January 16, 2008 - 4:45 pm
Remember when I said that I was puzzled by the buoyancy of our current economy? I just had another thought, one that I’m ashamed to say I should have thought of a long time ago, but allow me this “duh” moment if you will.
Despite off-the-chart oil prices, despite the over-inflated housing market, despite two ongoing wars, the economy is still pretty good. (Not as good now as it has been the last couple of years, but pretty good nonetheless.)
What keeps an economy growing is basically spending. As long as people are spending money, the economy grows. The conservative notion is that lowering taxes and keeping people employed results in more people with money to spend. So, more to spend, more people spending it, good economy. But when gas prices are high and mortgage payments are high there is less money to spend. When a large chunk of the population is out of the country getting shot at, there are less people to spend their money. Less money, less people spending it, bad economy.
I just couldn’t fill in the gaps. That is until today.
In the last two years, I’ve gotten completely and angrily sick of seeing the same commercial on cable TV fifteen times a night. It seems like not a single commercial break went by without that fatherly looking guy in the sports coat telling me I my life would be better if I refinanced my home with Country Wide. Totally aside from the fact that I don’t like commercials in general and even more so when they’re repeated over and over, there must have been a heck of a lot of people out there following fatherly sport coat guy’s advice. Otherwise, Country Wide would have changed their marketing tactic.
Smart people refinance their home to get a better interest rate or to roll in some other existing debt for tax purposes. But there are very few smart people out there. The rest of the populous refinances their home in order to pull their equity out and buy “stuff” they don’t really need. Lately the Fed has cut interest rates every time the economy quivered thinking that the big crash was just around the corner. Lower rates encourage people to take our more loans and spend more money, thus propping up the economy. But what happens when people (the less smart ones) get comfortable living a lifestyle they can’t afford by living on credit and mortgaging their home way past it’s actual worth?
The economy has not been propped up by tax cuts. It’s been propped up by people living on credit. “Duh!” And now, the Fed can’t cut the rates much more than they already have. People have mortgaged themselves well beyond the real value of their homes (thus the housing market is artificially inflated) and now the banks who wrote all those nut-case mortgages can’t collect because the people can’t pay their mortgage payments with their maxed out credit cards.
This is pretty scary when you look at it in historical perspective. The people were living beyond their means and playing the stock market with borrowed money in the Roaring 20’s lead up to the 30’s “Great Depression”. When the stock market slipped, people owed more on their stocks than the stocks were worth and they lost everything. Admittedly that’s a very simplistic explanation, but it does mirror nicely the current housing market situation.
Anyway, I just thought I should correct my earlier grim forecast with an even grimmer one after I had my head-smacking, “duh” moment.
Ok, so the post title is a little sensational, but let there be no mistake: the tree-hugger-centric world view sees humanity as a virus. And