I don’t trust government economists or politicians. I think their political agenda clouds any objective disclosure, resulting in a positive bias. In other words, they lie to make us feel better, so they can get elected. According to most economists and politicians, the economy is slowly improving. The recession technically ended in June of 2009 and unemployment is officially back down to 9.6%. Inflation is allegedly hovering around 1%.
My opinion is the economy is a mixed-bag, especially in the long-term. Some groups of people are going to do very well, while others will face deteriorating financial conditions. I believe the wealth divergence will continue to grow and the rich will get richer, while the poor get poorer. I also think the huge deficits are going to cost America in terms of security and opportunity. But, I’m more interested in your opinion. What do you think about the economy?
The unemployment rate is always the most critical economic indicator. The more people who are out of work, the longer it is going to take the economy to recover and the more painful the recession is on people. It’s one thing to have the stock market drop or oil prices go up. It’s quite another to have people losing their jobs and homes.
My opinion is the unemployment rate isn’t going to drop for a while. There are too many huge drags on the economy, such as housing and the deficits. Businesses are taking advantage of the recession to keep productivity high. So, they are squeezing all of the work out of existing employees, instead of hiring new ones. There is also a lot of structural unemployment, which means entire industries have disappeared or permanently downsized and those jobs are never coming back.
Foreclosures were the trigger for the financial crisis and they are the most difficult problem to overcome. Because housing prices rose so high compared to real wages, young couples couldn’t afford to buy houses. And, people who bought houses during the peak or refinanced them at the higher values couldn’t afford to keep them.
My opinion is housing is going to take years to recover and a lot of money will be lost. No amount of stimulus or government intervention is going to solve this problem. The only real long-term solution is that housing becomes affordable and loans become available. This means that housing prices have to drop or real wages have to rise. Lenders have to wade through their foreclosure mess and start to lend to qualified buyers.
Without getting too technical about QE2, the Fed’s plan is to use $600 Billion to repurchase their bonds in an attempt to lower the interest rates. Here is the shaky part; the Fed doesn’t have $600 Billion. So, they are going to print the money, which may lead to inflation. The Chinese and most other nations that hold our bonds have soundly criticized the plan.
My opinion is QE2 is a national embarrassment. It’s like paying off a credit card with an IOU. The government has to get its spending under control while we still have any shred of credibility left in the world. The only thing holding up the dollar is the financial mess going on in Europe. We will see much higher prices for food and commodities in the next couple of years.
Now that the election is finally over, the government is attempting to address the deficit. A bipartisan commission made a number of recommendations, most of which will be difficult to pass. The proposal includes, cuts to Medicare and Social Security, reductions in federal spending, higher taxes and elimination of the child tax credit and mortgage interest deduction.
My opinion is the government doesn’t have the guts to pull the trigger on this plan, even though it is absolutely necessary. I would prefer to see them make the spending cuts before they are allowed to raise taxes, otherwise they will fritter away the new tax revenue, instead of reducing the deficit.
The Bottom Line
The bottom line is the economy is in the fragile beginnings of recovery. The government has to be patient with the poor state of the economy, while avoiding any actions that would disrupt the recovery.
What’s your take on the economy?
“It’s a recession when your neighbor loses his job; it’s a depression when you lose yours.”
Harry Truman – 33rd President of the United States
Shadow Stats – Shows the real rates of Inflation and Unemployment
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