Finance Issues in the NewsFinance Issues in the News

Economic IndicatorsEconomic Indicators

• Inflation: Overall rise in pricesInflation: Overall rise in prices

-The Consumer Price Index averages -The Consumer Price Index averages the prices for various commodities the prices for various commodities and tries to track overall inflationand tries to track overall inflation

• Unemployment: Tracks people out of Unemployment: Tracks people out of work and looking for work but not work and looking for work but not those who have given upthose who have given up

Why is too much inflation Why is too much inflation bad?bad?

• Prices too high-people can’t buy Prices too high-people can’t buy things-things-

• Factories stop producing as much-Factories stop producing as much-

• Factories start laying people off-Factories start laying people off-

• Laid-off people can’t buy things-Laid-off people can’t buy things-

• Life isn’t good for a lot of peopleLife isn’t good for a lot of people

• RECESSION!RECESSION!

RecessionRecession

Six months of:Six months of:

• People buying less stuff People buying less stuff

• Decrease in factory production Decrease in factory production

• Growing unemployment Growing unemployment

• Slump in personal income Slump in personal income

• An unhealthy stock market An unhealthy stock market

Can inflation be good?Can inflation be good?

• If your income goes up at the rate of If your income goes up at the rate of inflation then it doesn’t hurt you too inflation then it doesn’t hurt you too muchmuch

• If you owe money and there is high If you owe money and there is high inflation then the real value of your inflation then the real value of your debt goes down, which is good for debt goes down, which is good for you and bad for the people you owe.you and bad for the people you owe.

Economic IndicatorsEconomic Indicators

• Housing startsHousing starts• Gross National Product: The total value Gross National Product: The total value

of final goods and services produced in of final goods and services produced in a year by a country's nationals a year by a country's nationals (including profits from capital held (including profits from capital held abroad). abroad).

• Gross Domestic Product: The total value Gross Domestic Product: The total value of final goods and services produced of final goods and services produced within a country's borders in a year. within a country's borders in a year.

Economic IndicatorsEconomic Indicators

• Dow Jones Industrial Average: Dow Jones Industrial Average: Average of major stock market Average of major stock market corporation’s stock valuecorporation’s stock value

• NASDAQ: Tech stock averageNASDAQ: Tech stock average

• These aren’t officially economic These aren’t officially economic indicatorsindicators

• There are other, more boring There are other, more boring indicators like “factory orders”.indicators like “factory orders”.

Budget Deficit and National Budget Deficit and National DebtDebt

• Budget Deficit: How much the U.S. Budget Deficit: How much the U.S. spends vs. how much it makes spends vs. how much it makes (through taxes) each year. Currently (through taxes) each year. Currently about $250 billion.about $250 billion.

• National Debt: The total amount of National Debt: The total amount of all of our deficits added up. all of our deficits added up. Currently about $9 Trillion.Currently about $9 Trillion.

Who Do We Owe That Money Who Do We Owe That Money To?To?

• Our country sells Treasury Bonds Our country sells Treasury Bonds (T-Bills) to raise money. These bonds (T-Bills) to raise money. These bonds are guaranteed to be paid and the are guaranteed to be paid and the interest you earn on them is tax free interest you earn on them is tax free so people like to buy them.so people like to buy them.

• T-Bills are mostly bought by banks, T-Bills are mostly bought by banks, corporations, or rich people. Many corporations, or rich people. Many are from foreign countries.are from foreign countries.

Federal Reserve Board (The Federal Reserve Board (The Fed)Fed)

• The Fed regulates the banking The Fed regulates the banking industry and, to some degree, our industry and, to some degree, our economyeconomy

• The Fed influences our economy by The Fed influences our economy by raising and lowering interest rates raising and lowering interest rates and controlling the money supply. and controlling the money supply.

• This allows them to regulate inflation This allows them to regulate inflation and avoid recessionand avoid recession

The Fed Balancing ActThe Fed Balancing Act

• The Fed regulates the money supply The Fed regulates the money supply by buying and selling T-Bills.by buying and selling T-Bills.

