An Economic Play Book 2009

Economy May be Bottoming but Main Street will Remain Under Water

Economists are being conservative in a quarter by quarter analysis of how and when the US economy and housing market will recover.  Based on manufacturing output, exports and a host of variables everyone is eyeing GDP growth – especially when compared to last year.  I am of the opinion that a lemonade stand would look positive against the last year.  Expect that US “Big Business” begins to revive themselves it will take some time – not the expected big bounce but a slow, painful and gradual increase.  The key will be you and me getting back to buying products, goods and services.  It has always been the key.  Without consumption no economy can survive.

Credit addicted consumers will remain in rehab and locked out of the spending game for quite a while.  The unemployed and under employed will be a huge factor in recovery given that they are hobbled and scared.  Those consumers are likely to have curbed their spending or stopped all non essentials purchases already.  These consumers will most likely be withdrawn from spending and focus on re building their lives – that is if they can ever get a job or a comparable one.  Expect this to further impact domestic growth.  The credit addicted can’t get more credit and the credit worthy aren’t going to spend enough to make up for all that.  It is the credit spending that artificially boosted the economy for so long.

I have been hand waiving for some time that the heart of recovery will be consumption.  Even with home sales spiking in some areas overall it is a mess.  Also, the higher end homes are stagnant and many people can’t qualify for loans to buy them and certainly those wanting to sell are having their equity eaten away just to unload them if at all.  This will be a problem.  I understand the “Clunker” program to artificially move the auto market but that is another dangerous game.  Getting consumers on a different hook with new bait may look good on paper but is a future credit problem too.

As you can see I am sour on the recovery however modest it will be.  The psychology of Americans may be lifted by public relations around consumer spending and recovery but this go around I think “Joe Plumber” is hurt so bad that the underpinnings of the US and the world’s economy will suffer as will main street.  Expect chest pounding and pandering of all the great things done to “stimulate” the economy but remember that is mostly big business artificially driven by blow out sales of inventory and products just to get more stuff on the shelf that people can’t or won’t buy.

You want answers here are few:

Adjust FICA scores.  An immediate psychological boost and open door for consumers to consume when they do recover.  It is simple in fact – have the credit bureaus adjust scores – just during the last 18 months and next 18 months so 30,60,90,120 days lates – foreclosures and bankruptcy (rates we don’t like to talk about) won’t be as devastating.  This period would not hold the same weight as other times in history and not assure tens of millions of families are locked out.

Use Stimulus Money for businesses hiring workers.  Unleashed money quickly and provided to small business, midsized and even large businesses in the form of a tax credit, access to capital and a shot in the arm ONLY IF THEY HIRE MORE PEOPLE.  Now that sounds like a reasonable way to better invest the recovery dollars than to just bail out big companies.

Eliminate Capital Gains.  So you invest and make money for your retirement or other things and the government gets 15% off the top of your returns when you sell.  And now the proposal is to raise that.  So I make $5 dollars per share investing in Microsoft.  I took the risk and supported the stock market and Microsoft.  I invested $75 dollars and sold at $80.  A great return.  Well I forfeit $.75 for having done the right thing.  This would put huge dollars in the markets and more money in the pockets of consumers who would be incented to save huge amounts of money and YES SPEND MORE.  It would make up ground for a lot of the losses and of course a huge market surge.

Instead of Tax Cuts – Give Economy Bonds.  Japan only survived its banking meltdown because it was a savings nation and it took almost 10 years to recover.  They were a savings nation not credit addicted.  If 5% of the income tax you pay was to be given back in the form of economy bonds we would have a huge upsurge in savings and help people pay for their retirement.  Social Security isn’t a sure retirement anymore.

Oh I have a lot more than this but doesn’t this make sense to help get consumers on their feet so the stagnant recovery can happen and be sustained.  If we don’t solve unemployment, consumers access to cheap capital, unemployment and psychology beyond pandering this is going to take a long time.