The American Economy--Game Over

I am hearing a number of economists, and so-called experts declaring that the middle of 2009 is the time to look for the recession to end. I think these experts need to provide some REAL signs that this economy will turn the corner soon. I think we are out of options to save this economy, as it currently stands. Here's what I think 2009 will bring:

1. Unemployment will rise--A continuation of frozen credit markets will lead more companies to horde cash, spend far less, and dry up consumption. Reduced liquidity, and lower sales will result in companies being far less able to keep the kinds of payrolls they employed circa 2006. Companies don't typically spend much until they hear the "all clear" signal on the economy. Given recent events, I think we could easily reach 9-10% unemployment in the next year.

For those of you who think 9-10% is not as bad as recessions past (1982, 1973-5), think again. Millions of people are starting to "age out" of the work force. This country is starting the exodus from the work force, as baby boomers start to retire en masse. Those who can afford it are likely to be the ones who currently have jobs, and as they leave, smart companies may not hire replacements, if they are looking for ways to reduce headcount.

So a 9-10% unemployment rate, as bad as it is, actually looks WORSE than that, because we will be adding to the entitlement ranks, and NOT replacing those ranks with workers.

2. Bailouts will continue--GM will get their money. Citigroup already got their money. California, and the rest of the states will get their money. But at what cost? The idea of a market-based economy can't hold in such an environment. Are Chris Dodd, Chuck Schumer, and Lindsey Graham going to have monthly performance meetings on each company and state agency's performance? How else will they be sure their dollars are well spent? Will they legislate who buys a Buick, or gets the next dollar to build a local bridge?

3. The dollar will not sustain--The dollar is stronger against the rest of the world. But only because everything else is weaker. That situation will not persist. We still don't make anything in this country, and that's the biggest issue. All the money pumped into these institutions only help things when the money is loaned to businesses. What industry do we have in this country, to build back up? We don't make much here. It will take a decade to rebuild some of these industries.

4. Irrational Exuberance gives way to irrational malaise--People ignored Alan Greenspan's warnings of a stock market bubble for about 3-4 years. His warnings were around 1997, and the markets didn't crash until about 2000/2001. People are not going to come out of their houses and spend, just because the fed has signaled that things are better. People will continue to be conservative with their money, and the economic picture will continue to suffer as a result. Perhaps for the next 4-5 years.

5. The Stock Market will continue to lag--with demographics working against us, more retirees are going to be pulling their money out going forward, then new workers putting money in through retirement vehicles. This won't get better for a long time. Perhaps a decade. People will feel poorer, and spend less. See bullet #4.

So to recap:

• Higher unemployment
• more bailouts
• weaker dollar
• tightening of consumer spending
• weak stock markets.

How do we fix this?

In a nutshell, we can't fix it. But we can build a new environment for a healthy economy on the back of an aggressive but sensible energy policy. This will include creating wind, solar, and nuclear facilities, and upgrading the energy grids, putting people to work. These can be private sector jobs. Success in this field could inspire lending to these types of projects, and start to help banks get back solvency.

People need incentive to save, and this country needs to avoid an inflation ramp up. Raising interest rates achieves both, even though it may also kill any lending going on. Personally, I think it's worth the risk, since we are currently sitting on basically 0% lending right now, and no lending is actually going on. At least with an 8% interest rate, people will be rewarded for saving, and the banks may actually build reserves and deposits for more sensible lending.

But in the long run, I wouldn't be surprised if it took 6-10 YEARS for this country to get itself back on track economically. My advice--do what you can to keep your job, put some bucks away, and look for ways to make money on the side. Personally, I think writing a blog might just be my night job...

I would welcome any ideas on this topic. Perhaps I can be swayed from this position, but for right now, it's game over.