• When it sells T-bills, it takes money When it sells T-bills, it takes money out of circulation. When it buys out of circulation. When it buys them, it puts money backthem, it puts money back

The Fed Balancing ActThe Fed Balancing Act

• The Fed also raises and lowers interest The Fed also raises and lowers interest rates because the amount of money in rates because the amount of money in supply determines how much it is worth.supply determines how much it is worth.

• If there is more money in supply then it If there is more money in supply then it costs less to borrow it (rates go down).costs less to borrow it (rates go down).

• If there is less money in supply then it If there is less money in supply then it costs more to borrow it (rates go up).costs more to borrow it (rates go up).

The Fed Balancing ActThe Fed Balancing Act

If interest rates are lowered, borrowingIf interest rates are lowered, borrowing

money to make purchases becomes less money to make purchases becomes less

expensive, and people are more motivated expensive, and people are more motivated

to spend money because they can get a to spend money because they can get a

better deal on the loan. Spending money, in better deal on the loan. Spending money, in

turn, stimulates economic growth, which is turn, stimulates economic growth, which is

what the Fed is trying to do in that what the Fed is trying to do in that instance. instance.

The Fed Balancing ActThe Fed Balancing Act

If there is too much money in the If there is too much money in the economy,economy,

however, people spend more money andhowever, people spend more money and

Demand increases at a faster rate thanDemand increases at a faster rate than

supply can match. Prices rise too quicklysupply can match. Prices rise too quickly

because of the shortage of products, andbecause of the shortage of products, and

inflation results. That’s why we can’t justinflation results. That’s why we can’t just

print more money to pay our debt.print more money to pay our debt.

The Fed Balancing ActThe Fed Balancing Act

If there is too little money in the If there is too little money in the economy,economy,

people don't have excess spending people don't have excess spending money,money,

and there is little economic growth. and there is little economic growth.

The Fed Balancing ActThe Fed Balancing Act

The Fed watches economic indicators closely The Fed watches economic indicators closely

to determine in which the direction theto determine in which the direction the

economy is going. By forecasting increaseseconomy is going. By forecasting increases

in inflation or slow-downs in the economy, in inflation or slow-downs in the economy,

the Fed knows whether to increase or the Fed knows whether to increase or

decrease the supply of money, which raisesdecrease the supply of money, which raises

or lowers interest rates.or lowers interest rates.

Federal BudgetFederal Budget

Federal Budget Expenses Federal Budget Expenses (2004)(2004)

• Social Security: 21.6%Social Security: 21.6%

• Defense: 19.9%Defense: 19.9%

• Medicare: 11.8%Medicare: 11.8%

• Medicaid: 7.7%Medicaid: 7.7%

• Interest on the debt: 7%Interest on the debt: 7%

• Everything else: 32%Everything else: 32%

Stufflebeam’s Financial AdviceStufflebeam’s Financial Advice

• Go to school after high school. Go to school after high school. • Find something you enjoy and do it Find something you enjoy and do it

for a living.for a living.• Pay yourself first. Put money in the Pay yourself first. Put money in the

stock market (mutual funds) and a stock market (mutual funds) and a Roth I.R.A. every month as soon as Roth I.R.A. every month as soon as you get a real job.you get a real job.

• Avoid credit card debt like the Avoid credit card debt like the plague.plague.

Stufflebeam’s Financial Stufflebeam’s Financial AdviceAdvice

• It’s what you spend, not what you It’s what you spend, not what you earn, that counts. Live well within earn, that counts. Live well within your means.your means.

• If you borrow money, the interest If you borrow money, the interest rate is the key number to know.rate is the key number to know.

• Don’t be a cheapskate but don’t be Don’t be a cheapskate but don’t be foolish either.foolish either.

• Ever hear of a savings account?Ever hear of a savings account?

Stufflebeam’s Financial Stufflebeam’s Financial AdviceAdvice

• Whenever possible, pay cash or Whenever possible, pay cash or don’t buy it. That probably won’t don’t buy it. That probably won’t be be practical for cars for homes.practical for cars for homes.

• Car expenses will eat up your Car expenses will eat up your income very fast. income very fast.

• Buy inexpensive and used cars.Buy inexpensive and used cars.• Avoid continuous but less expensive Avoid continuous but less expensive

stuff (a $3.00 coffee each stuff (a $3.00 coffee each day=$1,100 a year).day=$1,100 a year).