Your Financial Future: Navigating uncharted financial waters
The U.S. economy is in uncharted waters.
Last year at this time we were in an economic shut down that we had not experienced since the Spanish Flu, 100 years ago. Businesses were ordered to close and there were shortages of many household items including toilet paper. Many businesses were deemed non-essential and ordered to close. The unemployment rate surged from the lowest in 50 years to one of the highest. Many companies went out of business.
We were already in an artificial environment of very low interest rates. When the crisis hit, the Federal Reserve dropped these rates even lower to near zero. Congress took huge spending measures to stimulate the economy including giving most people $1,200 checks. Maybe they had to go 鈥渂ig鈥� at that time, because no one knew what would come next.
The billions of dollars invested in vaccine research may have been the most important expenditure. Scientists all around the world worked to develop effective vaccines that are now slowing the spread of the virus and will eventually help us get back to normal. While we are not there yet, we can see a light at the end of the tunnel.
Last March, we had a sharp drop in stock market values. In April we made up most of the losses. This is not a normal market cycle. While markets will normally experience both bull and bear cycles, they usually last years and not months. Today, the stock market is at all-time highs.
Economic policy is dictated by two parties in Washington, D.C. Monetary policy is the work of the Fed. They are supposed to be non-partisan and experienced bankers. They exercise huge influence over interest rates through their policies and actions. When they are purchasing government debt, they can keep interest rates low. The Fed has two main jobs in our country. One is to stimulate the economy when it is slowing, and the other is to slow it down when it is overheating.
We do not want hyper-inflation.
The other type of economic control in Washington, D.C., is the fiscal element. It originates in Congress with government spending and tax policy. Spending can stimulate growth and taxes can restrict growth. The problem is that we are spending way more money than we are taking in. If this continues, we are burying our children and grandchildren in debt and inflation will take off. When this happens, policies must become much more restrictive or we could experience hyperinflation like in some South American nations.
Visit the website, www.usdebtclock.org to see how bad the problem is.
The Fed last year said they might accept inflation a little above their historic level of 2%. We are seeing this already in certain sectors. A recent report said grocery prices were up 3.5%. Gas prices have jumped and home sales are going up rapidly. There is a shortage of housing inventory which will lead to higher prices. Lumber prices have doubled as have many other household commodities. Used car price have risen to the point that some small dealers will not purchase inventory.
Many businesses are having a hard time hiring new employees and wages are going up. Yet Washington, D.C., is providing incentive to not work.
The Fed is on a high wire balancing act. They will have to raise interest rates 鈥� probably sooner than they want. This will have a negative effect on the stock market. The 10-year Treasury recently hit 1.71%. This is a gain of 90 basis points in the first quarter, and Congress is determined to keep spending.
There can be no question that taxes will go up and not just for the rich. They do not have enough money to pay the bills. It is going to be your retirement savings that pay for these expenditures. That is where the money is located. It seems that often times the people who controlled their spending and saved for their dreams are the ones that must pay for those who did not.
Your Financial Future is written by certified financial planner Gary W. Boatman, MBA and CFP, who also wrote the book, 鈥淵our Financial Compass: Safe Passage Through The Turbulent Waters of Taxes, Income Planning and Market Volatility.鈥� If there is an area that you would like to see discussed in the column, send your suggestions to gary@BoatmanWealthManagement.com.