Whats Up With the Economy?

by Dual Income No Kids on July 10, 2008 · 0 comments

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

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