Economics of Hope –2009

This is the season of joy and hope.

A look at my investment portfolio certainly does not fill me with joy at this time. My joy also does not come from the things I own, it comes from spending time with family and friends and sharing the holidays with them.

My hope is an end to the gut wrenching recession we are experiencing and moving on to an America that is once again a highly competitive and productive economy.

Before I discuss what lies ahead for the economy in 2009 and beyond I will recount a bit of recent economic history as a lot has happened in the last year.

The U.S. recession started in December 2007 and much of the world is also mired in a recession including the 14 European Union countries. Even the robust economies of China and India are experiencing significant slowdown. By the end of 2008 the US will have lost 2 million jobs with unemployment level at around 7%.
We may have staved off further worsening of the downturn in the last six months by pumping more than trillion dollars of taxpayer’s money into the economy in 2008 via the Federal Reserve System and the U.S. Treasury. In addition further reinforcements for the floundering economy have come from the Fed with a recent cut in the Fed Funds rate to near zero (~ 0.275%).This is almost free money for the bankers that borrow from the Fed.

Typically in past recessions easy money policy of the Fed alone would have been sufficient to start the economic recovery. This time it has not done so because of the double whammy of the housing bust and the meltdown of the financial markets. Credit is still very tight despite the infusion of billions of dollars by the government into the banking system. Confidence has been undermined and many banks are still shy about lending money to clients.

The December 2008 Anderson UCLA forecast suggests that the national recession will continue well into 2009 with total job losses of another 2 million and unemployment rising up to 8.5% by the end of 2009 and early 2010.The recovery will begin by the end of 2009 .Most experts agree with this viewpoint.

What kind on a national economic recovery are we going to have?  Things are not going to go back to the booming housing bubble years of 2005 and 2006 when sky rocketing home prices encouraged consumers to use their houses as ATM machines to finance their reckless spending. With the housing bust consumer confidence plummeted and it continues to fall today.

Consumers account for nearly 70% of our economy and they will not participate in the next revival. This is a serious problem. They will be too busy taking care of their household debt accrued over several years of weak income and in addition they will work on building up their depleted savings again.

In last several years US exports have been a major factor in the nation’s economic growth because of an anemic dollar as well as robust economic growth abroad. The global recession will restrict this avenue of growth for the US with declining foreign demand for our exports at least next two years.

So where will the economic recovery come from? It will have to be from the massive fiscal stimulus being proposed by President elect Obama’s team. The plan involves hundreds of billions of dollars in spending on improving and adding to the nation’s infrastructure in areas such as highways, mass transit, weatherization of government buildings for energy efficiency, installation of information technology in medical facilities among others.

Nobel Prize winning economist Paul Krugman of Princeton University recently suggested that the U.S. economy will have to depend on massive infusion of public money into infrastructure for many years to come before the economy will pick up enough steam and sustain respectable economic growth. His concern is that once the economy picks up momentum there will be enormous political pressure on the new administration to cut spending and raise taxes prematurely to reduce the deficit before the economy gets on a sound footing. (Paul Krugman, New York Times, and December 22, 2008).I agree. That will be a big mistake.FDR did that in 1937 and the economy went into a recession.

There is little doubt in my mind that a New Economy is about to unfold where government becomes a major player in investing in much needed public capital goods just as the nation did in the aftermath of WW II when we built the Interstate Highway system. That made a huge difference in our economic well being and made the nation more competitive. It is about time we started rebuilding America’s competitive base by investing in our future and not just living in the past.

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