"John! What's happening to the US economy?" asked Matthew.
"Why do you ask?" replied John, his head still fixed towards the TV in the corner. He was more interested in the basketball game. The world of economics is far too much of a headache to discuss when there are much more exciting things to occupy our minds.
"I have a strange feeling," said Matt, not wishing to end the conversation, but knowing that he had to get his father to focus for a minute on what was concerning him.
John screamed, his face was all smiles, and he laughed, "Yes! Yes! Yes!" The Wizards had just won the game. He turned to his son swivelling his chair around. "I'm all ears."
Matt smiled and grabbed the remote. There as a swift click and the TV fell silent after a few crackles of static showered the room.
Matt resumed his discussion, "Something is not right with the economy. It's serious dad. There is something that is wrong with our economy. We are not being told how dangerous the present situation really is."
John nodded, for he knew that Matt was an intuitive. He knew that Matt could sense that the world that they had come to know might just possibly be in for a very rough ride. How rough John could not imagine since his perspective was focused on the immediate need to save enough for a reasonable living out of his pension.
"The problem is," said Matt, "That many people are like you. They have had an idea that they could save for a reasonable pension and enjoy the fruits of their hard labour over the past forty or more years. You are from the baby boomer age and you expect that you will have a good retirement income much like grandad and grandma did. I don't see it. I am very worried about whether we will have enough jobs and whether inflation will come because of the huges rises in energy prices everywhere."
John's smile had lasted for a long while since he was still ruminating over the Wizard win. He suddenly realized that Matt had a genuine concern, but he did not want to discuss that concern. He did not understand what was happening to the US economy any more that Matt did. "I hear that our exports have picked up and that our trade with the rest of the world isn't as bad as it used to be," said John without thinking very deeply. He neglected to comment that he was finding his weekly pay check did not go as far as it had, and that it was more difficult to set aside the amounts need to add to their pension.
"Dad! Don't you see it?" Matt's voice had gone up a notch and his face revealed his frustration. "You are in a dream world. If the stock market takes many more hits and it is almost certain that it will, then share prices can fall badly, and you lose much of the capital that now represents your pension. People had gone into property after the stock market weakened, then they went into commodities, such as wheat and soy beans. Where will this end? I, for one, am not confident that the stock market will be a sound investment over the next ten years."
Matt was thinking about what he had read in the Wall Street Journal that whether you gain or not on stock prices will be up to how lucky you are. Sure there will be winners, but there will be more losers!
Matt thought aloud, " Dad! If you sell your shares and take the money and put it on deposit with a bank, you are also in a bind because as I see it, we have the emergings of an inflationary period. The interest rate on your deposit will need to keep up with inflation, but what I am seeing is that interest rate on deposits not keeping up with inflation. People don't realize how dangerous inflation can be. People are so used to the Fed keeping things so that inflation does not happen, but the Fed failed on house prices, it failed on energy prices, it failed on the dollar exchange rate, and won't it fail now on interest rates?"
John fell silent, and the two of them just looked through the living room window at the activity going on outside.
Matt continued, "Inflation in China is running pretty high. We have been enjoying all those cheap Chinese imports. What if that ended? With the dollar so weak, we would not be able to buy as much as we have over the last decade. Our economy is turning very slowly, but maybe that turn is too slow. Maybe, we are in for a very long period of adjustment lasting over a decade!"
John thought for a moment and said, "Perhaps, the Fed will raise interest rates. That will help reduce the risk of inflation by reducing the money supply growth. Albeit, house prices will suffer and property will not be such a money winner. Houses will always be a good investment over the longer term and perhaps we can shift back to people buying their own homes, but aware of the interest rate risks. That might not be such a bad thing."
Matt responded, "Well, you are right. If interest rates were to go up, it would help some people, but it could be very hard on business people, who are looking to grow the economy through more sales."
"But, people need to save for their pension years," said John. "It makes sense to raise interest rates. That would make consumption of all the unnecessary junk we buy less attractive."
Matt replied, "You are much older than I, so you see the need for higher interest rates to slow down inflation, but I think that the economy will slow down without the higher rates. Perhaps, we have overdone what needs to be done. People will not buy as much because their houses are not going up in value so rapidly. House prices are even falling. That will slow the spending of some people down. What home owners should be doing is locking in on interest rates that they can afford, so that they can get a handle on their cash flow each month. I am not so sure people will do that. It requires a big shift in attitude, especially for people of my age group, in their thirties. Some lenders are still saying spend, spend, spend. There are many people who are doing well. Do you think most people will be able to figure out a good strategy?"
John wished to answer quickly, but he thought about it. "Matt, my question is whether energy prices are going to make my pension years a nightmare. The Fed has focused on property values and the credit crisis caused by borrowing at risk money rates. When will people realize how luck they are the Fed took action. Things could have been much worse, and the thing is not over yet. The piper has to be paid some time, even if it is in the future."
"Dad! All the signs are there that because of the need to redirect the economy towards lower energy costs, we will see many businesses and divisions of companies based on the older energy-wasting technologies go out of business. My thinking is that if you invest wisely in companies with energy-saving technology, their share prices will do better. The problem is that the failing companies will try to buy their way into such technologies. That may be good, but if you invest then you need to wait until after such takeovers and mergers, then sell."
John answered, "Playing the stock market is a very risky game. People think that they are so intelligent when they experience substantial gains. In reality they are more likely to have been very lucky. The stock market is very risky and is like a form of gambling. I think, however, that you are right. We should all think about reducing our use of energy. That will produce a profit for the whole economy and we may all come out winners."
Matt frowned. He had not expected that the conversation would lead to anything so optimistic. "Dad, we still have the proble that inflation may take hold and interest rates may need to rise in order to stem inflation. Can we live with that?"