Sunday, June 21, 2009

Shell shocked by the economy? Or is it just post-traumatic stress?

Comedian George Carlin isn't the first person many of us think of when we try to figure out economic trends. But his classic riff on the evolution of shell shock, about one minute into this YouTube video, popped into my head as I tried to sort through Kansas City Fed president Tom Hoenig's estimate of our coming inflation prospects last week on CNBC.

Economic forecasters worry that all the stimulus money that no one is spending fast could send inflation rates skyrocketing when enough of us feel confident enough to start spending again. Some of them fret about rerunning the bad old days of stagflation 30 years ago, when prices soared but the rest of the economy sputtered along. Something like that could happen again, though blogger Steve Saville, among others, argues we should call it an 'inflationary recession.'

I don't care as much about what to call it as much as I wonder how to deal with it. Last time around, former Fed chairman Paul Volcker slammed on the monetary brakes to stop the price increases. It worked, though a lot of us went through the windshield. I really don't want to do that again because bouncing back now seems tougher than 30 years ago,

But maybe we won't have to do that. When you think about it, surviving a recession is pretty good street-level training for dealing with inflation too. Either way, your most pressing problem at the kitchen table level is that your dollars don't go as far as you need them to. The Bureau of Labor Statistics has a calculator to help you measure how well you're keeping up or not. Many financial planning websites across the country also offer this calculator to help you tweak your own consumer price index projections.

Many of your basic strategies for dealing with recession or inflation are the same too. Jilian Mincer, a former Kansas City colleague now at The Wall Street Journal outlines the basics. You need to control spending, clamp down on debt, build a cushion and regularly review your investments to make sure they are appropriate what's happening at the moment. And those second, third and other income sources we cultivated to get through the recession will become more valuable if prices start going nuts again.

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