Economics for Consumers
6/8/09

(c) copyright 2009 Walter O. Smith, CFP, ChFC, CLU  All rights reserved
A Rose of Sharon Publication

Notice:  The content of this newsletter is intended for purposes of consumer financial education only.  The content is not, nor intended to be accounting, tax, legal, or financial planning advice of a personal nature to readers.  If you want, or need, professional advice, you are advised to consult a properly qualified professional.  The author is solely responsible for all content.  This newsletter is a benefit to Members of GMAX1, a faith-based consumer financial educational organization.

Most people don't have much interest in economics until something goes wrong with the economy.  When something does go wrong, the only question most people have is, "when will it get fixed?".  Typically, reading stories in newspapers, or listening to TV news reports about the situation tend to confuse most people.  A lot of it sounds like confusing doubletalk.  The way most people get their economic news is by living in the experience of it.  My purpose in this issue of the newsletter is to help you cut through the guck (a technical economic term used by consumers) to zero you in on which things are most important and critical to follow so you can at least track the direction of things, i.e., staying the same, getting better, or worse, etc.  With all the millions of words being used to tell the story, you may be surprised by how few the things are that you need to focus-in on to take the temperature of the economy.  Meaning, the global economy, now, not just our economy in the US.  Things are now so inter-connected,  economic effects don't stop at borders.  We're that "village" that you may have heard about that was coming.  Now, it's a reality, not a forecast.  You may have personally experienced the effects of that, e.g., when your job, or a family member or friend's job, got shipped to another country.  Naturally, however, your keenest interest concerns the US economy because of the immediacy of impact on you.  So, I'll focus-in on that, and leave the rest of it for another day.

Taking the Economy's "Vitals"
     *  Zero-in on just 3 things:
                 1.  Consumer spending         2.  Jobs/unemployment          3.  Availability and cost of credit
     *  Of the three, consumer spending has the most economic weight and significance.  Consumer spending accounts for about 70% of our economy.  When it's up, solid, consistent, and growing, things are "good".  And, of course, the opposite if things are bad.
     *  Consumer spending is a result of the other 2 things.  Pretty straightfoward in the logic of it:
            *  People lose their jobs -- or, they're afraid they might -- and consumer spending gets zapped.  A straight line into the tank.  To spend money, we need to have some.  Meaning, for most of us, we need a job that gives us a signficant and steady paycheck.  Cut that out of our personal picture (or in the grip of fear of the loss of it) and, most of us, pull in our horns, cutting our spending.  Things dry up.  Real fast.
            * Same effect with credit because a lot of our spending is or was made on credit.

As you already know, the job market is weak and the banks (and other lenders) have tightened up on the availability of credit.  It's tough to get credit if you don't have a job.  At the consumer level (as distinguished from businesses), the effects of credit tightening are diminishing at the moment because of the decline in consumer demand for it.   (not including home mortgages)  In March 2009, consumer borrowing took its biggest decline since records were started going all the way back to 1943.  For the first time in a long time we Americans are actually saving money in signficant amounts.  Long-term, that will have positive economic effects.  Short-term, however, that's cutting into-you guessed it -- consumer spending.  And, the longer, and more it does -- right again, folks -- the longer economic recovery will stretch-out and take.  As you can see, economics has moving parts that connect to each other.

Long and short of it?  If you focus on these 3 things -- consumer spending, jobs/unemployment, and credit,  you'll have the current picture -- or enough ot it -- from a consumer perspective.  If you keep tabs on changes in these 3 things combined they'll show you the track, or direction, of the basic trend of the economy. 
Is that it?  Of course not.  You know better than that.

