As we have learned from the current economic crisis spending more money than you have in your pocket can be a disaster. When this happens as it has then we face a recession that affects everyone. It does not matter whether you are rich or poor, the cost of paying for goods rises. This includes the cost of groceries, fuel, utilities, insurance, and entertainment. The prices rise because we find ourselves cutting back on spending and when we do this our local and national businesses have to find a way to make up the difference.
When prices do go up we are stuck because the chance of those prices ever going back to what they were is unlikely. No one knows this better than our parents and grandparents, who have seen the world they once knew change dramatically over the years. Understanding how our government officials and the Federal Reserve operate keeps us in the loop on changes that are coming, and give us the opportunity to be prepared.
The overall structure of the Federal Reserve has always been one of its great strengths. When they falter, it is up to the Feds to see that problems are addresses. Throughout this process there must be a means finding a balance between decentralized regional planning, which preserves the strengths of the regional structure.
While the Federal Reserve has acted on its own to address problems facing our financial stability the process can be enhanced. When banking institutes and the government cooperate together they can alleviate problems before they get out of hand. We can make a difference at home by reviewing our financial spending. When we do invest after researching our options we can chose real and financial assets that will increase in asset values. This in turn will result in lower the cost of capital and improve the balance sheet positions of potential borrowers.
When debtors are in financial distress it can increase the fragility of the nation’s financial system. We have seen this example recently in regards to the many bank loans that are delinquent or in default. This affect then results in massive financial problems that include bankruptcies, and bank failures. When this happens every one begins to feel the crunch of the economic crisis. The cost rise while spending drops, and this creates an unbalance system that must be corrected in order for the financial system to get back on a productive track.
Understanding how the Federal Reserve works and uses our money can help our children as well. They will learn how are money not only affects the family lifestyle, but the global conditions of the markets as well. This prepares them to make good choices in the future.
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