Cost-of-Living Crisis: A Disaster Years In The Making

The news has been dominated by the war in Ukraine and the cost-of-living crisis. Sometimes it might seem as though the latter is entirely the result of the former, but in truth the cost-of-living crisis was already a fact of life long before Russia invaded.

The huge increase in financial and housing wealth has masked the way that the real “economic cake” has been stagnant for some time and is now getting smaller. The very wealthy have been gaining a larger share, so the “slice of cake” left for the rest of us is shrinking.

This shrinking can happen in two ways: there can be job losses and wage cuts and declining incomes (deflation), or prices can rise so much that things become unaffordable. It is through the second way – rising prices – that this is happening now. Either way, most people end up with less: less heating, fewer car trips, less to eat or fewer meals out.

Why should the economic “cake” be shrinking? The easy answer is to claim that it is because of coronavirus, the war in Ukraine, Brexit, climate change and the shift to green energy or other global issues that are largely outside the control of national politicians.

Politicians and policymakers would no doubt like us to believe this, but the truth is that the origins of our problems go back to before the global financial crisis of 2007-2009, and are very much the result of poor economic and financial policies.

Blame it on the Federal Reserve

If one country deserves much of the blame, it is the United States, and particularly the Federal Reserve. The Fed, in effect, took advantage of the hegemony of the dollar to implement policies that supported US financial markets and thereby promoted excessive leverage and the over-financialisation of the economy.

Successive governments favoured Wall Street and big corporations. These policies had beneficial short-term effects – particularly for the wealthy – but at the longer-term cost of declining economic growth.

Price discovery in financial markets has become so distorted as to inhibit economic growth, rather than acting as a lubricant for it. Capital has flowed to loss-making ventures, many of which will probably never be profitable, while over-indebted failing “zombie companies” have been kept alive by ultra-low interest rates. Financial speculation has become more profitable for many – both individuals and companies – than doing productive work.

What is not well understood – and is critical for investors at this point – are the implications for inflation or deflation. One of my own indicators – which has a reliable long-run record but is admittedly poor on short-term timing – points to a very high risk of a “deflation shock”.

That might seem ridiculous at a time when prices of nearly everything are jumping. But the key to what is really happening is worsening monetary and financial instability. For some years, central banks have used their own balance sheets to protect financial asset prices and suppress financial volatility.

But stability breeds instability, as the economist Hyman Minsky explained. This is doubly so when that very stability has been artificially engineered by what amounts to central bank manipulation of financial markets.

Today the clearest sign of this underlying instability is the combination of the extremely elevated valuations of US equities with sharply rising market interest rates and imminent contraction of the Fed balance sheet. The deflation shock indicator is heading to a record level – meaning that the likelihood of a deflation shock is very high and increasing – primarily because the total value of US financial assets is so high relative to GDP.

One gauge of this is that the ratio of total wealth to GDP for US residents is about 70% higher than its long-run average. This is an indication that systemic leverage is at an extreme.

The deflation shock indicator is also responding to the fact that money-supply growth is beginning to slow dramatically at a time when cash in the US economy still remains at a lower proportion of total financial assets than it has done historically, despite very rapid growth in the money supply over the previous two years.

System on a knife-edge

The system is on a knife-edge between extreme inflation and deflation. There is nothing in between. Either excess financial-asset valuations, leverage and debt have to be inflated away – a process that would involve the prices of wages, goods and everything else catching up with the levels of financial assets, leverage and debt – or financial asset values have to deflate.

The latter would create a huge unwinding of leverage and a “dash for cash”, which cannot be accommodated by a tightening Fed and low money-supply growth. Fundamentally, there is no way to continue hiding the shrinking of the cake. Unfortunately – and this is an impossibly difficult thing to accept – most people are going to become poorer in real terms.

This will either happen through an inflationary process or a deflationary process – or more likely a combination of both. Right now we are experiencing the inflationary part but deflation is likely to come next. Depending on how central banks respond, that may then be followed by even greater inflation.

