This is Part 6 of the
"Plain English" American Economic Disaster series of diaries. Up until now the series has looked at all the problems that we face. Today I want to look at a few possible solutions.
A word of warning though, these solutions are not pleasant (translation - they will hurt real bad), and are almost certainly too politically unacceptable to ever be implemented, but hey.... You also might want to look at
Jerome a Paris' - You thought I was a pessimist? Not until you read this! for more depressing stuff.
OK. How do we fix the mess? There are a couple of ways to look at this. We could take a look at what the folks in charge should be doing and/or we could see what we as individuals should be doing (to fix as well as survive the mess). Since the second approach is probably of more interest to most folks (the non-economists that is) I will start there - hopefully in "Plain English".
Before I start, let me give a "quick" summary of the problem. culled from the previous diaries
1. Quite simply Americans are living beyond their means. You may not personally think this applies to you, BUT overall Americans are. Take a look;
Every single day:
- Americans buy $5.5 billion in foreign goods, but only sell $3.5 billion to foreigners. It is like shopping (buying) every day of the week, but only working (selling) Monday to Thursday and a half day on Friday.
- The Federal government spends more than it makes so that it has to borrow $1.5 billion/day! It also spends a billion a day on interest!
- The US needs to have foreigners send it $2 billion new money each day to finance the spending. The foreigners either lend the money, or they buy up parts of America (land, companies, mortgages etc.)
- The US spends an obscene amount of money on defense. For 2006 the military has requested $441 billion. Then there is $49 billion for Iraq and $41 billion for Homeland Security for a total of $531 billion (That's another $1.5 billion a day). In fact the US military budget is almost as large as the Rest of the World's put together.
2. Interest rates were/are too low: When the economy looked like it would tank after the tech bubble and 9/11, the Fed reduced interest rates. This did two important things; it made it more interesting to borrow AND it made it less interesting to save. It definitely got people spending - so it worked - except too well. Just like the crowd at the 3.99 all-you-can-eat buffet gorging on food, the general populace gorged itself on low interest credit. Now people owe too much (ate too much) and it is time for a diet.
3. The US dollar: In most cases when a country is living beyond its means the international market will slam its currency making it too expensive to buy imports and at the same time making the things that they sell (exports) cheaper on the world market. The problem is in this case that everyone is using the US dollar for trade and no one wants to deliver the unpleasant message. So it is a bit like a big, tough, rude drunk that should be told to stop drinking. But no one has the guts to stop him, except now he is getting in his car about to try to drive home.
Two final points before we get into the prescription phase. First, we live in a capitalist economic system. In this type of system you want to try to be the one with the capital - not the one with debt. That is why it is called capitalism. You can object all you want but that is reality. Second, the greatest minds in America are not trying to cure cancer, they are working to get those few remaining dollars out of your pocket. They are highly skilled and very effective. You need a strong defense to combat them.
An individual prescription for survival:
It is impossible to come up with a one size fits all plan, so what follows are some to ideas to consider. You need to figure out if they are useful for you.
1. Stop spending. Although you may have been told that spending is "patriotic", don't listen. Resolve to buy nothing that is not essential until the US trade deficit goes to zero. Now that would truly be patriotic! Start by really separating needs from wants.
2. Pay down debt. Interest rates are going to go higher. First because inflation is increasing, but later they will go up to protect the dollar. They will only fall again if the US goes into a major Japan like depression. Cut up every credit card but one. If you can't pay the full amount each month cut that one up too.
3. Get rid of the TV. The single easiest thing to do. The TV is the major channel into your house to convince you to buy (the ads and the shows). Try not watching for 2 weeks (not that hard) then turn on the set again. You will be amazed after a 2 week break how hard it is to watch as you are continually "sold to". If you must keep a TV set (yes only one) then put it in the most out of the way inconvenient place in the hosue.
4. Stop going to the mall, restaurants, bars (places where people spend money). Instead hang out with friends, spend time with the family, or read a book. Spend time to build up friendships because if things go bad, you will need a community and friends. Plus it's good for your health and mental well being.
5. Start saving again. Once you have paid off credit card debt work to build up a nest egg of at least 3 months of expenses.
In general: Live below your means. This is the attitude that built America. To rebuild America it needs to make a comeback.
A prescription for the US government:
This sounds brutal but believe me it is a minimum requirement to rebuild a strong foundation for the future.
1. Make it harder to borrow money. People have been borrowing like crazy for two reasons. Interest rates were too low and credit standards were...well what credit standards? What you get then is everybody borrowing and then wanting to buy something. Guess what prices (especially for houses) go soaring. If all those nutty gimmicky mortgages did not exist, house prices would never have gone this high, and...and...
Interest rates are going up, that is a given. Greenspan is raising rates to fight inflation, but this will also keep the US dollar high making it very hard to reduce imports and increase exports. A much easier way to accomplish the same objective would be to tighten credit standards. Something as simple as requiring 10% down payments on housing and outlawing interest only mortgages would have an even greater impact with less side effects than an interest rate increase.
2. Increase the gas tax as part of a new Energy plan. America is spending close to $25 billion A MONTH on imported energy that is to a large degree used wastefully because it is too cheap. The plan would raise gas prices to $5/gallon, fund alternate energy projects, rebuild the railroads (far more energy efficient than trucking), and reintroduce lower speed limits. It would be made clear that gas prices would be reduced once American demand decreased significantly (for example America uses about 22 million barrels a day of oil. If this were reduced to say 17 million, gas prices could be reduced to $4.00).
3. Slash defense spending. I mean slash! It should be bloody evident to everyone that America can no longer afford to "police the world", without the Rest of the World lending it the money to do so (remember they are not paying for it, just lending the money to do it). The cuts have to be massive - a cut of 50% over 4 years would be a start.
4. Bring in national health care. Every major Western economy (the ones America is really competing with) has a national health care system. Every Western economy spends less on health care, but covers all of its citizens, and in almost all cases has better health outcomes. National health care would also put all companies on an equal footing as well as making it easier for people to go out and start their own businesses without the worry of "not having benefits".
There are many more ideas but the 4 above are key to getting America off of the spend `til you drop mentality and back to the saving and investing mode that builds all strong economies.
Of course just like the hangover after a hard night of drinking, the recovery from the debt binge will not be easy. The standard of living of Americans will be reduced and people in general will feel less well off...BUT... this is infinitely better than what could happen if nothing is done...think 1930's, or worse.
This has been part 6 of the series, with other parts to follow in future diaries (hopefully). If you missed the first few installments click on the links below to read them.
Part 1. The Bushies have dug a big, big hole.
Part 2. Consumers are up to their eyeballs
Part 3. How low interest rates have destroyed America
Part 4. Our foreign friends (?)
Part 5. An Oily Mess
As always, questions are welcome.