Over the past few weeks, I have had the luxury of being able to spend some time at home with my family and in between other activities with them, I was able to catch various pundits preaching on TV or in news articles how the world was coming to an end because of the US economy. If you haven’t caught any of this on the news, feel free to do a google search or visit our friends at EconomyInCrisis.org and then come back to this post. If you don’t want to visit that site, here is the general message – Everything related to the US Economy stinks: the rate cuts don’t work, NAFTA is killing domestic companies, and several other ‘America’s Economic Policies Stink’ messages.
If you want to look at the very short term, I will agree that there is enough pain to be had for everyone and then some. That is a very easy thing to do. You are very likely to know someone that has been affected or will be affected by this current recession. Dwelling on this will actually help the recession stick around because the pessimism about the economy lowers consumer confidence. With lower consumer confidence, we will experience deflation, lower consumer spending, lower industry profits and higher inflation.
The period we are experiencing is more like a creative destruction period where the world as we understand it is being destroyed only to leave a more balanced environment. Without a doubt it is and will be for at least 6 more months – painful. We can only thank ourselves as we went out and purchased more expensive food, guzzling cars, mini-mansion houses, and slicker pocket cell phones. Many other countries did the opposite and suppresed the urge to burn more gas than their neighbor. For example, China has grown through more cautious investment by stock-piling about $1trillion in US Treasuries. So, there has been a natural imbalance between saving and spending around the globe.
All systems eventually reach a new equilibrium as it is natural law to do so and humans are not able to defy the laws of physics. Eventually other countries will need to buy our higher quality goods as they seek to raise their own standards of living. This will happen but it will not happen overnight. When it does occur, the US will need to maintain their goods at that higher quality and be there to sell. So, companies with higher savings rates will leak money to those on the opposite side of the imbalance. The strongest companies will be those that determine how to make it from now until then without freeing themselves of all of their employees and raising the unemployment rate / lowering consumer confidence.
Here are a couple of items to be optimistic about:
- US Consumers are more educated about how the financial system works and consequently are staying away from riskier investments
- US Consumers are beginning to save more money (per www.bls.gov) – 0.75% increased to ~2.5%
- US Consumers are beginning to get numb to the bad news and will spend again. For example, Amazon sold almost 73 items per second.
- Investors around the world view this recession as a “sale” on American investments and they are buying up US Treasuries.
- The US Government is taking reasonable actions to combat the decline.
I don’t claim to know everything but what I do know is that it is easier to report on bad news than good. So, as I listen to the pundits on TV, I am going to keep the facts in mind and hope that the steep drop turns into a slow climb soon.
Dana
