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Rough Start to a New Year

Well, it was a rough start to 2008.

The new year was ushered in with a big drop in the Dow and a rise in oil prices up near $100 per barrel.  Although the first day shouldn’t be taken as a harbinger for the entire year, it wasn’t a welcome nor a pleasant way to start off a new year.

The Underlying Problems

As I stated around Christmas, I suspect their are too many negative forces for the American economy to sustain its recent momentum.  In addition to the terrorist attacks around the globe, that are pushing up oil prices, there are many domestic factors weighing on the economy.  The deficits, the loss of high paying jobs overseas and our government’s shameless affinity for wasting our tax dollars are all bad signs for things to come.

Most important, is the constant slide of the dollar.  This hidden form of inflation is undermining the average American’s ability to afford their current lifestyle.  Since housing, food, energy and other service and commodity prices are rising much faster than real incomes, our purchasing power is eroding and our ability to keep up is diminishing.  The recent response has been to make this up by accumulating debt, but our ability to borrow beyond our means is quickly coming to an end.

According to basic economics, the decreased demand should cause prices to fall and the market forces should correct the problem.  Unfortunately, the harsh reality is that America is increasingly competing for resources with the rest of the world and their demand may keep the prices rising beyond our ability to compete.  So as long as the dollar keeps falling, Americans will continue to lose purchasing power to those living in countries with stronger currencies.

The Future of Your Money

One of the scariest facets of this dollar erosion, is the fate of current and future retirees.  If you retire or plan to retire with a certain amount of assets and income, but find out they are both worth much less than you had anticipated, there is no practical way to make up the difference.

Retirees counting on stable prices and inflation may be in for a real shock, if the costs of living keep spiraling upward.  The Government is doing America a big disservice by publishing an inflation rate that is so clearly disconnected from reality.  They can call it the “Core Rate” and use whatever clever devices they choose to fudge the numbers.  But, don’t count on the Government economists to publish an accurate rate of inflation.  They couldn’t afford the increased costs of debt service payments and the automatic cost-of-living adjustments, if they did.

Tough Solutions for Difficult Problems

I don’t pretend to offer any magical solution to these problems, because there aren’t any.  If you have ever tried to climb out of your own personal debt of a couple thousand dollars, then imagine owing trillions of dollars, like our Federal Government.  And, there are no easy solutions to our jobs going overseas and our massive trade deficits.  Most Americans will still choose the $2.00 Chineese item at Walmart, over the $5.00 item that was made in America.  In five years, our markets will be flooded with cars, and other big-ticket items, made in China and India.

The only useful advice I have to offer is to save more money than you think you will need.  Because, in the future, you will probably need a lot more money than you think.

2 comments to Rough Start to a New Year

  • Agree with the inflation problem, but I have different information regarding “jobs going overseas” and terrorist attacks as being the supposed reason for the increase in oil prices… they’re not, it’s what the media focuses on. Most of US oil imports come from Canada, not the middle east. Funny how this is never mentioned – Canada’s always left in the US’s blindspot. Also, it makes no sense to think in terms of “American” and “chinese” jobs anymore, just because of the interconnectedness of all products and services now – one GM car gets parts from many places, crosses many borders etc. before being sold. And besides, China is America’s unacknowledged (until very recently) sugar daddy, so it’s a good thing Americans are buying some Chinese products anyway:)

  • [...] 2007 - I complained about the lack of a Santa Clause Rally. 2008 - I complained about the Rough Start to a New Year. 2009 - I complained about The Great Recession. 2010 - I’m not complaining about the stock [...]