Friday, July 16, 2010

A Vote of No Confidence?

Its said that, if you look around the room and you can’t find the sucker, then perhaps its you. We may have finally learned who the sucker is.

Early last week, the news that consumer confidence indexes had taken a sharp drop, sent stocks plummeting, surprised pundits, and sent everyone searching for an explanation - unless, of course you were thinking clearly.

The Consumer Confidence Survey® is based on a representative sample of 5,000 U.S. households. Previously, the survey showed that consumer confidence had posted three consecutive monthly gains, and suggested that the economy was finally gaining some traction. Well, there was a big drop in June with a commensurate drop in stocks. Why? Well, I’m not sure about these surveys. I can tell you that on a basic level, some things have changed, perhaps permanently.

  • Corporations are not spending and expanding as before. They are holding onto their cash, they’re not hiring. They understand that to be profitable, they must streamline. They’re more profitable for just that reason. They see dark clouds ahead, they want to be prepared, to be one of the survivors. For that, they’ll need cash. They’ve learned.The general public has learned as well. We now realize that fully 70% of the GDP in the U.S. is comprised of consumer spending. In the aftermath of 9/11 we were encouraged to go shopping. It was a shock, and so we’ve learned. Now, Americans are closing their wallets, and there goes that growth. It is possible to see this as the first step in creating a healthy and viable economy. More on that later.

  • Until this recent economic shakeup, The U.S. consumer had, ashamedly, a negative savings rate. Our spending far exceeded our savings. Now, we’re balancing our budgets, living within our means, not living paycheck to paycheck. We’re paying down our debt. The new car, the bigger house, may not be necessary. It’s a change in mindset, its been a very long time in coming, and it is a very positive development.

What do we do now? We do the next right thing.The list is very long, but here's just one example of what must be our priority.

In light of the difficulties we are having, with millions of American families losing their homes, with the irresponsible allocation of taxpayer resources to the banking industry, it is unacceptable that lawmakers go home without voting to extend unemployment benefits to over 2 million Americans.

What can we expect?

Magic bullets? We need to stop believing in magic. An unemployment rate of 9.7%, means that Americans are experiencing a great deal of pain. Economists are looking for a 7% rate, which is an historically acceptable level, but is merely subjective. There is no reason to expect that employment may rise at a faster rate than we are seeing right now.

This is a long road back We’re seeing that perpetual growth is not possible. If we look at the economies of Europe, we see their unemployment rates at pretty much right where we are now. Good economic policy involves slow growth. Artificial growth, generated by irresponsible lending and borrowing, are the seeds of future problems. Permanent change takes time. Stable growth is slow, not drastic and dramatic. We’d gotten used to double digit returns on our investments, on bull markets in real estate that were propelled by irresponsible lending and borrowing.

Now, its time for the reality check.

For next time: The Steps to Financial Recovery


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