Crash

Recently I’ve been finding all I’ve learned about economics turned on its head. As someone recently graduated from a university undergraduate program, I am not too far removed from economic abstraction. How economics should work, an ideal if you will.  Real world effects either confirm or confuse what’s been learned in the classroom. One such effect is to see how two accepted economic models react to a recession. On one side, we have the microeconomic model of the firm and it’s pathway to success, and on the other, the macroeconomic model of growth of a domestic economy. I accepted both of these models from lesson one. Now I see how one can work against another.

A Recession Fallout (Nuclear Winter?)

Credit Card Fallout?

If you really want to think about how scary this recession will be, consider this: Everything individuals and families were doing with their credit cards and homes, businesses were doing on a much larger level. Cheap credit pervaded every facet of the economy. From Construction to the Federal Government, expansion was fuelled by credit. Credit through low interest bonds, finance companies, and government debt selling. So how much of this credit-fuelled bubble is going to be around after this is all over? After this heavy recession and possible depression, how many companies will be left?

Cost of War

“War is the reciprocal and violent application of force between hostile political entities aimed at bringing about a desired political end-state via armed conflict.” – Wikipedia

What is it about America that sets this country apart? We’ve never warmed to metric systems or soccer. There is a real sense of American Exceptionalism. We are different, we like different things than everyone else. So what it is it? Why are we so different from the rest of the world?

Perhaps it is because we have not had a major national conflict occur in the continental United States since 1865. We have not suffered the destruction of war as Europe and Asia has.

Please don’t stimulate my economy…

Country Politician - George Bingham

In my other recent blog, In Defense of Capitalism, I argued that increased government activity would exacerbate this crisis. I argued that, in the long-run, investment will fix itself. As I read the news, I hear good and bad things. I cringe when I hear that the government is going to spend $850 billion for a stimulus package. But, I am encouraged when Barack Obama wants to cut taxes to stimulate the economy. I fear that government spending, on this scale, is bound to be inefficient and may makes things worse. But, I also know that tax cuts tend to stimulate economies in the long run. When people can spend their own money, they tend to benefit an economy. Money is invested wisely, looking for returns. The government is a bureaucratic mechanism that is extremely slow to work. When it does finally work, it tends to lend and trade favors not always for the social economic good. Governments tend to overspend on shotty merchandise. You need only look at the J. Edgar Hoover building to see how poorly the American government spends its citizens’ money. What makes you think they will use $850 Billion any wiser?

Money Supply Blues

Up up and away!

As I hear more and more about this economic crisis, the pundits and politicians’ voice begin to merge and it becomes a sort of white noise. There isn’t much sense to be made out of most the reports, so as a statistician I prefer to look at data and see what the real story is. Data sometimes lies, but to be frank it lies a lot less than politicians and businessmen scrambling to keep their jobs. I went to the Bureau of Labor Statistics (BLS) website for some graphic interpretations of various economic data. As I had said back in March, the United States is in a recession, perhaps the worst in a very long time. But what does the data say about this? Inflation is currently at 3.7%, not much different from last year. The unemployment rate (6.7%) increases every month, but we’re still nowhere near where we were in 1982 when the rate was around 10 percent. What really worries me is not the labor indicators, it’s the monetary indicators. Check out the latest data and you will see what worries me.

Despise not foul speculation

As any oil-watcher has noticed, the barrel of oil’s price has dropped dramatically in the past couple weeks. This afternoon, the barrel fell to $120. Considering at the beginning of July, the barrel was $147, that means is that in a little under a month, the price of a barrel of oil has dropped nearly 20%. To me, it shows how bidding in the market will usually overshoot equilibrium before moving back, much like a pendulum. What worries me is that this price drop has occured amidst cries of foul speculation, and proposed taxes on windfall profits. Who makes these cries and propositions? Politicians do, and since these events have occured simultaneously, I am afraid those same politicians will claim these asanine policies brought the price of oil down. Nothing could be further from the truth.

In Defense of Capitalism

In a recent opinion piece in the Washington Post columnist E.J. Dionne lays the economy’s woes at the feet of capitalism. From the article I believe Dionne is saying that a more governmental redistribution program would alleviate our suffering from this most recent credit crisis. I was most shocked to find that most Washington Post readers agreed with his critique of the system of capitalism. Many readers agreed with Dionne that the New Deal had gotten us out of the Great Depression, and a more active governmental role in today’s economy would make us better off. This shows a flawed understanding of the capitalist system. Although I don’t have many readers, I would feel amiss if I didn’t defend this system against such misunderstood attacks.

Rebate Check (part II)

If anyone is curious how Americans are spending that stimulus check, here’s a website dedicated to sharing those stories. Not surprisingly, many are using it to pay off debt. I’m sure that wasn’t quite the intention of the rebate, but it gets into the economy either way. If I purchase a dishwasher with the money, that increases the revenues of the dishwasher company. They can in turn reinvest that into growth (theoretically). If I pay off debt, I send money to Visa or American Express. They will in turn either reinvest that money or lend that money out again. There is a stimulus in the economy, but I would equate it to a burp. The money has been “digested” already; our economy will need real sustained growth to come out of this funk. Rebate checks are nice, but they fall well short of a long-term solution.

 

Rebate Check

There should be little doubt at this point that our economy is hurting. But, what does this mean? Besides the obvious fact that many Americans are now out of work, or looking for work, there is the predictable backlash against some scapegoat. Our economic woes aren’t our fault, they must be someone else’s. I recently received this email that perfectly illustrates what I’m talking about:

As you may have heard the Bush Administration said each and every one of us would now get a nice rebate. If we spend that money at Wal-Mart, all the money will go to China. If we spend it on gasoline it will all go to the Arabs, if we purchase a computer it will all go to India, if we purchase fruit and vegetables it will all go to Mexico, Honduras, and Guatemala, if we purchase a good car it will all go to Japan, if we purchase useless crap it will all go to Taiwan and none of it will help the American economy.

We need to keep that money here in America, so the only way to keep that money here at home is to buy beer, since those are the only businesses still in the US.

A new recession?

I just got my monthly update from the Bureau of Economic Analysis on the GDP. Apparently, growth is still positive (0.9%). This means that we still are technically not in a recession, and my guess is that we won’t be, barring some unknown shock. The worst of the housing crisis is over, despite the Case-Shiller housing index indicating still-falling home prices. Although these prices are still falling, this is a long overdue correction. Home prices are falling slower now, which indicates a near-bottom. If housing prices at this point haven’t caused negative growth, I’m not sure what will. With the world as global as it is, one must ask: is this piddly growth the new recession?