The Worst of Both Worlds

I was driving by a gas station the other day and realized that regular gas was $3.60/gallon here in Florida. That is about the highest I’ve ever seen it in February.

It is odd, because I know that not only are Americans driving less, but we are also producing almost two million barrels of oil more each day. We use less, produce more, and yet the price of oil sits just under $100/barrel for West Texas Intermediate.

Hmmm.

Things don’t get better at the grocery store. Eggs, chicken, beef, coffee… they’re all up in price.

I just received my auto insurance renewal. I have two teen drivers, so I understand that my rate is astronomical anyway, but that didn’t prepare me for what I saw. My annual premium went from $6,600 to $8,500.

I called and was told that it had nothing to do with the drivers. We all have spotless records. It was entirely due to uninsured motorists.

My daughters’ school sent the tuition bill for 2013-2014 and was thrilled to let us know that tuition went up by only – only – 4%.

[%= :subscriberName(E, Survive & Prosper Reader) %]… say “Hi!” to inflation. You’re no doubt already well acquainted. But there’s something you need to know about this guy…

He’s not the “good” kind of inflation. He’s not driven by more people choosing to buy something. Nope, this is a monetary event. The Fed is desperate to create inflation with the intention to motivate spending, hoping it will spur the economy.

It won’t.

No matter how much the Fed tries, our main economy is stuck in a deflationary trend, not an inflationary one.

“But you just reminded me about the inflation all around us! What gives?” I hear you ask.

Think of it this way: we have slack demand for goods and services, which leads to falling production and therefore falling employment (high unemployment). This also means we have an overabundance of workers, so income falls.

And money? No one wants it… or at least, fewer people want to borrow it. This means that interest rates are exceptionally low. The Fed is trying to make credit as easy to get as possible, but those who are credit-worthy have no interest. The outcome is interest rates that don’t even match the rate of inflation.

That’s all pretty deflationary.

What I’ve just described can be thought of as the worst of both worlds. We pay higher prices for necessary goods, but we earn less on both our labor and our savings.

The reason we’re stuck in this pattern is because the central banks of the world are trying to change the natural cycle of events.

Typically, economies will go through a boom period that is marked by rising consumption, rising prices and rising levels of debt. This cycle becomes self-fulfilling, with most people assuming the good times will go on forever. The idea of risk is thrown out the window.

Of course, it doesn’t go on forever. Instead, asset prices come crashing down, demand falls off and all that is left is a bunch of debt. This leads to a conservative period where debt is paid down or written off, demand is weak and money is hard to come by.

We had the risk-on period, now the Fed and other central banks want to erase the whole risk-off period. Unfortunately we can’t just wish it away.

The debts are still with us, incomes are down and interest rates almost don’t exist. For all the Fed’s efforts, what it’s really doing is killing our standard of living by draining away what savings and income we have.

You don’t have to just sit back and quietly take it. You can fight back. Start by building as many income streams as you can.

Rodney

 

 

Ahead of the Curve with Adam O’Dell

What Soybeans Say About Inflation

It was at one of Harry’s and Rodney’s Demographics School conferences that I first saw them speak in public. Naturally I had read several of their books, but I’d wanted to see the show in person.

 

 

Categories: Economy

About Author

Rodney Johnson works closely with Harry Dent to study how people spend their money as they go through predictable stages of life, how that spending drives our economy and how you can use this information to invest successfully in any market. Rodney began his career in financial services on Wall Street in the 1980s with Thomson McKinnon and then Prudential Securities. He started working on projects with Harry in the mid-1990s. He’s a regular guest on several radio programs such as America’s Wealth Management, Savvy Investor Radio, and has been featured on CNBC, Fox News and Fox Business’s “America’s Nightly Scorecard, where he discusses economic trends ranging from the price of oil to the direction of the U.S. economy. He holds degrees from Georgetown University and Southern Methodist University.