You’d have to be unplugged from all media sources to not hear debates on “…the economy…” by academically refined “experts” and screeching emotional hot heads. Is it getting worse, is it beginning to recover, is it stagnate, are there are hopeful signs?
I’ve been wondering if changes to our economy precede or follow political beliefs – on both sides of the house. Which is the cart and which is the horse? What is reactionary and what is proactive and when should either tactic be used? It’s been awhile since I’VE seen strategic non-partisan proactive economic policies but maybe I missed a few along the way. Where does the role of government begin and end during shifts in our economy? What a lot to debate!
It is important to come to some sort of conclusion to the questions above to feel confident about the way our country is being led – either confident in the policies or confident that you want significant change at the next election season.
Our conclusions depend on how we define economic health. Regardless of differences in economic camps (there are big disparities), I personally do not know anyone who doesn’t include in their definition of a healthy economy: 1. low unemployment and 2. a healthy housing market. Maybe I have purely capitalist friends – but no, I do have friends with far more big-government instincts who also want healthy job markets and a healthy housing market. Really, what more affects us personally than our ability to earn a living, and where we sleep? With the American tradition of home ownership and a God given desire to plant roots and secure our place in this world, to convince a majority of Americans that this idea is outdated would be a very hard sell.
I liken it to Maslow’s Hierarchy of Needs: The philosopher determined that until basic needs are met (physiological and safety,) more ecclectic needs such as self esteem and self actualization (whatever that personally means) aren’t important. It is odd in the world’s most advanced country to think of Maslow’s heirarchy of needs in general terms. Third World Countries come to mind when you think of food and shelter, although without a doubt this crisis also exists in America. The point is – to be discussing this in American majority terms says something to me. The phrase: “It’s the Economy, Stupid” rings true. Call me simple, but our government’s MAIN goals, actually pledged outloud are preventative: Defend and Protect the Constitution of the United States of America. This includes our economic strength. When all is well on the fronts of security and economy, THEN we can focus on other aspects of quality of life for us and the world in general. Sounds simple, doesn’t it? Of course we all know it is far from simple.
Terms are thrown around regarding our economy: inflation, deflation, stagnation, stagflation, depression, recession, debt vs. GDP growth. Defining a few of these terms:
During the depression, something called DEFLATION occurred: too few dollars for too many goods, translated simply: no one could buy what was for sale. This occured partially because businesses had a hard time getting credit and could not expand and weather slow downs, and because our economy was out of balance: not enough solid businesses to employ enough people. The result was a drastic slowing of the economy: prices dropped and production slowed – causing high unemployment. The government stepped in and created programs to stimulate the economy. The hope was to get people back to work. Many did go back to work, but most jobs created were for the government. Since the government has to make payroll for government jobs and they get their funds by taxing citizens or increasing US debt, it is seriously debatable that their actions really grew the economy in the LONG run. They did in the short run, with permanent government expansion being a consequence. Many respected economists argue that necessary production for World War II actually brought our nation out of deflation and the depression. So if we want to avoid a deflationary pattern, what long term policies will actually impact our nation’s economic growth? This is the million dollar question. Economists seem to know less about the causes and fixes of deflation than they do inflation. If we are headed towards deflation, then this is the CART that must be directed. It is usually harder for a society to recover from severe deflation than inflation – there are less variables to “tweak.” Interest rates are already very low, which is a typical way the Federal Reserve Board “tweaks” the economy. What is needed are JOBS and demand for supplies.
On the flip side, INFLATION can occur when prices rise quickly(due to rapid growth) and and it takes more dollars to buy necessary things. Raw materials begin to cost too much for businesses to expand. Some level of inflation means the economy is growing. There is a precarious balance to keeping inflation in check that is largely controlled by interest rates. When inflation surpasses the health zone, unemployment increases, just as with deflation, and the vicious cycle of high unemployment and high cost of living seriously affects quality of life. The Federal Reserve Board’s ultimate responsibility is to regulate the supply of money in accordance with the needs of the economy as a whole. They do this through interest rates and money supply. The US Treasury is in charge of money policies, tax policies (the IRS) and is an arm of the administration. Easing up money allows businesses to expand, but the money supply can’t be too loose or money loses intrinsic value as inflation creeps in. Just as in our personal finances, BALANCE is key. Overcorrection can bounce the economy from one extreme to another. There are actually 3 types of inflation that yield similar results but are based on different realities of our economy and corrective actions depend on understanding inflationary issues.
So where are we today? Low interest rates, high unemployment, increasing US Debt, increased government spending and regulations. Add to this mix that we are part of a global society – with economic stability of other countries affecting our economy and vice versa. In the near term, if our policies do not focus on JOBS, meaning business friendly activity, we could shift to deflationary times. Inflation could also occur with increased government spending and loose money policies that diminish purchasing power of goods. Much of this depends on how well our leaders balance our economy and put this balance ahead of political ideals.
Think about what matters most to Americans and what you think of our economy. Do you see glimpses of recovery? Further challenges? Personally, I see hope based on more than financial decisions. I think our economy is a filter to view our nation’s heart and what we stand for. Economic policies are a reflection of the values of those making them. That is what makes economics interesting. My hope is that as good economic decisions align with most American’s hearts and values, our economy will improve. Uncertainty is a stumbling block to a healthy economy. Taken to a personal level: how we handle our finances often reveals our hearts and values. Amidst Maslow’s hierarchy of needs in this economy, we as individuals can make a big difference in other’s lives. It has been demonstrated time and again that individuals and private citizens make the most significant and cost effective changes in other’s lives. How many dollars does it take for the government to feed the hungry vs. how many dollars does it take for individuals or private charitable organizations to help those less fortunate in their community and elsewhere?
The saying goes: there is an economist within each of us, whether we know it or not. Because in the end, we all have to deal with money in one form or another. That is why we, as individuals, should buffer both extremes of inflation and deflation when managing our personal finances. As a comprehensive financial planner using functional asset allocation, we help clients lay out individual life plans. We consider future streams of income, investments poised for growth, and identifiable standards of living that bring peace of mind to our clients. I’ve not yet seen a more complete and cost effective way to approach an individual, couple, or family with financial recommendations.