Please fasten your seatbelts…the economy will be going through a little turbulence…
I remember being about 10 years old, flying with my family to South America. I was in the restroom when I heard over the loudspeaker, “Please fasten your seatbelts. We might be experiencing a little turbulence.” I was standing there, doing my business, and I couldn’t just stop. Suddenly, the plane fell violently and my head hit the ceiling. The plane shook up and down and back and forth for about a second or two. Then the plane leveled out. As I came out of the bathroom, I could see that several passengers had cuts and bruises but it appeared that everyone was okay.
I mention all this to say that our economy will be going through the same type of turbulence. I do not think that our economy will fall out of the sky. On the other hand, I don’t believe that this $700 billion “rescue package” will fix everything immediately either.
After 28 years of bleeding the economy dry, we have some work to do to get it back on the right track. We have a deficit that has just exploded over $10 trillion. We have to convince foreign investors that we are serious in paying off our country’s debt. We need balanced budgets, which means we’ll need a tax increase to increase revenues. The tax increase can be levied on the upper five to 10% of wage earners since they make more than the bottom 50% of wage earners.
Consumers have to understand that the credit markets will tighten. For a while, banks are going to be reluctant to hand out loans of almost any kind. Small businesses are going to be in a vise grip for a while. It may be 12 to 18 months before credit loosens up significantly.
I suspect there will be more bank failures. The one extremely positive thing that has come out of this “rescue bill” is that the FDIC will cover deposits up to $250,000.
The underlying problem with our economy is not fixed by a $700 billion redistribution. There is a grave imbalance between wages and home values. This imbalance can be fixed by one of two methods — increased wages or decreased home values. Floyd Norris writes an economic blog for the New York Times. A couple of days ago, he posted a solution that someone had sent to him:
Here is a simple idea that might help address part of this this very un-simple mess. Take $100B and buy 500,000 empty homes for an average of $200,000, and destroy the homes. A shortage of available housing will push the market value of existing homes up, building trades will boom, mortgages will start to happen again (with new terms that NEVER offer less than 15% down) and then we can go to work on how to split up A.I.G. and the three remaining banks in the country…
Having had nine straight months of job loss, it is hard to say that we’re not sitting in a recession. It is going to take a while for us to extricate ourselves from this financial disaster. Black Monday, which was back in 1987, caused some economic hardship but because we made things in this country back then it was relatively easy to pull ourselves out. Now we don’t make anything. Large portions of cars are made overseas. Computers are assembled in Malaysia and Singapore. The factories which produced all of the furniture and garments in Virginia, North Carolina and South Carolina have been shipped overseas. The making of appliances like washers and dryers has been shipped either to Mexico or to China. We have turned ourselves into a service country. We need to reinvent ourselves as a people who make things because things have value.
Barack Obama has rightly suggested that companies which ship their goods overseas to be made and then ship them back in the country need to have all of that merchandise taxed. Companies who stay in the United States and make a product from beginning to end here in the US need to be rewarded with tax breaks. This is what Barack Obama has proposed. He has also proposed that we invest in alternative energies. Through a combination of tax breaks, grants and tax incentives, we will begin to make things again in this country. Whether it is nuclear plants or solar panels or large wind turbines, we will make things of value in the US again.
We need to buckle our seat belts and prepare for a bumpy ride.
