America's Economy: a Vicious Cycle
by Brett Wyard
It has been a daunting and disheartening couple of years for workers, households, investors, companies and societies around the world. In the US at the beginning of 2009, unemployment had risen to 7.6 percent, consumer confidence had fallen to a record low of 25, household net worth had slipped from a peak of $64 trillion to $45 trillion (a 30 percent decline) and the GDP had dropped 6.2 percent. The stock market had gone from all-time highs on October 11, 2007, to 1996 levels on March 9, 2009. Credit markets had materially retracted—if not completely shut down—for consumers and companies of all sizes.
When will it end? What will cause the economy to turn around? Is the Obama administration doing the right things or the wrong things? Can this government bailout— or any bailout really—dictate or drive a recovery to a material degree? While opinions and guesstimates with a variety of intelligent threads of thought may exist, I can’t find a single article by any mentor I respect that doesn’t have a headline or bottom-line disclaimer stating that they don’t really know. Nobody really knows.
Until 2007, our society had been the beneficiary of a virtuous cycle in the economy and financial markets
that continued for too long and went too far (with or without the dimension of corporate scandal) and has now been the victim of what most people believe to be the greatest and most complex vicious cycle in history. But society is as much to blame as anyone: Consumers, corporations, the government and investors that abused the excessive availability of credit drove spending and investment asset values to levels that never would have been reached in the absence of such an environment.
Will the reinstatement of more conservative credit regulations lead the economy and markets to a more controlled, more virtuous state again? Will the rebound of the stock market and housing industry induce lenders to perpetuate it? We know credit will induce the spending that universally drives GDP and corporate profits, which in turn drive stock valuations and the ability of companies to employ, borrow, spend and grow again. The resumption of employment and asset appreciation will then drive household net worth and further spending. But what comes first in turning the vicious cycle virtuous again? Like my favorite mentors, I don’t know. But as many look to the great Warren Buffet for guidance, I am drawn to his quote: “Be fearful when others are greedy and be greedy when others are fearful.” It is when such market psychology is absorbed by the masses in lending, spending and investing again that a virtuous cycle can take hold.
Let’s hope the right balance of government intervention; ongoing regulation; future taxation; disciplined public, private and consumer spending; and saving and investing in a continuing capitalist society induces and controls but doesn’t paralyze a prosperous recovery so the inevitable next cycle is not as drastic. We don’t want to have to look back on the Great Depression as our point of comparison again.
illustration by Darren Booth