The Blinker Effect: Decreasing Disposable Income and Savings

The sounds of samba on the street, sun, happy people.

I spent some of my teenage years living in Brazil and loved every minute of it.

It’s why, even after moving away to live in the US I used to visit as often as I could.

Back in the mid-2000s I travelled to the cidade maravilhosa (marvellous city in Portuguese), how Rio de Janeiro is also known, to visit a friend that lived there.

Some locals like to say that God spent six days making the world and left the seventh for Rio. With its incredible views and unusual landscape, Rio has to be one of the most beautiful cities in the world.

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I stayed in one of the iconic neighbourhoods: Ipanema. Steps away from the bar where, while drinking beer, Antonio Carlos Jobim and Vinícius de Moraes spotted Helo Pinheiro. Pinheiro would later become the world famous ‘Girl from Ipanema’.

Anyway, the exchange rate was good, so I decided to do some shopping.

To my surprise, prices were wildly cheaper than what I had expected. Bargain!

That is, until I started reading the small print. Oh yes, there was fine print.

There on the sign, underneath the large R$30 price, printed in tiny letters you would read something along these lines: ‘10 x R$30’.

That is, the price was 10 times more expensive than I had initially thought.

Fact is paying in instalments had become a common thing in Brazil.

The reason for this was because of the exchange rate. Imported items like Nike tennis shoes, for example, were quite unaffordable if your salary was in local currency. So, paying in quotas made those items more accessible.

Now I hear that the practice has extended to just about anything, not just imported items.

Buy Now, Pay Later…

Paying in instalments is also becoming quite common in Australia too. Today we have buy now pay later schemes like Afterpay or Zip.

It’s a payment method which you can use to purchase almost anything, from vacations to shoes, either online or in store. It allows you to pay off items in several instalments over a certain period of time.

Approvals are quick and it’s appealing to consumers because these companies don’t usually charge any interest, as long as you pay on time.

In a way, it is a techy version of layby.

Afterpay has been increasing in popularity. It currently has 4.3 million active customers and over 30,000 retailers.

The company makes most of its revenue through charging commission to retailers. Customers pay in four instalments, interest free.

The thing is, if you fall behind, you could pay quite a hefty price on commissions, especially if you used it for a lower price item, the percentage interest that you end up paying could be high.

Shoppers are spending an average of $150 per transaction on Afterpay.

But the fact that we are using these schemes to pay for small everyday things, to take from our future income, signals to me that we are losing purchasing power.

Don’t get me wrong, I have nothing against companies like Afterpay. On the contrary, I am all for disruptive technologies and giving consumers more choice.

But, in a way, buy now pay later companies’ incredible growth is not surprising. It’s an extra way to get consumers to stretch their hard-earned dollars from stagnant wages.

And while wage growth has been non-existent, many essential items like energy and health have been increasing at a faster pace.

Both our disposable income and savings are decreasing, as you can see in the graph below.

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Source: RBA

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Increasing property prices have masked much of this. But now with property prices falling, the blinker is starting to come off.

A recent survey by ME Bank noted:

Australian households are feeling overall worse about their net wealth, jobs, income and living expenses with further significant residential property price falls over the past six months and a weakening labour market […]

In net terms of the greatest financial worries and positives, cost of necessities was the most commonly cited worry in ME’s latest report, nominated by 44% of households. This was followed by worries about level of cash savings on hand (34%), ability to maintain lifestyle in retirement (31%) and impact of legislative change (19%).

Cost of necessities and level of cash savings are some of the biggest worries.

Reserve Bank governor Philip Lowe is now looking at further interest rate cuts as central banks around the world decrease theirs.

This would bring the cash rate below 1%, at 0.75%. But how much will cheaper money increase growth?

From The Australian:

The prospect of another cut in the official interest rate after back-to-back to cuts in June and July will fuel concerns about the economy just a week after Josh Frydenberg declared the federal budget back “in balance”, with the smallest budget deficit in 11 years.

“Over the past year, there has been no growth at all in consumption per person, which is an unusual outcome at a time when employment is growing strongly,” Dr Lowe said.

It’s questionable how much effect lower rates will have on consumption when we already hold record amounts of debt.


Selva Freigedo,
Editor, The Rum Rebellion

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Selva Freigedo is a research analyst for The Rum Rebellion.

Born in Argentina, her passion for economic analysis started at a young age. Her father was an economist for the Argentinean governments and the family used to discuss politics and economics at the dinner table.

Argentina is a country with an unusual economic history. Growing up there gave Selva first-hand experience on different economic phenomena such as hyperinflation, devaluation and debt default.

Selva has also lived in Brazil, Spain and the USA.

Back in 2000 she was living in the US as the dot com bubble popped…
And in 2008 she was in Spain as the property market exploded and then collapsed…

She has seen first-hand what happens when bubbles burst.

Selva joined Fat Tail Investment Research’s team in 2016, as an analyst. She now writes from her vantage point in Australia, where she settled in 2015.

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