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Wednesday, February 18, 2009

Debt Brought US Down, Only We Can Rescue Ourselves

If your not life is not being impacted in any way by the current economic disaster you must be a subsistence farmer working your fields on the side of a mountain somewhere. Even those farmers have almost no access to modern health care, education or future opportunities for their children.

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I do not advocate buying nothing of foreign origin whatsoever. Rising nationalism and trade embargoes were among the primary causes of World War Two. However, it is important to understand the true reasons your daughter or son or you yourself cannot find a job. 

Do not rush to blame the Bernie Madoffs and Lehman Brothers in New York just yet. It is true those people are having an impact on our economy but they are not the primary reasons our nation may soon default on all debts and collapse in an economic heap. These large financial crimes hurt mostly the very wealthiest people, although we are all being forced to pay for their huge crimes. Retirement funds and 401ks are where most people put away cash for their senior years. Those funds can lose a great deal of money when major financial firms fold.

Reasons for 2008 Recession

  • The piling of many risky home mortgages into one large investment, an investment that often failed.
  • Rich people pulled back many other investments, putting the money into gold or art or other "safe" investments, like government bonds.
  • Investments in emerging markets were drastically reduced.
  • Businesses laid off employees as customer bases shrank.
  • People stopped buying big ticket items like washers or cars.
  • Families and individuals took fewer vacations.
  • People on unemployment spend less. Far less. They also miss home mortgage payments, and lose their homes to foreclosure.

We spent more than we will earn for too many years. This major fault line runs though our nation and our individual lives. It is the primary cause of what is happening in the U.S. and around the world.

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We borrowed more than we could ever repay to build our mighty Navy and Army. We borrowed to buy a house in the suburbs and the car to get us back and forth to our distant jobs. We borrowed from the value of our homes, using home equity loans, to take vacations, pay for extra rooms, or buy digital television sets. We borrowed to go to college and we borrowed to take our wives to that fancy restaurant down the street.

We failed to save for a rainy day and now that rainy day is upon us.

Our government has no choice but to borrow more money from the wise Chinese. China decided to save up much of the money Americans spent on Chinese goods; at discount stores or electronics outlets.

Enough about the problems, what solutions must we consider?

Right now many Americans are staying home more nights, saving what little they can after the credit cards, bills and home mortgage are paid. For some families, this is probably a very good thing for them to be doing. Personally, I have worked out my budget for the next few years and set aside some money every week to spend at locally-operated establishments where I socialize or buy essentials. If I do not spend some money in those places they will close up. Many neighboring businesses already have gone out of business. If I soon fail altogether, there are places in the Third World that will welcome a talented computer, farming and language instructor. Been there, done that.

Failed Market House, Annapolis 073941

If you can afford it, you must continue to spend some of the money left over after the bills are paid. Consumer spending makes up 70% or more than two thirds of the U.S. economy. If you stop spending in your local community, the businesses will close and crime and property taxes will go up. If you stop spending money on American-made products, American private-sector jobs will nearly all vanish. Finally, the value of your home will continue to fall well below the value of the mortgage you are trying to pay off. In most places in our country 90% of our fellow citizens are still employed.

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If you work for the government or a place that exists primarily to fulfill government contracts, do not fool yourself into thinking this problem is not your problem. You may soon need a second job or even another job. My dear friend just returned from a trip to California, she told me she saw more homeless people in the streets than she has ever seen in her life, anywhere in the world. Of course, she has never lived in Kolkatta or Port au Prince like I have. Many of those homeless people my friend saw were formerly working on government building contracts. California may not have the money to make the state payroll as soon as next month.

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I do not want to sound like former President Bush after the events of September 11, 2001, telling everyone to go out and spend. I do suggest that those who can afford to support local establishments do so, within their means. Buy American products if the choice is there before you, unless you somehow expect Japanese or Chinese firms to give you a job. I realize there are Americans working for Honda, Toyota and other foreign-owned firms. For them it may well be a good thing to send part of their earnings to Tokyo or Beijing. For most Americans that is not a wise choice, unless you plan to start living on incomes equivalent to poor laborers in China, India or Japan.

Market Day,  Purulia District 00018

These are difficult times that require tough choices. China and India are still growing, albeit at a slower pace. The governments and people in those places will adjust to life with fewer exports to Western nations. Many people are already returning to family farms to ride out this recession. In the United States most of us simply don't have the luxury of returning to subsistence farming.

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Links

New York Times article
Washington Post article
Second New York Times article

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