothly gliding down to normal, the gauges are telling a story of sticky prices, a cooling but stable job market, and a consumer that is starting to feel the pinch.
Here is the breakdown of what the core indicators are saying:
1. Core Inflation: "Sticky and Volatile"
The Fed’s absolute favorite gauge—the Core PCE Price Index (which strips out volatile food and energy)—is sending a message that inflation is proving incredibly stubborn to kill entirely.
The Data: Core PCE inflation sits at 3.3% year-over-year.
The Message: This is a notable tick up from earlier readings, and it remains firmly above the Fed's 2.0% target. While the month-over-month increase was a modest 0.2%, the annual numbers show that underlying price pressures—especially in services like insurance and housing—are heavily dug in.
The Reality: Headline inflation (which includes food and energy) jumped even higher to 3.8%, heavily driven by a painful spike in gasoline prices. For the average American, the feeling of inflation is accelerating again.
2. Employment: "Cooling, But Not Cracking"
The labor market has historically been the engine of this economic cycle, but it is shifting from "red hot" to "lukewarm."
The Data: The national unemployment rate holds steady at 4.3%, with the economy adding a modest 115,000 jobs.
The Message: A 4.3% unemployment rate is historically quite decent, but it represents a clear upward drift from the sub-4.0% lows seen over the last couple of years. Job growth is becoming highly concentrated in specific sectors like healthcare and retail, while hiring elsewhere has slowed to a crawl.
The Reality: The labor market is no longer tight enough to trigger massive, runaway wage spikes, which gives the Fed some comfort. However, it is soft enough that workers are noticing it takes longer to find a new job if they lose one.
3. Consumer Spending: "Running on Real-Dollar Fumes"
This is perhaps the most fascinating gauge on the dashboard right now because it looks healthy on the surface but reveals stress underneath.
The Data: Retail sales and overall personal consumption expenditures rose 0.5% for the month.
The Message: On paper, a 0.5% jump looks like Americans are still happily buying things. But remember: retail sales are measured in nominal dollars (not adjusted for inflation). Because gasoline and service prices spiked so sharply, real consumer spending (adjusted for inflation) only edged up 0.1%, and real retail sales actually fell 0.2%.
The Reality: Americans aren't necessarily buying more stuff; they are just paying more money for the same amount of stuff. Rising gas prices are actively crowding out discretionary spending on non-essentials like clothing and furniture. Furthermore, the personal savings rate has drifted down to a lean 2.6%, signaling that households are draining their cash cushions to keep up.
The Executive Summary
If you tie all three messages together, the economy is sending a clear warning to policymakers: Stagflationary pressures are flirting with the edges of the radar.
Inflation is too high for the Federal Reserve to comfortably cut interest rates to rescue a cooling job market, but the consumer is stretched thin enough that keeping interest rates high risks grinding economic growth down to a halt. It is a incredibly narrow tightrope for central bankers to walk.
I remember inflation at 0 followed by a depression (aka "recession") so I guess 2 percent is more realistic if you want to avoid suffering.
You are pointing to one of the deepest, most hard-earned lessons in modern economic history. That intuition is exactly why central banks around the world settled on 2% as their magic number, rather than aiming for a pristine 0%.
When inflation hits 0%, the economy is balanced on a knife-edge. A tiny downward nudge flips the country into deflation (falling prices). While "cheaper stuff" sounds great on paper, in reality, deflation is an economic death spiral that almost always triggers or severely worsens a depression.
The Anatomy of the Deflationary Spiral
When the price level stops growing and starts dropping, it breaks the basic psychology of spending and borrowing:
The Spending Strike: If you know a car, a television, or a house will be 5% cheaper next year, you wait to buy it. When millions of consumers collectively decide to wait, overall spending collapses.
The Business Trap: Companies see their revenues drop because prices are falling, but their fixed expenses (like long-term building leases and existing debts) stay exactly the same. To survive, they have to cut their biggest variable cost: payroll. This triggers mass layoffs and wage cuts.
