Do you think the Economy is Improving?
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?
Unemployment Rate
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.
Housing Foreclosures
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.
Quantitative Easing
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.
Deficit Spending
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
Recommended Reading
Shadow Stats – Shows the real rates of Inflation and Unemployment
Watson, Inc. – Will the Economy Collapse in 2011?
Balance Junkie – If you can’t Change the World
Punch Debt in the Face – Does the Economy Have you Down?
This post was featured on the Carnival of Personal Finance over at Simply Forties. If you aren’t familiar with the Carnival of Personal Finance, you need to check it out. It’s the greatest carnival on the net.
I believe that our economic problems were caused by the massive stock overvaluation of the late 1990s. I believe that we experience cognitive dissonance re stock overvaluation — we know on some level of consciousness that it is a bad thing but we block that knowledge from our minds because we like the temporary gains. It usually takes several crashes and years of economic stability to break through the mental blocks.
On the three earlier times when we permitted stock prices to reach insanely dangerous levels, we had to drop to valuations of one half fair value (that’s a 65 percent drop from where we are today) before we reached capitulation and were able to begin a new growth cycle. So I am looking for at least one more major crash (and perhaps the Second Great Depression that may result from it).
The good news is that, after that crash, we will be looking forward to decades of solid growth, perhaps the greatest period of economic growth in U.S. history. If any of us have any money left!
Rob
Rob,
I sure hope we don’t have a second crash and a depression. There are still a lot of people on the edge and many more who are barely hanging on.
I am hoping for a long slow recovery, instead of a big spike. I am very impressed that the savings rate is still high and people haven’t gone back to crazy debt and spending.
I think that the US lost a lot of credibility with QE2. Even the *liberal* newspapers are starting to talk about the US massive deficits and how QE2 is a mistake, as well as the coming devaluation of the dollar. You know that they’ve made shockwaves when you start reading those sort of viewpoints in a mainstream newspaper and not Zero Hedge.com.
Personally, I don’t know where this is going to lead. I think that wealth and power will continue to shift from west to east. As you said, the voters are very reluctant to give up their entitlements, so what may happen is that the value of those entitlements may be destroyed anyways through devaluation. It’s certainly not a pretty way to go about things, but the way things are now, the government may be caught between the frying pan and the fire. No matter which way they go, someone, somewhere, will call for someone’s head to roll. There are no easy solutions out.
Kevin,
The deficits have always been a problem, but in the last two administrations it became a disaster. There is no easy way out, besides inflation and/or devaluing the dollar. Paying off $13 Billion in debt is going to take generations. QE2 is not a solution, it’s a problem. We need to stop printing money now.
The thing that really makes me angry is where most of this money went. It went to investment banks, auto manufacturers, millitary suppliers, oil companies, big agribusiness and other connected entities. And, we as taxpayers are going to have to pay it back.
The only positive thing I see is that people are really angry and they are starting to do something about it at the polls. I hope more heads roll in the next election.
Bret,
I agree. When we talk about the welfare/warfare state, we should keep in mind that most of this welfare is not going to poor Americans in the form of food stamps or anything like that: most of it is going to entrenched interests, whether it be public sector unions, big military suppliers, or other vultures feeding off of state privilege like Monsanto.
I am even more skeptical of “businessmen” who claim that they will run Washington like a business than I am of the leftists, because while the businessmen talk the free market talk, they actually walk a “let’s help out our buddies and friends and shut out the competition” walk. At least the leftists. although I don’t support their means, are honest about their goals.
Kevin,
I have said on this blog many times, the only difference between Democrats and Republicans are the special interests they represent.
Being a registered independent, I have an open mind to any ideas that benefit citizens and strengthen the country. Unfortunately, what I see is a lot of graft and corruption from both parties. That’s why politicians are being evicted from office and I expect that to continue into the future. I would love to see the rise of a strong independent party to challenge the establishment.
Bret,
Is a split answer allowed? The economy is getting better, but it isn’t taking everyone with it. I like to use the abnormally (historically, in fact) high figured of the unemployment duration tables to see where we are: http://www.bls.gov/news.release/empsit.t12.htm
-Paul
Not only is a split answer allowed, I think your answer is 100% correct.
There are a lot of permanently displaced workers and many of them are aging professionals. I have a lot of friends who have been out of work for a long time and they are completely discouraged. The BLS unemployment duration figures from your link are an accurate indicator of this problem. And, the improving economy isn’t going to completely resolve it.
Hi Bret, I can find little here to disagree with. That job loss chart is a real eye opener. Sadly, I think many of those jobs have been outsourced and aren’t coming back. Unemployment is probably about 22% according to John Williams, and for Gen Y the number is much higher.
Personally, I think the Fed knows it’s bad and will get worse soon, and that’s why we have the QE2. They are trying to save Christmas. I think it won’t help and a double dip will be apparent soon. Even here in Dallas where the economy is pretty strong I saw few people shopping and dining during my parents’ recent visit.
The increase in ag futures prices has just started to be passed on to the consumer. Expect sticker shock at the supermarket in a few months.
Jennifer,
You are so right. I hear there will be record prices for Thanksgiving Turkey this year and gas prices are almost certain to skyrocket next year. There is no way prices are going to remain stable with the current monetary policy and future global demand. The posted inflation and unemployment rates are a joke.
Wait until you see my next week’s post. It is really going to be an eye-opener.
Is the economy improving? I guess it depends on where you live and what you do. If living in the Midwest’s industrial heartland and you’re a machinist by trade, chances are you don’t feel so secure in your job, if you still have one. Farm workers in the SF Bay Area delta? EPA rulings on the delta smelt may have cost you your job. A police officer in Hamtramck, MI? Your city may file for bankruptcy. Oil and gas engineers working in Texas? Doing great if working on projects overseas. A federal government worker in Maryland? Probably doing OK.
Thanks for stopping by Andrew.
The level of job security has consistently diminished throughout my career. I think this is more of a trend than a reaction to the recession. At this point, it’s safe to call job security an oxymoron. Even the traditionally safe government jobs are going to be under heavy pressure in the near future.
I firmly believe making your own income or generating a side-income is going to become the new security blanket.
I think the economy is in terrible shape and is being propped up by too much government meddling.
If the government refuses to 1) cut back its current scope of responsibility for everything from retirement to healthcare, and 2) stop bailouts for the bankers who want to save their businesses, the unions who want to save their jobs (see: teachers) and pensions (see: autoworkers), and distressed homeowners (see: those who bought more home than they could afford), then we will continue to limp along until the money printing by the Fed collapses the dollar.
We need to take our lumps now and let the creative destruction of capitalism cleanse the system and get our economy back in balance. Yes, it’s gonna hurt a lot. But I promise everyone that the alternative will be much much worse.
All the best,
Len
Len Penzo dot Com
Len,
Amen on the government meddling. I think people are finally starting to catch on. As Ronald Reagan said:
“Government is not the solution to your problems. Government is the problem.”
It’s amazing to me that people keep voting for more government. I think it is finally starting to change course with the Tea Party. Hopefully, they can weed out some of the more extreme elements, so their platform will appeal to a broader base of voters.