Over the past few years gas prices seem to always be in the news. In one week they are extremely high and the next they are extremely low. This volatility in gas prices is not a positive trend four our country as we are trying to increase stability and then in turn increase our economic growth. Unfortunately, these bouncing prices leaving the U.S. behind other countries as our growth rate is 2 – 2.5% and not the 5% expected globally.
In March gasoline prices rose 10.6% making it more expensive to commute to and from work. This expense eats up any increases in income that may have been experienced during the past month. Furthermore, it costs companies more to transport their products, send mail, and get supplies. This increase in cost in transportation and resources will again be sent back to the consumer who experiences further income loss for basic necessities.
Thus a substantial and sustain increase in oil prices has a compounding effect on society and the economy. Heating costs are higher, food costs which use gasoline in tractors are higher, product costs are higher, the cost of war which uses lots of fuel goes up, less jobs are produced and things cost more money across the board.
The good news is that when checking on the price of food and clothing (basic necessities) it was found that clothing costs reduced slightly while food rose only slightly. In other words, the higher cost of fuel is not reflected in other product which means it is not yet damping the economy. It can be said, however, that the rise in fuel cost is one of the major contributors to the rising of inflation and loss of realized income.
The faster the Country can develop alternative sources of fuel that are both sustainable and cost effective the less reliance on oil. The less reliance on oil the less likely the price of oil will bounce around and affect the economy. A more stable economy means a better chance of sustained growth in GNP, jobs and investments.
As we reflect back on 2010 and ponder what lies ahead for the U.S. economy in 2011. There is no shortage of optimism by Wallstreet analyst and economist that the U.S. economy will continue to expand and recover in 2011. This optimism comes along with improving economic indicators that have been on the upswing for a number of months. As a result of better economic news, the Dow Jones Industrial Average recently closed at the highest levels since June 25, 2008. Some of the positive economic news includes; increasing bank lending, lower “initial” unemployment insurance claims, increasing durable goods orders, increasing U.S. exports, and increased retail and auto sales. One of the most encouraging and important pieces of good news is the increase in consumer spending.
The importance of Consumer Spending:
The economy is measured by GDP (Gross Domestic Product). GDP is defined as the total market value of all final goods and services produced in a country (in a given year) equal to the total consumer, investment and government spending, plus the value of exports minus the value of imports. The United States has the largest GDP of any country at about $14.75 trillion dollars. Historically, the GDP growth rate has been at about 2.5-3% per year. Some analyst speculate that U.S. GDP could grow by as much as 3-3.5% in 2011. The increased projections in 2011 U.S. GDP growth is partially a result of renewed spending by consumers. Consumer spending accounts for about 65-70% of GDP. In December 2008, consumer spending went down to $9.9 trillion dollars from over $10.2 trillion dollars (6 months prior). A report issued last month (12/23/10) put consumer spending at $10.52 trillion dollars. This is very good news for the stock market as well as the economy! Simultaneously, while consumers were curtailing spending in 2008, they began paying down debt. Total consumer debt (revolving and non-revolving) decreased from $2.6 trillion in 2008 to about $2.4 trillion in December 2010. The federal government realizes how important consumer spending is to economic growth. So much that in December 2010, the President and Congress agreed to reduce the employee portion of FICA (payroll tax) for 2011 from 6.2% to 4.2%. Employees should immediately see a bottom line increase in their paychecks. The government hopes the pay increase will be spent in the economy, rather than paying down consumer debt. As a result of increased consumer spending came increases in retail store sales, auto sales, sales tax receipts (for states that have sales taxes). The Commerce Department reported in December 2010 that retail sales at stores ranging from car dealers to grocers rose 7.9% from a year ago and overall sales surpassed their pre-recession peak. While most economist are downplaying the likelihood of a double-dip recession, no one would deny there are some “headwinds” in front of U.S. economic growth. Those pitfalls include the European debt crisis, high oil prices, stagnant real estate market, and high unemployment.
Current unemployment situation:
The current unemployment rate stands at 9.4%, reduced from 9.8% in December 2010. Prior to the recession unemployment stood at about 4.2%. While reductions in the unemployment rate are generally good, the recent reduction occurred because people became discouraged and stopped looking for work. When this happens those individuals aren’t counted in the unemployment rate. There are currently about 14.4 million people officially unemployed, but the actual unemployed number is closer to 25.6 million people. High unemployment is obviously an anchor on the economy. There are currently about 311 million people in the U.S. In order to keep up with population growth and reduce unemployment to pre-recession levels the economy needs to create about 200,000 jobs per month. In 2010, the economy created on average about 94,000 jobs per month. Obviously, this is better than losing jobs each month but it is not good enough to promote a healthy and vibrant economy. Economist are expecting accelerated job growth at some point in 2011. While time will tell whether or not 2011 lives up to all of the optimism, there is no doubt that the U.S. economy has survived the brink of disaster. But let us be mindful that once the economy is back on “firm footing,” the U.S. needs to address the growing National Debt, which is in excess of $14 trillion dollars. Click on the link for the real time debt clock: http://www.usdebtclock.org/#.
