Tags: inflation | consumer debt | government spending | jobs | recession

David Phelps: Economy Is Worse Than Anyone Admits

David Phelps: Economy Is Worse Than Anyone Admits

By    |   Tuesday, 11 July 2023 08:45 AM EDT

Most Americans want many of the same things—a decent income, freedom to have options, and time to spend with family. And most Americans don’t have time or the financial background to sift through mounds of financial data. Instead, they rely on mainstream media, social media, or bright shiny “investment products” to make decisions that will have a major impact on their financial future.

The problem is that most reporting on the economy is done in sound bites that are only meant to capture attention without going beneath the surface of what is really happening. And to be fair, governments and the economy are purposely very complex machinations creating an optimistic but false perception of our economy. Some might even say this is intentional, but I’ll leave that to you to decide.

My objective here is to paint a very clear picture of what’s really going on in our economy, what’s coming, and how we all need to prepare and adapt so we can not only survive, but also thrive through it all.

Inflation is still astronomically high (Whatever happened to “transitory?”)

If you watch today’s headline news, many pundits are cheering that “inflation is the lowest it’s been in two years,” but that claim is intentionally misleading.

Yes, inflation may be decreasing from its 40-year highpoint of 9.1% consumer price index (CPI, the government’s manipulated statistics), but what people don’t understand is that the inflation index is a “rate of change” — not a fixed number.

Better stated, the inflation rate of change has decreased, but the higher costs experienced over the past year have not abated — they are higher than they have ever been. Claiming that the inflation battle is all but over is a gross over-simplification. It hides the reality that the cost of living is significantly higher than it has been at any time in the past. When the rate of wage growth is less than the inflation rate, the citizenry is losing ground. The impact is exponential.

Think about it like this — when the cost of construction materials and labor goes up, which it has, the contractors have to charge more for the end product. So now, it costs more money to buy a new home. That means a potential homebuyer needs to earn more money, so many will demand a raise.

Now their employer’s costs have gone up, which means that company has to raise its prices. It doesn’t take an economic genius to see how this quickly spreads through the entire economy like a wildfire. And like a wildfire, containing an inflationary spiral is very difficult once the flames ignite.

Unfortunately, instead of pulling back on or eliminating the economic policies that led us here, our elected officials are continuing to double down on them, so the inflation problem is here to stay for the foreseeable future. The Inflation Reduction Act, passed in 2022 and hailed as the magic bullet to solve the inflation problem is filled with pork barrel deficit spending — meaning, more printing press of the dollar to fund a government that has no spending guardrails. More recently, the controversy and debate over raising the government debt ceiling ended in “compromise” by extending the debt ceiling for another two years — past the next presidential election.  No one is willing to have the hard conversations.

Debt is at historic levels and climbing (“What me worry?”)

When economic challenges hit, people tend to lean more heavily on credit, including credit cards, personal loans, auto loans, and mortgages, rather than reigning in their spending or increasing their income.

This is exactly what we’re experiencing right now. Total household debt rose by $148 billion, or 0.9 percent, to $17.05 trillion in the first quarter of 2023, according to the latest Quarterly Report on Household Debt and Credit. Mortgage balances climbed by $121 billion and stood at $12.04 trillion at the end of March, while auto loan and student loan balances also increased to $1.56 trillion and $1.60 trillion, respectively, but credit card balances didn’t grow, but did remain higher than previous periods at $986 billion.

It’s true that debt can be leveraged to handle financial emergencies, but this can be incredibly dangerous because adding additional debt when you’re already facing adversity can quickly sabotage one’s budget, causing it to spiral out of control, economically speaking.

Might as well have Mad Magazine’s Alfred E. Neuman of “What Me Worry” fame running the government. 

At the end of the day, rising debt levels, both personal and business, is an early indicator of economic problems.

