Doom and Gloom

The economic news has been a succession of doom and gloom for weeks.  There doesn’t seem to be any end to news such as massive layoffs (53,000 in one fell swoop last week), more bailouts (another $20B this morning to CitiGroup) and the downward spiral of consumer spending.

Consumer spending, financed by debt through credit cards and home equity lines, is falling fast.  The public has no confidence in the economy and their financial futures and are cutting back severely.  What spending is out there is being done with cash as people begin paying down debt and hoarding cash, natural reactions in such a climate.

The massive job losses have everyone scared about their own jobs.  With four million Americans now collecting unemployment compensation, 500,000+ per month joining their ranks and a very bleak Christmas on the horizon more retailers and manufacturers are likely to go belly up.

So much of economic activity is based on confidence.  When people feel financially secure they spend money.  Once they perceive significant threats to their jobs, homes and retirements they pull back.  This is normal human nature.  Much of the solution lies in restoring that confidence.  This slump is so severe the first concern is simply to halt the downward spiral.

Keynesian economic theory, that used during the Great Depression by FDR, is the classic solution.  This means using federal deficit spending to stimulate the economy.  Barack Obama’s plan will utilize this by spending federal funds on infrastructure and the coming green economic revolution.  He hopes to create 2.5 million new jobs.  To put that into perspective the economy will lose about that same number of jobs THIS YEAR alone.

In other words, if Obama’s plan works it will only replace the jobs already lost this year.  Now remember we need 120,000 new jobs each month for those new people entering the economy (population growth).  Even with the new plan we’re losing huge numbers of jobs.

Republicans are already trying to blame the recession on Obama just as they tried to blame Clinton for the first Bush recession.  It is just as likely the Phillies triggered this by winning the World Series.  The shocking lack of accountability by the GOP is nothing new, of course.

At some point taxpayers cannot continue bailing out huge firms.  The Treasury is, simply put, printing money to finance these rescues.  More money means that already existing is worth less.  The expanding money supply dilutes the value of the currency, already battered by Republican deficits.  Piling more debt on top of the massive debt which precipitated the crisis can only work for a short term.  In fact it may be that a classic Keynesian solution will not work because of the deficits Reagan and the Bush’s already ran up.

The foundation of our economic mess is DEBT.  We have run up trade deficits, federal government deficits and huge consumer debt.  America has run on debt for thirty years and the piper is playing his tune.  The time to pay the piper, as always, has come.  This is going to be painful and may last a long time.  Doom and gloom is going to be our constant companion for some time.

What to do?  First the government must halt the downward spiral.  Then it is a matter of gradually restoring confidence.  Once those with jobs begin feeling secure in those jobs they will begin spending again creating new jobs for those crippled by the slump.  As a family or individual reduce your debt as much and as soon as possible and do everything possible to keep your jobs.

If you are an investor this is a pleasant opportunity.  If you have little or no debt, a secure job and cash set aside for that rainy day this is a golden opportunity to get rich.  Stocks, homes, businesses, everything is available at rock bottom prices.  You get rich investing by buying low and selling high.  Fortunately 95% of investors do the opposite.  They bought stocks while the market crested over 10,000, homes were on the top of that market, and so on.  When the bubble burst and everything tanked they sold.  Bought high and sold low, the classic stupidity which makes people poor.  If you can invest now is the time.  Buy stocks, houses (these people foreclosed on have to live somewhere so buy rental units) and other properly researched investments.

If you do not understand how a company makes money steer clear.  If you don’t understand how an investment works run the opposite direction as fast as possible.  Meanwhile hunker down and survive.  Things will turn around, they always do.  The doom and gloom will, eventually, go away.

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