We tend to think of startling noises as the attention getters in our lives, but have you ever been startled by silence? I don’t know about you, but there is an internal clock inside of me that always awakens in the middle of the night when the power goes out. There is an awareness that realizes “something in my environment has changed”. Without electrical power quietly energizing my home, all the noises that my subconscious mind has tuned out as “normally recurring aspects of my environment” suddenly disappear. Instantly, things like a humming air conditioner compressor, buzzing refrigerators, and chirping baby monitors vanish into silence. I’m aware and thus driven to investigate. “The power is just out”, I quickly conclude as I drift off to sleep long before the temperature rises.
There is a timely documentary being released soon that I encourage you to see. The film “Money for Nothing – Inside the Federal Reserve” debuts this October. Now I have not yet seen the film so cannot comment on the quality. What I do know is any attempt by a filmmaker to help us better understand the ubiquitous role the Fed plays in all of our lives is worthy of our attention. The Federal Reserve (The Fed) is the entity that quietly delivers power to all our financial lives, and few people seem to appreciate the magnitude of their role. Much like a lineman, either one employed by a power company after a storm or a beloved sports franchise during the big game, their role remains mostly anonymous until something happens that makes us appreciate their significance. It’s only through the disruption of our comfortable plans that they become the dreaded “household name”.
Each day thousands of baby boomers are entering retirement, and I cannot think of a better way of preparing for that new reality than to better understand the state of the economy into which we will all be retiring. Investing and financial planning involve drafting an ideal lifestyle plan within a certain set of rules in order to optimize the potential for successful outcomes. My professional role bears many similarities to that of a guide or navigator. As a result, I’m driven to always be exploring the nature of the surroundings into which clients are retiring into. It’s me they call when they need to understand the source of the silence.
Perhaps the easiest way to understand the massive role the Fed plays in each of our lives is to consider the following reality – the average baby boomer paid more for their last car than they did for their first home. You likely know this from experience, but if you are someone who relishes facts than the median price of a home in 1970 was around $24,000. As someone who only buys used cars, I struggle to keep the purchase price at that level today.
When I speak with investors across the wealth spectrum and across the nation, each possesses a basic understanding of this subtle dynamic of everyday life. We know this dynamic as inflation. Inflation is the name we give to the monetary phenomenon that leads us to observe paying higher prices for the things we invest in or consume. The intention of this brief article is not to dive into the mundane depths of monetary policy, but to attempt to provide clarity on one of the most critical financial dynamics of a peaceful retirement.
An important starting point to better understanding the mysterious nature of inflation, and the role the Fed plays in creating it, is to dispel a potential myth in our thinking. Contrary to popular belief, inflation is not a natural or random phenomenon like wind or rain. In other words, it’s not just a byproduct of being alive. For decades inflation has actually remained a deliberate act of policy. It’s one of our collectively agreed upon rules. This basic fact is what prompted us to ask the question in last month’s article – “Why would a society voluntarily choose as a rule constantly rising costs to our standard of living?” The answer has to do with another monetary phenomenon from your college economics courses called velocity. Velocity refers to the rate at which money flows through participants in an economy. For me, the best way to understand money’s role in the economy is to consider blood’s role in the human body. Blood must flow at an optimally efficient rate for the body to remain healthy. The same is true for money. The major difference between these two examples is that in the human body blood flows naturally in most instances without intervention. Nature handles the optimization effortlessly. The moment we intervene in this process we introduce the notion of unintended consequence or “side effects”.
There is a deeply held belief underlying the current rules of our society that an economy must be intervened with in order to function at optimal efficiency. My intention is not to offer opinions or judgments about whether this is a desirable condition or if it’s even true. My hope is simply to spark the curiosity within you to examine it for yourself. Despite all the political theater currently taking place, let there be no doubt that the Fed is powering the economy. Even though you don’t hear the sounds of the power they apply, their involvement impacts everything from the value of your home to the price of making groceries and even the returns we achieve on our investments. To understand how to optimize your plans for success in retirement, you must understand the role of the Fed.
I hope you will view the film. To motivate you using an analogy we can all relate to, think of it as a process of shopping for back-up generators before being awakened by the silence. Because simply understanding the source of the silence is what permits you to resume resting peacefully.
Your trusted guide and friend,
Brad F. Fortier, CFP®
Certified Estate Planner™
President, Fortier Financial
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing.
Securities offered through LPL Financial, Member FINRA/SIPC