Archive for the ‘economy’ Category

The Economist has an excellent piece up about the disturbing trends in the economy:

This compulsory return to thrift will be deeply painful; consumer spending and housing are almost three-quarters of GDP. Of the 1.2 million, or 0.9%, decline in jobs since December, about 700,000 are directly related to consumers: retail trade, transportation manufacturing and home-building. The rise in unemployment, from 4.4% in 2006 to 6.5% in October, is nearing that of 2001-03 and is not over. On November 19th Federal Reserve policymakers disclosed they expect the recession to last until mid-2009. Their inflation worries have evaporated; indeed, consumer prices plunged a record 1% in October from September, and by 0.1% excluding fuel and food, the first such decline since 1982. The Fed’s vice-chairman, Donald Kohn, said outright deflation “is a risk out there but it’s still small”.

I think this article, in pointing out the trends in the American economy (such as decreased savings by baby boomers as well as the sharp rise in consumer saving in the wake of the sky falling), also reveals the bigger problem in the American psyche: we risk and spend too much when things are going well, and immediately shock the system by saving as soon as things start to go bad, which makes things get worse. It can be argued that the extra saving is a good thing (and I agree that it’s what we should be doing in the first place!), but, simply put, by not spending as much money in an ailing economy, the economy is obviously going to do worse. Of course, it’s likely that what people are spending now is truly what they can afford, rather than their fake plastic money that created the piles of debt that led to this catastrophe in the first place.

What I fear the most is that this country (and the rest of the world) will weather this recession by being savvy spenders and savers, and immediately return to our old ways of boundless spending and unwise use of credit cards, again buying goods we can’t afford with our plastic friends. That would be sure to land us in another recession in the future, as the debt would, again, crash our system.

But, if we could only maintain our unprecedented level of spending with low savings coupled with unlimited amounts of credit, if we were to remain savvy spenders, taking less risks and saving more, would that mean a permanent shrinkage of the economy (proportional, of course, to the amount of workers in the system; as time goes on, the economy will “grow”, due to job creation, but the net spending per person will go down)?

Maybe this period of economic success was nothing but a hallucination, and we are now getting off the hallucinogens and waking up to reality. And that reality may be a smaller economy.

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During my brief excursion, readers, I had a chance to talk to some of my relatives that are or have been employed in organizations like the UN, the World Bank, and the IMF. And, my own views included, there was never a consensus on what has caused the economy to drop so much.

One said that it’s a direct result from the subprime mortgages, and the banks went bankrupt because they took too much of a gamble in granting said mortgages, as the subprime folks couldn’t repay their loans, and proved they deserved the “subprime” tag.

Another said is that it’s not the banks, but the government, in supporting the subprime mortgages, as well as the extensive borrowing in the public sector, hence our massive national deficit and our addiction to borrowing from the Chinese. Another key issue that was raised was inflation – the dollar’s value has decreased without wages going up to compensate for it, so real wages have gone down, resulting in worse buying power for the public and private sectors, which ultimately leads to more borrowing.

The third said that, for America, it’s just a psychological issue. People see the market going down, so they feel worse and insecure, so they sell – and, as a result, more people sell because they’re anxious that other people are apprehensive about the market. The reverse is true: when the market is true, more people feel optimistic and buy, and, again, the optimism is contagious, and more people buy. What’s needed to turn the market around? The courage to buy.

All interesting takes, and somehow, I think that all of them are true to an extent. With a collapse of this magnitude, I don’t think that there is a distinct cause — the market was pushed off the edge little by little, not with one fell swoop.