The Dollar Stretcher : inflation

Unintended Consequences

Gary — Mon, 09 Jun 2008 20:27:00 GMT

I bet that you like low interest rates. I do, too! They make it much easier for people to borrow and repay loans. That's something that both borrowers and lenders like. Making it easier to repay loans!

Not only are low interest rates good for borrowers and lenders, they can also spur the economy in two ways. First, domestically. If you can afford the mortgage on a new house then I get to build it. Good for the economy!

Plus it makes it easier for people to refinance those nasty adjustable mortgages that are getting all the headlines. Congress, the mortgage lenders and homeowners all like that.

It's also good internationally. Lower interest rates makes American goods cheaper in the world market. That means that we're able to see more 'made in America' product in places like Europe and Asia. Great for the American worker!

So how do we get lower interest rates? Well, when you cut through all the fancy economics talk, the bottom line is that you print more money! Yep, it's that simple. Just crank up those presses a notch or two and dollars are plentiful for all of us.

Sounds pretty good. That's why the Federal Reserve is holding interest rates down and Congress doesn't mind spending money that the government doesn't have. Whirrr! You can just hear those presses run.

And it would be good except for a couple of little problems that need to be worked out. The first is that it makes imported goods more expensive for us. So those Nike's that Junior wants or the (gasp!) gasoline that you put in your tank will cost more. The Saudis know a falling dollar when they see one.

Yes, those cheaper dollars won't buy as much of all the foreign goods that we like so much. We're importing a little over $200 billion a month. So it's not just gasoline and sneakers that will cost more.

Looks like the small problems with cheaper dollars aren't really so little. In fact, at $4 a gallon for gas, it looks like those cheaper dollars could turn out to be very expensive.

So what's the average consumer to do? Be prepared to see imported items (like oil and sneakers) cost more. Don't believe any politician who claims that they can pass a bill and make those things cheaper. They can't (and if they were honest they'd admit it).

Anything that they try to do will only make it worse. If you don't believe it read about the Smoot-Hawley Tarriff Act that was a major cause of the depression of the 1930's. That time they were trying to protect the American worker from low cost foreign goods. It didn't work out too well.

What else can you do? Change your habits to reflect the new prices. Find a way to drive less. Carpool. Switch your workweek to 4 ten hour days. Shift your day so you can commute before or after 'rush hour'. Find some way to reduce the amount of gas that you must buy.

If you have any extra money it's a good time to pay down any variable debt. The higher prices (think inflation) will almost certainly cause higher interest rates some time soon. And, that means that any debt that's tied to interest rates will cost you more. So pay it off now. Make it a priority. The last time that we choked off inflation with higher interest rates unemployment went up. It's much easier for you and I to pay off debts when we have a job.

Have a variable home loan? You'll want to convert it over to a fixed loan. You might even want to pay off your credit cards and add that to the new loan. (a caution: this will only work if you have the discipline to pay off your entire credit card bill each month from now on)

Finally, don't sit back and wait for someone to solve the problem for you. The same people who brought you the problem aren't likely to solve it.

Your best bet is to recognize the change in prices today and make changes to the way you live. Prepare for the changes in interest rates to come. No one is saying that the future will be easy. But, it will be easier if you start making changes now.

Keep on Stretching those Dollars!

Gary Foreman

Supply and Demand

Gary — Thu, 01 May 2008 16:10:00 GMT

Wow! The news is full of stories about rising gas and food prices. For those of us who pay attention to our expenses it's not a big surprise. We've known for awhile that's been happening. In fact, what surprises us (at least me) is that so many people were unaware of what was happening.

Take gas for instance. World demand is up (primarily due to growth in China and India). Supply is basically unchanged. Economics 101 will tell you that prices will rise. On one hand we can argue about how to increase energy supplies or whether we can conserve enough to offset increased demand by other countries. But, that's not really our mission here.

What we can do here is provide ideas that you can put to work this week to reduce those gas and grocery bills. So with that in mind I invite you to pour a tall glass of your favorite cool beverage (I favor sweet tea or lemonade), sit back and enjoy this week's issue. I hope that you find it saves you some money!

Gas Boycott

Gary — Thu, 27 Mar 2008 15:28:00 GMT

This just in:

Now that the oil companies and the OPEC nations have conditioned us to think that the cost of a gallon of gas is CHEAP at $1.50 - $1.75, we need to take aggressive action to teach them that BUYERS control the marketplace..not sellers.

With the price of gasoline going up more each day, we consumers need to take action. The only way we are going to see the price of gas come down is if we hit someone in the pocketbook by not purchasing their gas! And, we can do that WITHOUT hurting ourselves. How? Since we all rely on our cars, we can't just stop buying gas. But we CAN have an impact on gas prices if we all act together to force a price war.

Here's the idea: For the rest of this year, DON'T purchase ANY gasoline from the two biggest companies (which now are one), EXXON and MOBIL. If they are not selling any gas, they will be inclined to reduce their prices. If they reduce their prices, the other companies will have to follow suit.

I received this email just recently. The sender had included me on a list of people that they thought should see this message. Presumably to encourage me to join the fight. Maybe they even hoped that I'd put it in the newsletter. I'm not going to do that. And, I'll tell you why. There are a number of good reasons.

First, variations on this idea are sent around via email every time gas prices spike upward. If the idea was workable, it would have done it's magic years ago.

