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How the Current Economy Works (in English)

How the Current Economy Works (in English)

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How the Current Economy Works – In English
By: Brian C. Beasley, CPWA®

Over the past 16 years, I’ve worked with some pretty wonderful clients. Their input has greatly shaped not only my business decisions, but some personal ones too. One of the best pieces of advice I’ve received has been, “SPEAK ENGLISH!” Without a doubt, our industry and the media have done a pretty good job complicating the economy and markets. Today, many people throw in the towel and say, “I just don’t understand that stuf
How the Current Economy Works – In English
By: Brian C. Beasley, CPWA®

Over the past 16 years, I’ve worked with some pretty wonderful clients. Their input has greatly shaped not only my business decisions, but some personal ones too. One of the best pieces of advice I’ve received has been, “SPEAK ENGLISH!” Without a doubt, our industry and the media have done a pretty good job complicating the economy and markets. Today, many people throw in the towel and say, “I just don’t understand that stuf

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Published by: Brian C. Beasley, CPWA on Sep 16, 2010
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03/08/2011

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How the Current Economy Works – In English
By: Brian C. Beasley, CPWA
®
 
Over the past 16 years, I’ve worked with some pretty wonderful clients. Their input has greatly shapednot only my business decisions, but some personal ones too. One of the best pieces of advice I’vereceived has been, “SPEAK ENGLISH!” Without a doubt, our industry and the media have done a prettygood job complicating the economy and markets. Today, many people throw in the towel and say, “I justdon’t understand that stuff.” That might work if you have a truly competent advisor that you can trust.But if you don’t understand the world you live in, you’re bound to make some big mistakes. Hopefullythis will help you make some good decisions moving forward.
The Economy
 An economy is people buying goods and services from one another. That’s it. Don’t forget it. It’s reallythat simple.
Key Concept #1: More people buying more “stuff” results in a bigger economy. Fewer peoplebuying fewer things results in a smaller economy.
The CIA World Factbook estimates that the size of the U.S. economy was about $14.14 Trillion in 2009.So who spends all that money? Let’s keep it pretty simple. The largest piece of the economy hastraditionally been the private sector. The other portion is government spending.Here is the government’s portion of our Gross Domestic Product (GDP) over time.
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The remainder of our economy is the private sector. This spending is from actual consumers buyingeverything from houses to cell phones to groceries. Currently, consumer spending is slightly less than60% of the overall economy. Let’s look at these consumers a little more closely.
Consumer Spending
 Most of you are aware that after World War II, our nation’s soldiers came home, got married, and had aLOT of babies. This Baby Boom lasted from 1946 through 1964, and resulted in a generation totalingnearly 80 million people. This generation’s impact on our economy is now common knowledge.There are two other major generations that followed. These were, Generation “X” (born between 1965and 1978) and Generation “Y” (born 1979-1994). Generation X is only about 20-30 million strong.Generation Y is nearly the size of the “Boomers” at 60-70 million, depending on the source.Research done by Harry S. Dent (www.hsdent.com) has shown that consumer spending peaks in our mid-40’s. This “peaking” in spending habits has been relatively constant for over 100 years.
Key concept #2: Consumer spending peaks when people are in their mid-40’s.
 Right now, the boomers have peaked in their consumer spending. They are moving into a phase of lifewhere they are more likely to save than to spend. The next generation is less than half as large. AndGeneration Y won’t hit their mid 40’s for another 10-15 years. We are likely to have a period where thereare fewer people in those peak spending years of their life. As a group, Boomers are shifting fromspending to saving—from borrowing to paying down debt. But there’s that other piece of the economy…
Government Spending
 The government (Federal, State, and Local) makes up 44% of our $14 Trillion economy in the U.S.Where does all that money come from? The government is almost entirely dependent on revenue fromtaxing the private sector. Here is the rough breakdown of that spending in 1968 and 2008.
 
Obviously, the Government provides a lot of services and help to people. The problem they are facingnow is two-fold. First, they are spending much more than they can bring in from taxes. Here’s anestimate from our recent 3rd Quarter Outlook:This is just the Federal deficit estimate, which assumes that our economy will grow at 4.5% in each of those years. Many states and local governments also have similar budget challenges.Secondly, our government owes a ton of money in debt (rock) and unfunded promises (hard place). In arecent speech by the Chairman of the Joint Chiefs of Staff, Admiral Mike Mullen said that the singlebiggest threat to our national security is the national debt. Adding public debt, government sponsoredentities (like Freddie Mac and Fannie Mae), and unfunded promises (Social Security and Medicare)—thetotal is over $100 Trillion!
Key Concept #3: Our government’s spending and promising habits are completely unsustainable.
What can the Government do?
 Our government can basically go down two paths. They can either reduce their spending or increase theirspending. Let’s talk about these:
Reduced Spending (austerity):
What might happen if government spending is reduced to balance thebudget?
 
The economy shrinks by the amount of the spending cut, causing some serious short-term pain
 
Public services get cut, reduced or eliminated
 
A political backlash toward anyone with the courage to make these cuts

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