Wednesday, March 19, 2008

Why the economic slump hangover seems to be lasting longer than expected

I am finally coming to the realization that it's going to be harder to get the economy out of its slump than I had predicted last year and would have liked. The problem seems to be runaway government spending combined with putting off paying for it.

Two crazy scenarios that wouln't have been imaginable under another administration include (1) the prolonged war but with its cost financed rather than being paid for now, and (2) the economic stimulus package paid for by borrowing against future earnings.

Just like in a big company, the outlook for profitability is dampened by borrowing because eventually, all this debt is going to have to be paid off. The US wants to finance the current war and the stimulus package by borrowing. But what it's willing to pay for the privelege keeps dropping. Each time the Fed drops interest rates, bond prices also fall. What we're doing, in effect, is asking foreign governments and foreign companies to lend us money, but we aren't paying decent interest rates for the privelege. So there isn't much interest. This has the unintended effect of making our money worthless. Witness the tumbling of the US Dollar against most other currencies - especially the Euro and Asian currencies.

Which makes it that much harder to pay for the war and the stimulus package because our currency keeps falling in value.

So, even though Americans are the most productive workers in the world, our profitability is perceived to be hampered by the fact that we have to pay off our existing debt, nearly $1-trillion in war debt, and another $200-billion for the stimulus package.

These drags on our potential profitiability are what's keeping the economy from rebounding as quickly as it could. Because with our low unemployment and record productivity, if we could just get out from underneath the mountain of debt, the economy should be able to bounce back robustly.

We promise to return to more real estate related posting as well as light-hearted Chicago diversions as quickly as possible, and hope you'll forgive this particular sober economic analysis.