Wednesday, November 28, 2007

A Macro View? Don't Run and Hide. Just Ask The Right Questions

So, its been a while since I've written anything and I think it is interesting to start looking at some macro ideas. I'd like to sum up a couple of conversations I've had recently about the economy.

With a friend over the holidays, we were discussing the economy and people were asking me what the best thing to do was. I told them that I thought that the time to "prepare" and "react" to this situation is long since gone. People that are leveraged in investments or real estate are going to have a hard time unless they have liquid cash to weather the storm. An emergency fund is key here and most people don't have serious free cash flow to save money right now, especially with the cold winter and holidays coming up.

So, the takeaway for people in trouble is to do the same old boring things:
1. Build an emergency/freedom fund to handle these lean times that we're in.
2. Cut spending and increase earnings so that you can have a good "cushion" of free cash flow each month. You might want to aim for 10 or 20% on top of what you're already saving and contributing to retirement. Right now I am at about 5% (plus additional monthly savings and retirement), but I'd like to see that number be even higher.

The second conversation was about foreign trade and how it relates to the economy and inflation. Inflation runs amok when economies run hot for too long and money is too easy to get. In the end, it is easy to understand why the combination of lower housing prices (due to excess demand) and the problems with financial stocks are contributing to a souring of the economy (at least in terms of Market Volitility). But the real question is whether or not we can/will spend our way out of it. I learned something new in this article.

Consumer Spending is the main contributor to GDP. And GDP is the way that we earn money. GDP is what gives our economy stability because it shows that the US is producing and therefore can collect taxes. Our ability to collect taxes shows that our paper dollars are worth something. To me, this number, GDP, is what I am interested in. And knowing that our GDP is 70% based on consumer spending, makes me even more interested to see how consumer confidence is.

This article details that although total spending is up, consumer confidence is at a two-year low.

Instead of asking whether or not Santa Claus is poor this year...the real two questions people should be asking are:
1. (personal) How secure is my job? What sectors of the economy (finance/construction/retail) might cause a possible downsizing?
2. (macroeconomic) Are people going to keep buying large, durable goods like cars, dishwashers, etc that make up large amounts of consumer spending?

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