For investors, being aware of the risks of both inflation and deflation and focusing on where there is genuine value would seem to be the only way forward. In the coming years we almost certainly face the most difficult investing environment of our lives.

By: Tim Lee

Tim Lee is a co-author of The Rise of Carry: The Dangerous Consequences of Volatility Suppression and the New Financial Order of Decaying Growth and Recurring Crisis (McGraw-Hill, 2020).

Source: Cost-of-living crisis: a disaster years in the making | MoneyWeek


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When The Pandemic Forced Young Adults To Move Back Home, They Got a Financial Education

“When we face a stressor, we tend to think more about the future,” says Brad Koontz, a financial psychologist and professor at Creighton University in Omaha, Neb. Young adults’ growing openness to discuss finances with their parents and peers, they say, reflects a kind of tribal response among people to the stress of the pandemic.

Here’s a look at what the adult children and parents of three families learned about money — and themselves — in their time of pandemic together. When the pandemic forced 23-year-old Hannah Froling to move into her parents’ townhouse in Southampton, NY in March 2020 to remotely finish her final semester of college, the financial clock began to tick.

Ms Frohling’s parents, Jennifer Schlueter and Matthew Froehling, set to move to their winter home in Florida during the fall of 2020, told her they would need to begin helping support the household in their absence. That means monthly payments of $500 for rent and $250 for family car use. They also set a deadline for Memorial Day 2022 for her to be out of the house. Ms Schlueter says she wanted to provide her daughter with a “soft landing” after the shocking experience of graduating in the middle of a pandemic. But she also wanted Ms Froling to transition to living independently, so the transfer deadline passed.

So, Ms. Froling got two waitress jobs and eventually began to rely on the savings lessons her parents took as they grew up. She has two income streams—cash tips and a regular paycheck that includes her hourly rate and credit card tips. She keeps the cash tips in a savings account and splits the paycheck between a checking account and an investment account linked to an S&P 500 index fund. She has saved about $10,000 since moving back home and started looking for apartments to rent on Long Island.

Saving and managing money doesn’t always come easily to Ms. Froling. While in college, he received an allowance from his parents at the beginning of each semester. “As a freshman, I’ll blow it in the first two months,” she says. So her parents, who both work in finance, seated her and helped her budget by outlining the necessities and luxuries in her spending habits.

But it’s been the past 18 months at home, and the closeness to her parents, which has allowed Ms Froling to be more proactive about her savings and investments, and to put all those lessons into practice. She says many of her money talks happen on family road trips. Her father helps her stay on top of the latest trends in investing and her mother shares strategies for how Ms. Froling can increase her savings and continue to build a foundation for moving out of the family home. Ms. Froling is taking it further by sharing these tips with her coworkers and encouraging some of them to open their own investment accounts.

“The lesson we want to teach her is that she can do this,” says Ms Schlueter, referencing the financial wisdom she is sharing with her daughter rather than just talking to her from being together during the pandemic. got the opportunity to do. via phone or text. That includes discussing expenses such as health and car insurance after Ms. Froling leaves home again.

Ms Froling says, while she often feels like her parents bother her about how much she’s saving, in the end she knows it’s best: “They don’t want me when I If I get out of here, it will fall flat on my face.”

breaking the money taboo

In November 2020, 27-year-old Rogelio Meza left his $1,500-a-month apartment in Austin, Texas, to move into his parents’ home in Laredo.

The move helped him work towards his goal of saving money and becoming a homeowner, says Mr. Meja, who works as a customer-experience manager for a solar-power company. It also allowed him to help his parents, who were battling the financial stress of the pandemic.

When the pandemic struck, her mother, Eudoxia Meja, who works as a cook, noticed that her hours had been cut in half. His father Juan Meja is handicapped and unable to work. Since living with his parents, little Mr. Majora has helped with grocery and utility bills, paying about $700 a month, which still allows him to take out money for a home down-payment. Is.

