Translation?
Be careful, Jerome Powell. Be careful, Janet Yellen. We've never seen a fiat currency that enjoyed global reserve status get pushed to the limit.
Play with fire, you just might get us all burned. 🔥
A game of confidence
The U.S. dollar is the global reserve currency largely because it is considered the most stable currency in the world.
Foreign countries often hold U.S. treasury bonds in reserve to invest surplus funds, pay imports, and adjust the value of their own currency.
High demand for U.S. treasury assets allows us to borrow money at relatively low interest rates.
But when foreign countries lose confidence in the stability of these treasury assets, they start seeking alternatives.
A decrease in demand for U.S. treasury assets can lead to a decline in the value of the dollar relative to other currencies.
Hello inflation!
This means imported goods get EXPENSIVE.
This means purchasing power erodes.
This means a decade defined by inflation.
Why is inflation bad?
Because it stifles small business growth and society at large.
Small business growth, the lifeline of middle-class America, depends largely on the amount of discretionary income people have at their disposal.
Less discretionary income means less revenue for most small businesses, increased unemployment, and less money circulating in our economy.
While wealthier people spend a much smaller percentage of their earnings on necessities, inflation typically causes them to invest less.
This has negative consequences because capital investment is what fuels productivity. Less investment leads to less innovation, stagnates job creation, and accelerates economic inequality.
How to hedge against inflation
I don't have a crystal ball, but future rounds of stimulus and an increase in the money supply seem inevitable.
All roads lead to the money printer.
Inflation is already rattling small businesses and our broader economy. And we ain't seen nothing yet.
So what to do?
Keep tabs on inflation and find creative ways to fight it. Here are a few tips:
1. Cut costs
These seems like a Captain Obvious, but you'd be surprised how many don't know this most basic of rules.
One of the easiest ways to deal with inflation is by cutting expenses.
Check all of your expenses. Cut what isn't necessary and renegotiate what is.
2. Prioritize cash flow
Your business needs fuel to fly. Most businesses fail because they run out of cash.
Follow these 6 simple tips to manage cash flows and never run out of fuel.
3. Optimize your offerings
Make sure every product or service you sell makes a profit by identifying the average gross margin and net profit across all your offerings.
Maximize and adjust the offerings worth keeping. Cut out the rest.
4. Leverage technology
Improving processes in 2023 means leveraging technology to automate as many tasks as possible.
This allows you to accomplish more with less.
5. Focus on employee retention
Proactively communicate with your team. They're feeling the pain too.
If you can't afford to mitigate the costs of inflation by raising employee salaries, find creative ways to ease their financial burden.
Examples include allowing employees to work from home to cut down on commuting costs or offering stipends for child care, continuing education, or anything they find useful.
Don't lose talented employees because you failed to communicate.
Operating a small business is hard. Staying profitable in an inflationary environment like the 2020's will prove to be doubly hard.
As always, stay aware, stay educated, but most importantly stay cool.
Talk soon,
Old Man Winter
