Where Do We Go From Here?
No. 32
I must admit that watching Congress on TV is like being in a submarine driven by the cast of SpongeBob SquarePants. Did any of these elected officials bother to take an economics class in college? As I swear at the flat screen my wife reminds me that they are all just politicking and performing in the hopes that their constituents are watching or that they get picked up on the nightly news. It begs the question, what is the character of an individual who knowingly says dumb, vitriolic hogwash on national television in the hope that people with even fewer brain cells hear and believe what they are saying? It’s no wonder that our elected officials do little to improve the state of education in America.
As our collective group of Neroes fiddle, Rome faces crises too numerous to mention as it makes me want to reread the final chapters of Atlas Shrugged to map out an escape route. Rather than opine about things that are not within our control, the topic for this post is how to survive possible stagflation and a recession.
What’s going on with the economy?
If you listen to the President, all is well. But is it? Is it really? Inflation is coming down, but slowly and is stubbornly holding on in some areas. Despite frequent criticism, the Federal Reserve is doing its best to control inflation and nail a “soft landing” or modest recession. They are attempting to do this by raising interest rates. When rates rise the economy contracts creating less demand for goods and services which should cause inflation to decrease. The challenge is that slowing demand can also cause a slowing economy or recession.
If you are confused, join the crowd. Image a scale with Inflation on one side and interest rates on the other. The scale was tilted in favor of inflation and interest rates were at zero. By slowly raising rates the Fed is attempting to get the scale to move slowly and come into balance where the economy slows a bit, but not too much, and inflation abates. Raise rates too fast and the scale swings wildly in the opposite direction where interest rates are too high to stimulate growth in the economy and you have a full-blown recession and high unemployment as a result.
I conducted a straw poll among a dozen individuals in the finance industry where I asked how high the Fed would raise interest rates by the end of 2023. It was no surprise to me that there wasn’t a consensus. About 25% thought the Fed would pause at 5%, 25% thought it would pause at 5.25%, 25% said 5.5%, and 25% said 6%. My conclusion, it is a waste of time trying to predict what the Fed will do.
There is a maxim that states, “Never bet against the Fed.” The Federal Reserve’s duties are narrow and well understood. It will get inflation under control come hell or high water. I am not a big believer in the Goldilocks theory that states that the Fed will be able to stick the landing. It’s not that I don’t have faith in the Fed. Hell, chairman Powell is the only adult in the room. It’s just that there are too many moving parts to the global economy and geopolitics that can affect supply and demand.
So, what can you do?
If you are a frequent reader of this newsletter you’ll know that I have written in the past about dealing with inflation on a personal level – What is Inflation? How to Deal With Inflation?
Monitor your spending: Keep track of your expenses and try to reduce your overall spending where possible. This can help to offset the impact of rising prices on your budget.
Save and invest wisely: Try to save and invest your money in a way that preserves its value over time. This may include investing in assets that tend to do well during periods of inflation, such as stocks or real estate, or in vehicles that offer a higher rate of return than the rate of inflation, such as certificates of deposit or high-yield savings accounts.
Consider adjusting your budget: If you are on a fixed income, you may need to adjust your budget to account for rising prices. This may involve cutting back on certain expenses or finding ways to increase your income, such as by working a part-time job or taking on freelance work.
Shop around for the best prices: Take the time to compare prices at different retailers or online and look for sales and discounts to help stretch your budget further.
Trade out more expensive products and services for less expensive products and services. See my tips to beat inflation.
Be mindful of debt: Inflation can make it more expensive to pay off debt, so try to pay off high-interest debts as soon as possible and avoid taking on new debt if possible.
What about dealing with a recession?
First, here is what not to do. Do not co-sign any loans, take out adjustable-rate loans, or take on any new debt, spend like there is no tomorrow.
Next,
Focus on budgeting and building an emergency fund. Try to have a minimum of 3 months of expenses on hand in the event that you find yourself unemployed. Get creative about saving and be prepared to lower your expectations for a while.
Prioritize paying off high-interest debt whether it be bank debt or credit cards. Don’t allow a blip in employment to affect your credit rating.
If you have money to invest, do so wisely. If you don’t know how to do that then get professional help. If you are invested in the market, it may be a good time to be sure that you are diversified and prepared for slow growth.
Update your resume.
If you were considering leaving your job, don’t. No need to elaborate on this.
Invest in yourself. No is not the time to worry or panic about job security. Being the best at your job will either make you invaluable to your current employer or attractive to future employers. That college degree alone doesn’t cut it anymore. We are living in a world where things evolve quickly, and your skills constantly need to be refreshed. Take every opportunity to refresh your skills. There is no shortage of inexpensive education online.
Maintain an enthusiastic attitude at work. Give others hope and don’t participate in graveyard humor. Now is not the time for quiet quitting. Go to the office. Be part of the solution.
Never let a crisis go to waste. THINK about how to get ahead.