It doesn’t seem like that long ago, America and the world were going about business, hustling and bustling, moving and shaking. The stock market seemed strong, real estate was hitting the stratosphere, interest rates were low, money and credit was there for the taking. We were stylin.
Then the news hit. Large financial organizations were bankrupt and crying for bailouts. The stock markets went into free fall. Real estate hit the skids and the bubbles burst. Money was hard to get. Home equity lines were reduced or closed out all together.
All of a sudden people could not pay their loans, debts, credit cards. Firms cut back, laid off or fired employees. The dominos were falling. One loses his job, he can’t pay his bills, he can’t shop till he drops. No vacations, no movies, no morning latte! Since he (include she and multiply this by millions of people) can no longer spend, the businesses do not make sales, no or lower profits, more layoffs, and maybe the business is forced to close.
Now the business owner is out of work, can’t pay bills, goes for government assistance, and the businesses and people the business owner supported with his patronage now experience a drop in income.
The government steps in and throws stimulus plan after stimulus plan at the problem, and it seems to help for a while. But with all the unemployed workers and businesses paying less taxes due to less income, the government is pressed to come up with the bucks to fund all this. So we look at the governments balance sheet and find we are $12 trillion in debt and climbing by $2 trillion a year.
Where is the government getting all this money? Taxes is one place but tax collections are not nearly enough. So it borrows it. How? By issuing bonds and securities to whoever will buy them. A major source of these funds is foreign investors. Well, as long as these investors keep buying the bonds we keep going. But do you see the problem here?
Imagine you lose your job. You’ve got some savings and few credit cards so you live on that for a while. But things are tough out there and eventually your money runs out and soon after your credit cards are maxed out. You try to apply for more but who is going to lend you money?
You hit up some relatives or friends and find some to lend you some cash to tide you over. They knew your situation so you had to promise them a pretty high return to get them to risk it. Things are worse than you thought and that money runs out. At this point maybe you default on your loans and give up your house to the bank. Maybe you file bankruptcy. You somehow get a fresh start, lower your standard of living and begin to rebuild.
That is what we do in the situation but what does a government do? Well, when no wants the governments bonds, that is, they won’t lend the government money at any interest rate, the government might default on it’s debts. More likely though, is that the fed will start printing up money, lots of it and fast to keep things going.
If you’ve ever taken economics 101 you know that printing up a bunch of money causes the “I” word…Inflation! We all know thats not going to be good, but what choice do they (we) have?
Backtracking a bit, interest rates have shot up due to the fact that the government has had to raise the interest rate it pays on it’s bonds (it’s IOU’s) to attract investors. But at some point even that won’t work just like our scenario of the fellow who lost his job and ran out of friends and relatives to lend him the dough.
So we have sky high interest rates and inflation is going through the roof. Stocks and real estate tanked a long time ago as business slumped even more and nobody could get credit to buy houses at a reasonable interest rate. Doesn’t paint a pretty picture does it?
Why am I telling you all this grim news? Am I a ‘doom and gloomer’? Absolutely not. Quite the contrary. We can win this but without knowing the reality of what’s ahead, how can we position ourselves to be ready for each phase? That’s what this website is all about. It’s time to take the steps now that will get us through the turbulence that will come. Stay with me and we’ll start the journey.
