How far can you stretch a buck…?

Anyone who is an economic guru is predicting rough times ahead, with no clear breaks in sight together with a possible recession sometime next year. The economic outlook for 2022 and 2023 is looking cloudy at best with inflation remaining high and a bleak future in coming years.

The war in Ukraine has raged with uncertain outcomes, playing a negative role in our economy. However, the one major economic statistic to watch in my estimation is COVID and its future impact on the world and its economy. The best working assumption of an economic forecast is that COVID will have less impact, thanks to vaccinations and past infections. Assume no more lockdowns and people will dine out, travel and go to concerts. But keep your fingers crossed, as new variants are quite possible.

What happens beyond 2023?

This is the scary part of the forecast. The Federal Reserve and government entities have a huge challenge in that their policies work with time lags of one to two years. The constant spiral of uncertainty could have a major impact on our economies moving forward. The one word that you keep hearing in the news these days is inflation and it will be devastating to many individuals and their families.

What is Inflation?

The best example that l can use about inflation is when you pay ten dollars for a bag of potatoes that you used to buy for five dollars. Inflation is an economic term that describes a general increase in prices and a fall in the purchasing power of money. Some inflation is normal and may even be good for a healthy economy. Inflation becomes a problem when it grows too quickly. Money losing value at a rapid rate can lead an entire economy to spiral out of control. All governments and central banks try and control inflation with regulation and monetary policy. Inflation is expressed as a percentage and they are predicting a 7.7 % inflation increase for us.

For me, gradual inflation can be a positive because it keeps the economy moving and we don’t come to a standstill as with a recession. If a recession hits us, and it still may because COVID and other viruses could shut down the economy and have devastating effects across the board. In my view, some inflation could be a reset for our spending habits.

Inflation is better than recession and who benefits and who gets hurt by inflation?

Well, inflation does not impact everyone the same. Some folks get hurt by the fall in the value of currency while others can benefit from it. During these times like all in the past, there are always winners and losers and l will give you a small sampling of who wins and who loses.

Debtors, especially if their debts carry fixed rates. They pay their loans back in less valuable currency. Owners of land and physical assets are big winners in an inflationary economy. These assets tend to hold their value through inflationary periods. Workers whose salaries are indexed to inflation will not be adversely affected by inflation.
Some losers during an inflationary period are savers, if the inflation rate is higher than the interest rate, savings are decreasing in value. Retirees on fixed incomes, if you have a fixed pension or interest income from investments your income will not grow with inflation. Workers on fixed-wage contracts, if your wage doesn’t rise with inflation, it is effectively getting smaller.

Borrowers with variable-rate loans, governments often raise interest rates to try to make their currency more desirable. That can push interest rates on variable-rate loans up. Lenders on fixed rate loans, if you lent money at a fixed rate you are getting paid back in less valuable currency. Unfortunately, in all these times, the weaker and most vulnerable are always the ones that affected the most.

Inflation has been a growing topic of concern for most especially in recent months. The latest inflation figures are well above central bank targets in Canada. It sounds like things may get worse or is the global economic future controlled by a handful of elitists. I do not want to deviate from the issues at hand, but l needs to mention that in my humble opinion, many of these economic issues get fueled up or down by a few that seem to control the flow of money on this planet. We still need to control our own house and feed our families, and many of us have no choice, but to keep working and getting creative at how we can continue to put food on the table.

After listening to experts, these are my simple recommendations on how to keep your head above water….

• Try to keep your debt low or no debt at all if you can
• If you do not have a job, try to get into a cash flow business
• Try to manage your expectations

In the long run, keeping your debt under control is probably the best thing to control to manage your financial expectations which will be paramount moving forward with your finances.

Good Luck!

Vincent Black/MS