You've probably noticed time estimates for when things will get better keep getting longer.  That point keeps coming through consistently in all the mixed messages you read in newspapers, or hear on TV News programs about the economy.  The cause of the continuing revisions is the  enormity of the injuries our economy has sustained.  The depth of them has dazed even our best experts.  The depths of the economic injuries are just unimaginable.  Unthinkable to the trained minds that study, and teach, economics.  It's a process of seeping realization of the implications of what's happened.  (and still is)  Virtually all of the experts you listen to never lived through the actual experience of anything even approaching the proportions, of the Great Depression.  They read about it.  They studied it.  They understand it..intellectually.  But, actually experienced it?  NO.  Even Ben Bernanke, Chairman of the Federal Reserve, an expert on the Great Depression, said he had to refresh his mind, again, by re-reading books about the Great Depression as he started the process of formulating strategy and policy solutions to recommend to Congress and the President.  (a pretty good mind -- former Princeton professor, etc.)  So, one effect of all this, is a stream of revisions in time estimates as awareness of the dimensions of things continue to settle-in to a three-dimensional vision of the implications of them...fed by continuing developemnts of where, and how, effects have shown up in often unexpected, surprising ways.

* The "Shift" in the Parts of the Recovery   The timing of the parts of the recovery will be different.  In the earliest stages of it, the three fundamentals will probably happen, first.  In that sense, those things will show improvement sooner than others.  It's the fourth factor that will have profound, transformative effects that will overshadow everything else for a very long duration of time.

The Fourth Factor    This consists of federal budget deficits, and the amount of our national debt.  Much has been written about this.  Little is understood concerning the realities of the effects of it.  The sheer enormity of the amounts involved will be permanently transformative on all of us economically.  Fundamentally, things will get restored to what we consider a more normal state of things in our daily lives.  Eventually.  For the period of our lifetimes, however, things will never be the same again...as we've been accustomed to in our expectations and lifestyles.  Change is upon us.  Long-term, parts of that change will have positive effects as our economy is transformed.  New directions and opportunties will emerge to heal the enormities of our economic injuries caused by indifferent neglect for immediate gains at the sacrifice of long-term needs.  We're at a point of transformative convergence of competing, contradictory economic needs for which there are no easy, or simple, solutions.  Vast sums had to be expended to prevent a complete, catastrophic meltdown of not only our economy, but the global economy as well.  The suddeness of how quickly the effects of our economic fractures metastisied around the world surprised and shocked world leaders.  They just didn't see it coming.  For many years, the evidence was there in plain view.  But the stakes of vested financial interests had been made.  There were no good choices of alternatives but to keep the game of immediate gains continued and sustained.  The enormous capital that had to be put out there to prevent catastrophe is in a collision of convergence with the fundamental economic needs of people to simply live; to survive.  We call these contradtiory economic forces, "entitlements".  Social Security for income because our aging population is essentially broke.  Medicare and Medicaid for health care because of the breakdowns in human bodies caused by people living much longer than any previous generation.  The trigger is the "Boomer" generation arriving at the door consisting of milions of people.  A little over 78 million of them arriving over an 18 year time span.  That's already started.  The problem is adding the costs of benefits for all these people to our fractured financial foundation.  That's the collision of convergence.  It has nuclear financial implications.  It's that mountain range President Obama alluded to in one of his very first speechs when he assumed office.  Trillions of dollars are needed to support basic, fundamental necessities of living.  I suspect the actual amounts of money needed aren't really known, or defined yet, because, for years, the actual estimated costs were distorted by administrations and Congress for political expediency.  The fact is, we just didn't want to hear it.  Social Security, and, now Medicare, were even called the "third rail" of politics.  A clear warning to any politician who expected to actually be re-elected by voters in denial.  So between that denial of the realities, and the forces of power of lobbyists, nobody dealt with it.  Not seriously.  Now we're at a point where the realities have arrived and converged.  Solutions can't be put off any longer.  Poor timing.  Nobody imagined the magnitude of the economic catastrophe coming that was years in the making.  That broke the financial back of both federal and state governments.  State govenments will be the nexus -- the point of focus of this collison of convergence because, unlike the federal government, states have to balance their budgets.  They can't run deficits. For now.  It's time to pay the piper.  You'll see the effects of that in reduced benefits of a tattered "safety net", significantly increased taxes, and higher interest rates.  That's our coming bottomline of impact.

My best regards to each of you.  Until next time.
                     Walt