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The Catch-22 Of The Economic Slowdown
1 CommentIt occurred to me that we seem to be in a catch-22 when it comes to the current economic slowdown.
On one hand, we are here because we collectively got in over our heads in debt. Solution: Save more, buy only what you can afford, and don’t use credit unwisely. These are all wise words of wisdom for each and every person.
On the other hand, if we are to save, that means we spend less. When spending slows down, companies bring in less money and lay people off, wage growth slows for those who keep their jobs, and we don’t see growth.
Yet growth and more spending is what we are counting on to get us out of the economic slowdown.
It seems sort of impossible when you think about it.
We’ve been here before, though. This isn’t the first economic slowdown that we’ve had, nor will it be the last. I do think that this will be harder to get out of than any recession we’ve seen in the last 20 years, only because so many jobs have disappeared from this country over the past 10-15 years that simply aren’t coming back.
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One Response to “The Catch-22 Of The Economic Slowdown”
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Global Warming IS REAL said on October 30th, 2008 at 10:10 am
I don’t know if “we’ve been here before.” This set of economic conditions is completely unprecidented. Consider that the FED has never dropped interest rates so quickly and there is still no growth. There is the potential that we could have 0% interest rates and still no growth. That is what happened to Japan in the 90s. As you described above, corporate earnings will be hit hard in the coming quarters due to less consumer spending. In the past 5 years, corporations were able to tap into credit for cash. Well, as we know, those days are over. We haven’t even begun to see corporate defaults yet. Reports are that corporate defaults could reach 10% (of all corporations in the U.S. ). We have never had such a threat for an economic collapse on our hands as we do today. What do we do? Well, as individuals, protection against equity market risk is hard to get as there are restrictions on retirement accounts. In general, U.S. Treasuries, CDs and cash are the safe plays to ride out the storm. Unfortunately, most people out there will end up taking significant additional losses in their 401K as we have not even begun to see the worst. Once corporate defaults begin, things will get much worse as more jobs will get cut across the country. So, what on earth is the gov’t going to do to stimulate growth?
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