Personal Finance Advice

More trouble may be brewing for credit markets in the upcoming year.  The growing fear of inflation has caused many large institutional investors to pump money into the commodities market, forcing prices upwards as the market becomes over saturated. 

The assault on the dollar in exchange markets has not helped either.  This is a huge problem with so much of our nation’s debt being held overseas.  Foreigners are becoming more  and more reluctant to hold U.S. Treasury Securities. 

Right now, the annualized rate of inflation is higher than the yields offered on Treasury Bills.  A number of central banks have expressed dismay at this and many foreign entities are considering drawing down their stocks of dollars and dollar denominated assets.

I wrote about this type of scenario back in November when China was threatening a massive sell off of U.S. Treasury Notes as retaliation for proposed trade sanctions.  If the fixed income market becomes flooded with Treasury Securities, prices will tumble and send long term interest rates soaring.

Once it starts, it could become a domino effect, forcing other entities to get out of dollars before it’s too late.  The effect on future economic growth could be devastating.  If you think it’s hard to find credit now, you haven’t seen anything yet.

You can always tell how a state’s doing financially by looking at the tuition rates at the state run colleges and universities.  With local and state governments having difficulties financing their debt because of recent disruptions in the municipal bond market, a number of states have already started raising tuition fees.

Many families will also find it difficult to finance their child’s higher education with a home equity loan or mortgage.  Much of the wealth built up by the middle class has been lost, as home prices have plummeted in the worst housing slump in generations.

Some institutions have increased the number of grants they offer to help incoming students compensate.  It becomes essential for your child to apply for any and all grants and scholarships for which they might qualify.

Lawmakers are also trying to increase the limit on federal student loans which is capped at $3,500 for first year students.  With tuition costs rapidly outpacing inflation, this limit has been outdated for years.

This can be a drawback for families with low incomes that receive a high amount of financial aid, colleges and universities tend to offer aid packages up to the federal loan limit.  So, if the limit rises, the amount of aid you receive will more than likely fall.

On top of all that many lending institutions have stopped offering student loans all together.  While the Fed has been slashing interest rates since last fall it has had little effect on the rates of student loans which remain relatively high.  Coupled with much tighter lending standards, finding any kind of financing may become a daunting task.

While a lack of liquidity in the credit markets are providing a natural break in spending, many Americans are also tightening their belts with the prospects of recession on the horizon.  Consumer spending has slowed considerably over the last few months and it’s having a noticeable effect on the economy.

It is unfortunate that it takes this kind of situation for people to finally start thinking about saving money.  The amount of debt we have in our society is ridiculous.  For many people, their idea of budgeting is the limit on their credit cards.  The government is no better with the national debt at $9 trillion and rising.

It can be difficult to save money in our over commercialized society.  We are being constantly bombarded with marketing spam at every level, when you watch television or surf the web, we even get it from text messages on our cell phones now.

As ridiculous as it sounds, the current economic climate actually seems to encourage more debt.  Rising inflation and low interest rates greatly favors debtors rather than savers.  This can be misleading however, since our economy doesn’t exist in a vacuum.  With the dollar falling to record lows, the relative wealth of our economy compared to the other nations of the world is taking a serious beating.

It is really the savings rate of a society that builds up wealth over time for an economy.  Over the years, our society’s savings rate has dwindled and the accumulation of debt has grown to epic proportions.

As much it would help the economy for us to spend our way out of a recession, is that really the best thing for us as individuals or as a society?  Debt and credit can be powerful tools to help leverage your financial situation, too much of it however can be disastrous.  You need only look to our highly leveraged financial system to see how that is working out now.