Too scared to ask – Economic Indicators explained

February 9, 2007

When I use others’ research I always try to give proper credit to the source. Much of the information and research for today’s podcast comes from Consumer Reports Money Adviser (January 2007 Issue). If you are interested in subscribing click here (Money-Guy.com store).

If you listen to AM radio, watch any of the cable news networks and/or your evening news, or read a newspaper, you have probably heard the following terms: Federal Reserve, Federal Reserve Chairman Ben Bernanke, Inverted Yield Curve, GDP, and Inflation Rate. How many of us really know what these figures and terms truly represent?

I did a seminar last night, “Tips, Tricks, and Secrets to Mastering Your Money” for Gwinnett Federal Credit Union and had a great time and met some really fun individuals. While I was there I had the opportunity before the presentation to ask individuals several pop culture questions and then a few questions on today’s topic, “Economic Indicators and terms”. Listen to the show and you will see that the answers provided were just as I anticipated; most of us know a lot about current events, but very little about what drives the economy and our money.

Let’s clear that up today by providing you with the tools to know what these terms means as well as provide you the chance to educate your friends and family.

The Federal Reserve:
The Federal Reserve, the central bank of the United States, was founded by Congress in 1913 to provide the nation with a safer, more flexible, and more stable monetary and financial system.

Well what does that mean? It means that the Federal Reserve tries to influence the economy, inflation, and substain a healthy marketplace by controling the supply of money. When interest rates are low the Federal Reserve is encouraging us to spend and borrow more money because the cost of money is low (low interest rates = easy access to additional money/funds). When the Federal Reserve feels that the economy is getting too hot and expanding too rapidily they will tighten the money supply by raising interest rates. If you think about this in common sense terms you are less likely to borrow money for a new car or an addition to your house if you feel that interest rates are high. This influence tries to control the natural greed and fear that drives our short-term marketplace.

For those that listened to the “Man About Town” segment:

FYI… Alan Greenspan has retired and the current Federal Reserve Chairman is Ben S. Bernanke

FYI… When the Federal Reserve raises interest rates it causes the value of your existing bonds to go down. The opposite is true when the Federal Reserve lowers interest rates / the value of your existing bonds go up.

Strength of the US Dollar :

The value of the dollar fluctuates compared to other currencies based upon our economy and other factors including interest rates. Common countries that our dollar is compared to include:

The United Kingdom Pound; $1US Dollar = 0.50867 British Pound
The Euro; $1 US Dollar = 0.76851 Euro
The Japanese Yen; $1 US Dollar = 121.004 Yen

Countries that sell a lot of goods in the US, like China, Japan, and the OPEC nations, have tons of dollars. They benefit when our currency maintains its strength, which they help ensure by investing in US Treasuries instead of dumping dollars on the open market.

Yield Curve:

The yield curve compares short-term and long-term US Treasury interest rates. Normally, debt that matures more quickly should offer a lower yield because your money is tied up for only a limited period of time. In contrast, longer-term debt should earn a higher interest rate because it carries more risk and your money is locked up for the long-term. However, since about February of 2006, the curve has been inverted (meaning that short-term bonds are yielding more than long-term bonds. Inverted yield curves have preceded several US recessions. This is most likely not the case for this market because outside investments from China, India, Japan, and other countries loaded up with cash from exporting goods to us have kept long-term rates lower than usual.

The planning opportunity I see with an inverted yield curve is to stay away from long-term bonds. If you are not going to be paid a premium for locking your money up for the long-term then you should purchase the higher yielding short-term bond funds.

You also need to know with an inverted yield curve that it’s much better to purchase traditional 15 and 30 year mortgages since short-term ARMs and variable products are charging the same or higher interest rates.

Gross Domestic Product :
The gross domestic product is a survey of the monetary value of all finished goods and services produced within the US.

Included in the so-called real GDP, which is adjusted for inflation, are consumer and government spending, capital investments by businesses, and exports minus imports. Experts consider the GDP the best overall measure of the economy’s performance.

