Can I pay you later?

 I'm being a bit general today, not my usually specific self.  The title of this post suggests that I am going to talk about subscriptions as a way to acquire products or services, but actually, the idea is broader than that.  Subscriptions allow individuals to acquire goods or services on a month basis that they may, or may not, be able to afford otherwise.  Obviously, we have other mechanisms for this same behavior - the loan.  For example, the vast majority of us use loans to purchase big ticket items like cars or homes.  We make a small downpayment and borrow the rest to pay over time.

Increasingly, the idea of paying over time (buy now, pay later) is being used for other goods and services.  DoorDash is partnering with Klarna, so that you can have your dinner delivered and pay for it months later.  In a more interesting case, there's the story I read on LinkedIn about people buying their pets on an installment plan.  Yes, buying your puppy for only 12 easy payments.  Either puppies are too expensive (likely, with all the crazy hybrids) or people have become accustomed to placing every purchase on an installment plan.  

The interesting question to ask about this behavior - that is, buying most goods and services on time - is why?  Why would people buy a $15 delivered hamburger and pay $20 for it over time?  Why would people buy a puppy and pay for it months or perhaps even years later?  Do the vet bills come included in the payment plan?  

This behavior is much more prevalent in younger generations - that is, Millennials and Gen Z.  I am not attempting to judge them but noting that older generations have traditionally had a mantra of saving to purchase, delaying gratification to either pay more or pay all of the purchase at the point of sale.  I can remember (I sound like an old grumpy man here, which, in all honesty I may be) when my father DID NOT own a credit card in the mid 1980s.  My parents used cash or checks, and paid for things except for their cars and houses, at the point of purchase.  Of course, they lived in a time with exceptionally high interest rates, which is where this story turns.

Many younger folk who have grown accustomed to lower interest rates before and during the COVID pandemic are not used to higher interest rates and what those interest rates do to your standard of living.  If you are used to a 3% or 4% inflation rate and lower interest rates, borrowing a few dollars today to pay it back on low terms over a few months is not risky.  However, I think many people are falling into a trap, because it becomes very easy to rack up a lot of smaller loans at somewhat reasonable rates, only to discover that wage increases and other costs haven't left enough remaining income to pay down the debts.  If and when (and it will be when) interest rates rise again, many people very comfortable today buying their pets or dinners on a buy now pay later model may regret their experiences.  After all, it's not as if people are stuffing their investment portfolios and savings accounts and obtaining a higher level of return while paying by the month for their goods and services.

One could argue that if there were a substantial arbitrage going on - people were borrowing low and lending high - that all of this delayed payment would make sense.  Instead, what we have now is the largest amount of outstanding credit card debt in history, and very moderate wage growth, which means that people will be struggling to pay their bills.  We may need to re-educate an entire generation of people who are used to the good things early in life without the ability to fully pay for them.  

Am I crying wolf?  Is it possible that interest rates will rise?  I would think that it's more than likely, regardless of how much pressure the Trump administration places on the Fed and how accommodating the Fed is to Trump.  Take just a few realities:

1. The federal government continues to spend far more than it takes in.  There is both a crowding out issue and the need to either print more money (inflationary) or raise taxes (reducing take home money) to cover a growing debt.  While the good government types complain about the growing debt balance, it shocks me that younger generations cannot see that we are mortgaging their futures by living beyond our means now.
2. As long as the Trump tariffs are in place, goods and services will increase in cost if they are imported.  We've seen price increases in a number of sectors and tariffs are a tax on the consumer, not the producer, which means fewer disposable dollars for a household.
3. While some items in the economy are experience dramatic cost reductions because of greater efficiency or scale (software, computer hardware), many services, especially those reliant on people rather than machines (healthcare, education, services for elderly) are rapidly increasing in cost.  As our population ages, these costs will only increase, leaving fewer disposable dollars for a household.  Just look at the price increases in Obamacare if you haven't already.
4. Our expectations about standard of living have increased.  I got my first cell phone when I was almost 30, because they were just become ubiquitous and I needed one for work.  My kids got one when they were early teens, because, well, everyone else had one.  Today, kids as young as 4 or 5 have phones or near phone alternatives.  Technology is pervasive and our expectations for these and other gadgets mean that our base household costs are going up faster than wages.
5. Let's talk about something easy - electricity.  When you combine the rapidly growing demand for electricity because of all the electronics in our homes, and the growing demand for data centers, and the expectations that more electricity will come from green sources, all of these factors dictate a higher cost for a really basic need - electricity.  That's something the vast majority of homes cannot do without, and it will cost more.

There's no doom and gloom here.  When we as Americans decide to address a problem, we typically focus a lot of attention and develop committees, which don't do much, until the problem becomes critical, at which point we appoint special committees, which investigate until a wave election happens that votes new decision makers into office.  Just saying that a lot of the factors described above will be coming to a head in 2026 and 2027, with a major presidential election coming quickly.