Sunday, January 27, 2008

Economics...'s been a while since I've written anything here. So what has brought me out of the woodworks? The economy.

There are many out there that are talking about the economy, and the idea of a recession, and how this will all be "bad" for the economy. I beg to differ.

According to an article in the "Tribune-Review", reprinted from the Chicago Tribune, entitled "Housing mess turns uglier than it needs to" (by Gail MarksJarvis) , this is the "worst housing slump since World War II". So that's 50+ years of inflating housing prices, inflating the dollar, and more - which really only goes to what I am going to say that much more...

The U.S. Economy is in a big need for a re-adjustment. The prices of goods are too high, and need a correction with respect to the dollar. True, the perceived value of the dollar will remain about the same, but it will strengthen the dollar in the process. This can be done through a forced correction - e.g. a restatement where X dollars is declared to now to Y dollars. The other option, is a prolonged recession or a depression.

What we are seeing in the housing market at present is a recession. People are not buying. Why? It's not simply recent issues with banks and brokers, mortgages, etc - though that is certainly a big factor. It's also the prices - housing prices, gas/oil, goods, etc. It's also a national debt issue.

Since the 1980's the nation has come to rely on debt - not just as a nation, but also for each individuals. While I don't have a reference, I have recently heard that the average personal debt is around $10-12 thousand. That's $10-12 thousand gaining anywhere from 3% to 25% (on average) interest per year. Figuring it at $10k, and 8%, that's $800/year in interest alone for just paying the minimum amount due; fail that and you have a fees add up pretty quickly. Assuming that that is the average over the year, that's $66.67/month in interest alone - plus the $833.34 monthly payment - yielding a total $900.01 monthly payment.

So, let' assume an average income of $40k - which, figuring a 25% tax rate, leaves $30k for use - or $2500 per month. After we subtract out the $900.01 payment that leaves $1599.99 for use. Take out the rent/mortgage, bills, food, gas, etc. and there would be nearly nothing left over at the end of the month to either save or buy extras with (e.g. PS3, computers, music, movies, etc.). What results is either people stall their spending or people go into greater debt. If people are financially wise, then they would first eliminate the debt and then start spending again - but only within their income.

Unfortunately, that is not so easy. Why? As a nation, we have come to be a "having it now" group. We simply can't wait for things. So give people money, and they'll likely spend themselves into more debt. Thus, the President & Congress's proposal to give an early 2009 tax refund ($1200/household, plus $300/child; for those up to a certain income level at which it starts going down) will work to get people spending because (like it or not) the majority will simply spend it. While it will work temporarily, it will not work in the long run. You'll have to keep doing it every year, and every year give a greater amount to keep up its effects. What the economy needs in the long run is for the average citizen to lower their personal debt, for the nation as a whole to lower personal debt, and for the nation to decrease the national debt as well.

Sadly though, the solution only goes back to the same solution as doing a natural occurring (non-forced by gov't) price fix - a prolonged recession, or a depression.

How would these help? First, they would put the country at a whole under an economic hardship. For many, it will mean bankruptcy as they will lose their jobs and succumb to the debt they built up. It'll also mean the rich will get yet richer as they will be the ones to more easily survive without much problem, though it will also bankrupt the "rich" - those who pretend to be rich but in reality are extremely in debt; their life style makes them out to be billionaires, but their income is negative - even if they are making a six-figure income.

This would also mean a lot of "IP" companies (e.g. patent trolls, etc.) will go under. The result will be that commercial software will see very hard times, and there will be a lot more open source products as numerous programmers who just love to program go without work and find projects to work on.

It will also likely mean the dollar will crash. But, in the end, the economy will become stronger for it.

But this is really nothing new. Years go - before we had the centralized Federal Bank, and even during its early years - the economy was very cyclical and adjusted itself all the time. Since the Federal Bank matured, economists have come to believe that we can maintain the cyclical-ness, but do so in an overall positive way. (See any Econ. 101 class.) What this means is that the depressions/recessions will be lessened so that the economy continues growing. This also leads directly to inflation, which results directly from the difference between the dip of the depression and the peak of the grown. (I.e. if it grows by 5 points but only recesses by 3, then there is a 2 point inflation going into the next cycle.) However, in reality, inflation can only be maintained for so long before it must be corrected.

It's the simple natural law - what goes up must come down. What inflates must deflate. Eventually the bubble will burst, and the balloon will be popped - you can only patch it for so long before it becomes just one bigset of patches that will give way and explode.

So, either you can take the bigger effects up front - such as we use to have - or you can take long periods of growth followed by extremely big depressions. Either way, the result will be the same, and life WILL go on.

Personally, I'd rather take the shorter cycles. Life would be a lot easier that way and we'd all learn faster that simple principles of living with less debt as the consequences will be more evident faster, and the dollar will be stronger in the end. It also means things will be a lot cheaper - at least by the dollar figure, and the term "a million dollars" will be something really significant again.