Blogs > Your Money

Dave Patterson and Erin Preston, a father-daughter team of Certified Financial Planner® licensees, provide thoughts and suggestions on a broad collection of personal finance topics.  Information provided in this BLOG is intended to be of a general nature and may not be appropriate for all situations.  Readers should consult with their own financial advisors before relying on any information contained herein.

Saturday, August 7, 2010

Inflation, Deflation, Double Dip?

If you’ve read the papers, watched the TV or listened to the radio lately in hopes of getting a clue as to where the economy is going, we expect you are confused. We hear concerns about inflation, deflation and a double-dip recession. Unemployment is steady at 9.5% with some 131,000 jobs lost last month alone. At the same time, the President says the economy is recovering slowly but surely.

A recent report we heard, predicted that housing prices won’t bottom out until the middle of 2011. Foreclosures are expected to be as high or higher this year than last. The new financial regulations bill just passed by Congress will clearly increase business costs for many but in ways that have yet to be determined. The bill was quite general in nature and some 240 rules need to be defined before the regulations can be fully implemented.

While it seems likely that taxes will increase, it’s not one hundred percent clear for whom the Bush tax cuts will be extended. The new healthcare legislation also raises a significant amount of uncertainty for businesses, since it creates a significant number of new government organizations that must define their role and span of control.

We’ve written before that all the uncertainty in the economy could certainly be the reason that small businesses are not hiring. Many are struggling to make ends meet. Expanding businesses requires confidence that the economy is on the mend.

It would be nice if we could turn to the economists for a definitive projection about what the future holds. Unfortunately, many of them disagree. Laurence Peter, the author associated most famously with The Peter Principle, said of economists: “An economist is an expert who will know tomorrow why the things he predicted yesterday didn’t happen today.”

Edgar Fiedler, former Chief Economist at The Conference Board once said: “Ask five economists and you’ll get five different answers (six if one went to Harvard).”

We can’t remember when there’s been this much uncertainty about the economy. It doesn’t seem that anyone can convince anyone else what’s going to happen. So what are we to do? What lesson can we learn from all of this?

The lesson to be learned is that if you ever thought you could time the market or pick the next hot asset class, you clearly have your work cut out for you (We don’t believe in trying to time the market.). Avoid looking for the silver bullet. Make sure you are broadly diversified. Pay down your debt. Build up your emergency fund. Increase your savings. Do all the things you should do in a normal market and don’t panic. If you do those things you should do all right no matter which way the economy turns.


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