When you read or listen to political and economic news about some action and the result, did you ever wonder, “How did that happen?”
Physics majors ponder Newton’s Third Law of Motion: “For every action there is an equal and opposite reaction.” Across the global political and economic arena, the reaction to any action may not be equal, but there’s always a consequence. As the American sociologist Robert Merton (1910-2003) theorized in his Law of Unintended Consequences, often the outcome is not the one foreseen or intended.
Envision political economics as a game of chess. World chess champion Gary Kasparov observed, “Chess is life in miniature. Chess is struggle, chess is battles.” French-Polish Grandmaster Savielly Tartakower agreed: “The blunders are all there on the board, waiting to be made.”
Take Turkey. The bill for an overleveraged growth spurt in NATO partner Turkey, along with economic mismanagement by the increasingly authoritarian president Recep Erdogan, is coming due. Mix in sparring between Erdogan and President Trump over the jailing of an American pastor, Turkey’s growing foreign currency debt equal to about 40 percent of economic output, and inflation at 16 percent annually, and Mr. Market gets worried. Turkey’s currency, lira, is down 41 percent against the dollar so far this year, a plunge that worsened the week of Aug. 6, as Trump moved to double steel and aluminum tariffs on Turkey to prevent Turkish exports from becoming cheaper with its devalued currency.
Worries about Turkish debt hit the stock prices of American and foreign banks and other institutions involved in Turkish obligations, throwing ash clouds of doubt on the currencies and stock values of other emerging countries. This impacts emerging market and global mutual funds which may be held in your portfolios.
Then there’s U.S. inflation with our economic growth trend on a strong track. Following the 2007-2008 economic rout due largely from an overleveraged real estate sector, the U.S. Federal Reserve Bank initiated an easy money policy to stimulate economic growth. That included the lowest interest rates in American history and an inflation target of 2 percent annually. Add tax and regulation cuts and the stock market boomed with American GDP growing by 4.1 percent in the second quarter.
We have pointed out the possibility of inflation overshooting the Fed target, as it seems to be doing. The Wall Street Journal, Aug. 11, reported that consumer prices rose by 2.9 percent in the past year. Good news or bad news?
If you consume food, energy, and healthcare, among other things, your money’s buying power has shrunk. Rent costs are rising, bad news if you are a renter, good news if you own income producing real estate.
Rising prices offset wage gains but you may stay somewhat even if you get cost-of-living (COLA) wage adjustments or bonuses. Fixed pension payments that have no COLA adjustments, and most don’t, buy less over time.
At this juncture economic gurus don’t expect inflation to rise dramatically as the Federal Reserve Bank is likely to raise interest rates to cool the economy. Good news if you are a saver, bad news if you are a debtor with variable rate obligations. The rising cost of debt could slow housing starts and other ventures where economics depend on cheap money. (Read: Turkey).
Federal tax receipts have increased along with the growing economy, yet the budget deficit also increased with higher spending for Medicare, Medicaid, and Social Security. At some point, we will have to see higher Social Security taxes and Medicare premiums. Younger workers should plan on the retirement age for full Social Security benefits increasing to age 70 at some point. Work longer, retire later.
Remember Newton’s Third Law and the Law of Unintended Consequences relative to every important decision you make in life. That includes family, business, and moral decisions, and financial and investment decisions. That’s why all financial life planning decisions and plans must be monitored and adjusted to reflect changes and unanticipated outcomes. The changes may be big picture such as tax and estate law changes or major economic developments. They may be uniquely personal involving you, loved ones, business associates, and others that depend on you.
As writer and lecturer David Shenk notes, “Chess is rarely a game of ideal moves. Almost always, a player faces a series of difficult consequences whichever move he [or she] makes.” Ditto for life decisions. Planning helps to sort through options, consequences, and potential solutions if you’re wrong...or right!
Lewis Walker, CFP®, is a financial life planning strategist at Capital Insight Group; 770-441-2603. Securities and advisory services offered through The Strategic Financial Alliance, Inc. (SFA). Lewis Walker is a registered representative and investment adviser representative of SFA which otherwise is unaffiliated with Capital Insight Group. He is a Gallup Certified Strengths Coach and a Certified Exit Planning Advisor (CEPA®).