UMT

I’m really getting sick of hearing “We can’t just give the money back to the tax payers because they’ll just save it.”

Cause: Why is there a global slowdown and “credit crisis” right now?
Is it because over the past 10 years people have not been able to quench their insatiable desire to socked their money away under their mattresses? No, of course not! The answer is, and I’m paraphrasing, there is nothing worse than watching your friend get rich. In other words it sucks to watch someone else who is on the same financial plane as you make decisions that you could have made and end up rich. “That’s it”, you say, “that’s the crisis?”

Let me explain.
I’m not analyzing the technical reasons why there is a crisis (I can sum that up in 2 or 3 sentences and many other people already have). Instead, since “they’ll just save it” is more of a sociological statement, I’m looking to analyze the psyche of our society in the formation of this crisis.

The actors (from buyer to investor, to banker, to broker, to agent…) were all watching their colleagues make tons of $ contributing to the process that caused the housing bubble. There was the responsible Broker watching other Brokers make tons of $ working “creative financing” deals. There was the responsible Investor who was getting 3% on an FDIC insured investment but watching his buddy get 11%, year after year, on a risky investment of 7% on what was supposed to be a safe investment. There was the responsible home buyer, who admittedly was happy to make 100K profit in 5 years on their now 200K house, who had to watch their buddy make 300K profit in 3 years on the 400K house they couldn’t afford in the first place but was now worth a million and had a full 300K HELOC (1m - 400K - 300K = 300K) . All of these things drove the housing bubble higher and higher.

Effect: So why specifically aren’t people buying things right now?
Well this one is easy. We had a slowdown because of the tech stock bubble, of which I’m less familiar with, which we got out of because of the housing bubble. This enabled people to spend more than they could and for years prop up the economy. Sort of like a “hair of the dog that bit you” approach to economics. The problem is our government, president, and federal reserve didn’t stop after one or two beers–they kept pounding. The effect of low rates, easy credit, deregulation, and consumerism enabled our economy to drain all of the places people could tap for money. What we have now is a country where the citizens are in debt, the banks are tight, and the investors are scared.

Solution: So then what are some solutions?
Looking back at our problems: The investors and banks are scared and the consumers are powerless. The investors are scared–but hoping. This means if they start to see economic indicators turning around then they’ll jump back in (every good investor knows the money under the matress technique is a bad one). The banks just got burned for various reasons so now they only want to make investments they are sure are safe. I expect new technologies to help out on that front. What that leaves is the consumer. The consumer is now faced with the challenge of paying higher bills, without being able to leverage themselves any farther. I have been going through an analogous process in the last year after racking up huge debt in school and through buying/fixing up my house. So how do you do it? Well you either cut spending or raise revenues of course. In my case I don’t really have any options to raise revenues, so I had to cut spending. Luckily the latest data shows us that the cleansing process that is going on right now is enabling everyone else to reduce their overall indebtedness. We have begrudgingly gone from a nation of hard core consumerists leveraging our futures, to a nation of “ohh shit I need to reduce my bills.” The side effect of this of course is that as people become less and less leveraged, they have more and more income that isn’t going to debt service. This in itself is stimulus. Right now the American consumer is paying a tax on their existing debts to banks and credit card companies that will slowly be lifted as they pay off their debts. Once we return to a more reasonable level of debt it will be almost like adding a new revenue stream. In addition the banks and companies that have needed to be capitalized by the government lately will get their money, but through the consumer paying off large chunks of their debt.

In other words if we give large checks to the tax payer they are going to do a combination of 3 things. 1. They are going to pay off their debt giving them a new revenue stream each month and giving the companies much needed $. 2. They are going to spend that money which would prop up the economy. or 3. They are going to invest that money in safe assets. What they are not going to do is stick it in a drawer or under their mattress. Any combination of these outcomes is a good thing. Combine this with some sort of action to reduce the value of our currency (helping raise the value of homes relative to mortgages, helping exports, and reducing the income gap) and we’ll be well on our way to recovery.

-J