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The Wright Perspective℠
Social Commentary from the C-Suite to Main Street℠
A Blog by Gary Wright II
Economy, jobs, deflation, and confidence
Tuesday, July 27th, 2010
It's been a while since I last wrote about the economy, so I thought I would provide an update. The news is still not good:
The States: 46 out of 50 states have huge deficits (versus 48 last time) and they have very little hope of getting out of debt. There are only two options: Increase revenue through higher taxes or cut things out of their budget. Neither solution is very pretty. They can't collect income tax on the 10% that are unemployed. Raising sales taxes can stifle growth and would put even more strain on the families who are struggling to survive. Most states have cut all but the basic services and still don't have the money for critical items such as police and schools. The only thing left is a federal bailout for the states, but with the US 2010 deficit already at $1.47 Trillion (10% of our Gross Domestic Product) that is a bitter pill to swallow.
Jobs: Many companies now have money on the books, but they will not spend it with so much uncertainty about the future. Most of the jobs that have left the country will never return. This is catastrophic for all cities with only a single industry. Places that have diversity will be the first to recover, but even Bernanke estimated that unemployment will not recover for 2 1/2 years. Last week congress was forced to extend unemployment benefits because so many can't find work and some have given up looking for them. Consumer confidence will not return until jobs and the economy stabilizes. The Federal Reserve expects recovery might take another six years and they have lowered their expectation of GDP growth to around 3%.
Housing: It is painfully ironic that we have so many families now homeless, yet there are entire neighborhoods of empty houses. Since foreclosed homes bring down the value of those around it, no one is moving to these neighborhoods even though some of these houses are being sold for pennies on the dollar. Fannie Mae and Freddie Mac were complete failures. Over 1/3 of home owners are trapped because they now owe more that their house is worth. The mortgage companies got bailed out, but none of that money made it to help the families who need it most. With jobs being lost and such economic uncertainty, refinancing can be quite difficult. Again, the ones who need help the most can't qualify for a new mortgage.
Where did all of the money go? To the wealthy. In 1998, the richest 1% owned 30%. In 2003, they owned 57%. In 2008, they owned 70%. Notice a trend???
The Fed is all out of tricks. Raising the interest rates decreases lending and lowering them decreases profits.
Prices and Deflation: The falling price of consumer products make it a great time to buy things (if you have money to spend) but the price of food is going up. Where else but America can you buy a double cheeseburger for $1 but a gallon of milk is twice the price of a gallon of gas? The US consumer prices index fell for the third consecutive month in June, raising fears of deflation. A trend of inflation would not be good right now, but it can be very difficult to break out of a cycle of deflation. When prices keep going down, people put off buying items since they know it will be cheaper in the near future. Those purchasing delays equate to lower sales which causes company profits to fall. When the profit margin get squeezed many companies compensate by letting go off employees. As the supply of items grow, the business will reduce the prices in order to get rid of the inventory. Consumers notice prices are falling and wait to buy. The whole cycle of deflation then starts all over again.
So what can we do? There isn't a household in the country who will not be affected by the challenging days that are ahead of us. I hope we will all come together as families, friends, and neighbors. Always remember: Your net worth and your self worth are NOT related.
Best regards,
-- Gary Wright II