There's good "financial" news in the headlines today. It doesn't mean anything except that stock brokers and bankers are happy. If you equate them with "the economy" then you'll be happy too. But if you understand what's really going on, you'll understand that they really don't matter that much, and prepare accordingly.
The U.S. government is inflating itself out of debt.
We owe trillions of dollars. Fortunately, we also own the printing presses that make dollars. The solution is stupidly obvious and obviously stupid. We are just going to print all the dollars we need. Of course, those dollars aren't going to be worth nearly as much as they used to be, which means we're really not paying off our debts at all. We looked at our bills and said, "Let's not and say we did."
Except, we will pay as prices for everything go up. We're going to have to work harder for less. It's a tax. It's just like the government decided to take more of your paycheck, or more of your savings. Except they don't have to go to the trouble of passing any new laws, they don't have to debate it, they don't have to put a vote on record, or even to collect it. It's coming out of your paycheck automatically, it's coming out of your savings, it's coming out of your 401k.
The one brilliant part of it is, it taxes anyone who uses dollars, or currencies linked to the dollar. We're taxing the Chinese, the Middle East, and now that Europe is starting to print more too just to keep up with us, the French and Germans and everyone else.
At first, people are going to be happy about all this new money. Bankers and stock brokers especially, but also everyone getting $600 new dollars from the government.
(By the way, I hope you're not just sticking that in the bank. Because the longer you hold on to it, the less it will be worth. Inflation-taxed just like the rest of your savings. Buy things you'll need or want in the future. Propane, heating oil, non-perishable food, ammunition, liquor, an extra set of tires for your vehicles, medications if they'll keep. If you've already got all that stuff, 1/2 oz. of gold. Just remember you won't be able to eat it.)
So I expect to see a lot of irrational exuberance over the next couple of months. Followed by some deep, deep rage when people figure out that despite the extra "money", they're still finding it harder and harder to pay their bills and put gas in their cars. Just in time for the election.
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Put some money into British pounds, Euros, Australian and New Zealand dollars 3 weeks ago.
The Economist calculated April year-over-year inflation at 31%, food inflation at 61%!
- The money will sit in my Dutch-owned ING Direct savings account until June.
- The money, along with a chunk of my tax refund, will likely be spent in a trip to Europe in June and July with my girlfriend and another couple.
The whole idea of giving $168 billion dollars taken from the taxpayers back to the taxpayers and calling it a magic "stimulus" to the economy is rather silly.
Right now I'm in a rather mixed bag economically:
- On the negative side, I'm dependent on the generosity of my grandparents for my living expenses and tuition until I graduate (Fall 2009). This means a very fixed budget, which is already strained by putting money away for the Europe trip (which was planned two years ago).
- On the plus side, I don't really have any assets to lose or depreciate. I usually cook for myself (occasionally getting lunch at the university when I don't have time to make a sandwich), and I eat simple fare (cereal, pasta, ground beef, etc.) so my food costs are low. I bike to class, so my gas costs are low. I live in a studio apartment with included utilities (except internet, which I split three ways with neighbors, bringing the cost to $15/month). I also have no debt, as I pay off what little charges I make to the credit card entirely every month.
I wish I could put money away into gold or other fairly stable reserves of some sort, but I simply don't have the assets at the moment. That said, while I don't have much money, I'm not being stupid with what I do have. :-D
Yeah. But it's also subsidizing my mortgage, which is currently worth way more than my cash savings, and pushing up the value of the stocks in that 401k and the amount of the raise I get from my boss every year. If there's no collapse, I should come out nicely ahead, just like my parents did in the Eighties. If there's no collapse.
Not unless your wages start to inflate too. Your mortgage is holding steady, but that's it. The stocks, likewise. Assuming overhead and malinvestment doesn't affect them, and it does. For one thing, any money you've got invested in banks that lend money for homes isn't going to be making much of a return after accounting for inflation...