Welcome to the first post of Your Financial Muscle! This will mostly take the place of the quarterly newsletter known as News from the Front. The quarterly newsletter is a large undertaking and is prone to running out of room. So, in the interest of quick, timely information and a format that can be added to, the blog offers the best of a few worlds. I say a few because there are times when a blog will simply not provide the continuity necessary. For example, when the topic is too large and important to skimp on the size of the writing, or if there are too many charts for our own good, a blog just will not cut it. I will fall back on News From the Front special reports that will be attached to FinancialMuscle.com. Keeping you informed of what is real, material, and important is what this site is all about. So, keep it handy.
To keep it handy you have a few choices: make it a favorite, make my website a favorite because there will be a link to it from there very soon (www.privatewealthadvisorsllc.com), friend me on Facebook.com (Give me a few days to be there), follow me on Twitter.com (Give me a few days to be there). All of these locations will have links to here and will be updated when there is a post. In the future, I expect to provide you with podcasts of the same information for the drive home.
It has taken me a while to get “social” but when I get…I really get. Your information flow from me will increase many fold in the near future due to these changes. If you have any trouble getting on any of these sites, just call Angie and she will walk you through it.
I am really looking forward to sharing back room information with you. I want you to know that there is a mountain of consideration that goes into your portfolio and the financial analysis I do. I am hoping this format helps you know what I know.
So with that, lets GO!!!!
Hyperinflation, Currency, and Other Scary Things
"I just want to say one word to you - just one word.... 'Plastics.'” from The Graduate
We have fiat currency. Nothing backs it other than confidence. Where do we get confidence in it? Generally from the strength of our economy compared to all others. When our confidence is shaken like the last two and one half years, it is no wonder that currency substitutes have become a hot topic. Just turn on your radio for a half hour and you will likely hear multiple advertisements for currency substitutes. Let’s dig deeper, though. When does a currency likely collapse from lack of confidence?
Option1: Government overthrow: I am not worried about this at this particular moment.
Option 2: Hyperinflation could cause a currency collapse, but it did not in the late 1970s and in the early 1980s. But, do we really have a similar situation now?
Option1: Government overthrow: I am not worried about this at this particular moment.
Option 2: Hyperinflation could cause a currency collapse, but it did not in the late 1970s and in the early 1980s. But, do we really have a similar situation now?
Inflation in and of itself is an everyday occurence. Normally, inflation of 2-3% is condidered necessary to reach full employment - assumed to be 5-6% unemployment. Hyperinflation occurs when inflation is raging in an uncontrolled manner to the point where the Fed does not feel confident reeling it in. Surprisingly, I am not too concerned about hyperinflation right now. I am more concerned about deflation, as is the Fed. Let's break apart inflation into its main components:
Wages
Deficits
Dollar
Wages: the single most important component of national income is wages, they account for about 62% of all national income. If wages go up so does spending and so does money creation. Wages can have an enormous impact on inflation potential. The reality check is best thought about in terms of some key questions to bring this factor close to home: How many people do you know receiving big raises? Likely none or almost none. You probably know more people out of work or working two or three jobs to stay afloat. At just under 10% unemployment it is unlikely that wages will increase dramatically anytime soon. There is ample evidence that we will have high unemployment for years to come, but that’s another post. So, what about the deficit?
Deficits: There is no question that the deficit is high. You would think that wage expansion is not necessary because the printing of money is creating enough dollars in the system to stoke inflation. The real numbers say that the relationship between money supply and inflation does not exist like it used to. We remember a time in the 1970s when inflation ate our collective lunches. Then, economic output as measured by factory utilization was maxed out. The administration fed more dollars into a maxed out system and inflation had nowhere to go but up. Production of goods and services had nowhere to go. So, more dollars chased a relatively static number of goods and services. Now, things have changed. Industrial production in the US
Dollar: So, how does a falling dollar lead to inflation? The conventional wisdom is that cheaper dollars lead to higher import prices. It takes more dollars to buy a, say, British pound, making the Rolls Royce more expensive. So let’s say that that actually happens. Surprisingly, imports are only 16% of our GDP. Let’s say that the dollar falls by 10%. So economy-wide the Rolls (the proxy for all imported goods in this example) increases dollars necessary by 1.6% overall. It is not really that much of a problem.
Show Me the Money!
Let’s look at how we spend our money (GDP):
According the Bureau of Economic Analysis, here is the make up of GDP:
2010 Annualized GDP (based on 3 quarters of 2010) $14,750 (trillions)
Personal consumption $10,383
Investment $1,895
Imports $2,399
Exports $1,897
Government: federal, state, and local $3,023
The elephant in the room for inflation purposes is personal consumption. Unless something miraculous occurs, personal consumption is in for a long slow growth spell just based on unemployment alone.
The next post will be on deflation and why the Fed is far more concerned about it than inflation. Please call me if you have any questions or comments.
Take care!
Chris
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results.