Canary in the Coal Mine — Unemployment and underemployment is down (And why that’s actually a bad thing)

You probably know that unemployment and underemployment typically go up during a recession, and that, like inflation, has an exponential ripple effect throughout the economy. But what you may not know is that preceding a recession, they tend to go down slightly, just like we’ve seen this year.

Now, you might be asking, “Why is that, David? It doesn’t seem to make any sense.”

Well, as the economy slows, many people, in an effort to compensate for the negative impact of growing inflation, will start looking for a second or third job, or in other cases, a spouse who previously didn’t need to work will take on a job.

This artificially improves the unemployment rate, but it’s actually the proverbial “canary in the coal mine” because it’s a sign of looming unemployment and underemployment just around the corner. Once that happens, things start to snowball pretty quickly.

The Snowball Effect of Lower Consumer Confidence

Despite what the media is telling us, most rational people can see that the economy is in bad shape, which has driven down consumer confidence to historic lows. That’s why, like inflation, they’re reporting a “17 month high” but failing to mention it’s still significantly lower than it’s been over a majority of the last decade.

This means people are buying less, especially when it comes to big ticket purchases. That reduction in purchasing directly and immediately affects the bottom line for businesses.

Now I know it may be trendy to find fault with business owners, so some people might be saying, “Great! They deserve the pain!” but that mindset comes from a position of ignorance.

What most people don't realize is that small business accounts for a staggering 99.7% of all jobs in America, and these business owners are not the ones getting handouts and special favors from the government. They have no lifeline, so they have two choices — either reduce costs by laying employees off, or go out of business, which means they and all of their employees are now unemployed. And the worse that consumer confidence gets, the more people will be laid off.

This factor, too, snowballs very quickly.

Deglobalization = higher costs. We’re still facing tremendous supply chain challenges

There is still a tremendous backlog for a lot of products, materials, and supplies we all rely on. I see this a lot in the real estate industry because a majority of building materials are produced overseas, so there’s a huge lag between when something is manufactured and when it can get into the hands of its buyers.

It’s also worth noting that giant multinational companies can, and are often willing to, outbid smaller companies, leading to market instability because it puts more business in the hands of fewer companies, which creates monopolies and leaves consumers with fewer choices.

This drives increased costs and delays, and also makes it exceptionally difficult for entrepreneurs to run a successful business. After all, how well do you think you could run a business if you didn’t know if or when you would be able to get the necessary raw materials, supplies, and products?

Where do we go from here? It’s a choice you can control

Since each of these factors I’ve outlined are intertwined, the magnitude of the economic challenges quickly grows exponentially, with each factor causing the others to worsen.

Relying on the ability of the government or Federal Reserve to have the power to continue to kick the can down the road will bring frustration and perhaps despair to those who don’t heed the warning signs depicted herein.

It’s kind of like the old anti drug commercial from the 1980s where the guy says, “I do coke so I can work longer. So I can earn more. So I can do more coke,” while circling the room at an increasingly frantic pace.

What I mean by that is because our elected officials are more worried about their next election and enriching themselves, the policy decisions being made to “solve” our current economic crisis are designed to “feel good” but are actually making it worse, which then causes them to double down  on those policies.

So what we all need to do is twofold:

  • Take steps to drastically reduce our expenses and debt while increasing our income, and,
  • Demand better policy decisions from our elected officials.

Hard times are coming, and no one will be spared from this reality, but if we make the right choices, we can come out of this in a stronger position than we started, and even put our families, communities, and country on a better financial trajectory for decades to come.

But only if we’re aware of the situation and take the appropriate action to adapt.

Dr. David Phelps created Freedom Founders to help its members achieve the freedom they wanted in their lives by building the necessary financial foundation. He is a noted financial expert who is regularly cited by the media, and recently helped the FL Dept. of Education develop its new financial literacy curriculum.

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Most Americans want many of the same things-a decent income, freedom to have options, and time to spend with family. And most Americans don't have time or the financial background to sift through mounds of financial data.
inflation, consumer debt, government spending, jobs, recession
Tuesday, 11 July 2023 08:45 AM
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