As I write this commentary, there is still no solution to the Fiscal Cliff situation. In all my assumptions about our budget for next year, I have decided to be realistic and assumed that our taxes will go up. Thank you Washington for dropping the ball.
Despite whatever efforts have been made, I question if any solution would really fix the problems that revealed themselves in 2008. In a sense, I wonder if we’re simply putting duck-tape on a leaky pipe. Are we actually addressing the real problem? Consider the facts:
Has Progress Really Been Made?
On the surface, it would appear as though the future of US economy is recovering and we’ve made a lot of progress since 2008. The DJI stock market index has almost doubled from its lowest point, the GDP (gross domestic product) is up, and unemployment is trending lower.
But you’ve got to remember that most of that momentum was government funded. Take a look at the following chart comparing US debt and GDP:
Notice that as our country’s debt level increased, so did the percentage of debt to GDP. Basically from this chart, you could conclude that the only reason the economic wheels got turning was because of government spending.
The fiscal cliff threatens to cut that spending and thus bring things to a halt. The media is warning us that that would throw the economy back into a Recession. While no one (including myself) really wants the country to go back into a recession, I don’t really see how we can avoid one when nothing was ever actually fixed.
Consider this: When you take away the government programs, the stimulus spending, the various quantitative easing programs, did we ever REALLY exit the Recession? Would our GDP really be do high? I don’t think so.
In order to sustain itself, the economy has to be a naturally moving organism that is not dependent upon one sole contributor. In this case – the government.
So how do create a stable economy? Simple:
• Businesses need to have a natural flow of consumers to buy their products. They also need to be healthy enough to employ people as part of this process.
• Regular people like you and I need to be capable of going forth and naturally spending our money.
Those are the fundamentals of the economy. But yet, there is evidence to support that neither is really happening:
1) Median income has been little unchanged over the past few years while CPI (and therefore inflation) continue to rise. How can we naturally afford to buy more things if they continue to go up in price, and yet we aren’t making any more money?
2) And on that note, home prices have not seen a comeback. For many of us, our houses are arguably some of our most valuable assets as well as the largest purchases we will ever make. Yet, if most of us are under-water and unable to sell our houses for more than what still owe on them, then we’ll have little opportunity to do so. Thus, an important contribution to the GDP will be missed.
3) Despite the decline, overall unemployment is still higher than it has ever been over the past two decades. If we were really naturally fixing the economy, this rate should be lower because more businesses would be hiring.
Unless these fundamentals are corrected, we’ll only be putting band-aids on an already broken leg.
Of course, this is not a one-sided effort. As we evolve into our World Economy, Americans need to understand that the rules of the game are changing when it comes to being a world leader. Supply and demand has shifted many jobs. In order to retain our dominance as a First World Nation, we’ll have to get back to being innovative about we move into the future.
Still Optimistic About the Future of US Economy:
Despite the faults I point out, I am fundamentally optimistic when it comes to the future and long term prospects for our economy. That is why you will still find me encouraging people to plan and invest for the future.
It is my personal belief that the majority of the population does not want to suffer and will always find a way to right the wrongs of the few. We’ve moved past the Great Depression, inflation spikes in the 1970’s, Black Monday, the Dot-com bust, the Housing-bust, etc. And we’ll do it again.
Remember that the economy and investments are all cyclical. Even if taxes do rise and the U.S. goes back into a recession, that won’t stop me from doing what I need to in order to reach my goals. It just means the rules of the game will be different and I’ll have to adapt.
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