01 January 2009

It's the economy, stupid

Disclaimer: I have zero economic training, so this post is more about posting questions that me pontificating on the current economic situation in the U.S. For that, see posts from people smarter than I am

My thoughts are about the basic structure of the economy. 

1. If I understand correctly, here's your basic capitalism: a.) Consumers have money, b.) they spend this money on goods and services companies render, c.) companies use this money to expand and hire more workers, give raises, and generally put more money into the hands of consumers. Then we go back to point a. 

So when someone says "the economy is bad," what part of this cycle is "sick," or "broken," or whatever?

2. I understand that the stock market has taken hits, but for the average American who lives on a steady paycheck from his employer, what has changed? He still gets X number of dollars a month, and the cost of goods hasn't gone up. In fact, gas prices have fallen a lot over the past few months, which has to help the bottom line for most Americans. Sure, multimillionaires who have wads of money invested in Wall Street have lost money, but it's all on paper. The only way they really "lose" it is if they cash out their stocks now. 

Same goes for the average American's 401k. Unless they're cashing out now, they haven't lost anything. 

And as of November the unemployment rate was 6.7%. For context, here's a graph showing national unemployment rates since 1950:

So we're not even as high as we were in 1993. 

And in 1933, the last time we experienced a REAL depression, unemployment was at 24.9%. Now that's damaging. 

So why the fear? Why the "sky is falling" rhetoric? If consumer confidence is a major contributor to economic well-being, why are the media outlets freaking everyone out? 

That's about it. Personally, I'm not doing that well economically, butI think that has more to do with the fact that the journalism industry has been tanking for the last decade than it does the current "recession". 


MooKoo Joe said...

Makes sense, but I think the reason the economy is... down, is because of people freaking out in the stock market business, with a pinch of people just not having the spending money they usually have, because of gas prices. Yes they have come down, but they were high for quite a while there, and people just didn't have the cash for a while. I think it kinda' just built up slowly and no one really saw it coming. =/

LaPaube said...
This comment has been removed by the author.
LaPaube said...

These are very complex questions. You're definitely right about one thing, which I'm grateful for--those of us who have jobs and (knock on wood) don't seem to be in any danger of losing them, are not significantly worse off for now. At least not in base wages.

By the way, I have to say that after checking your blog a couple times a day, every day, for two weeks with nothing new to read, it's nice to see a new post. How's for a little writeup and prediction on the Sugar Bowl?

Brooke said...

Yes the stock market has tanked, but with that money to be lended has gone down as well. I know several companies that the money to pay a multimillion dollar project was in the stock market and now they lost half of it can't pay the company- and they can't even get loans to pay their employees because no one has tons of money to throw around right now and so those consumers don't have money- the company goes under, and more lost jobs and no money. Yes many people don't cash out on their stock market stuff, but they do use it as leverage for debt loans and things, and when you've lost 40% of that it's kind of concerning. I can give you more specifics later if you want- I know people of all groups suffering from this, rich, middle class and poor. But I also know we haven't really seen a recession since sept 11, 2001- and many would say even since the 1980's so people aren't used to recessions. Even those that could have been in a career for 20 years.

Anonymous said...

I agree with Brooke here. No one has come out and officially called this a depression yet. There are some in denial who won't even call it a recession. Part of the problem is those words don't have definite meanings that any two people can agree on.

It's the slippery slope. It's not the stock market crash of '29 where everything happened at one time; where there was a defining moment in history when it all came crumbling down. This is more gradual, hence why not everyone is seeing it in the same way. Just take the automotive industry for one. High gas prices made people shy away from buying big cars with low mpg. The American car industries began to suffer. Now they're going belly up with no hope except bailout after bailout (which won't last forever and they'll still go under). People just aren't interested in cars that cost a fortune to maintain, gas up, and have low resale value. So they lay off people by the millions. Those people are now milling around looking for jobs; however, there aren't enough jobs for all of them, let alone a majority. They lose their houses, they don't pay their bills. Those businesses expecting their money lose that expected capital. They have to lay people off as a result. They can't get jobs. They buy less, well, everything, including food, insurance, cars, airline tickets, clothing, education, etc. All of those industries had been counting on that money too, and when they don't get it they have to start shutting stores down (like you're seeing all over the US now) and letting people go.

It's just very slow and gradual, but not any less of a problem for the country at large. Those of us with secure jobs are lucky to have them, but we will still be affected one way or another in the end. It's just taking longer this time around.

LaPaube said...

Well, you need to re-read your history, Anonymous. It's not like unemployment got to 24% on October 30, 1929. The effects of the depression were felt outside of Wall Street starting in the early '30's. It's just that Black Tuesday is a convenient marker to call the beginning of the depression. We're still only a couple of months removed from the extreme volatility of the stock market--and more importantly, the lockup of the credit markets. This isn't happening any slower than the Great Depression.