Whats Up With the Economy?
Hi All,
So, last weekend I got back to civilization from having taking a weekend camping in Virginia. Being in the woods away from 100% media access gave me a bit of perspective on the news. And, the news is that the economy is in rough shape. So, I'm trying to put everything together to figure out what the story is.
Its pretty clear that the US is a recession. But, what does that mean anyways?
Recessions are cyclical events which occur when demand slows down. In response to decreased demand, producers lay off people and decrease their consumption of raw materials. Unemployed workers have less money to spend, so demand decreases. Employed workers fear job loss so they spend less money. Investors fear the value of companies will decline so they are less willing to purchase stocks or invest. All these factors coalesce into a messy downward spiral. Bottom line: profits are down and its hard to get a job.
But whats causing it? There are several factors?
1) High Oil Prices:
Natch. This is the obvious reason. High oil prices are decreasing the efficiency of companies that specialize in transportation, heating and commodity production. When gas prices increase, then it means that people don't have the bucks to buy or invest in other things. Right, so if you're forking over 4 dollars a gallon, who's got money for a new lawnmower or a steak?
2) A Big Trade Imbalance:
In the first quarter of 08, the US had a negative balance of payments of 178 billion. Right, this means that we brought in 178 billion more of goods and services than we had going out. However, whats important about this is that we are importing consumption and exporting production. Right, so to put this in plain language, more of our economic life surrounds cheap stuff from Wal-Mart, rather than making cars, electronics, or durables. Basically, we are importing a ton of cheap shit and in return are loosing high paying manufacturing and professional managerial jobs to Asia.
3) The Subprime Mess:
- This is classic. Back in 04 you didn't have to be Merlin the magician to know that real estate prices were gonna come down.
The subprime mess is contributing to the recession in at least two major ways. First, a lot of people stopped paying their mortgages. Second, many mortgage loans were bundled together and converted into bonds. These bonds were partially secured against the cash flow provided by the mortgages. So when the mortgages went south the bonds became worthless as well. Its hit the balance sheets of many big financial corporations pretty hard.
Best,
James
Stumble It!
2 comments:
Hi James:
These are all great points. What do you think are the factors that will lead to a "happy days are here again" improvement of the economy?
Here are some observations from my family and friends: High oil prices are here to stay. I've heard some people say that after the November elections the prices will "surprisingly" drop down and become stable.... what we are seeing in high oil prices are part of a well oiled (excuse the pun) political machine.
I'm not sure what the solution would be for the trade imbalance, except to move to Asia or India myself for one of these "outsourced" jobs. My best friend and her husband own apartment buildings - when Katrina hit - they bought three buildings in Houston knowing many people would not return to New Orleans. They were right. Now they are investing in India for the new "professional" class of workers. (These same friends bought ten Nicaragua beach front lots four years ago for less than $20,000 - they held on to them, and are now selling them for over $65,000 each!)
Regarding the subprime mess - I think it just needs to work its way to correction - like the S&L problems of a few decades ago. Yes, it is a big ugly mess - but it will work itself out.
Anyway, I'd be interested in reading your thoughts about an economic correction.
MP,
There are at least two things we need to do.
First, the federal government has to balance its budget and pay off its debt. This means getting out of Iraq pronto and, I hate to say, getting out the entitlement business. My wife Miel strongly disagrees here, but I feel we should seriously consider more individual economic empowerment and less social service spending, at least at the federal level.
Second, and this may seem like a problem to some people We need to end corporate bailouts. Right, so the federal government and congress is constantly propping up big banks and outfits like Freddie Mac and Sallie Mae with tax payer dollars. Thats protectionism and I don't like it because it suggests that gov is more concerned w/corporate welfare than the general interest.
We need to let big corporations that take a risk to suffer the outcomes of that risk. If they screw up and go bankrupt, its their own fault.
Think about it, if you borrow money and can't pay it back, nobody will help you. Why should the big boys get a bailout.
Best,
James
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