No finagling at the top alone will restore the American economy. 75 percent of the economy is driven by the spending of ordinary consumers and they are frightened. Call it PTS and it will not be cured easily. The distribution of free booze and Prozac will jerk start spending again. That is the only quick fix that is possible.
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We save about as little as any nation on earth relative to our income. The problem is too little savings and too much borrowing. There have been studies showing that people are now buying food on credit, using credit cards just to go to the corner grocery store. I don't think this is Armageddon or a Great Depression, but at best we're in for a year or so of stagflation or flat growth.
Beyond a year, we'll have a new administration, and I don't know what they'll do to offset this. By November, there will be only two issues voters care about: their house and their job. That will provoke the candidates to deal with the question of how to pump up the economy. One thing they can do is let the dollar fall. Part of the reason you have declining asset values in the United States is that our currency is overvalued. Right now we have a huge trade deficit that is helping make the economy weak. A lower dollar will help that. The growth rate in exports has been better than the growth of imports. Our trade deficit has been running at 7 percent of the entire economy. If we were to cut the deficit in half, we'd take care of unemployment.
The world is getting more interconnected. We need to have a lower currency to get a semblance of strength for exports, but we shouldn't try to derail free trade. That would trigger a worldwide recession because of our interconnectedness. If we start a trade war, there could be bad consequences, such as our trading partners selling the trillions of government securities they own. If you start a war, people use the weapons they have.
Don
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t be fooled by a
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dead-cat bounce
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Mark Zandi, chief economist of Moody's Economy.com
The economy will rebound in the second half of the year, although there is a good chance it will be a "dead-cat bounce." The key is the rebate checks taxpayers are receiving this summer—worth more than $100 billion. Without the rebates, households would be cutting back on spending, and there would be no debate about whether we are in a recession. If history is a guide, about two thirds of the rebate money will be spent by the end of the year. Surveys of what people say they will do with the money suggest that this time more will be saved and used to repay debt, but what people say is not the same as what they do.
But the rebate checks don't address the economy's fundamental problems, most importantly the free fall in the housing market. By my calculation, the decline in house prices has slashed $2.5 trillion from household wealth (more than $25,000 for the average homeowner), and prices continue to decline rapidly in much of the country. By early next year the rebates will be spent and households will be poorer.
Meanwhile, the surging oil prices are acting like a tax increase—except the proceeds don't go to our friendly governments but to big energy companies and overseas producers. And there is lots of money involved. When gasoline was selling for closer to $1 at the start of the decade, American households were spending some $300 billion each year to drive their cars and heat and cool their homes. They are now spending some $700 billion a year on energy. Household gasoline bills in the coming year will rise about $100 billion—even if national gas prices stay near $4 a gallon through 2008.
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