Tuesday, June 3, 2008

Think U.S. Economy Is Bad Now? Just Wait, Says New York Times

As if we needed another reminder about the dire straits of the current U.S. economy, the New York Times just published an article which makes an excellent point as to why things are only going to get worse.

What the New York Times points out in their article is that states and cities have yet to contract their budgets, but that is coming. Local governments have a fiscal year which begins July 1, and many of them are planning drastic cut backs to spending.

These local governments account for around $1.8 trillion of the nation’s $14 trillion economy, and their spending accounts for around double that of the Federal government, according to the article. In the past year city and state governments have spent approximately $40 billion above and beyond their budgets, which has aided in keeping the economy above water, but now the consensus is that they are going to have to scale back. Goldman Sachs is predicting that local governments will retract their budgets around $50 billion this year creating a total drop in spending of approximately $90 billion. With this major decrease in spending, and the loss of consumer confidence it is likely to invoke, we might not be able to avoid a recession for much longer.

Certain states will certainly be hit harder than others, with the biggest problems being faced in those areas which are suffering the most from the housing bubble. Local governments draw a large portion of their tax revenue from property taxes, and with property values dropping upwards of 20 percent in some areas, we can expect to see serious budgetary issues.

One of the likely casualties to these budget cutbacks will be schools, according to the article. In my mind this is a shame; considering the state of our school system, this is one of the last areas we should be cutting. Apparently this is the easiest place to make the cuts, though, or at least the one that will create the least problems for elected officials in the immediate term.

We can expect a good number of layoffs as a result of these cutbacks, and consumer confidence will likely shrink further as more people begin to fear for their jobs. By contracting spending, though, people will in essence create a self-fulfilling prophecy by which more businesses are forced to make cutbacks as their profits shrink, and more people lose their jobs as a result. The local government budget cutbacks might just be the straw that breaks the camel’s back, but we’ll have to see how it all plays out.

Who knows, maybe the next president will enact another economic stimulus thereby postponing the inevitable once again. Not only are we piling more and more debt on our nation’s youth, but we are going to cut back on their education as well. So, to sum it up it is not a good time to be a young person in America. Guess I better go up the budget a bit for my daughter’s savings account, as well as create a budget for private school tuition. Looks like we are going to need it…


Anonymous said...

It seems to me that the banking and oil industries have gotten greedy. They want it ALL. They want all the money and they want all the power that comes with the money...and they will stop at nothing to attain their goals.
This is disheartening. I don't have an issue with a company making a profit, but I do have an issue with predatory business practices and a regulatory environment that appears to be encouraging such practices. I liken this greed to a drug addiction. A drug addict will do ANYTHING for another 'high', even up to and including self-destruction (e.g., death by overdose). The people who control both banking and oil are just as addicted. Their quest for limitless profits is DESTROYING the US economy. If this is the end result of free market capitalism, then we may want to take inventory of its effects and consider a different approach.
What if we took an approach based on a philosphy of economic equilibrium? Right now, we have a top-heavy economy with the majority of its money and assets held by banks and oil companies. It is an inverse pyramid and it is teetering. I cannot help but wonder when it will fall over.

And what of the US Dollar? If I understand correctly, much of the currency in circulation exists as 'leveraged' investments. That is, they are borrowed dollars, the very kind of dollar that has had a tremendous impact upon the US economy. It might not be so bad if the ratio of 'real' dollars (e.g., cash on hand or real assets) to borrowed dollars was within reason--say, a 1:2 ratio. With 1 million USD, I could borrow 2 million USD. Not 20 million!
If we look at how this shapes up in an investment, I think the difference is apparent. When I have a $20 million investment backed by $10 million cash or real assets, I have a MUCH more solid investment. A small decline in the market value of my holdings will only have a nominal impact on my investment. In contrast, when I use $1 million to borrow $20 million to invest, I am setting myself up for HUGE losses! instead of $.50 backing every dollar invested, I have only $.05 backing the investment. I am not an economist, nor do I specialize in finance, but even I can see the danger in this! A small decline in the value of my investment destabilizes the entire investment because it is really worth only about 5% of its stated value.
I grant that a loss is a loss, regardless of the ratio of real dollars to borrowed ones. At the same time, it is sensible to me that I make as sound an investment as possible. The first investment might be much smaller, but it will likely be much more profitable over time. The second investment, however, is a gambler's bet at best. It might make a huge profit in the short term, but it is also at much greater risk of becoming a source of significant losses.

I would like to digress for a moment and extend the effects of a 1:2 investment ratio into the overall impact on the economy. First, this would serve as a natural limiter on the amount the economy could grow during the course of a year. It would virtually eliminate 'bubbles' in every sector and industry. Consequently, it would also smooth out the boom and bust cycles. In short, the economy would grow at a much slower rate--and it would also be highly stable. I also think that it would also likely distribute wealth more evenly throughout all levels of society.
My hope is that we see there are other ways of working with money and that the philosophy of economic equilibrium is one of them.

Anonymous said...

Welcome to reality.

This is the real economy we've been avoiding for years? Our local, city, state and federal governments and people (by the way, I'm a proud American conservative) have been living beyond their means for at least a decade.

Also, I have school age children. I would argue our biggest problem revolves around our inept administrators and teachers as well as our poorly designed education system. It's not money. It's people.