I have pondered recently what I think the economy is doing and will do. The Pundit Review tries to link the most recent economic information to an "all is well" argument for the US Economy. However, the arguments do not hold for a variety of reasons not the least of which is common sense - you cannot have a housing collapse, a banking crisis, and huge debt and have a great economy. You have to be able to look at the signals being sent and bring them together. Unfortunately, I cannot see anyway that this economy is not going to slide into a recession. I believe this for four main reasons:
- We are overspent and in incredible debt. Both the Country at large and individuals are saddled with more debt than they can handle. Debt works when your growth rate is higher than your debt. This allows you to "grow out of debt". However, many have found they are in debt at much higher levels than any reasonable wage or economic growth will allow. Much like a ponzi scheme comes crashing down at some point, so this is now crashing down. This will lead to....
- My second reason: The American Consumer will stop spending. Because they can no longer use their home as a piggy bank I believe major purchases will stop dead in their tracks. As the consumer shuts down due to lack of funding, companies will begin shedding labor as they retract. And the vicious cycle will start. The question just is how long will it go and how deep will it affect the American family.
- Oil.. at over $95 per barrel and climbing, our fossil fuel economy is shutting down. We get kind of excited when gas goes down a little but the long term, mega trend is very clear: We are running out of oil at a very fast pace and the price is only going in one direction - up.
- The rise of China. George Soros even said that, "China is the "absolute winner" in economic terms, and will continue to see its economy soaring during the next few years.". China is sucking all the natural resources from the world mainly just due to its size and population. We are watching a Country go from an agrarian state to a modern industrialized nation in record time. Natural resources are being used a higher rate than we have ever seen and they will continue to be used at a very high rate even if China's economy slows down. This is just the "law of large numbers".
With the huge issues at both Merrill Lynch and Citi Bank how can one not think that this economy is on borrowed time? Citbank for example has already written down $6.5bl in bad subprime loans and now likely will write down another $11bl. Merrill, for its part, lost $2.2bl last quarter after writing down over $7bl in bad loans.
Then there is the US Dollar which is on probably the largest slide since I have been alive. Recently the dollar hit an all time low against the Euro and other currencies are experiencing the same thing. In a recent article in the Wall Street Journal, they stated:
""Expectations for Fed easing and a sharp deterioration in economic
conditions have encouraged outflows from the U.S. into emerging markets
and commodities, asset classes which seem to have shed their
traditional dependency on U.S. growth," said Sophia Hardy, currency
analyst at UBS AG."
As people abandon the US Dollar, they will be less likely to invest in our debt which leads to a vicious cycle. The Fed wants to (needs to) lower interest rates to stimulate the economy yet every time they lower it, the dollar devalues further and the desire to hold US Dollars decreases which, interestingly, puts upward pressure on interest rates counteracting exactly what the Fed is trying to do.
Unfortunately, the only way out of this is to get our Country out of debt which generally means taxes. Someone has to pay for our excesses we have enjoyed over the last few years. Further, spending EVERYWHERE is going to have to be severely curtailed. This includes domestic social spending as well as military spending. Bottom line: If Bin Laden's goal was to just bleed our economy dry, he has successfully done it. We cannot afford this war any further. We must:
- End the war - absolutely and completely and downsize the military.
- Raise taxes - We should immediately take the cap off of the social security tax as well as reinstate, fully, the estate tax.
- Curtail social security spending - it should be for retirement only.
- Have national healthcare (as a financial plan). The problem with Medicare right now is the only people using it are the old and sick. That is not how insurance should work. Insurance is designed, by definition, to have a whole bunch of people not using it in the plan. A national healthcare system would ensure that the young and healthy are in the same plan as the old and sick - the way insurance was meant to work.
We must also encourage saving and here are some ways:
- Repeal the taxes on interest. You should not be penalized for saving money.
- Remove the top limits on how much you can save in your 401(k)/IRA. Right now, we force dependence on SS because the Government penalizes you for saving too much money for retirement.
I am continuing to develop my thoughts on this topic but it is clear we are going into a very unstable time economically and we need a higher level of thinking (beyond the political soundbite economics) to solve it.