This is from December 1st, 2008 when I sort of figured out what is going on, and what is going to happen.
For a while now, I've had this feeling that the economy is in trouble. I started by sharing my thoughts on the economic stimulus package and then the bank bailouts. But I didn't fully understand why things were bad until recently. Here is a brief synopsis of why I think things are going to be bad for the next 10 plus years.
Over the past 200 years, we went from an agrarian economy, to an industrial economy, to what people now call a "service based" economy. When we made the move from agriculture to industrial, we went from a lot of jobs producing food, to a lot more jobs producing goods. But we were always producing. Today, in our "service based" economy, we have moved away from producing to consuming. People (wall street, the government and thus the media) say the fact that we consume so much is a sign of a strong economy. This simply is not true.
We have a lot of money, but not much wealth. Think of wealth as savings and the ability to produce things to sell. It's a lot of work to create wealth, but oh so easy to create money. To have lots of money, all you need to do is open a credit card or borrow against the equity in your house. Unfortunately, home equity is now gone, and credit cards are next.
Here is a very short list of very serious warning signs that our economy is in for it, two of which were in the news today:
- People Don't Save
Saving is the true measure of wealth, far different from how much money people spend. People point to all the things we consume as an indication our economy is doing well. Where does that money come from? We borrow it.
Just look at this graph. People in the U.S. literally do not save money anymore. Savings rates are less then zero percent. We are broke. - Housing Bubble
The housing bubble burst earlier this year. It is another major sign of economic problems. This is how people could spend money and keep the "service economy" going. Need money? Just borrowing against the "equity" in your home.
This is also how many people (including Wall Street and the government) could justify the lack of savings. Home prices will keep going up, so we can count that as savings.
Oh, and it also caused the collapse of the global financial world.Good thing the governments of the world can print money.I take that back, it's not even funny to joke about. Printing money to save banks is only making things worse. MUCH worse. The sooner we let things fall apart, the sooner (and easier in the long run) we'll be able to rebuild our economy. - Credit Card Bubble
The Credit Card industry is next. Now that the housing bubble burst, which sent the financial world into a downward spiral, nobody will be able to pay off their credit cards. Credit card companies will have to stop issuing new lines of credit. This article just came out today.
Credit card industry may cut $2 trillion of lines: analyst
"The U.S. credit card industry may pull back well over $2 trillion of lines over the next 18 months due to risk aversion and regulatory changes, leading to sharp declines in consumer spending, prominent banking analyst Meredith Whitney said."
The Credit Card companies will be next to ask for government money to cover their losses. They are as essential to the "service based economy" as banks, if not more so. With no equity left in houses and no more credit available to consumers from credit cards, how will we keep the spending going? - We Don't Manufacture Anything
The other article from today, Manufacturing Index is at a 26 year low. Like I said above, wealth is measured by savings and by our ability to produce goods. We don't have either anymore. What will we do when people can't borrow money? How will people pay the money they owe back without being able to produce things to sell?
To me, this feels like the impending doom of global warming. People early on talked about it but nobody listened. Then signs started to show up, but still nobody really listened. Until it has a direct impact on our lives, it won't really exist. The difference between this and global warming is that this happened a lot quicker, a lot fewer people saw it, and the direct effects are here right now. It's becoming very real.
I'm not sure what to do about all this yet, so don't ask me for advice. But I am researching it. Maybe I'll let you know what I find. Oh, and if you don't agree with me, please email me and tell me why. I'd love to be convinced I'm wrong.
