Monday, June 14, 2010

Economics 101 why America can’t get out of this depression

Economists are touting the great strides consumers are making in paying down their debt, but in prompting this illusion they have tuned to the wrong channel.

The real reason many Americans’ went into debt was because their wages didn't keep up with the costs of goods and services. The median wage (adjusted for inflation) dropped between 2001 and 2007, the last purported economic expansion. And that was one of the primary reasons America began borrowing the equity out of their homes, in many cases it was to be able to make the payments and retain some semblance of a purchasing power.

A recession had already begun in 2000, and by September 11, the economy came to an abrupt stand still. What brought us out of that bog was the ability to draw on our own assets. That is what actually maintained the appearance of a robust economy, but that was an appearance only!

As the bubble began to burst, most of the borrowers; that class between poverty and abundance all but threw in the towel

The common wisdom today among Wall Street’s elite is that excessive debt-financed spending was one of the causes of the recent recession; to the contrary, that was what brought America out of the last recession. It was when the ability of borrowers to refinance their assets in order to maintain the economy fell apart that we dropped right back into the fan.

So now Americans out of work and living with much less income from working fewer hours have no choice but to cut back their debt load and perhaps this is why millions have either stopping making their mortgage payments, and in some cases actually filed for bankruptcy.

Consumer spending is 70 percent of the economy. Since consumers had until the financial collapse traditionally lived with their credit cards outstretched, it helps explain why so few jobs are being created, aside from the fact that everything has been outsourced; and it explains why we can't escape the gravitational pull of this Depression without far more government spending. However should government continue to spend like a drunken sailor it will inevitable crush the US economy even further, it seems to be an impasse we are disaster-prone either way we go.

It's also a bad prophecy for the future.