Economics: I Don't Get It
I have been watching the economic paroxisms of the United States with a sense of disbelief and amusement. The economic goings on I find bewildering. Here are some of the things that I just fail to understand.
We are told indebtedness in the United States by individuals and the government it at an all time high. Both the government and the individual American consumer are spending more than they make. There is a lot of cheap credit and the country looks to the consumers to spend. . . . spend , . . . . spend to make the economy go. There seems to be a widespread understanding that "we are living beyond our means."
Now that the sh** has hit the fan they are faced with a "recession". There is no longer enough credit to allow people to consume beyond their means and the economy is slowing down. The housing crisis is the best, but not the only example. People were buying espensive houses they could not afford. With little or nothing down and cheap credit. People were trying to create the American dream before they earned it. With no equity in the homes, homes decreasing in value and credit getting more expensive people have to walk away when they can no longer afford the payments and/or don't want to pay more than the house is revalued.
When I was in the market for housing one had to put down $25% of the value of the house and the guideline was that not more than 25% of your income should be used for housing (capital and maintenance costs.) What happened to this cautious approach to home ownership and money lending?
I suspect radical free enterprise and deregulation allowed parasitic lenders to change the rules.
A generation of people had grown up thinking they can have it all and borrow so they can have it before they earned it.
Well now there is an economic crisis. What is the solution? It seems the solution chosen was to stimulate spending. ( taxpayers are being send money to spend and federal interest rates are lowered, and lending agencies are being given access to cheap money. ) THAT'S HOW THE MESS WAS CREATED IN THE FIRST PLACE. More consumption may have helped the American economy when American people worked at making things but increased consumption by Americans only creates jobs in the third world.
I suggest this stimulus will fail. The wise middle class American will take the gift from the Federal Government and pay down some debt rather than spend it. It the government was serious about stimulating spending, the money should go to the poor and working poor, perhaps, by dramatically increasing the minimum wage. The poor will spend it on consumables ,for sure, for they have a pent up demand for necessary things. (Increasing the minimum wage is always argued against as inflationary). But making the "undeserving" poor less poor is so un-Americans .
It seem to me that the US government and consumer need to bite the bullet and feel the pain of getting their economy under control by paying down debt. Less consumption is called for, . . . not more!
It is only discipline in spending that will build confidence in the American dollar and give it real value.
The US has been paying for two wars on credit. Borrowing from the Chinese and Arab Oil Producing countries doesn't seem wise. Of course, government can always print money and devalue the American dollar.
When war was declared there should have been a war surtax enacted to help pay for it and a limit to profiteering by companies supplying the war effort. Instead, someone decided to give well off indiviuals and companies tax relief and pass the debt on to American's grandchildren and great grandchildren. This never made sense. If the present generation of individuals and corporations had to pay, the war might have been a lot shorter.
So far, Canada, has not been affected by the economic woes of the United States. If the recession is deep it will certainly affect us. Three reasons Canada has escaped being affected so far are: Canada lives within its means ( for over a dozen years Canada has suplus budgets, a portion of the suplus goes to lowering the debt) ; Canada is a resource exporting country (Think oil and minerals) and Canada is slowly lessoning its dependence of the US for trade. When Canada was accused of risking becoming a third World economy by deficit financing, it was a deliberate policy of the Liberal government to reverse this situation. It was not popular at the time by it has proved to be a wise policy.
One more wonder of the Amercian economic crisis is how quickly the fress enterprise types got their government politicians to prop their banking enterprises up. The most glaring example is the salvation of Bear Stearn Bank in one day. It seem to be true that if youown the bank $100 they hound you for it, if you owe them $1,000.000 they fall all over you to keep you afloat. It seems the economy cannot have one of its major banks fail. It looks bad. Whatever happened to the discipline of the market place.
It will be very interesting to see how all this works out. Americans seem to believe they can have both "guns and butter". Have you noticed no one ever suggests decreasing deamatically military expenditures.? Spend. . .Spend . . . Spend and all will be well. . . . . .Right!!!