Houston, TX (PRWEB) July 17, 2009
The great economic debate of today is whether wages and prices are going to increase, decrease, or stay fairly stable. The goal of the Federal Reserve is price stability. Stability breeds certainty and confidence and gives the greatest number of people the best chance to build financial wealth. Inflation is very destructive to those who lack the knowledge or financial ability to own assets that appreciate. This means inflation is especially harmful to the poor and those on fixed incomes. Deflation is the worst of all worlds because it is destructive to all segments of society and is the most difficult to stop.
Because of the historically intense inflationary and deflationary pressures the world is experiencing simultaneously, it is difficult for the government and investors to plan and invest with any certainty. Therefore the tug of war between these two forces is critical because of the effect it will have on society. Inflationary pressure is coming in the form of massive insertion of monetary reserves and an attempt to hold down interest rates by the Federal Reserve. Deflationary pressure is coming from the unwinding of the credit bubble created with derivatives. The most obvious example of the bubble bursting is the collapse of housing prices across much of the country.
Unfortunately, it appears deflation is slowly winning. The "stimulus" plan is not stimulating. Less than 30% was worthwhile spending; the other 70% was political payoffs to friends of the Democratic Party. While this is par for the course for either party, the sheer size of the waste this time is having serious side effects. All this wasted money is being borrowed. Long term interest rates have soared since the plan was passed. The negative effects appear to out weight the positives as lack of available credit and fear is causing consumers and businesses alike to live frugally and conserve.
The alarming part of deflation is the fact it can feed upon itself resulting in a deflationary spiral. As employment and wages fall people act rationally, saving more and consuming less. This causes business to invest less in inventories, equipment, and labor. As business shrinks more workers are laid off, wages and consumption fall, and the cycle feeds upon itself.
The Federal Reserve is trying hard to break the deflationary cycle by adding large amounts of liquidity to the system, but the money is not being circulated as hoped. It's being held by both institutions and individuals who are trying to pay off debts and live within their shrinking means. Due to the fact there is a lag between injecting reserves and increased economic activity; the Federal Reserve is trying not to inject reserves to the point of causing inflation a year or two down the road. In the meantime, deflation can take the upper hand and may force the Fed to add liquidity at any cost.
The Obama Administration (see article: Obamanomics: How Policy Affects Investment Management, by Ken Faulkenberry) is not helping with policies that reward those who have made poor choices (bailouts of bankrupt companies and homeowners) with borrowed money. The Administration seems intent on carrying out an agenda instead of providing certainty and sound fiscal policies.
The volatility and uncertainty faced today makes investment management difficult for investors. Most investors need some outside portfolio management guidance in these challenging times. The Arbor Investment Planner has a long term record of staying ahead of the major trends and providing sound conservative portfolio management advice. Independent Investors can stay in control of their assets because the Planner provides the Arbor Asset Allocation Model Portfolio (AAAMP), Trade Alerts, Updates, and Special Reports to help them make their own decisions.
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