Be prepared

Aug. 10, 2012



        Unfortunately most Americans have little or no educational background in Economics.  I am always amazed when I talk to highly educated individuals (common in my chosen professions) and observe that they rarely studied any economics at all. I would submit that even those who graduated from Harvard with a degree in constitutional law might not have taken any substantive economics courses.  Those  who did manage to take a course or two often took a fundamentals course or the basic Micro/Macro mix.  Talking to business majors who were required to take at least an additional course in Macro and several Finance courses is like a breath of fresh air.  Why, it is because so many decisions we make are based on economic or financial foundations.  Without this support we tend to make emotional decisions that are counterproductive. Please do not overreact to what I am about to say.


        Let's take an example.  Now, you can agree or disagree with the example and may like or dislike the policy but remember that looking at a different view is always productive.  The example is that of the various stimulus packages and their long term effect.  I'll address only one here.  That was the action of sending all individuals a check to "stimulate" the economy.  Let's say your family received $1,200.  If you were a person that is in poverty or is lower income you were delighted.  This is a sizable boost to your disposable income.  You celebrated and vowed your allegiance to those who so blessed you.  In fact this impressed the greatest voting bloc in the country.


        Now, let's take another look.  The economy has just had over 500 million dollars dropped into the system.  As with all products this means there is a surplus of dollars.  The result has to be a depreciation in the value of the dollar. OK we didn't see that big a depreciation, but that was because of actions by the Fed and the depreciation of the Euro with the European financial crisis.  Never the less those dollars are sitting in the system, in surplus, placing continual pressure on the system to register inflation.  Any shock to the system will result in accelerated inflation.  The current corn crisis due to the continued drought is a fine example.


        Another potential problem is the fact that foreign nations use our dollar to trade in oil.  This means that a huge excess of dollars are being held to augment that trade.  IF these nations either reduce their activity because of the economy or elect to choose another currency for trade purposes (China has already suggested this) then we will instantly be flung into an inflationary situation.


        So who benefits?  Now, follow closely.  We took this action to keep the economy from deteriorating further and it appeared that we helped the "poor" and underprivileged.  Why, because a $1,200 injection is felt more dramatically by this level of income.  In fact, we injured this group disproportionately.  The well off or secure families can adjust if there is a rapid rise in prices whereas the poor and underprivileged are trapped in a situation where they have no discretionary disposable income.  A rise in prices will hit the poor and those on fixed incomes more dramatically than any others.  The poor single mother of three was elated when she received $600. Now, she must try to feed and clothe her family when prices have grown (or will).  Ground beef that was $2.50/lb is now #3.25 and she has no way to avoid that fact.  More affluent families have disposable income that can be redirected so that the impact will be less severe.


        Currently we are sitting on world dollar reserves that are placing a continual pressure on the economy with the potential result being accelerated inflation.  In fact, with  a slowing GDP growth, the potential for "stagflation" is in my opinion much more likely than most want to admit.  What does this mean?  Hopefully, policies will be enacted that reduce the dollar reserve and decrease this potential.  If they don't then we should all be prepared to experience double digit inflation.  Be careful, many will say that at present there isn't any indication of this happening.  The factors are in place for this to happen and the warning signs may be subtle. 


        What can we do?  Actually, very little.  One cautionary step is to begin reducing our monthly expenses to free more income that can be the offset to rising prices.  Also, begin to examine habits that restrict spending habits.  One trip per week to shop versus "running to the store" is a good example. 

        I have included a link that helps to explain the value of our dollar.  I hope this helps some of my readers.


        One more thought, do your research.