Last month, Norwegians reinforced their reputation as economic innovators with a voluntary income tax – you pay based on what you think you should pay.Read More
Most of you probably did not notice the drop in your retirement accounts at the end of last week. CNN was still covering the story of the American guys on the French train, and frankly, there in nothing more pointless than staring at your 401k balance every day. This morning, however, CNN and the rest of the media are off to a roaring start on the topic of stock markets. While we were sleeping, China's market gave in to the fears of a crash... and crashed. Which led the European markets to fall into a bit of a frenzy during the wee hours of our morning. Which caused our own market traders and press to fall into a tizzy over their morning coffee. And there you are; a news story to rival failed terrorist attacks. So, is this the crash we've been dreading?
Probably not. Don't get me wrong, this is going to hurt in China, where we have suspected for months that the amount of money (much of it borrowed) in Chinese stocks is excessive. And the amount that middle-class Chinese investors lose here could well cause problems for some companies that depend on those Chinese consumers. But very few people outside China are invested in this market. In fact, it was only in October of last fall that China began to give out licenses allowing foreign investors to buy directly into their markets. And that move itself was a sign of China's new direction.
The Chinese economy has grown by leaps and bounds for years now. Economists like to measure the size of a nation's economy by calculating Gross Domestic Product (GDP). Roughly speaking for our purposes, GDP takes one year of information and adds together how much a nation's consumers spent, how much the government spent, how much businesses invested and how much was exported minus how much was imported in that year. To figure out whether a country's economy is going forward or backward, we compare that number to how much the economy produced the year before
In its best years, China's GDP has grown by as much as 14.2% from one year to the next. And China has had no difficulty getting its GDP to grow about 7% to 8% a year since 2012. That number seems to be steadily dropping, though, which means that while China's economy is still getting bigger and richer every year, it may only be by 6% instead of 7%.
You might be thinking that this doesn't sound like such a bad problem to have. And you'd be right. Consider this—for 2014, the annual growth rate of the U.S. was 2.3%, the U.K. was at 2.6%, and Germany was at 1.6%. Among the "highest performing" countries in terms of growth rate were South Sudan (36.2%), Sierra Leone (13.8%) and Papua New Guinea (8.4%). The fact is that 2% of a lot is still bigger than 36% of next to nothing.
So why is China in panic mode? What all the figures are telling us is that China is no longer (and hasn't been for a while now) an "emerging market" or a "developing country." It is a significant player in the global economy with a well-developed work force, a solid middle class, and a stock market capable of handling enormous investments in Chinese firms. The nation now has to iron out its plans for this new role. And the rest of us are going to have to adjust to those plans, as well. That doesn't mean the transition will be easy, but it does mean that China's stock market problems are not likely to cause a global melt down this year.
And if you are feeling anxious about that 401k balance this morning, take another look at last month's post, What To Do When The Stock Market Drops.
I came up with this post after meeting with a favorite client today. She's a charming and intelligent woman with a good career and a 401k who, until recently, had never thought of herself as an investor. Investments were complicated things designed for wealthy people. And then she realized that she wanted to buy a home. Part of our problem with the term "investor" is that too many of us picture this when we hear it:
There is some kind of vague understanding out there that "real" investors have special access to a supply of financial jargon, legal tricks and overpriced cuff links that somehow make sense of those relentless scrolling stock prices on CNN. And let's face it, throwing in tax references (tax-deferred, capital gains, tax efficiency) isn't helping. It's enough to make any reasonable person throw her hands up. And it's no surprise that so many of us, even when we actually have investments, don't think of ourselves as investors.
Watching the determination with which my client approached her goal of homeownership really brought home what we are doing wrong when it comes to investing. Buying a home is a form of investing, but where talk of 401k's and index funds makes people feel overwhelmed and anxious, talk of mortgage calculations and down payments has a completely different effect. People who feel empowered as they approach home ownership. And that's important. Because while I am the first to point out that homeownership isn't a good investment for everyone, the real estate industry has done something right by making clear that every buyer should feel like she belongs at that proverbial homeownership table just as much as any coiffed businessman in navy suit.
Since the great home building boom of the 1950's, Americans have understood that our economy depends on the willingness of "average" middle-class people to buy homes. But we seem to have forgotten that our economy depends on those same people to hold up everything else, as well,—grocery chains, cars, professional services, restaurants, charities, and yes, stock markets. Because no matter how wealthy our wealthy class gets, they are never going to make, hold or spend enough money to sustain a modern economy (feel free to ask me why "trickle down theory" was a clever illusion).