Second, it will do nothing to change the economics of gasoline. Ultimately, what we pay for gasoline is most affected by the amount of gasoline available and the total amount of gasoline produced.

We can stop buying from Exxon. But if we buy from Hess, Texaco or anyone else we haven't changed the total demand for gasoline or the total amount produced.

Now if the email suggested that everyone drive 10% less or that they encourage the oil companies to build additional refineries that would change the supply and/or demand for gasoline. (if I recall correctly no new refineries have been built in the last 20 years - every one is basically running at full capacity now) I know that means some inconvenience (driving less) or doing something that we might not want to do (allow oil refineries to be built).

Third, Exxon won't be hurt, Mom and Pop Smith who own the local gas station will be. There is very little retail mark-up on gasoline.

"Most gas stations today double as convenience stores, and although they generate more than two-thirds of sales from gas, two-thirds of profit comes from in-store sales of cigarettes, drinks and food, according to the convenience store association." ">Wall St. Journal

Yes, some stations are owned by the big oil companies. And, if you quit buying gas from them you might force them to lower their price. But the mom and pop stations that compete with them won't be ABLE to drop their price. Right now with oil prices going up they have a very small mark-up on gasoline. They can't afford to lose money on gasoline to bring you to their convenience store.

In fact, if they did drop their price the result will be to drive them out of business. That means LESS competition. And according to my old college economics textbook, less competition means higher prices. Not a winning strategy for the consumer.

So to the extent the strategy causes a 'gas war' it only does so temporarily and then makes the problem worse.

Fourth, none of this has any effect on the real problem. Demand has increased. Supply hasn't kept pace and could be interrupted by political events.

"With real gross domestic product growing at a rate of 8-10% a year, China's need for energy is projected to increase by 150 percent by 2020. to sustain its growth China requires increasing amounts of oil. Its oil consumption grows by 7.5% per year, seven times faster than the U.S." Institute for the Analysis of Global Security

"Worldwide oil consumption increased by a cumulative 11.4 percent from 2001 to 2006 (2.3 percent per annum). The United States is the world’s largest petroleum consumer, at 20.6 million barrels per day (mbd). But while U.S. oil consumption has increased by 1 percent annually over the past five years, consumption in other nations, particularly China and India, has grown much faster due to their rapid output growth. Over the past 25 years, China’s annual GDP growth—about 9.5 percent—has averaged more than three times that of the United States, while India’s has averaged almost 6 percent, nearly double that of the United States. Federal Reserve Bank of St. Louis

In other words, China and Indea are consuming more and more oil. And, they will continue to do so.

OK, so what can the poor consumer do to fight higher gasoline prices? First, recognize that we can make a difference.

We can start by using less gasoline. Check your tire's air pressure once a month. Replace your air filter on schedule. Drive slower. Don't buy a bigger vehicle than you really need. Carpool if you can. Group trips to reduce the amount of miles you drive.

We can recognize that gasoline is only one part of a bigger problem. Even with conservation, worldwide demand for energy is going to continue to increase. Unless we expect millions of people worldwide to continue to live in abject poverty, we're going to have to make affordable energy available to them.

So we need to get busy exploring ALL possible ways of producing clean, cost-efficient energy. I won't get into specifics. No need to set off a political firestorm on a blog devoted to personal finances. But I admit to getting fed up with some of the politicians and political activists. It seems that there's no type of energy that acceptable to some of them. Not oil, not natural gas, not coal, not nuclear, not solar, not windpower, not...well, you get the idea.

If we continue to block all types of energy production we can expect higher prices for energy. It's really that simple. Maybe they're right. Maybe none of those methods are acceptable. Maybe some amazing new technology will save us. But, if it doesn't let's not pretend to be shocked when prices increase. Let's be honest enough to admit that we made choices that caused them to go up.

Keep on Stretching those dollars!

Gary

Become an Inflation Fighter

Gary — Tue, 25 Mar 2008 17:05:00 GMT

For the first time in years, inflation is back in the news. If you've studied economics, that's no surprise to you. In an attempt to make it easy for people to borrow money, the Federal Reserve has been lowering interest rates for years. When they do that, they reduce the value of the U.S. Dollar compared to other currencies. That has the effect of raising the price that you and I pay. Especially for foreign goods. (yes, you can argue that helps the American worker, but it does raise prices)

Add to that increased demand for certain commodities (for instance, corn to make ethanol, oil and building materials in the far east) without an increase in the supply of those commodities and prices will go up. That's basic supply and demand.

But you don't need to get into economics with the typical consumer. We already know that prices are going up. I bought gas and groceries in the last week. Enough said. What we need is a solution.

Here at the Dollar Stretcher we can't lower prices for you. That's beyond our abilities. But we can show you how to substitute a cheaper product, use less of a product or find it for the best price possible. All those things will reduce the effect of inflation on your family.

And, we're going to make every effort to do just that. We'll be calling them "Inflation Fighters" and you'll find them in our email newsletters, our Community Forum and on our website. Just look for the words "Inflation Fighter" and you'll find articles to help you deal with the inflation that we're all facing.We're also starting a weekly email newsletter with articles specifically designed to help you become a Inflation Fighter. To subscribe send an email to subscribe-InflationFighters@hub.TheDollarStretcher.com.

Here's to a less expensive tomorrow!
Gary