Economic thoughts

I'm always amazed at how so many of the prognosticators act as if the world was inhabited by a large group of drones who weren't able to adapt to change. When you study a trend, as every prospectus in the world points out, past results are not necessarily indicative of the future.

Recently we have been living in a domestic consumer driven economy. In fact, the economy was almost 70% based on domestic consumer spending. Now, if consumer spending goes down, as it has, the economy becomes by definition less consumer dependant. Now it may also be smaller, and it is, but the recovery could be a resurgence of consumer spending or it could be instead a tremendous growth in exports and a greater reliance on American energy and American products.

This wouldn't mean that the consumer would be unimportant, but if the percentage of the economy dependant on the consumer drops to say 60% it doesn't necessarily mean that the entire economy also drops 10%. Agile businesses with excess capacity and potentially lower energy costs, may find ways to sell to the increasing demand in emerging markets. Further, each additional kilowatt of domestic energy reduces the amount of foreign energy required and increases the energy sector of our domestic economy.

Now, the economy has contracted because of the great amount of wealth we lost and the Government has provided a large amount of stimulus. This stimulus has been geared to increasing certain aspects of the economy, such as automobile production, clean energy and infrastructure improvement. All three of these areas have the potential to create a significant amount of jobs. However, they also have the potential to reduce our dependence on foreign products and increase our balance of payments.

It has been argued that our reliance on domestic consumer spending was unhealthy and fueled by easy credit and unrealistic asset prices. There is a simple formula that can be used to determine the health of an economy, the amount of wealth at the start of a period, plus the wealth created, less the wealth consumed. If the result of this formula is positive, it means the people in that economy are wealthier than they were at the start.

We have seen a decline in wealth due to asset devaluations. It is estimated that net household wealth since 2007 has fallen by about $11 trillion. This loss has been painful, but, this is still a tremendously wealthy country that will adapt to the changing circumstances we are faced with, people always do.