All of this leaves us with a dilemma. Most of us believe that we are cut out to be investors in housing, even if we aren't quite ready, yet. And we believe (even if we have temporarily forgotten) that we, in fact, are the U.S. economy when we work and when we spend. But we don't seem to realize that we are also the "public" behind publicly traded corporations and the only reason that stock markets are worth tracking. The hard truth is that we depend on these markets to ensure that we have funds to live on after 65 and that we have the money to buy homes (or to help our children buy them). So how do we convince one another to demand a little more clarity around the retirement plans and investment accounts on which we depend? How do we claim our places at this other table?
Well, not everyone, necessarily. But all of those chatty economists. And your grandma, of course ("Why is this store so expensive? You know, I used to be able to buy a loaf of bread for a nickel!"). But we are seeing signs that inflation is on the rise after years of a whole-lot-of-nothing. So what does it mean and why should you care?
Inflation, of course, is that phenomenon whereby the loaf of bread your grandmother could by for a nickel now costs $4.25. As economies grow, there is more money moving faster amongst more people. More dollar notes swirling around means they aren't as hard to come by, which means you have to give up more of them to get the same thing. If you are an average shopper, this doesn't sound great. I personally would love to go to the grocery store without wondering if my son will actually eat his inheritance. But really bad things happen if inflation goes too low. Consider this story from your great-grandmother's era—
Inflation in the U.S. has averaged about 3.32% over the years from 1914 to now. But in between there have been a few times when things went crazy. In June of 1920, the price of all sorts of products skyrocketed by 23.70%. That's like watching your neighbor by a car for $20,000 and four weeks later, having to pay $24,740 for the exact same car. It gets worse if you think about the fact that the CPI (Consumer Price Index) by which we generally measure inflation includes a lot more than cars—groceries, rent, medical costs, clothing, services and supplies are all in there getting ridiculously expensive all of a sudden.
It was a moment of spectacular political failure—the feds had slashed spending and raised interest rates to try to balance the budget, and everyone panicked. But what followed was equally bad. By June 1921, prices had dropped to the point where it became obvious that no one was buying anything. That month, the lowest inflation rate in U.S. history came in at -15.80%. Over the 18 months that the recession lasted the wholesale price of a lot what we buy fell by well over a third. Things were cheap because no one was buying. And the jobs disappeared as a result; unemployment went from a pretty normal 5.2% to a painful 11.7%. That's almost 12% of American who could work not being able to find a job.
All of this brings us to our current predicament. Our own Great Depression (after the 2008 crash—thank you, Wall Street) pretty much killed off inflation. The money just wasn't moving. And as much as we enjoy the lower prices, we've been counting on inflation to make a return (along with some more jobs, thank you). Fortunately things are finally looking up. Inflation has gone from -2% this past April to .1% in June (total for the past 12 months). Still not impressive, but better than the goose egg we've been looking at since 2008. And speaking of eggs— they accounted for most of the inflation in food this summer (it was a tough spring for chickens). So you might do better to stick with that loaf of bread after all.
With all of its graduations, May seems like an especially good time to attack the question of student loans and student debt. Whether you have loans, are taking out loans or are just thinking about the effect of student loans on our economy as a whole, this series will give you an introduction to the highs, lows and in-betweens of paying for higher education. Once considered a private issue for students fortunate enough to go for a degree, student loans in the U.S. have grown into a massive industry. That means they are now everyone's problem. Don't believe me? This 2013 Report from American Student Assistance laid bare the trends we have all been seeing: student debt is causing some of our most promising grads to put off home and car purchases, delay starting families and shy away from entrepreneurship. With even professional degree students struggling to cover basic purchases on top of student debt payments, it's fair to say that these loans mean grads are now less active in parts of the economy they once helped sustain. What's more, the growing costs of education mean that the numbers are really adding up. In 2014, student loan debt surpassed the total credit card debt and auto loan debt held by U.S. families. The Federal Reserve's May 2015 Report calculates outstanding student loan at a frightening $1.355 trillion.
All of this is to say that even if you don't have student debt or intend to take out a loan in the future, this issue is already having a big effect on the marketplace you work and live in. Over the next two weeks, I will be posting on Student Loans from three angles:
- What do you consider if you are applying for student loans;
- What are you options if you have existing loans;
- What is the future of student loans;
And if you want to join into the discussion, email with your questions, anecdotes, ideas and other comments!