Thoughts on the economy

A year ago there was general fear, and with good reason, that the financial system that allowed business to operate was in serious danger. We had already seen the Government bail out Freddie and Fannie and there were frantic negotiations going on about Lehman Brothers. We all know that the result of all that effort was futile and Lehman declared bankruptcy, the market dropped and the big question everyone had was who was next?

Since then we have seen Governments prop up many financial institutions, restore a degree of confidence in the financial system and sow the seeds of recovery. There are some who feel that all these efforts are actually counterproductive, and that the ill that infest the financial system have been allowed to continue. These doomsayers expect that the "house of cards" created by the Government will collapse once again and we will end up worse off than we would have been had we not tried to prop up a doomed system.

Meanwhile, the actual economic activity of the country has contracted and is starting to grow from it new base. The loss in wealth related to asset devaluation is significant and has reduced the amount consumers have to spend. With this reduced level of consumer spending, companies have reduced costs to remain profitable and in doing so have reduced staff leading to significant unemployment. Many of these jobs will never come back, even as these companies grow since technology and automation will be employed to avoid the high cost of labor.

I believe that the devaluation of the dollar will make our exports more competitive, increase the cost of foreign energy, promoting faster utilization of domestic resources and stabilize our balance of payments. This will help to create jobs to reduce unemployment and create increase consumer demand. It will take a bit of time for housing to start to recover although it will be faster in some parts of the country. A few areas, and some of our previous fastest growers, may find themselves in contraction for quite awhile. California, despite its desirable climate, seems intent on self destruction. Florida needs an industry that doesn't rely on population growth to sustain it. Nevada has relied on Gambling and more and more competition is being created every day. Arizona has been so dependant on Southern California real estate values that its prosperity is clearly in jeopardy for quite awhile. All of these States have an opportunity to develop solar energy alternatives because of their climates and that could help them recover and reduce local costs.

Most of the rest of the country will recover faster since the boom growth was not as pronounced as it was in those four states. One of the things that is inevitable is that the percentage of the economy related to domestic consumer spending will decrease. This is the result of the asset devaluations and it will be replaced to some extent by the growth of our domestic energy industry and increased exports due to the weak dollar. The growth of emerging markets will be a significant boost for many of our industries. Of course as more jobs are created, consumer spending will recover to some extent, but it is unlikely to be as high a percentage as it was.

Some of this reduction is going to be related to reduced prices for any items as industries have cut costs to remain competitive. We will likely see inflation in import prices and deflation in domestic prices, driven by reduced demand. This will of course force companies who rely heavily on imports to look for domestic options, such as energy. However, there is too much slack in the domestic market for inflation to be a major problem for quite a while.