My favorite quote about money comes from the British novelist W. Somerset Maugham: Money is like a sixth sense without which we cannot make a complete use of the other five.
There are probably millions of wage earners who wish they could use their five basic senses to see, hear, smell, taste and touch life without any concern for the necessity of financing their life, but money is a stern taskmaster who keeps their noses to the grindstone.
Even the struggling artist who abhors capitalism and the money chase must find the money to purchase his canvas and oils so he may lose himself in his craft.
Art certainly offers appeal as an activity that is more creative, inspiring and noble than the pure pursuit of making money, but the true capitalist or investor can paint with joy on a much larger canvas when he knows and understands that money has no actual value in the marketplace, or real meaning in the greater scheme of life.
Money is but a tool that does the bidding of its master. Money is neither good nor evil. In any drug transaction, money is not the evil element. In the payment of wages for time spend working in honest labor, money is not our savior.
We can make money the right way or the wrong way. We can spend money productively or unproductively. We can help people or hurt people in our use of money.
Money has no actual value other than the value we attach to it. The barter system would still be practiced today if the participants did not agree to set a value on a piece of printed paper that represented the value of the goods and services they had to offer.
When the users of money lose faith in their currency, its value drops sharply, causing inflation. When the productivity of a country stalls, its currency on the world market plunges, again causing inflation.
Money has no actual meaning other than the meaning we attach to it. Our rational mind tells us that a surplus of money can not buy us love, respect, admiration or health, yet we know that an abundance of money can buy us opportunities, financial freedom, better health care, better housing, better nutrition and a more convenient lifestyle.
Here starts the connection between rendering service and making money.
We know that nothing in our material world can come from nowhere or go nowhere, nor can it be free as there is a price to be paid. Our government can render us service through its employees, but our government is never a source of goods. Everything produced is produced by the people and everything that a government gives to its people it must first take from its people.
The only money that government has to spend is money taxed or borrowed from people’s earnings. Earnings come from productivity. All productivity is based on natural resources, human energy and tools. Tools are the only factor among the three factors that is limitless. The primary tool that is used to create productivity is money.
Businesses and organizations need to understand that you know what drives their existence; it is not giving service, it is taking in revenue to support what they are doing. Service is simply a
by-product of making money.
Do not let businesses or public service organizations fool you into thinking that they exist to help or serve people; helping or serving people is merely a by-product of generating enough revenue to be in a position to do so.
There are some people in government providing services who would have you believe that their primary mission in life is to render service, but if they believe this, they do not understand much about our economy and its role in their survival.
The primary role of any business or governmental unit, large or small, is to find and keep a revenue source. Without a budget to create programs and hire the people (employees) to deliver the programs (services), there would be no services delivered. When budgets are cut, programs and the employees to deliver them are reduced, and departments get reorganized.
Clearly, the world turns on a dollar bill. I am not judging what causes our economy to work (greed is its greatest motivator), but I am suggesting we need to be street smart about how our money system works.
Here is another sobering thought: Our entire economy and all of its employees are created by less than 5% of our population, and not a single one of the 5% work for government, or any other public service organization.
That is because nothing happens in our economy until a product or service is sold to satisfy a want or need, and less than 5% of the income generators in our economy are professional sales people.
Non-profit corporations and governmental units have no profits to tax as any earnings generated by them must be reinvested. There would be no earnings to tax unless business created the profits to be taxed, and created the jobs that also created taxes from the wages earned by the workers.
Seen this way, true capitalists and investors understand business is as much about art as it is about science. The great business people and giants of industry in our country are not really the bean counters and tech heads, they are the masters who paint on an economic canvas much bigger than that of the solitary artist.
The solitary artist creates an oil painting on a canvas. The creative business person takes the canvas to market and creates more opportunities for the artist to ply his craft.
H. L. Mencken was fond of saying “never underestimate the stupidity of the American people”. I do not belong to that group and neither should you; that is why it is important that you understand the money game even if people around you do not.
Understanding the money game does not make us better or smarter people than others, it does make us more aware and savvy when opportunity knocks on our door.
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