Walker - Pass The 7 - 2015: A Plain English Explanation To Help You Pass The Series 7 Exam

Even though I started investing at least a decade later than I should have, I am proud to report that my retirement accounts are now showing light at the end of the tunnel. If I keep funding the accounts and investing wisely, I could shave several years off my working life. On the other hand, if I get too lazy to make contributions, or if I invest those contributions foolishly, I could end up adding several years to my career, whether I want to or not.

What about youwill you be able to stop working someday? Even if you keep working, wouldnt it be nice to know you didnt have to at some point? Maybe you are already saving and planning through a 401(k), IRA, or other retirement account. If so, your financial future is subject to factors such as inflation, interest rates, recessions, corporate profits, and credit ratings.

Lets start with inflation.

Some of my ancestors came to Chicago long before American banks were insured by the FDIC and never really trusted the banking system. Several of my aunts and uncles would make purchases for washers & dryers or even used cars by pulling out a coffee can and grabbing a big roll of twenty-dollar bills. Unfortunately, if you put your extra cash in a coffee can, prices are probably rising throughout the economy. That means you are losing purchasing power as your money just sits there. Of course, it makes no sense to subject your cash to fire, theft, or flood, but even when you park your money in an FDIC-insured bank deposit, you usually find that the low rates of interest the bank pays do not keep pace with inflation eating away at your purchasing power. It might look as if youre earning more dollars, but because of inflation those dollars cant buy as much as they used to.

Inflation is sometimes described as the result of too many dollars chasing a limited supply of goods and services. If an early frost kills off an orange crop, the same demand for a limited supply of oranges will send the price of oranges and everything made from them up. Inflation is more system-wide than that, where the overall level of pricing for all consumer goods is increasing. Since many workers in the American economy have little ability to raise their own paychecks, inflation is a real problem. At first, maybe consumers will have more money for gasoline by cutting back on snack chips. Maybe they can pay the power bill if the whole family agrees to brown-bag their lunch for a few months. While its always nice to see American families pull together like that, the fact is we dont like to see the snack chip company or the local restaurants lose revenue, as those companies represent hundreds or thousands of families, as well.

A loss of purchasing power for consumers is a fairly obvious economic problem, but sometimes economists worry about the opposite scenario: deflation . While inflation can make things too expensive for consumers to buy, deflation can make things ever cheaper. With deflation at work profit margins at businesses will be squeezed, as the companies pay last months prices for raw materials and then struggle to sell their finished goods at next months cheaper prices. Thats assuming they can sell anything to anyonewould you rush out to buy something today if you knew it would be cheaper tomorrow? Wouldnt we all be tempted to put off our purchases indefinitely, waiting for the prices of cell phones, clothing, and automobiles to drop in our favor? That would lead to lay-offs. And then those workers would have less money to spend and less confidence in their ability to buy anything on credit.

About two-thirds of the American economy is driven by consumer spending, so if consumers arent spending, thats a problem. Therefore, the Federal Reserve Boards Federal Open Market Committee ( FOMC ) is forever monitoring and manipulating short-term interest rates in an attempt to find the right economic temperaturenot too hot, not too cold. An inflation rate of about 23% is generally considered ideal, although it isnt as if theres a magic button they can push to adjust the economy.

By moving their interest rate targets up or down, the Federal Reserve Board tries to achieve maximum employment, stable prices and stable economic growth. The Fed raises interest rates to fight inflation . To stimulate a sagging economy, the Fed lowers interest rates.

Inflation/deflation is measured by the CPI , or Consumer Price Index . The CPI surveys the prices consumers are paying for the basic things consumers buy (groceries, movie tickets, milk, blue jeans, gasoline, etc.) and tracks the increases or decreases in those prices. Sometimes economists exclude certain items which are volatile (food and energy) to track whats called core inflation . Why? A one-time weather event such as a hurricane could kill production of food and oil, sending prices upward, but that one-time event would not necessarily indicate that prices overall are rising due to excessive demand for a limited supply of goods.

Economists also monitor the PPI , or Producer Price Index . If producers are paying higher prices for materials, they will end up passing that on to consumers as much as possible. Perhaps youve seen the price of breakfast cereals jump dramatically. Did the demand for Corn Flakes or Special K suddenly force the $4 box of cereal up to $5.99? Probably not. Its just that the price of corn, sugar or rice has shot up recently and the increased cost is being passed on to consumers. Unfortunately, cereal producers will eventually hit the point where they cant pass on increased costs to consumers, and then their corporate profits will sag, and they will start laying people off, setting off a whole wave of bad economic news concerning a drop in consumer confidence, personal income levels, and employment rates. As well soon see, if the CPI and PPI are revealing inflation, the FOMC will raise interest rates to let some air out of the tires. If prices start to collapse we can end up with deflation, so the Fed will pump some air back into the tires by lowering interest rates.