The Debt Poison: This is what makes a depression truly brutal. Deflation makes the real burden of debt heavier. If prices and wages drop by 10%, your mortgage payment doesn't drop by 10%. You are stuck paying back old debts with fewer, harder-to-earn dollars. Foreclosures and bankruptcies skyrocket, dragging down the banking system.
Why 2% is a "Safety Cushion"
Central banks don't aim for 2% inflation because they want your money to lose value; they do it to buy economic insurance. That 2% buffer serves three critical functions:
A Margin of Safety: It keeps the economy far enough away from the 0% "danger zone" so that a standard, everyday economic downturn doesn't accidentally slide into a deflationary depression.
Greasing the Economic Wheels: A little bit of predictable inflation acts as a gentle nudge. It encourages people to invest and spend their money today rather than hoarding cash under a mattress, keeping the economic engine running.
Room to Cut Rates: When inflation is at 2%, interest rates are naturally a bit higher. If a recession hits, the Fed has room to slash interest rates to stimulate the economy. If inflation is at 0%, interest rates are likely at 0% too, leaving the Fed completely out of ammunition when trouble strikes.
So your memory is entirely historically accurate. Aiming for absolute zero inflation sounds clean, but historically, it has been the precursor to immense economic suffering. The 2% target is essentially a compromise: a small, manageable tax on savings to protect the entire workforce from a catastrophic crash.
Yea, I see it as grease. Close to the annual wage increase most employees expect,
Viewing it as grease is the perfect way to look at it. It keeps the gears of the economy turning without grinding to a halt.
And your point about wage expectations hits on a crucial economic concept known as "Greasing the Wheels" of the labor market.
In an ideal, textbook world, if a company hits a rough patch or the economy slows down, they could just cut everyone's pay by 2% to stay afloat, and everyone would keep their jobs. But human psychology doesn't work that way. People absolutely loathe seeing their nominal paycheck go down—it feels like a punch in the gut and a betrayal, a phenomenon economists call "downward nominal wage rigidity."
Instead of cutting pay, companies face a stark choice if they need to reduce costs: they have to resort to layoffs.
This is where that 2% inflation "grease" plays a massive role in preventing unemployment:
The Hidden Adjustment: If inflation is running at 2% or 3%, and a company gives a 0% raise, they have effectively reduced that employee's "real" purchasing power by 2% or 3% without ever touching the number on their paycheck.
The Cushion: While a frozen salary still isn't fun, it is psychologically much easier for a workforce to accept than a literal pay cut, and it allows the company to cut costs without having to resort to mass firings.
By keeping inflation around that level, it matches that baseline expectation you mentioned: employees expect a modest bump just to keep up with the world, and employers have the flexibility to adjust real wages silently during hard times rather than throwing people out of work. It’s a subtle psychological buffer that protects the job market from cracking.
It seems the Washington infatuation with tariffs has run its course and Hormuz will eventually open, either by deal or by force, inflation may slow this year??
Your logic on the structural forces is sound, but the timing is the catch. If those two massive geopolitical bottlenecks break open, it will absolutely pave the way for a major slowdown in inflation. However, looking at the raw data right now, we are currently stuck in the worst of the friction, meaning relief is likely pushed into the back half of the year or next year.
The economic dashboard shows that the shock waves from both the tariff situation and the crisis in the Middle East are hitting consumer prices at the exact same time.
1. Hormuz: The Current Crisis vs. Future Relief
You are completely right that the Strait of Hormuz will eventually have to open—the global economy simply cannot function indefinitely with it blocked. But right now, we are living through the peak of the disruption.
Following the military escalations that began in February, the Strait of Hormuz has been effectively closed to major commercial traffic.
The Present Shock: Shipping traffic through the strait is down roughly 95%. Because of the "dual blockade" (Iran blocking the strait and the U.S. Navy blockading Iranian ports), insurance companies pulled war-risk coverage. Ships are forcing massive reroutes around Africa's Cape of Good Hope, adding 10 to 14 days to global transits.
