Lessons in Economics

Years ago, people would frequently berate the Japanese for their economic successes. Always the contrarian, I used to say “Thank God for the Japanese” much to the chagrin of those around me. The way I looked at it, the Japanese spent hundreds of millions of dollars to build car plants here and then they left 98% of the money they made here in the form of paychecks for American workers, supplies and parts, taxes, etc.

What really made this sweet for the U.S. was that the 2% profit that went to Japan was also sent back to us to buy our stocks and Treasury bonds. We ended up getting all of the money. Life was good – for us.

Now Japan is in a financial mess and has been for a dozen years. Like you, I find it disturbing that so many American companies are now exporting jobs by building plants abroad like the Japanese did in the 1980’s. I just hope that somewhere in the world folks are saying “Thank God for the Americans”.

Mike Glasior gave me a concise and interesting economics lesson recently. He pointed out that U.S. inflation remains very low, but never entirely slid into negative territory. There are a few pockets of deflation, however, which caused many retailers fits this holiday season, such as apparel and consumer electronics. Apparel is currently falling in price at a 5% annual rate, while consumer electronics are falling 15-20%.

If prices are actually falling 20%, then retailers have to sell 20% more "stuff" just to keep their sales figures from falling. 20% growth is no easy task in any economy, and this illustrates clearly why deflation is such a horrifying situation to economists and the Federal Reserve Board.

What is the Fed’s solution? Inflation. Get ready for it by not holding long term bonds or bond funds whose values would likely be eroded by inflation. Ditto for long term annuities, mortgages, etc. We take care of this for our managed accounts, but if you don’t know what you hold elsewhere, call and we can look it up and tell you if you have one of these vulnerable investments.

Serious bouts of U.S. inflation have occurred about every 30 years, 1918, 1948 and 1978 were all times of high inflation. These are the periods that spawn tales of retirees on fixed incomes becoming poverty stricken as their savings and pensions are devastated by inflation. Do we have another cycle coming? I wouldn’t bet against it.

Will our country survive it? Of course. But some of us who see it coming will survive better than others.