Your Financial Future: The price of ‘free money’
On March 11, President Joe Biden signed the American Recuse Plan into law.
While this bill may help some people short term, it could become a tax burden for generations to come. Many people will be receiving $1,400 tax-free stimulus checks. Since the country was already experiencing a debt crisis this will increase the issue.
There are certainly segments of the population that are hurting through no fault of their own due to the pandemic. Many small businesses have closed forever. Restaurants, airlines and the entertainment industry have been very badly hurt. These injured segments should have been more targeted for help. They need it very much.
Many big businesses were considered essential and they were allowed to continue operating while small businesses were forced to close. These large retailer and online business are experiencing record profits. These businesses are having a hard time finding good employees.
Many houses are selling almost as soon as they are listed for sale. Often you must offer higher than the listing price to have a chance to purchase the property. Appliance, lumber and other building supplies are soaring in price. Gasoline is selling for some of the highest prices in years. This is going to lead to more inflation.
There are hour-long waits for a seat at many restaurants. Maybe they will be a little shorter as establishments are allowed to increase capacity over the next few weeks, but demand is likely to grow at the same time because of increased vaccinations. These businesses and their employees needed help much more months ago then they do right now.
These rising prices will start to show with increased inflation. Inflation causes your dollars to lose purchasing power. To keep inflation in check, the Fed will have to start rising interest rates and cut back on their bond buying.
Government bonds are sold at reverse auctions. Whoever is willing to earn the lowest interest rate at each duration gets to buy the new bonds. If the Fed is buying on their own behalf, they normally drive the price down. Last week, we saw large volatility when it appeared the 10-year bonds would yield a little over 1.5%. We have been on a downhill interest rate path for decades. Never have they been this near zero for such a long period. Remember when CDs were paying double digits during Jimmy Carter蘑菇视频 presidency?
This low interest rate is one of the biggest reasons the stock market is at record highs. When interest rates go up, there is less liquidity in the economy and people have safe risk free earning opportunities. Remember, when interest rates rise, bond values decrease. Bonds and CDs are paying extremely low yields today.
The stock market seems to reach a new high every day. Valuations are high by any measure. There is a rotation taking place in the market. Value stocks are beating growth stocks by the widest margin in two decades. There are similarities to some of the things that happened in the early 2000s.
We could be reaching the retirement perfect storm. While it might seem nice to get some free money that you did not really need, there could be a big price to pay.
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.