Let's take a hypothetical Joe Blow. He is married and has a teen-age son. Like many Americans, Joe likes to live big: a big suburban mansion, a gigantic SUV, and, pièce de résistance, a sportfishing boat with not two but three 325-hoursepower Yamaha outboards on the back! Joe sells vacation/investment properties: condo units in partially completed new neighborhoods overlooking scenic brackish swamps in a hurricane zone. I have some questions about the effects of macroeconomic shifts on the financial outlook of the Blow family.
1. Joe's savings and retirement funds are tapped out, and he doesn't seem to be able to get any more loans. Nobody wants accept his prized possessions as collateral. What effect will rising interest rates have on Joe's ability to borrow?
2. The condos that Joe is trying to move are dropping in value. He hasn't been able to move a single one in many months. What effect will continuing asset depreciation have on his ability to earn commissions?
3. Joe's wife's credit cards are maxed out, and she doesn't seem to be able to get any more. What effect will inflation in China have on her ability to continue buying those stylish Chinese-made outfits she likes to surprise Joe with?
4. Joe's wife has planted some potatoes and squash in the back yard. What effect will rising food prices have on the cost of the produce she is growing?
5. To keep warm in the wintertime, the Blow family plans on burning their furniture. What effect will the rising heating oil and natural gas prices have their family budget?
6. Joe's son hasn't been able to get the student loans he needed to go on to college, so his Plan B is to develop a heroin habit and spend his days sitting in his room nodding out to music. He plans to pay for his habit by dressing up in some of his mom's sexier outfits and turning tricks. What effect will the economic policies of the two presidential candidates have on his business plan?
I am guessing that, in tackling these questions, an economist would most likely want to discuss whether what we have should properly be called inflation or deflation. Joe's assets are decreasing in value, and that is deflationary. There is also a great deal of volatility in food and energy prices, which might look like inflation, but then Joe's wages aren't rising to keep up, so there is no wage inflation. So perhaps it's a wash. What then is the optimum interest rate? There will certainly be some short-term pain, but it will make the economy more efficient in the long run. What was the question again?
It seems to me that a perfectly reasonable answer to all these questions is "none at all," but then I am not an economist. I am an engineer by training. And so here's a question I should be able to answer. Joe's stereo system is on fire. It kept blowing fuses, so he wrapped the fuse in tin foil, and then rats chewed through the speaker wires and shorted them out. What effect will graphic equalizer settings have on the sound quality of his stereo system?
None at all.