If you understand how demand and supply determines the prices of all products and services, including the price of money (interest rates), reading the economy becomes very easy. Take a while and recall any auction you have attended in the past. You have surely experienced that a strong demand resulted in high prices as well as when there was a shortage on the supply side. By the same token, if there is a drop in demand with a stable supply, and/or when there is an over-supply, prices are lower. In a market economy demand and supply are the driving forces in the process of price determination.

In reading the economy it is also important to realize that dominant prices move in cycles. An up-cycle will always be followed by a down-cycle. When interest rates are relatively low, you can be sure it will be followed up by a “high interest rate” cycle. Good times are followed by bad times, and bad times again by good times, etc.

In keeping the price mechanism (demand and supply determines prices), as well as economic cycles in mind, let’s try to read the trend for food prices as an example:

Food prices are currently on the rise mainly due to a possible drop in supply, and a rising demand. We are aware of the fact that agriculture production is seasonal. We could therefore suspect the shortage in the food supply to continue for at least a season. However, judging from past experience, healthy competition between individual farmers and possible spare capacity (mainly due to farmers who found it not profitable, to work marginal land, during the relatively long low price cycle), food market prices should come down next season. Food retailers could specifically benefit from such a happening.

In predicting interest rates, using the same tools, we could anticipate that interest rates should be rising as soon as World economics starts recovering. Higher growth will therefore increase the demand for money, and interest rates will start rising again.

A word of advice

Please don’t increase your personal debt, unless it is to expand your business operations. You should also make provision for the higher interest rates we are expecting. Make therefore provision for higher fixed costs (more interests to be paid), in your cash flow projections.

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