I know that I have been very bad about posting to my blog and truthfully, I don’t have any really good excuses. You, my dutiful readers, deserve a nice long post that is humorous, insightful and eloquent. My weekend being a single parent to both Sophie and Riley would fit the bill. Or maybe a post about how I have finally broken down and ordered an iPhone.
I could write about these things, but “No Soup For You!” Instead you are going to receive a boring post that borders on being scary about the dangers of inflation and recession and what you should be doing to protect yourself.
For a while now I have been growing increasingly concerned about the state of our economy. I don’t know if you remember, but back when gas was about $2.85 a gallon I warned you that it would hit $4.00 by Labor Day of 2008. Well it did it a couple of months earlier than I thought. I am still worried about gas prices (actually I am very worried), but there is very little we or anyone can do about it (except maybe Bush, who could unequivocally tell Israel to NOT attack Iran. See
this post on why that would be VERY good); but, I have another concern that I am just as worried about, if not more worried.
Inflation has been playing peek-a-boo with the Fed for over a year and half now; but, the economy has been in such a sorry shape that they haven’t dared raise interest rates to combat it. And the truth is, that was the right decision because while inflation has been growing, it hasn’t been to point where anyone needed to hit the panic button. It is troublesome though. When you have recession and inflation at the same time, it creates a whole shit-storm of a mess that is very difficult to get out of. Those of us in our late twenties to early thirties won’t really remember it, but ask your parent’s about how fun the stagflation (recession mixed with inflation) of the ‘70s was. Back then if you had great credit, you would be lucky to get a home mortgage with a 14% interest rate. Think about that for a moment. Great credit with a 20% down payment on a home got you an interest rate of 14%. That was life in the 70s.
However, our parents had one thing going for them during this time that we don’t have now. Rising wages. While inflation grew and the economy was in a recession and oil prices went through the roof, they also had a comparable rise is wages. So while it sucked really badly, most people could get by. Today, with the global marketplace, wages have hit a plateau and no economist expects wages to rise anytime soon. Even if inflation gets out of control.
That brings me to today and why I have written this post. All last week, Bernanke kept repeating the mantra that he was not going to bail out Fannie Mae and Freddie Mac. He kept insisting that they were solid and we had nothing to worry about. Sunday night that all changed. Right before the markets opened in Asia for trading on Monday, Bernanke announced that he was going to seek authorization from Congress to bail out Fannie Mae and Freddie Mac. Why is this important? Well currently these two companies own the debt to HALF of all mortgages in this country. They are the ONLY two companies that are still buying mortgages off of banks. If they go under, there will be no one left to buy mortgages from banks. If there is no one buying mortgages from banks, then banks won’t be making mortgages, if there is no banks making mortgages, there will be no one buying homes, if there is no one buying homes, there will be a large surplus on the market, if there is a large surplus on the market, prices will drop, etc. etc. etc. I could keep going but it only gets worse from there.
Here is the problem, the bail out isn’t going to solve the problem at Fannie Mae and Freddie Mac. It is only going to a band-aid and effectively kicks the football down the road a couple of years. This bail out is also why I am now hitting the panic button. As I am sure you are aware, the dollar is the toilet right now and when the Fed bails out these two companies, it is going to destroy the Federal Reserves balance sheet, which is going to make the dollar even more vulnerable than it already is, which in turn leads to greater inflationary pressure. In fact the situation from an inflationary standpoint is far more precarious than it was in the ‘70s because our national debt is far larger than it was in the ‘70s and the debt we do have is no longer American owned. Historically, Republicans would make the argument that our national debt was no big deal because the debt was owned by Americans. Basically, we were borrowing from Peter to pay Paul. This is no longer the case. Most of our debt is now owned by foreign governments.
To make a long story short (too late), we are primed to have inflation grow faster than anytime since before WWII, no increase in wages, a deep recession based on the price of gasoline and middle class families in a position where they will be able to buy far less for much more. I hope I am wrong, but I don’t think I am.
So, what can you do? I have a real bad habit of not practicing what I preach but I am going to make a very concerted effort to prepare. If nothing happens, then great, I am far better off financially than I was before and I go about my merry way. But if I am right, well…. I had better get off my ass and prepare like I am advising you to do.
1.
Emergency Fund. First and foremost, you need to have some money set aside for emergencies. You should have three months worth of your expenses set aside for emergencies, but if you don’t have this set aside, it can seem like an impossible task. At minimum, every one of you should have at least $1,000.00 put aside for emergency expenses. If your tires blow out on your car and you have to get to work, the last thing you want is to have to go deeper in debt.
2.
Organize your debt. Make sure that all the debt you have (mortgage payment, credit cards, student loans, car payments, etc.) are manageable. When I say manageable, I am talking about making sure that your monthly payments are such that you can handle them without going hungry. Make sure those monthly payments stay at reasonable level, even if interest rates go through the roof. This is important. You may be thinking, yeah, I can handle the minimum payments easily if things get rough; but, you need to remember that if inflations gets really bad, then interest rates are going to go up, which means those payment on all variable rates are also going to go up.
3.
Retirement. Continue to put money into your retirement account. Your retirement account is your long term bet. You are not supposed to be thinking about it in short term goals, so it is important to continue to fund it even when things are bad.
4.
Shop Smart. Goods are never going to be cheaper than they are today. So, when you go shopping, if you see something on sale that you use regularly, buy a lot of it. This goes for almost everything. If you buy 10 things of shampoo when it is on sale, you are going to be spending far less money in the long run. Not only will you have gotten it at a better price, but you will already have it in stock so that is money that you won’t have to spend later when you might not have it. This is doubly important when it comes to food. Food costs are the one area that I think are going to rise the most and it is the one area that you can’t do without.
5.
Decrease your Energy Use. Not only is it better for the environment, but it will save you money and prepare you for possibly drastically increased costs in the future. Drive less, get a smaller car, use less air conditioning, use the heater less, etc. etc. etc.
Last but not least, if you feel that you are already adequately prepared for the above scenario and want to figure out how to profit from it, remember, tobacco, alcohol and gambling stocks all do very well when the economy crashes and burns. Sad but true.
