Anyone who’s lived through a recession or two can recognize the storm clouds on the horizon. Things are happening in the world and in this country that could easily make a mess of our economy. If that happens, those with high levels of debt and little available cash could find themselves in real trouble.
What are the warning signs of possible financial meltdown?
• First, the amount of American debt, both private and governmental, has climbed to frightening levels.
• Second, the ongoing conflicts in the middle East will serve as a reason (or possibly an excuse?) for the price of oil to remain high.
• Third, the current combination of blistering temperatures and lack of rainfall have resulted in drought conditions throughout much of the American west and heartland. Add to that damage caused by flooding along the east coast earlier this year and the prospects for agricultural yields are down.
• Fourth, interest rates have been climbing slowly but steadily during the last year and are now just below 7%. When the Federal Reserve meets in early August, it’s likely rates will climb higher still.
What will be the effects of these conditions?
Let’s start with the extraordinary levels of debt in this country.
According to the Bureau of the Public Debt, the national debt is now more than $8.4 trillion.
Increases in government spending overall, the cost of the wars in Afghanistan and Iraq, coupled with multiple rounds of tax cuts, have resulted in this record national debt. To make things even more precarious, much of it is owed, not to American citizens, as was true in the past, but to countries such as Japan and China.
Meanwhile, consumers have gotten in the habit of using their credit cards for everything from gas to groceries to college tuitions, which, when coupled with long-term debt such as mortgages, have created consumer debt loads that the Federal Reserve has termed "near record levels." This habit of charge-now-pay-later works until you reach your spending limit. Suddenly your source of funds is gone, and if you’ve been relying on credit cards to pay for necessities, you’re in real financial trouble.
The same holds true for government. If our “bankers” overseas decide to stop buying Treasuring notes and securities, our government could be in danger of running seriously short of funds.
And—here’s a thought that may not have occurred to you—as taxpayers, we are responsible for paying back money that our government borrows. So all of this debt, public and consumer, is our debt. Both as consumers and taxpayers, Americans owe a frightening amount....and, with interest accumulating, it just keeps growing.
What about the price of oil?
High oil prices don’t just affect what you pay at the pump. They hike the cost of almost everything sold in this country. Shipping costs, energy prices, manufacturing costs, travel fares; they all go up. And all this is passed on, in one way or another, to the consumer.
Now add in a years’ worth of bad weather.
In north central Texas, where I live, hay used to cost $3 to $4 a bale. The price now, after a grim year of drought, ranges between $8 to $10 a bale for hay that has to be shipped in from as far away as California.
Meanwhile, in much of the West, dust has replaced grass. Ranchers are wondering how they’re going to feed their livestock through the winter. Many are selling off their herds, which may drive down meat prices now, but will hike them in the long run. Crop yields have dropped in many parts of the country.
Add to this the damage caused by earlier flooding along the east coast, and we have a situation that will almost certainly result in higher food prices for the foreseeable future.
What Was Down (Interest Rates) Can Go Up... And What's Gone Up (Home Prices) Can Also Come Down
Finally, we have the chance that such rising costs will spur inflation, causing the Federal Reserve to hike interest rates. This could seriously affect two of the driving forces of our economy, the home building and home buying industries. People who took on overlarge mortgages in the last few years, counting on appreciation to build equity, may find any increase in their home's value wiped out as higher interest rates shrink the pool of potential buyers. Those with variable rates may find their mortgage payments rising.
Add it up—huge, ever-increasing levels of debt, high oil prices, bad weather throughout the country and climbing interest rates. This is a recipe for increased costs of living across the board at the very least, and at the worst, a recession that could really hurt wage earners.
So...just in case.... start stashing cash. Use the tips you’ll find on this site and others to cut your expenses, then bank the savings. Start paying off your debts, especially any high interest-rate debt such as credit cards. If any of your debt features a variable rate, check how much your payments might increase if the rate goes up, so you can plan how to handle that. Even better, see if you can switch to a reasonably low fixed rate without going broke paying refinancing charges.
If the economy goes south, money in the bank and smaller debt payments can help assure your financial survival. If the sky doesn’t fall—if our nation’s finances stay healthy—you’ll still have improved your personal balance sheet...and that’s always a good idea!
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