September 24, 2008
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The economy…
If you’re a normal person living in the US and you happen to be listening to the news you’re probably completely confused about what’s going on in the economy. You’ve heard people screaming gloom and doom but you personally don’t see anything different. If your economic status has sucked before it sucks just as much now and if you were on the up and up you’re still on the up and up unless you’re one of the unlucky ones who worked for Lehman Brothers. Maybe you monitor your 401k like a hawk and see it spiraling downwards, but mostly you’re thinking huh? what? who?
That’s normal. We’re not all economists and even our economists don’t really understand this monstrous economic system we are stuck in the grips of.
But we’re afraid. We heard the horror stories of the depression and we keep hearing that word come up again and again on the news and we imagine where our future lies? Will we be in soup lines? Will we all be out on the street? Will prices skyrocket? Will this last years?
Well that scenario is unlikely. Prices will rise as will unemployment, but probably, hopefully not like the depression. I don’t believe there is, amongst normal people, nearly that much of a lack of faith in the economic system to bring about that outcome.
However, there is a big problem it’s just that people aren’t explaining it to you very well. Here’s a quick and easy explanation: Nobody has any money.
You see it went like this salaries kept reducing relative to inflation, jobs kept being lost, and those jobs that were created weren’t making anything of particular value to anybody in the world. We were very productive at making this nothing mind you, our productivity has been on the rise, but there wasn’t any value behind our frantic activity. The one thing we made A LOT of is houses. We made way too many of those.
So then to keep up our standard of living we took out loans. In other words businesses sold us more nothing and we bought it with credit cards and mortgages and complex things that don’t make any sense. And all these loans had interest rates of course. So as time went on we owed more and more and more. In some sense we were over-exuberant arrogant money wasters. But in another sense we *had* to because the our salaries by and large weren’t increasing and yet our essential expenses – housing costs, energy costs, and educational costs were skyrocketing. Even the price of food has been on the rise. Most people can no longer afford to pay their bills. OF COURSE you take out loans if they are available and pray that things turn around eventually. It’s better than starving and being out on the street right? And maybe if you pay for your kids to go to an expensive college maybe they’ll have more luck than you. It’s the wishful thinking approach to personal finances.
Eventually that taking out of debt caught up with everyone and the big businesses started realizing all these loans they’ve sold actually aren’t worth very much at all because the people who have these loans can’t pay them and probably never will be able to. And the physical assets lying beneath most of these loans, the houses we built were dropping in value too because we built too many of them.
In effect Wall Street realized that a lot of businesses who said they had lots of money actually had no money. Because their money was intrinsically tied to yours and mine. And so Wall Street started to take their money out. So what happens to the businesses if they have no money coming in from stocks? They collapse. Unless they ask or beg for help. But who do they ask? The federal government of course! They’ll save us! They assume that the government will be so afraid of an economic collapse they’ll have no choice but to step in. It’s wishful thinking again.
But here’s the problem…
The federal government has no money either.
Not really. Because just like the businesses it’s wealth is dependent on the wealth of yours and mine. So it too has been going deeply into debt to fund a bunch of social programs, tax breaks, incentives, bale outs, and a war or two on top of all that.
In effect the entire economy is sort of going Bankrupt. We ran up a debt too large for us to pay. And when that happens for individuals the solution is, take control of the individual’s economic decisions, sell off assets to provide the creditors as much of their investment as possible forgive the remaining debts so the individual doesn’t end up stuck in an endless loop of increasing interest. And then the individual starts over. Only with everyone well aware that the person filed for bankruptcy and hence unlikely to loan them any more money for the ten years or so the bankruptcy remains on their record. And then the individual has to work his or her ass off to make a living and build a life for themself. Hopefully they’ll be able to take advantage of a number of programs to help out people going through hard financial times. If they don’t, or if they aren’t lucky and can’t find job(s), then they are totally screwed. They end up on the street or filing for bankruptcy again before you know it.
So what do you do when a nation size economy goes bankrupt? Apparently you randomly give 700 billion dollars of tax money to all the companies in trouble, no strings attached, and then cross your fingers and hope the problem goes away. I read somewhere that that’s about $2000 per American tax paying household. $2000 we don’t have. Because we have no money. Oh and by the way in the process we’ll just give the treasury secretary near unlimited power over national finances. Don’t you just love wishful thinking?
People say this is a surprise. How could this happen? Right? But how come I’ve read numerous people over the years who have warned over and over again that things were going badly. That the economy is on the wrong track. That the system we have is untenable. But nobody had any incentives to alter their behavior, least of all the wealthy investors and executives that were making out like bandits, and our government didn’t have the will to implement laws (and eliminate laws where necessary) that would create incentives for people to alter their behavior. So sure there’s a lot of blame to go around, but ultimately this is a failure of government.
And that’s how we fix it. Ultimately we need to become a more productive wealth building nation again. Not a debtor nation. That means we need to do whatever we can to stimulate our economy. To encourage new businesses. To encourage more jobs. But that’s not enough either. We’re already in a big big growing hole as rates increase and while that’s hanging over all of our heads how can we focus on being productive? We can’t. So government needs to divert a great deal of money to bailing out our debts. Not just that of big banks and investment firms but that of individuals. Mortgage rates can be frozen and renegotiated. Individual debts can be forgiven too. It’s not that we don’t have enough people to live in all the houses we
built, we just don’t have enough people who can afford them. Prices will drop sure, but we also have to make it so individuals can afford the investment and compete over the houses that exist causing prices to rise again.We need to bring troops home and stop intervening in other nations not just because that’s expensive but also because people have more confidence when they feel they are safe and when they are surrounded by their loved ones. Also the military employs a great many productive and hard working members of our society, whose expertise would be better put to use at home, improving our infrastructure and creating wealth.
I’m not saying stay out of global affairs, far from it, but intervene more cautiously and more fairly. Use military force only as needed. If we can hardly afford to prop up our own economy how can we afford to prop up several other nations?
People need to believe they actually have a chance in hell of GETTING a job so that they start searching. And they have to want to do their job and do a good job at it. They have to believe it matters. They have to believe there is a point in trying and that there is hope for a better economic future for everyone. Not just here but everywhere in the world. That way they start employing their energy and creativity and wit and skill for the betterment of humanity, rather than deciding to stay in their parents basement and play video games until disaster strikes.
Every policy we implement should be focused toward those ends. Every choice the government makes should be made with thoughts of how does this make individual Americans more wealthy and more confident? That’s how you build confidence in the big institutions too, by building confidence first in the little guy. And confidence is the force that can propel our nation into a new future.
But without that kind of investment, the only result of any bale out will be throwing more money into a black hole. It’ll be just like the individual who can’t get a job. No matter how many times he or she files for bankruptcy it won’t help them. People will still not be able to change their economic fate without having a means to earn money. Businesses won’t thrive unless people have money to spend. That’s all there is to it.
