I recently wrote a post speculating that the media might be overplaying the economic troubles of the U.S. right now in order to assure voter anger at the Republican party in November, thereby assuring a win by the most likely Democratic candidate, Obama. JD, from the blog Techfun, wrote an in-depth reply that was so good I am publishing it here as a guest post. His take on the U.S. economy is scary, but unfortunately makes quite a bit of sense. Thanks JD… I think.
Here are his thoughts:
Maybe its because I am a financial/economy news junkie, but I think the opposite is happening in terms of how the media is reporting on economic news. I think the media is greatly downplaying the severity of the economic problems we face.
We are only in the beginning of what is almost certainly going to develop into a “perfect storm” for the US economy.
The Dollar is Falling. This would have HELPED us 30 years ago since it would have made imports more expensive and enticed the US manufacturing sector to increase domestic production which would increase earnings and help the wider economy. That scenario is no longer viable for two main reasons. First, many of the US factories that once would have simply scaled back domestic production in times of a strong dollar and cheap imports have instead either closed or relocated out of the country entirely. Secondly, one of our biggest trading partners, China, has a currency that has only recently been allowed to diverge from its relationship with the US dollar. At present, it has not been allowed to diverge enough to make it prohibitive to keep importing their goods. The current federal plan to address the situation in the form of rebates to tax payers in May will not help because it will be used to either pay on existing debt or to purchase more goods that are not manufactured in the US any longer.
US Consumer Debt. US consumer debt, including primary and secondary home mortgages is insanely high. Too many people believed that home values could keep showing significant rises year after year and behaved accordingly via refinancing for the higher values or taking out lines of credit based on the bubble-inflated home value. As a result, people making their mortgage payments on time and not spending anything on credit are still going into further and further debt every month as house prices decline. “Realtors chief economist Lawrence Yun said a survey showed 18 percent of homes up for sale in March had negative equity, meaning the mortgage was larger than the value of the home. This percentage, which represented homes that were either in foreclosure or involved in a “short sale” in which the house was being sold for less than the value of the mortgage, was up from levels around 3 percent during the 2002-2006 housing boom.”
Imaginary/Play Money. As Roger Bootle, a well known London economist who predicted the dot com bubble collapse puts it: “The essential truth is that umpteen billions of dollars have been magicked out of nowhere – and must return whence they came, no amount of financial gerrymandering can obscure or diminish this point”. He further said “Do not expect the current market turmoil to go away easily or quickly. It is not imaginable or fanciful, on the contrary it is the direct result of the creation, on a massive scale, of imaginary wealth in the housing and financial markets of the world, a mirror of what happened in the 1920s America and 1980s Japan.” (Bootle accurately described our current situation in his 2003 book Money for Nothing – Real Wealth, Financial Fantasies, and the Economy of the Future.)
U.S. Federal Debt Increases. When Clinton left office the National Debt Clock stopped and we actually started repaying loans to the US Govt. In the time since Bush took office we have lost all those gains and gone so much further into the red that Congress has had to raise the debt ceiling (the amount the govt. is permitted to borrow) four times in five years. Three of these were while under the Republican control and the fourth was immediately after Democrats took control in March of 2006. This has taken our debt from $5.6 Trillion when bush took office to its current $9.3 Trillion. These were not loans to help Americans get education suited to the new world economy or anything like that. These were loans to keep the war in Iraq going and to forestall a shut down of the federal govt like we saw in the 1990’s after Republicans won control of Congress. This debt is not created by us just printing money. We have to sell the debt to people who are willing to trust in the U.S. ability to pay it back or at least pay the interest on the debt. Traditionally this has been other country’s reserve banks. This can only continue as long as people and nations are willing to buy US Dollar backed securities. This is growing harder over time and is not expected to change soon. In 2006, the central banks of Italy, Russia, Sweden, and the United Arab Emirates announced they would reduce their dollar holdings slightly, with Sweden moving from a 90% dollar-based foreign reserve to 85%.On May 20, 2007, Kuwait discontinued pegging its currency exclusively to the dollar. Syria made a similar announcement on June 4, 2007. In Europe, on the other hand, government deficit in the 15 countries now using the euro fell to 0.6 percent of GDP in 2007 from 1.3 percent in 2006 and debt declined to 66.3 percent from 68.4 percent. This makes Eurozone debt instruments far more attractive than similar US debt offerings.
I think the media is downplaying the economic news and talking in broad generalizations because most people are either too apathetic or just ill equipped to face head on the full ramifications of what is going on economically at this time. There is scary and depressing stuff going on and the fundamentals are not really changed by the media’s presentation. The media appearing pessimistic or optimistic about segments of the economy can speed or slow events to a small degree (self fulfilling prophecy style) but in the end, the fundamental facts don’t change and the corrections and losses continue on.
The Next President is in Trouble. Whoever is elected our next president is in for a economic crisis unlike anything in the last half century. By the time they are sworn in, this problem will have spread much farther around the world. I personally think the National Republican Party does not want to have McCain or any other Republican in office when this happens. For the GOP, a Democratic president is a win-win situation. Either the Democratic party president will man (or woman) up and make the tough and unpopular decisions to address the problems we are facing and as a result mitigate the worst of the symptoms, or they will go down in history as having presided over the second “Great Depression”. That will pave the way for the next round of “Change” in the form of a Republican president.