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November 01, 2008

The Glass Is Half Full

Many of the basic problems in the American economy are rapidly being addressed – it's the "rapidly" part that's the problem.

A year ago we had the following economic problems:

  • The savings rate was too low
  • Credit card usage was too high
  • Energy prices were staring to soar
  • We imported too much oil
  • We bought and drove too many gas guzzlers too far
  • Housing prices were too high
  • People were getting housing loans they'd never be able to repay
  • The dollar was very weak
  • There were signs of inflation
  • Jobs were being created overseas (and perhaps lost here)

So this week we got the good news that savings as a percentage of personal disposable income ROSE to 1.3% in September from .8% in August, a more than 50% increase! The .5 percentage point increase in savings was funded by a .2% INCREASE in personal income for the month AND a .3% DECREASE in spending. Americans took all the increase in income, matched it with a decrease in spending, and salted it away. The consequence – GDP (Gross Domestic Product) is down .3% for the latest quarter since we bought less stuff. The pain is today but there is a real promise from gain in the future from that additional savings (doesn't that help the banks, BTW?)

Credit card solicitation is down and banks are reducing some lines of credit. Those who complained about the avalanche of indiscriminate credit offers of prior years should be glad about this. Even those with good credit are using it less – just ask American Express. But less credit does mean less spending.

The price of crude oil is down 60% from its high; gasoline is down nearly 40%; home heating this winter may be cheaper than last if the weather cooperates. Hardly anything to complain about there – although it does reduce some of the pressure for fuel economy and alternative energy.

Not only is the price of the oil we import down; the actual amount imported is down as well. That's a lot of money that stays home; that's a lot of money that doesn't go to unfriendly places. Some of the leaders of unfriendly places are unhappy about that – Ahmajinadad and Chavez, for example. Too bad.

So far, despite the drop in the price of gasoline, we're still driving less and looking for more fuel efficient cars to do our driving in. That's tough on gas-guzzler makers and certainly on workers in the auto industry. It's also a fleet-replacement opportunity as well as a reason why a lot of retooling'll happen.

Housing is getting downright reasonable. Congresspeople demanded that Fannie Mae and Freddie Mac loosen credit standards because houses were too expensive for people to afford if traditional credit measures were used. Of course the unwise credit not only put people in houses they couldn't pay for and prompted leveraged housing speculation, it also helped drive the cost of housing up even further. The volume of house sales is now increasing despite belatedly tightened lending standards – the buyers are super-qualified and are getting good value; the backlog of unsold housing is just beginning to shrink. But this correction has hit the balance sheet of many Americans – especially hard hit are those that withdrew the gain in value of their houses by taking out second mortgages and spending the proceeds. The gain is gone and the debt isn't.

Funny thing happened in this financial crisis which has been labeled as "made in America" and taken as an indication of America's fall from economic power: much of the world suddenly wanted to hold dollars. The dollar has strengthened so much as a consequence that the US and other countries recently intervened AGAINST it. Much of the rush to guarantee bank deposits in the rest of the world was from fear that capital would flee to the US despite an only limited guarantee of deposits here.

A stronger dollar means less inflation. So does the economic slowdown – especially the reduction in the velocity of money (see this post). This morning the New York Times finally got around to realizing that deflation is now the economic threat of the moment.

Since a lot of what we buy comes from overseas and the US has become much more a services economy than it was, the bite of job loss when we cut back spending is also globalized. We still need plumbers and doctors (but not as many bankers); but we're not buying as much of what China makes. Those layoffs don't happen here.

So why all the happy talk from me? There certainly is plenty of pain in what's happening economically. Real people are losing real jobs. People who'd hoped to retire soon have seen their savings evaporate. Deflation brings more than a cure for inflation; it also brings the threat of depression. Huge segments of our financial industry have been partially nationalized; we'll pay for that for a long time to come.

But we need perspective. This correction from excess has been violent and in many ways harmful but it HAS cured many of the excesses; the goal shouldn't be to reestablish them. We don't want housing prices to boom out of reach again; we don't want oil prices to go up or credit to be extended promiscuously; we don't want a banking economy based on the third derivative of valueless debt. We need to be wary of those crying "crisis" because they have a solution to sell. We've already gone too far in pouring aid in at the top of the financial system hoping (to put a good light on it) that it'll trickle down.

We will need to cushion some of the pain at the bottom of the economic heap; there'll be more need for unemployment insurance before there's less. We can't afford to let starved states cut back on infrastructure projects both for the sake of the infrastructure and for the sake of the economy. But we also want the excesses that have been corrected stay corrected – at least until the next bubble.

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