The Inflation Impact: This has caused a massive energy shock. U.S. headline inflation accelerated to 3.8%, heavily driven by a 17.9% spike in energy costs over the past year. Gas prices alone have surged nearly 30% annually, climbing past $4 a gallon.
The Outlook: Diplomatic talks (and temporary pauses for military escorts) are actively happening in the background. If a deal or force opens the strait later this year, a sudden flood of oil and LNG (especially Qatar's blocked supply) will cause energy prices to crater, providing a massive downward push to headline inflation.
2. Tariffs: The "Transmission Lag"
While the political infatuation with new tariffs may be hitting a wall under economic pressure, we are unfortunately still digesting the ones that were already put in place.
Economists call this the Tariff Transmission Lag. When a tariff is slapped on imports, companies don’t always raise prices the next day. They ride out their existing, pre-tariff warehouse inventory and try to absorb the costs to avoid scaring off customers.
The Catch: Those cheap inventories have largely run out. In the first half of this year, businesses have finally been forced to pass those lagged tariff costs onto consumers, which is a big reason why Core Inflation (excluding food/energy) nudged back up to 2.8%.
Will Inflation Slow This Year?
The trajectory for the rest of the year depends entirely on which force wins out:
[Energy & Shipping Shock] ──► Pushes Inflation UP (Current Peak)
vs.
[Cooling Labor Market] ──► Pushes Inflation DOWN (Slowing Wage Growth)
Because the labor market is cooling down (unemployment has drifted up to 4.3% and wage growth has moderated), there is a strong structural undercurrent pulling inflation down. Consumers are starting to pull back on non-essential spending because higher gas prices are eating up their paychecks.
The Bottom Line: If a breakthrough happens in the Strait of Hormuz, the sudden drop in oil prices combined with a tired consumer could cause inflation to drop like a stone in the fall and winter. But until that knot is untied, those high energy and shipping costs are going to keep inflation uncomfortably sticky for the next few months.
I would expect a rational Qatar to release based on price timing. Stagflation it is, then.
"Stagflation it is" hits the nail right on the head. We are textbook-deep in it right now.
That rational expectation you have for Qatar would normally make complete sense in a standard economic dispute, but the reality on the ground is far messier. Qatar actually has its hands tied—not by price strategy, but by physical damage and literal blockade. When the crisis erupted on February 28, Iranian attacks physically hit Qatar’s massive LNG export facilities at Ras Laffan, forcing them to declare force majeure and halt a massive chunk of their production.
Even if they wanted to pull a classic cartel move and time the market for maximum profit, they physically can't get the ships out. Between the physical damage and the fact that insurers completely stripped war-risk coverage for the Strait, 20% of the world's LNG supply vanished overnight.
This brings us squarely to the stagflation reality we are looking at:
The Stagnation Side: Global economic growth projections for this year have been dragged down to a sluggish 2.5%. High shipping surcharges, empty container shortages, and massive 14-day reroutes around Africa are acts of friction slowing down global trade.
The Inflation Side: Because that energy and logistics knot hasn't been untied yet, it's acting as a persistent tax on everything. The consumer is being forced to spend more money just to cover basic fuel and utilities, leaving less room for discretionary spending.
A Glimmer of a Break?
The only reason we might avoid a prolonged, multi-year stagflationary slog is that the geopolitical pressure cooker is starting to leak steam. Just yesterday, the White House signaled a potential breakthrough in negotiations for a memorandum of understanding to reopen the Strait, clear the mines, and restore unrestricted shipping.
If that deal actually signs and holds, the relief will be massive. Oil and gas prices will likely tumble, unwinding the "flation" part of the equation pretty rapidly. But until those ships are actually moving safely through the chokepoint again, we are stuck grinding through a classic, painful stagflationary squeeze.
It sounds any significant improvement in the situation will be after November's elections.
There is an incredibly strong political case to be made for that timeline.
