Halloween is a time for the sort of fear we all enjoy - cheesy horror movies, clever costumes and a general appreciation for the macabre and creepy. Far less enjoyable, though, is thinking about some of the reasons investors may have for fearing the U.S. economy. Unlike ghosts and goblins, some of these fears may prove to be very real and offer more than just a friendly little tingle up the spine.
1. Crumbling Infrastructure
While the U.S. government has handed out plenty of money over the past three years, relatively little of it has made its way towards bridges, roads, schools and hospitals. That is unfortunate, as the U.S. went through a building boom in the 1950s and 1960s and is now badly in need of repair and expansion. Infrastructure underpins economic growth. Without better public facilities, there will be a long-term drag on economic productivity.
2. High Debt
Of all the problems in the United States, large budget deficits and a growing debt burden are probably the best-known. Public debt is at about $13.6 trillion in the United States, or roughly 94% of annual GDP. That puts the country in uncomfortable company with the likes of Japan, Italy, Greece and Portugal.
Please click the link below for the full story:
http://financialedge.investopedia.com/financial-edge/1010/10-Reasons-To-Fear-The-U.S.-Economy.aspx
Showing posts with label deflation. Show all posts
Showing posts with label deflation. Show all posts
Tuesday, October 26, 2010
Tuesday, August 10, 2010
Good Deflation and Bad Deflation
"You keep using that word. I do not think it means what you think it means."
Inigo Montoya, Princess Bride
To some extent, I have to say "I give up". I will grant that inflation and deflation no longer mean what they used to mean. Prior to the 70's, inflation/deflation pretty much just applied to the money supply - inflation meant an expanding money supply, deflation the opposite. Somewhere along the line, though, rising prices became "price inflation" and then just "inflation".
Why do I mention this? Well, it is something of a dirty secret that for most of the pre-Fed Reserve / pre-FDR history of the Republic, prices *declined* over time. That's right - the general expectation was that a pound of whatever would cost less in a year than it did that day.
I know ... it seems like it must be wrong, but I double-checked it and its true.
How did anybody survive? Well, for starters, the U.S. was a nation of savers and so people only spent when they really had to anyway. I mean, think about the entertainment or consumer spending options of Little House on the Prairie and you get the picture.
Business survived by being more productive and that is the real key to the story - so long as your costs of production decline faster than prevailing prices, you actually make more money (and expand your business and so on...). Actually, this should not be all that unfamiliar even to those of us living in the modern (inflationary) economy - think about PCs and how much less they cost today. And yet, plenty of money is still being made by PC manufacturers (though perhaps more of it by Asian manufacturers than ever before...).
I got to thinking about this because of all of the talk about the risk of deflation going around these days. Heck, even I am guilty of talking about it from time to time.
But as is actually not so often the case, maybe it *is* different this time. If deflation comes to America (and/or Western Europe), it will not be the "good" kind - the kind associated with ongoing productivity increases, quality of life increases, and a reasonable balance between spending and saving.
No ... we are most likely going to see the "bad" kind. This kind shows itself in buyers refusing to buy and companies desperately cutting prices to coax even a trickle of consumers through the doors. This is the kind were there is significant wage pressure and a grinding sense of malaise. In other words, Japan in the post-bubble aftermath.
This is not an "investable" post. I do not have any stock tips for you, nor many ways to play deflation (good or bad) if it does come ... though I suppose it is better to be a creditor in a deflationary environment, provided your borrowers can still pay you back. I also imagine we are going to want to be investing in companies that have the "juice" to drive even more operating efficiencies - like I said before, if you can cut your costs of production, you can actually thrive in a lower-price environment.
Nevertheless, I have been thinking about this issue a lot lately, and just wanted to get some thoughts "down on paper" as it were.
Inigo Montoya, Princess Bride
To some extent, I have to say "I give up". I will grant that inflation and deflation no longer mean what they used to mean. Prior to the 70's, inflation/deflation pretty much just applied to the money supply - inflation meant an expanding money supply, deflation the opposite. Somewhere along the line, though, rising prices became "price inflation" and then just "inflation".
Why do I mention this? Well, it is something of a dirty secret that for most of the pre-Fed Reserve / pre-FDR history of the Republic, prices *declined* over time. That's right - the general expectation was that a pound of whatever would cost less in a year than it did that day.
I know ... it seems like it must be wrong, but I double-checked it and its true.
How did anybody survive? Well, for starters, the U.S. was a nation of savers and so people only spent when they really had to anyway. I mean, think about the entertainment or consumer spending options of Little House on the Prairie and you get the picture.
Business survived by being more productive and that is the real key to the story - so long as your costs of production decline faster than prevailing prices, you actually make more money (and expand your business and so on...). Actually, this should not be all that unfamiliar even to those of us living in the modern (inflationary) economy - think about PCs and how much less they cost today. And yet, plenty of money is still being made by PC manufacturers (though perhaps more of it by Asian manufacturers than ever before...).
I got to thinking about this because of all of the talk about the risk of deflation going around these days. Heck, even I am guilty of talking about it from time to time.
But as is actually not so often the case, maybe it *is* different this time. If deflation comes to America (and/or Western Europe), it will not be the "good" kind - the kind associated with ongoing productivity increases, quality of life increases, and a reasonable balance between spending and saving.
No ... we are most likely going to see the "bad" kind. This kind shows itself in buyers refusing to buy and companies desperately cutting prices to coax even a trickle of consumers through the doors. This is the kind were there is significant wage pressure and a grinding sense of malaise. In other words, Japan in the post-bubble aftermath.
This is not an "investable" post. I do not have any stock tips for you, nor many ways to play deflation (good or bad) if it does come ... though I suppose it is better to be a creditor in a deflationary environment, provided your borrowers can still pay you back. I also imagine we are going to want to be investing in companies that have the "juice" to drive even more operating efficiencies - like I said before, if you can cut your costs of production, you can actually thrive in a lower-price environment.
Nevertheless, I have been thinking about this issue a lot lately, and just wanted to get some thoughts "down on paper" as it were.
Wednesday, July 7, 2010
5 Things To Do Before Interest Rates Go Up
Low interest rates are great, but even this silver lining has a cloud to it - those rates are eventually going to go up again. And when you really think about it, we should all be happy to see rates go up. Rising rates are a normal part of healthy economic growth and rock-bottom rates are usually a sign of a long-term malaise (like Japan) or bubbles in the making (like the U.S. housing market). With rates likely to head higher someday, what should investors do to prepare themselves?
For the full piece:
http://financialedge.investopedia.com/financial-edge/0710/5-Things-To-Do-Before-Interest-Rates-Go-Up.aspx
For the full piece:
http://financialedge.investopedia.com/financial-edge/0710/5-Things-To-Do-Before-Interest-Rates-Go-Up.aspx
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