So...What's Happening With The Economy?

Unless you're a financial analyst or otherwise finance-adjacent in some shape or form, you are probably feeling pretty confused as to what's happening with the global economy right now. And with the amount of smoke and mirrors we're getting from the authorities, banks, and various private equity titans, I really can't blame you.

Let's discuss some key points and debunk some myths while we're at it.

How Bad is Inflation Right Now?

Pretty bad, so let's put things in perspective. The U.S. is currently experiencing the highest level of inflation seen in over 30 years, at 6.8% - that's over 3x from 1.8% in 2019 - and the number is very likely to continue its climb. FYI, inflation in Canada is at about 4.4% right now, trending upwards as well.

In no small part, this is due to the fact that the U.S. was busy printing money on an industrial scale lately, introducing almost 50% of the dollars currently in circulation in the past year alone. Following simple supply and demand rules, introducing this much money into an economy struggling with meeting production thresholds is bound to cause price increases.

As a result, in a move that likely surprised no one, last month Jerome Powell, Chair of the Federal Reserve of the U.S. has announced that the Fed will be moving away from the term "transitory" when referring to the current inflation situation.

This is a 180-degree departure from their previous rhetoric on the subject and is a strong indicator that things won't be normalizing any time soon.

So What?

Well, obviously, the price of just about everything will be going up - in some cases, significantly, and especially when it comes to products that don't have particularly sticky prices, such as used cars, fuel, groceries, and more.

When a country experiences a shortage of essential goods, for example, due to global supply chain and production issues, there are fewer such goods to go around. People who want or need these items will be willing to pay more for them, driving the price up. This is referred to as cost-push inflation.

When more money is artificially introduced into an economy, more people will have more bills to throw around, accelerating the increase in prices (assuming the supply of these goods stays the same...which it probably will). This is called demand-pull inflation.

And this brings us to housing, the cornerstone of the American Dream. House prices have increased dramatically during the pandemic, pushed up by temporarily low interest rates, owners capitalizing on the lack of supply, and investors pouring money in real estate looking to diversify their portfolios among a high degree of unpredictability in the stock market.

Low Unemployment Rate is Good Though, Right?

To begin with, you may be misunderstanding what "unemployment rate" represents, and that's by design, so let me employ some useful stats. With the current unemployment rate in the U.S being 4.2%, you'd intuitively assume that the rest 95.8% of the population is employed, right?

Wrong. It's actually about 59.2%. The rest is made up of stay-at-home parents, people with disabilities, independently wealthy people, people who retired before the age of 64, and such.

This "the rest" number has gone up fairly significantly in recent times, indicating that more and more people choose not to work in the traditional sense. A record number of individuals retired during the pandemic as well, in most cases thanks to their retirement goal being reached much quicker riding the S&P 500 rally and the value of their other assets, such as real estate, growing as well.

Low unemployment will further drive up demand-pull inflation due to higher wages being offered to what labor is left in the market. Not enough workers will also mean consistent production issues, exacerbating cost-push inflation, resulting in a bit of a double whammy.

Okay. Should I Start Hoarding Bottle Caps?

Don't anticipate the collapse of the U.S. banking system, or the global economy just yet. While the current rate of inflation is high, the Fed will likely combat it via introducing higher interest rates in a year or two, hopefully curbing it a bit.

You might consider diversifying your investment portfolio, however, especially if it's currently made up primarily of U.S. dollar benchmarked assets.

Theoretically, this might also be a good time to get into debt with non-adjustable interest rates (this is key) and a high asset value, such as real estate - if you manage to get a good deal. The value of your property is likely to increase quicker in proportion to inflation rates, while the figure of your debt will stay the same and inflation will eat away at it.

Disclaimer: none of the above constitutes financial advice. I'm just a guy. Don't listen to me.

I'd also like to credit Economics Explained for some of the numbers in this article.