It's been an exciting three weeks since my last article, and a lot has happened. AIG's employees were paid hundreds of millions of dollars in bonuses, the stock market has had an actual good week (perhaps headed for an actual recovery?), Obama filled out his March Madness bracket and, oh yeah, the Fed has decided to effectively print 1.2 TRILLION dollars.
From what I gather, most people are irate about the bonuses paid to AIG employees. The whole ordeal has even launched Congress into a spree to pass legislation to tax the bonuses 90 percent. The Senate's proposed bill would affect any company that has received more than $100 million in bailout money, so not just AIG. I think everyone needs to calm down and look at the big picture. These bonuses are literally a drop in the bucket compared to the rest of the economy. It's insane that our government (and people) are wasting their time and energy worrying about bonuses when the economy is in the shape it's in.
Our friend Ben Bernanke, the chairman of the Fed, has been doing some work while Congress squabbles over the bonuses. On March 18, the Fed announced it was essentially printing $1.2 trillion. Some perspective on that amount of money: In 2007, the M2 money supply (amount of currency in circulation, saving/checking deposits, and CDs, certificates of deposit - all very liquid assets, considered cash equivalent) was around $7 trillion. With 1.2 trillion dollars you could buy one half of every company in the Dow 30. In the Fed's press release they said, "In these circumstances, the Federal Reserve will employ all available tools to promote economic recovery and to preserve price stability."
OK, promote economic growth, that's great, but preserving price stability? The Fed's latest move, combined with all the fiscal stimulus bailouts and previous Fed moves, all point to one thing: a dramatically increased money supply, which means inflation.
Inflation is simply too many dollars chasing too few goods. An article in the Washington Post last week stated "given the poor shape of the economy, the Fed made clear that for now it isn't worried about inflation. It's more concerned about falling prices, or deflation. The country's last serious bout of deflation came in the 1930s."
The LAST thing on my mind is deflation. The only reason the CPI (Consumer Price Index), has slightly fallen the last few quarters is because of the drastic fall in oil prices. (The price of oil is priced into every good in our economy; I challenge you to think of a good that is sold that in some way is not affected by oil ... you won't be able to).
The inflation we should have now is being masked in the short term by the fall in oil prices. I think we'll be seeing significant amounts of inflation within the next year or two, which once priced into forecasts, could quickly get out of control. The only real way to combat inflation would be for the Fed to quickly raise interest rates and eliminate much of the excess liquidity in the market. Chances are slim to none the Fed will be doing that anytime soon, especially because the economy will be perceived as still weak.
Once the economy begins to recover, if the Fed doesn't reduce the money supply we'll be guaranteed inflation. What should you do about it? If you're a senior, you should look into buying a house once you graduate. Mortgage rates are at a historic low, less than 5 percent. Lock in a 30-year fixed rate mortgage under 5 percent, and when we have inflation over 5 percent, say 10 percent, each year the real amount owed on your house will decrease. The bank will literally be paying you to own the home. For the rest of us not able to buy houses, now is a good time to invest in stocks. Gold is the traditional inflation and will probably be increased modestly over the next few months. However, I still think stocks offer the best return. Think about stocks that will benefit from a weaker dollar (inflation). These are companies whose products have an elastic demand, meaning they can raise prices without losing too much market share. Commodities are usually a good bet, along with essential consumer goods.
Despite everything going on in Washington and on Wall Street, I'm still very optimistic about the economy. The Financial Management Student Association (FMSA) has formed an investment group on theupdown.com. It's free to make an account, you can search for Ball State and join our group. We're having an investment competition that ends in April with cash prizes for whoever's portfolio has the best return. One thing to remember about fake portfolios is that you WILL invest differently with your own money. You will take much higher risks with fake money because the downside is so little. Nevertheless, theupdown.com is a great place to learn the basics of investing and try out a few strategies. There'll never be a better time to learn, trial by fire and all.
Derek Wilson is a junior double majoring in economics and finance and writes 'Making Cents' for the Daily News. His views do not necessarily agree with those of the newspaper.
Write to Derek at dawilson2@bsu.edu
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