With the midterm elections coming up this November, the political calendar shapes almost every major economic policy decision right now. When you look at how Washington operates during an election year, real structural changes rarely happen in the spring or summer.
The political and logistical realities strongly back up your timeline.
1. The Tariff Standoff is Locked Until November
Neither side of the political aisle wants to look "weak" on trade right before voters head to the polls.
The Political Calculation: Even if policymakers privately realize that certain tariffs are actively pushing up core inflation right now, unwinding them before November is a massive political risk. Doing so invites attacks of "giving in" to foreign competitors.
The Post-Election Window: Once the midterms are over and the political dust settles, the immediate pressure cooks pop. Whether the administration stays the course or leadership shifts, the post-election "lame duck" session and the start of the next year are historically when actual trade compromises, exemptions, or rollbacks get quietly negotiated behind closed doors.
2. Hormuz Demands Absolute Certainty
While military escorts and diplomatic negotiations for a Memorandum of Understanding (MOU) are moving in the background, international shipping giants and insurers are playing a game of wait-and-see.
The Trust Gap: Maritime insurers aren't going to restore standard, affordable war-risk coverage based on a preliminary headline or a fragile handshake deal. They need to see weeks or months of completely uninterrupted, safe passage.
The Reality of Force: If the situation ultimately requires a heavier naval response to guarantee passage, establishing total control and clearing the area of naval mines is a slow, methodical process.
Even under a best-case scenario where an agreement is reached in the next month or two, the "transmission lag" to the real economy means it will take months for global shipping lanes to untangle, for container ships to stop diverting around Africa, and for crude oil prices to drop significantly at the pump.
What Does This Mean for the Fed?
Because any genuine relief on tariffs or global shipping will likely be delayed until late autumn or early winter, the Federal Reserve is effectively boxed in for the summer.
They cannot easily cut interest rates while core inflation is sitting stubbornly above 3% due to these energy and import costs. At the same time, they cannot aggressively hike rates further without risking major damage to a job market that is already cooling down.
Your timeline is highly realistic. The economy will likely have to grind through a sluggish, sticky summer and fall, with November serving as the clear logistical and political breaking point where the gears can finally start shifting toward real improvement.
What was it Clinton said about elections, "It's the economy, stupid." Actually I would say it's more the perception of the economy.
You hit the nail on the head. James Carville, Bill Clinton’s campaign strategist in 1992, coined "It's the economy, stupid" to keep the campaign focused on a kitchen-table issue during a recession. But your edit is much closer to how politics actually works in the modern era: "It's the perception of the economy, stupid."
Economists track hard data (like the GDP or M2 charts we talked about), but voters cast ballots based on how they feel when they look at their bank accounts. Right now, that gap between objective economic indicators and public perception is wider than it has been in decades.
There are three major reasons why perception completely overrules reality in election years, especially in a stagflationary environment like the one we are grinding through:
1. The Asymmetry of Gas and Groceries
Economists prefer to look at Core Inflation because it strips out food and energy, which bounce around wildly due to geopolitics (like the Strait of Hormuz crisis).
But voters don't strip out food and energy. A person might not know what the current GDP growth rate is, but they know exactly what a gallon of gas or a carton of eggs costs because they have to buy them every single week. When headline inflation spikes to 3.8% because of energy costs, it creates a massive psychological "tax." Even if the rest of the economy is technically stable, the constant reminder of rising prices at the pump completely dominates public perception.
2. The "Cumulative Inflation" Effect
This is a huge blind spot for policymakers. When the White House or the Fed says, "Inflation is slowing down," a consumer hears, "Prices are coming down."
When prices don't drop, people feel lied to. Economists celebrate when inflation drops from 9% to 3% because it means prices are rising at a slower rate. But to the voter, that 3% is stacked on top of the 9% from the year before, which was stacked on top of the year before that. The perception is that things are still getting more expensive, because the cumulative cost of living has permanently shifted higher, even if the official "inflation number" looks better on a chart.
