Wednesday, December 31, 2008

How We Got Here or My 2008 Economic Year Follies

Photo from the Flickr Commons

Ok, so I’m no economist, but here’s how I understand how we’ve gotten where we are today in terms of the recession/depression:

1. We fought a war and rather than pay for it with higher taxes, we paid for it with inflation. Now before you go wagging your fingers at the Republicans for being so foolish, realize that Kennedy and Johnson did the same thing in the 60’s with Vietnam. It’s interesting to note that all 20th Century wars, save the Gulf War, were started under Democratic administrations.

2. As inflation rose, the value of the dollar plummeted against foreign currency. Remember how bad the exchange rates where last year and how there were so many foreign tourists here?

3. Now, for some reason when the dollar is weak, investors (big time investors who invest in things like currency and commodities) tend to pull their money out of the dollar and put into oil. Why? I don’t know. For some reason this is considered the thing to do. The result: Oil prices went through the roof, topping $70, $80 and finally $100 a barrel.

4. With oil that expensive, suddenly gas and other fuels cost a lot more. This causes several problems

a. The airlines are screwed because they can’t really turn a profit if oil is more than $80 a barrel.
b. The U.S. Automobile industry is screwed because people stop buying their gas guzzling POS’s.
c. With gas costing $3, $4, or $5 a gallon, Joe or Jane Consumer gets hit in the pocket book and suddenly doesn’t have as much money to spend on other things.
d. Any product that is shipped any great distance, which is pretty much anything Joe or Jane Consumer might buy such as food for instance, suddenly also costs a lot more.
e. Joe or Jane Consumer can barely afford the gas they need to get to work and food for their families, leaving them little expendable income. At this point two things happen:

i. Joe or Jane Consumer stops buying things. Sales plummet. Companies already strapped for cash because of their added fuel costs, now have to lay-off workers.
ii. Now Unemployed Joe or Jane Consumer, or Freaked Out and Stretched Thin Joe or Jane Consumer suddenly don’t have the money to pay their mortgage bill every month (keeping in mind that they probably never should have qualified for a mortgage in the first place), so they default on their loan and the bank forecloses. This kicks off the Sub-Prime Mortgage crisis (which is a gigantic ball of yarn to unravel in its own right).

Ta Da! All kicked off by a stupid war we never should have started in the first place.

Incidentally, you may have noticed that oil and gas prices are way down now. That’s because when people stop buying stuff, factories stop making stuff. When factories aren’t making stuff there isn’t as much demand for the stuff stuff is made out of, namely commodities, like oil.

You might also remember bankruptcy laws changed a few years ago making it harder to get out of your credit card debt when you go bankrupt. As a result, when times are tough, people are more likely to pay their credit card bill then their mortgage. Take that Sub-Prime Lenders.

But lest you think the Consumer Credit Industry is safe, they’ll be the next to collapse. They’re teetering on the same toothpick the Sub-Prime Lenders were (extending credit to people who shouldn’t be getting it). Once people stop being able to pay their credit card bills, they’re toast too.

Happy New Year!

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In 1789, the governor of Australia granted land and some animals to James Ruse in an experiment to see how long it would take him to support himself. Within 15 months he had become self sufficient. The area is still known as Experiment Farm. This is my Experiment Farm to see how long it will take me to support myself by writing.