You arrive home to find water leaking out from your house onto your driveway. A number of thoughts run through your mind about the source. The answer is found as you follow the water trail and find the washing machine pumping out the water because the water level sensor has failed and the machine continues to pump water without limitation. You turn off the water valves and, after assessing the frustrating amount of damage, you begin the clean-up process.
When looking for a cause of the issues facing an economy, the source is not as easily apparent. At Teske Financial™, we help our clients to understand economic relationships and position themselves to take advantage of the knowledge. Just as you know what to do when you find the source of the leak in your own home, you can identify the actions to take when you understand the sources driving economic changes in our economy.
Generally, most people see the national and global economy as a set of multiple independent elements that have some effect on each other but most have very little idea about the interplay of each element to the other. Taxes, interest rates, markets, employment, etc. all being reported each day, week or month – each stating figures; up, down or unchanged – always identifying the most recent results. Trying to draw connections between the elements in the diagram below is difficult and consuming to the mind (select to enlarge). To be sure, not all of the elements in the economy are listed, but this is a start.One motivation for figuring out how each of the elements relate to each other would conceivably help a person predict what to expect next given changes in one or another element. Ideally, if one could figure out the cause and effect relationship among the elements, first there’d be a feeling of accomplishment, then a feeling of reduced uncertainty and likely lead to a sense of control. Just like finding the source of the water leakage, ultimately the control would lead to the ability to act on one’s own behalf (i.e., shutting off the water or, in the economy, capitalizing on the knowledge to gain profit).
With a little bit of time and research (there’s plenty out there), we can organize the economy’s elements in some cause and effect relationships – fully understanding that there are a lot of inter-dependencies among each – and some general assumptions will need to be made. Before viewing the next diagram, make an attempt on your own to identify the predecessor/successor relationships of some of these elements. Certainly personal income affects savings/investments. And increased consumption with a stable income produces less savings/investment. What relationship to corporate profits have on markets? How about tax effects on corporate profits? Even without a whole lot of research, depending on your education and experience, your common sense can provide a number of the answers.
Although not purporting to be an indisputable representation, the diagram below is provided as a means to organize economic elements into a general relationship to each other. Although one might be readily inclined to disagree on this or that relationship, this diagram is created to encourage a dialogue on the categories and the interplay between each (select to enlarge).
There are certainly circular relationships to most of these elements and to be sure, again, not all elements are included. It’s important to understand what element is driving the change in another element. Moving backwards from right to left on the diagram, we find the monetary base (money supply) and interest rates contributing as key sources to the outputs of the other elements. Remember the water valve – the key source of the water flooding? Understanding what these two elements cause to occur is critically helpful in setting yourself up for what happens because of it.
What’s been happening with the monetary base and interest rates? Take a look here (select to enlarge):
Significant changes have occurred in both measures in the last 5-6 years. What does that mean for the other economic elements and more importantly, for you?
Restating, at Teske Financial™, we help our clients to understand these many and often-confusing economic relationships and with the new found knowledge, make decisions the help them take advantage with financial intelligence. The knowledge and the actions can make a significant impact on your preparation for retirement or in managing your assets during retirement.
Select the “Contact Us” link, get the answers and get more certainty built into your financial positioning.