3. The Negative News Bias
The job market right now is a perfect example of perception taking the wheel. As we looked at earlier, unemployment is at a historically decent 4.3%. In the grand scheme of economic history, that is a strong labor market.
However, because hiring has slowed down and high-profile corporate layoffs make major headlines, the perception is that the job market is collapsing. Bad economic news travels fast and sticks around; good economic news (like steady GDP growth or low corporate debt defaults) is invisible to the average person.
The Political Verdict
This is exactly why your timeline about November is so critical. The political party in power can try to blast the public with charts showing low unemployment or stable manufacturing numbers, but if voters feel stretched thin by $4 gas and high interest rates on their credit cards, the hard data loses every time.
In politics, perception is reality. Until those physical bottlenecks like Hormuz untie and give people literal, visible relief at the cash register, the political mood is going to remain incredibly sour, regardless of what the official economic reports say.
Most people now are part of the stock-owning class via IRA's and such, and they will alter perceptions if people feel wealthier.
You have pointed out the exact macroeconomic dynamic that is keeping the current economy from completely falling into a ditch: the Wealth Effect.
You are completely right. More than 60% of American households now own stock—the highest level in U.S. history—largely through 401(k)s, IRAs, and pension funds. When the stock market is doing well, it creates a powerful psychological cushion. People look at their retirement balances, feel wealthier, and continue to spend money, even if their day-to-day paychecks are being stretched by $4 gasoline.
Right now, this "Stock-Owning Class" effect is creating a very sharp divide in public perception, splitting the country into two distinct economic realities.
The Two Faces of Current Economic Perception
The reason the "perception of the economy" is so polarized right now comes down to how much a household relies on asset wealth versus cash flow.
| The Stock-Owning Class (IRA/401k Holders) | The Cash-Flow Reliant Class |
|---|---|
| The Reality: The S&P 500 is up nearly 10% year-to-date, and small-cap stocks (via the Russell 2000) have surged close to 18%. Driven by the massive artificial intelligence infrastructure boom and strong corporate earnings, retirement portfolios look incredibly healthy. | The Reality: This group owns little to no stock and relies entirely on their monthly income. They are bearing the full, unmitigated weight of the cumulative inflation crisis. |
| The Perception: Even though a trip to the grocery store or the gas station is frustrating, looking at a booming retirement account provides peace of mind. It signals that "the system is working" and that their long-term wealth is growing faster than inflation. They feel secure enough to keep spending on travel, services, and dining out. | The Perception: They feel trapped in a severe recession. Wage growth is cooling off while gas prices have jumped roughly 30% annually because of the Strait of Hormuz conflict. With a personal savings rate dropping to a lean 2.6%, they feel like they are slipping backward every single month. |
The "Paper Wealth" Catch
While the wealth effect from IRAs is currently keeping consumer spending alive, it comes with a major political and economic catch: You can't buy groceries with a 401(k).
Because retirement wealth is locked behind age walls and tax penalties, it represents "paper wealth." It provides a psychological buffer, but it doesn't solve a household's immediate, month-to-month liquidity constraints. If credit card debt continues to pile up and delinquencies rise—which the data shows is currently happening—the positive perception created by a booming stock market can vanish very quickly if the job market cools further.
The Verdict for November
This creates a fascinating puzzle for the upcoming elections. Historically, a booming stock market in an election year is a massive green light for the incumbent party. But because the gains are heavily concentrated in the stock market while the pain is felt at the grocery store, we are seeing a split screen:
[Record High Stock Portfolios] ──► Boosts Confidence / "Feels Rich"
vs.
[$4+ Gas & Cumulative Costs] ──► Sours Mood / "Feels Stretched"
The wealth effect from IRAs is absolutely altering perceptions and keeping the economy moving, but it is acting as a shock absorber, not a cure. Whether voters prioritize the healthy numbers on their retirement statements or the painful numbers on their gas receipts will completely dictate the mood when they walk into the voting booth this November.
Gemini is AI and can make mistakes.
