Financial outlook is scary; be prepared
Seventy percent of the American economy is based on consumer spending. It was not always this way; 30 years ago, America was a manufacturing powerhouse not unlike present-day China or India.
Nowadays, most of what Americans consume is imported. The remaining 30 percent of our economy is based on financial institutions (banks), insurance companies and real estate, in addition to a modest manufacturing base. This is what is called the 'service economy.'
When an essential part of our service economy takes a nosedive - as we've seen over the past year in the real estate markets and financial institutions (liquidity crisis) - Americans tend to reduce their spending. A reduction in consumer confidence and spending can result in three quarters of negative growth, which becomes categorized as a recession. We may already be in a recession, but it won't be made official until the three-quarter milestone is passed.
The above paragraph is a simple explanation of what we're facing today. However, to fully understand the magnitude of what we're facing, we have to factor in more exponents into the equation. The exponents that are producing negative economic pressure are:
1. Oil futures are selling at more than $103 per barrel.
2. The federal debt stands at over $9 trillion.
3. The dollar is losing value (largely because the Fed is printing money, which stimulates inflation).
4. Inflation is rising and the economy is stagnating.
After World War II, America was the greatest lender nation in the world; today, America is the largest debtor nation in the world. We owe more money to other country's central banks in China, Japan, Saudi Arabia and Europe than any other country.
Our country is teetering close to insolvency. We spend nearly $600 billion a year just to service the federal debt. Imagine how many schools, libraries, roads, and other public services we could pay for with $600 billion a year!
During the Great Depression, America manufactured its way out of economic hardship. This time around, manufacturing our way out of a recession is not possible because most of our manufacturing base has either been shifted overseas or shut down (this is where the so-called 'free marketers' have taken us).
The three legs of our economy - financial, insurance and real estate - are in serious trouble. Most economists won't publicly declare what they fear, another Great Depression, but the signs point in that direction.
The coming recession promises to be prolonged and severe, and unless the Fed responds to the current inflationary cycle by raising interest rates instead of lowering them, America could reach a tipping point and tumble into catastrophe.
There is no way to predict accurately where our economy is headed, recession or depression, but the prudent person, whether you're an active stock trader or someone with a savings account, should prepare for the worst:
1. Reduce your personal debt, which means reducing credit card debt, paying down on car loans, lines of credit and mortgage debt if possible.
2. Forego major purchases based on credit; if you can't pay for it with cash, don't buy it.
3. Evaluate your investments (401k, IRA, Annuities, etc.) with an eye toward conserving capital shift investments away from high risk to very low risk. The stock market is due for more corrections, most analysts agree, and bonds face difficulties due to inflationary pressures. In a recession, 'cash is king,' as they say. The best preparation you can make is to remain liquid, to convert stock investments to cash and to buy a little gold as a hedge against inflation.
4. Take the time to create a family budget and stick to it. Pay yourself first, which means take as much out of your paycheck as you can and sock it away in your savings and investment plan.
5. Prepare for the worst, and no matter what happens, your family will be financially better off.
C. Marcus Parr is a Sandy resident who retired from the pharmaceutical industry. He also taught at Mt. Hood Community College.