Wednesday, December 3, 2014

Financial literacy and economic realities

The global and national economies are in a very precarious and unprecedented position.  I am not sure if this will have consequences in 2015 or beyond.  It is difficult to look at the macroeconomic realities and form a conclusion on the imminent results yet it is important to understand the realities and potential risks that are present in today’s business climate.  The United States, Europe and Japan are all in a race to see who can print money the quickest.  This is being done in an effort to fend off slowing economies and a financial downturn.  Japan and maybe others are hoping to ignite inflation so they can better afford their debt.  I guess the reasoning is that if we print enough money, it will lead to a growing economy, growing wages, a higher stock market and increased tax revenue.  There is no consideration of paying off debt, only to be able to increase tax revenue enough in order to make the monthly payments.  This is the equivalent of raising our credit card limits every year and only paying the minimum amount. 

The list of countries with debt of over 50% of their GDP keeps growing and there are many that are over 100% of their GDP.  I am not sure how this keeps growing but it does.  These numbers also do not take into account the committed costs such as retirement and healthcare.  There are several challenges that could potentially arise out of this reality.  The government gravy train will come to a slow end or a crashing stop and since this is unprecedented I do not think anyone knows the ending. 

The current costs for government largess is very consequential yet much is not overt.  The first significant challenge is the massive chasm between the rich and the poor.  Real wages fell in 2013 and currently appear to be stagnant.  At the same time governments have removed much of the risk for the very wealthy and large corporations.  Small gains can be leveraged many times over with the risk nearly completely removed.  The game is rigged with the very wealthy being subsidized by the average taxpayer covering the risk and paying the price through higher taxes and seeing the value of their savings inflated away.  Prices of everyday commodities keep rising but the packages get smaller so we don’t notice.  It appears as though my ice cream container is 20% smaller and yet the price is the same.  The good news on the pricing front is that gas is dropping rapidly which will have a downward effect on prices.  Yet watch as prices return to this summer’s price as companies place fuel surcharges on our deliveries! In the mean time more and more people are becoming dependent on government distributions in order to get by.  Food stamps, healthcare subsidies, government jobs, government disability payments, retirement benefits and more are being paid to more and more people each year.

As business owners what can we do about macroeconomic situations where we feel we have such little impact?  In many ways we are helpless to make changes at the national of Federal level.  In reality the only thing that we can do for certain is to take care of your personal situation.  The first thing you can do is to get rid of debt.  Although debt is really cheap, it also comes at a substantial cost.  If you live within our means and reduce debt, you are in control of your personal situation.  If you do not have fear of one day losing your house or not being able to make credit card payments due to radical changes in the business environment then you are truly in control.  Make sure you have diversified your investments in order to maximize your return and minimize your risk.  Identify appropriate stop losses on your investments so you are selling out of strategy rather than emotion.  Work to reduce your business debt.  Understand your balance sheet and take steps to strengthen your ratios and focus on cash generation and debt reduction. Teach proper financial lessons to your children or grandchildren.  Show them how to properly handle money and debt.  Work through your schools or churches to impact financial literacy.  Become involved in Junior Achievement to offer business lessons to children.  Vote and communicate with your local, regional, provincial, or national representatives.  These issues will not change the world but they can have an impact on your business, family and community. 

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