Sunday, March 30, 2014

Few People Really Understand The Economy

Few people really think about the economy to any great degree or even try to understand it. We who find the subject interesting and study it or are involved in seriously self directed investments often forget this fact. While they will tell you otherwise the average person only begins to care when they are directly effected or financially slapped in the face. To navigate the treacherous terrain of investing without a road-map or knowledge means you travel at your own peril. This does not mean that even a person totally ignorant of basic economics will not have an opinion.

The study of economics is often baffling and confusing. Many economic theories exist but many are full of holes and conundrums. Much of how people react to a policy may have to do with timing and perception instead of reality. Economics is full of loops that feed back upon themselves and unexpected pitfalls based on expectations. All this can become quite abstract. Economist predict events that never tend to unfold as expected or planned. Many of the "modern monetary theories" in use today have not been proven over time, but reflect an attitude that we can control  economic cycles better than in the past.

A vulnerability and  invisible burden is carried by the masses. Most people do not  have at their disposal many of the investment options those fully engaged in the markets have developed. The learning curve to investing is both long and hard even though we are often lead to believe shortcuts exist. Simply reading a book, taking an investment course, learning a new charting or technical system is no guarantee you will make money. Most investors only learn after a series of mistakes and errors how difficult this learning curve really is.

The lack of these investment options mean that many people are left unable to react if and when a trend dramatically shifts. This leaves the bulk of society extremely vulnerably when a shift does occur. We can add to this fact that we are often lulled into being far to complacent as to the real economic risk that surrounds us. An example of this is how people assume the bank will honor their credit-lines or they will be given access to their savings in the case of economic difficulty. In a crisis as everyone rushes to the exit it is silly to think you will be served in an orderly fashion or even fairly.

I contend that never before has mankind diverted such a large percentage of wealth into intangible products or goods and this is the primary reason that inflation has not raised its ugly head or become a major economic issue in recent years. Like many of those who study the economy I worry about the massive debt being accumulated by governments and the rate that central banks have expanded the money supply.  If money suddenly flows into tangible goods seeking a safe haven inflation could soar even as debts go unpaid and promises are left unfilled.

When will the next financial crisis hit and how deep will it be? That is a hard thing to predict or answer, just as difficult is speculating the form it will take. Many catalyst exist that could usher in such a scenario. One thing that complicates any decision is timing. Watershed events can occur at the blink of an eye or be spread out over weeks or even months. The basis of the economy we have today is unsustainable and because it has been able to exist for so long does not mean it can continue.  The fact the system muddles through does not guarantee that we will not suffer financial harm as individuals.

FOOTNOTE: I have already started to flesh out an article that expands on the scenario put forth in bold print. It will be interesting to see how well I can defend the theory. The article should appear in the next few days. Again, I encourage comments and urge you to explore the archives for any other articles that might interest you.

FOOTNOTE #2; The piece I promised  delves into how chaos and major disruption could result from such the current monetary policies, it can be found at the link below.


  1. Its not economic! Its a short term money crisis about to get interesting? Banks are sitting on a lot of discounted paper that could lose its discount if Fed lets long bonds (MBS) get the cold shoulder in secondary markets? There is about to be a short pause in the music and animal spirits pressure on many parts of the curve as Fed creates auction pin-action on every asset class!

  2. I believe the future demogragphic of not fighting Fed has a lot of LT Corp. Bonds Bought in next 6-18 months? I believe circumstance are coming together to spank risk and take money from dollar h8ters in bucketfools

    1. Thanks for your very interesting comments.