For years, we have heard dire warnings about how our economy is sure to take a significant downturn. They tell us that Social Security is running out in the relatively near future. The experts have been reminding us that the bull market we were experiencing would have to have a correction eventually. In the past three years, we watched our economy climb to record heights, surpassing the rest of the world’s economies by leaps and bounds. We watched as every socio-economic group’s situation improved. The rich got more prosperous, and the poor became the richest poor people in the world. Unemployment dropped to record lows, oil prices fell, and more fair trade deals in the international market became a reality. We had the strongest economy in the world. Then, the big Corona Bomb dropped. We became “coronaified” and didn’t even realize it right away. There is a possibility that recovery will happen equally fast, but that may not be the case.
The first changes we saw were international flights to and from China coming to a halt. Not long after that, borders were closed with Canada and Mexico, and all international travel ended. This restriction stopped much of the business that was happening with other countries and affected our economy. Oil prices plummeted because demand fell, and companies began to suffer. Sparks of worry were fanned into flames of fear with minimal effort, toilet paper became challenging to find, and the Stock Market had several loud hiccups. Schools and universities were closed, non-essential businesses were shut down, and people were asked to stay home. Manufacturing stopped, shopping stopped, business to business transactions stopped, and most of the economy stopped. Grocery stores and pharmacies remained open, but many of their shelves were bare.
There have been nearly 105,000 deaths in the United States listed as CoronaVirus related since December of 2019. As we now start into the seventh month of fighting this virus, there is little sign of it receding.
What Will Recovery Look Like?
The spending in this pandemic battle is looking much like our records of war-time finances. That history has taught us to expect inflation and high-interest rates when the war comes to an end. The Government recently poured more than 2 trillion dollars into the economy, and the positive effect of that will be coming to an end very soon. With fewer working citizens, there will be fewer tax dollars coming in to recover that large amount of money. Since many businesses could not survive the shutdown, unemployment will be a continuing issue. International trade has made changes, and when the pandemic passes, it will take a while for things to get back to what we have known in the past. International trade strongly influences our economy. Since it has been many years since we have been in this kind of financial situation, and technology has changed the business world so much, there will be things that we cannot expect because we have never experienced them before. Some of those things may even be positive. Experts are in agreement that the pandemic will pass, and most agree that recovery will happen, but slowly.
A simple way to define inflation is to say that the value of your money drops. What you used to pay a dollar for will now cost you a dollar and a half, or more. Inflation happens all the time, even in a strong economy. Most years, price increase occurs at a rate of 2% to 4% a year. The price increases do not happen with everything all at once, and consumers may not even notice what is commonly called a price hike. Inflation is when everything you have to pay for suddenly costs more. If the CEO of a company has been closed down for six months, he has still had expenses. When he finally gets up and running again, he will have to charge more for his product so that he can get caught up financially. The other problem that he will be having is that fewer people will be buying his product because they cannot afford to. His consumers have also been shut down and are struggling to get caught up. Inflation is a fancy word for the times when everything becomes more expensive than it used to be, and fewer dollars are circulating between businesses and consumers.
The inflation rate is a percentage of the cost difference during the year. If the inflation rate for a loaf of bread is 1% per year, you can expect it to be 1% higher in the next year. That cost increase will likely never go back down. That explains why your grandfather never paid as much as you will for the same services and goods. After both world wars, our country suffered from inflation. In the 1970s, there was worse inflation than during the post-war inflation eras. There is disagreement about what drove that inflation. Since the time of World War 2 until now, the dollar has lost value.
Supply And Demand
During a time of steady inflation, the availability of houses for sale will increase. The demand for those houses will drop. The cost of a home will decrease, but the interest rates will go up dramatically. There are other areas of the economy that will work the same way. In the case of some products or services, the demand will go up. The provider will not be able to keep up with demand, and the availability of the product will become scarce. This slow down in supply will drive the price of the product up. Supply and demand problems can increase with inflation and cause problems. The United States has experienced inflation far less than many other countries in the world and has seen fewer issues with supply and demand.
The good thing about this threat of inflation is that it is coming with some advanced warning. We have a little time to be prepared. If you are in the stock market, there are things that you can do to protect your investments. About the only thing most people can do is be sure their freezer is full, and try to build savings in preparation.