The economic environment today is characterized by significant uncertainty – demand questions, pricing unease, regulatory uncertainty, monetary expansion, and concern about European debt defaults.  There is a record $4 trillion U.S. in circulation, and savings rates are historically high. Businesses are holding over $1 trillion in cash reserves and short term investments.  Individual savings total nearly $600 billion. Across the board, we are storing our nuts in case there’s a hard winter.

Groskopf
Thomas J. Groskopf, CPA, CVA

The Federal Reserve has reacted to that anxiety by pumping more money into the economy. Whenever aggregate demand starts to increase, the money supply has to contract at the same rate. If it does not, inflation is inevitable. There are steps you can take today to manage the pain, including borrowing at a low, fixed rate; locking in rates for labor and goods; and negotiating favorable price indices with your customers to blunt the impact of potential inflation.

Economic downturns also increase the risk of fraud within your organization. Perhaps an employee is struggling to pay his bills because his wife is unemployed, or maybe an employee has become disenchanted with the company because she is working more hours for the same pay. You must remain vigilant about monitoring your assets and income.

Unlike portions of the European Union, the United States continues to be able to finance its deficits at record low rates of interest.  This appears unlikely to change in the foreseeable future. The market for U.S. bonds remains strong throughout the world.  As a result, the federal government has been able to subsidize the recovery with expansionist monetary policies. Our greatest export is the U.S. dollar. 

Eventually, though, even the United States must address its rising deficit, or it risks the same sovereign debt crises as certain European Union countries. In 2009, 13 percent of total federal spending went toward interest on the national debt; at the current rate, debt service will eat up more than 34 percent of spending by 2015, which will lead to significant spending cuts or increased taxes.

As always, we will monitor economic trends and legislative debates, and we will keep you abreast of any changes that might impact your organization. For more information, contact your Barnes Dennig representative at (513) 241-8313.

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