2006 GDP:

The 4th quarter GDP numbers shocked everyone when they came in with a 3.5% increase over last year. Most were expecting a continuation of the slowing third quarter that showed only a mild increase of 2.0%. Optimism that has led to recent market gains can be attributed to this positive report because it supports that the economy is strong plus there has been some evidence that inflation is easing (Goldilocks – not too hot, but not too cold…an economy that is just right for continued gains).

Inflation Rate :

The consumer price index, the closest corresponding statistic that measures inflation, tracks changes in prices from month to month and year to year from a group of items including food, shelter, clothing, health care, transportation, and energy. In the last few years the annual increase in CPI (inflation) has been increasing. In early 2004 inflation was below 2%/year, but since then we have been experiencing an increase over 4% in the cost of items.

Remember is you are a safe cash or bond investor inflation is your enemy. If the cost of goods that you are purchasing to live off of rise greater than the interest you are earning you can see how that situation can be devastating over the long-term. This is why I recommend that even retired individuals have a portion of their asset allocation in growth holdings like stock mutual funds to fight off the devastating power of inflation.

Hopefully some of this has been helpful, and I would once again like to thank Consumer Reports for producing such a great tool for individuals with their “MoneyAdviser Newsletter”.


Most Recent Episodes

Dave Ramsey vs. The Money Guy: Which Strategy is The Best?

Dave Ramsey has an incredible legacy of helping folks get out of debt and take control of their financial lives. We agree on a lot of things, but there are a few points of contrast. In this episode, we’ll discuss differences between The Money Guy Show and Dave Ramsey...

Top 4 Financial Mistakes We Saw This Year! (2022)

We saw some wild financial mistakes this year during the bear market. From making extreme changes to portfolio allocation, chasing the hot dot, and using too much leverage, we’ll talk about some of the biggest financial mistakes we saw in 2022 in this episode.   In...

How Millionaires Build Wealth! (With Dave Ramsey)

Join us for a very special episode as we welcome personal finance radio host and influencer Dave Ramsey to The Money Guy Show! There’s so much misinformation out there about building wealth. We had the pleasure of having a great conversation about how millionaires...

Do These 4 Things with Your Finances BEFORE 2023!

There are unique financial opportunities available at the end of the year - especially this year with the market down. In this episode, we’ll talk about what you need to do with your money BEFORE 2023! In this episode, you'll learn: What you need to do with your money...

How to Win When the Financial World is Burning!

Lately it’s felt like the financial world is in chaos, with rising interest rates, a falling stock market, and high inflation. Let’s talk about how to focus on what you can control and how to minimize the time spent worrying about what you can’t control. In this...

Financial Advisors React to RIDICULOUS Money Advice on TikTok!

The most powerful time to get serious about building wealth is when you’re young. So, what is the younger generation learning? Financial Advice (good and bad) is being produced in massive rates across online platforms and TikTok is the new frontier. Is there good...

Loss Harvesting: Why Wealthy People Love It (And You Should Too!)

Tax-loss harvesting: what is it and should you be doing it? In this episode, we’ll cover everything you need to know about tax-loss harvesting, including whether it makes sense for you, how much it could save you in taxes, and how to eliminate the downside of loss...

The Market is Crashing! (Where Should You Put Your Money?)

The stock market has not had a great year so far. You might be asking yourself, “Since the market is crashing, where should I put my money now?” In this episode, we’ll discuss how to invest when the market is dropping and how to make the most of your money. In this...

Will Rising Interest Rates Tank the Economy?!

The Federal Reserve is raising interest rates to combat inflation, and many are concerned about how it will affect the economy. In this episode, we’ll discuss what rising interest rates means for your wallet and how to make the best of it. In this episode, you'll...

How to Be Wealthy By Age! (Can You Catch Up?)

How much does it take for you to meet your retirement goals by age, and what are some common traps your peers fall into? Learn more about how to be wealthy, mistakes to avoid, and exactly what a little extra saving can do for your retirement income. In this episode,...