When he was growing up, Mr. Meja says, his family never talked about money. “Nobody really taught me how to save, nobody taught me about stock options or investment accounts, good versus bad debt.” He relied on friends who worked in finance to teach him about these things, and the conversation helped him understand where his money was going. Now, he says, he has passed on some of this knowledge to his parents.

One day, when an unusually large and overdue utility bill arrived in the mail, Mr. Majora turned it into an opportunity to start sharing his financial wisdom with his family.

“I was like, ‘Okay, let’s talk about it,’” he says, describing what led to several candid conversations about money with his parents. Indeed, after that initial exchange, he basically became the family financial advisor. Mr. Meja helped his parents calculate how much they were spending on groceries and how much they actually needed each month. He also discovered that he had $3,000 in credit-card debt and advised him to use his stimulus money to aggressively pay it off. Using a combination of direct payments from their mother’s wages, incentives and unemployment benefits, they were able to pay off their utility bills and credit-card debt in just a few weeks.

Thereafter, Mr. Meja set up a savings account for her mother and advised her to put forward 20% of her salary into the account. He also plans to help his parents open an investment account and teach them how to grow their money over time. He says being able to pay off his debt gave his parents a new starting point.

Mr. Meja has learned a few things during his stint at home as well. He says that the time he spent with his parents opened his eyes to how little he needed to be happy. For example, before reuniting with his mother and father, he often ordered takeout for lunch and dinner. But the home-cooked food he eats at home, he says, especially his mother’s enchiladas has inspired him to start cooking for himself.

As far as his parents are concerned, they say that talking about money is no longer a taboo in their family, and they will continue to seek financial advice from their son. He plans to move back to Austin in November and complete the purchase of an apartment in the city at that time.

a new perspective

Edgar Mendoza was living the high life in Chicago. The 41-year-old was paying about $3,000 a month for a downtown apartment. He often dined out and had courtside seats at basketball games.

But when the lockdown began, he began to re-evaluate his habits, limiting his activities and his spending. “What Covid taught me is no, I don’t need all that,” says Mr. Mendoza, who deals in sales and invests in startups. In January, he packed his belongings and moved to McAllister, Mont., to be with his mother and stepfather. And he doesn’t plan to leave anytime soon.

Living in Montana with his family, Mr. Mendoza says, he has reinforced the frugal lifestyle he grew up with. When he was young, he says, his mother, Maria Platt, used to tell him to “watch his money.” Now, he saves his money and invests it in places where it can grow.

Ms Platt says she is proud of the progress she has seen in her son and how she has embraced the lessons she has taught him. The family cooks together and they rarely eat out. Mr Mendoza says he is not being asked to pay the rent, but he buys all the groceries.

“He’s changed a lot,” Ms Pratt says of her son. “He used to spend money like crazy. I would talk to him and he’s like, ‘Mom, you’re right about this and you’re right about that.’ Now, in his view, he is motivated to support the family in the long run, and this has prompted him to refocus on his spending habits.

Mr. Mendoza says seeing his mother come home exhausted from work and budgeting his Social Security benefits has made him see his financial future in a new light. It has forced him to think more realistically about what retirement can be like. “When you see that you love someone… it hits you really hard,” he says. “I don’t want it to be me.”

Ms Pratt says her son still has to work on his financial habits. They sometimes forget to buy their groceries and eat food already in the family’s fridge, she says. She would also like to watch him learn to cook.

“I told him that if you make good money, save it,” she says. “I’m not going to live forever…….

By: Taylor Nakagawa

Taylor Nakagawa hails from Chicago, Illinois and earned a master’s degree from the Missouri School of Journalism in 2017. As part of the Audience Voice team, Taylor is focused on experimenting with new story formats to create a healthy environment for community engagement.

Source: When the Pandemic Forced Young Adults to Move Back Home, They Got a Financial Education – WSJ


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