This 3-part blog entry is a bit of a rant but contains information I believe every American with assets should have. With the call for another stimulus package being floated this past week by an Obama advisor and now some cheerleading for the idea from some economists, it’s important that Americans with assets understand what another stimulus package and more debt might mean for the economy.
Today, on Bloomberg, a story was published featuring the opinions of Nouriel Roubini and Robert Shiller. Roubini is a New York University economics professor who in 2006 predicted the credit crisis and Shiller, a Yale University professor, is the co-creator of the national housing price index that bears his name and author of “Irrational Exuberance”.
Shiller, appearing on the “Surveillance” radio show produced by Bloomberg said, ““The fundamental problem, as Franklin Delano Roosevelt said in 1933, is fear, the Great Depression was deepened by a sense of lost confidence or animal spirits that was a self-fulfilling prophecy. The worry is that we will have the same kind of issue arising again.”
Shiller then advocated another stimulus package because the Obama administration has been too slow in implementing the first one. Roubini added that more spending is necessary to avoid the kind of stagflation that Japan’s economy experienced in the 1990’s.
The economy shrank 5.5% in the first quarter and 6.3% in the fourth quarter according to the Bloomberg article. That’s the worst 6 month performance since 1958. Adding to the economic concern is the consumer savings rate which skyrocketed to 6.9% in May. Roubini predicted that it would reach 11%.
Here’s why that’s bad news.
The US economy is extremely dependent on consumer spending. According to an article published on CNN money in 2003, consumer spending comprises 70% of the US gross domestic product. As a side note, for those of you who think this whole economic mess blindsided economists and policy makers, this article outlines the coming crash quite nicely, a full 5 years before it happened. Here’s the link: http://money.cnn.com/2003/10/02/markets/consumerbubble/.
By the way Vice President Biden, you should have been reading CNN Money 5 years ago, then you wouldn’t have made the ridiculous comment you made this past week on the economy. For those of you who missed it, here it is, from examiner.com (July 6, 2009) (Link: http://www.examiner.com/x-3630-Orlando-Obama-Administration-Examiner~y2009m7d6-VP-Joe-Biden-says-the-administration-misread-the-economy-whats-next)
Vice President Joe Biden admitted that the Obama administration “misread” the perils of the American economy.
In an in-depth interview with ABC’s George Stephanopoulos, Biden stated the administration “worked off of figures in January that were consensus figures and most of the blue chip indexes out there.”
While Biden openly took responsibility for the administration not recognizing the depth of America’s economic troubles, he did state they acted on the information that was presented to them at the time.
Sorry for the digression. Back to the economy.
Both Shiller and Roubini are calling for more spending, a move I believe will only postpone the inevitable “hard landing”, if, in fact, another stimulus program can even get the economy moving, which in my view, is doubtful.
Here’s why.
Many recessions are inventory driven meaning there is excess capacity. Due to this excess capacity, inventories get ‘over built’ and as a result employees are laid off and plants are closed. Eventually inventories and demand balance and the economy will begin to move again.
This recession is different. It’s a credit driven recession created in large part by the Federal Reserve and the government itself. The Federal Reserve, as the 2003 article above describes, dropped interest rates to a low level to avoid a recession. As a result, credit was free and easy and people borrowed to spend. 0% interest on car purchases, low interest home equity loans, and credit cards allowing consumers to spend their home equity for ‘everyday expenses’ are just a few examples of this free and easy credit.
To be Continued………………
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