Over the coming weeks and months I will be explaining or trying to explain some of the complexities that exist in our current economy. First off let me explain to you that in no way am I trying to claim that I am an economic expert, but I do have access to privileged economic data, economic experts and I have an understanding of complex economic issues and concerns. That being said feel free to ask any questions in the comment section and I will try to answer them to the best of my ability. I will start by addressing issues that I hear in my everyday life from concerned people.
Are we heading towards a depression? The answer is maybe. The experts estimate that the national unemployment rate should peak at about 10 – 11%. The depression of the 1930’s had unemployment rates near 25%. Currently unemployment is just above 7% with a record layoff of more than 500,000 people just last month. 5% unemployment is considered full employment in the U.S. economy and if the unemployment rate hits 10% or more and stays there for more than a year then there will be a depression discussion. There is no standard definition of a depression and we cannot compare this crisis to the Great Depression because there are major differences in this economy when compared to the economy of the 30’s (no U.S. Securities and Exchange Commission, etc.). The bright side is that the Great Depression was marked with high unemployment for many years and this financial crisis should clear up in a year or so.
How or will we recover from this crisis? This is the worst financial crisis since the Great Depression, but we will absolutely recover. Our economy is cyclical and goes through regular cycles of peaks and valleys. Quietly the U.S. dollar has steadily risen back to normal levels and foreign investors are investing in U.S. Treasury securities in a major way. No matter how bad our economic condition, U.S. Treasury securities are the most sought out investment instrument in the world. The Federal Reserve is also purchasing U.S. Treasury securities to infuse cash into the system. This infusion of cash will hopefully help ease the credit crunch (a lack of lending and loans from lending institutions). The easing of the credit crunch will hopefully help to stabilize financial institutions and help increase consumer confidence. And when consumers start buying again then slowly jobs will be created. Employment numbers are the last thing to be hurt from a recession and the last thing to recover from one.
Recessions are vicious cycles. Consumer confidence lowers and consumer spending decreases. Business profits shrink and these businesses have to lay off employees. These layoffs help to reduce consumer confidence even more and business profits decrease even more. This creates more layoffs and you can see how this cycle can spiral out of control.
Do not freak out when on January 30 you hear a report that gross domestic product (measures our nation’s income) has had the worst decline in one quarter in the history of the U.S. It will be the worst ever but the bright side is that the “worst quarter in history” is over and the first quarter of 2009 will be a little better.Print Story