Le Blog’Ich

So the economy is tanking. Consumers are depressed. Credit is scarce. The debt amount is daunting. The system is broken, with more Madoffs to come out of the box. Chrysler might go underwater, if not GM…

Wow. Just writing about this is actually depressing me too…

How did we get there? I think there is no point in me going through what everyone knows by now; worthless mortgages, Real Estate Bubble, rotten Securities yadayadayada… But I think that the situation is actually not so new, and to a certain extent can shed some light on the recent Obama policies.

FYI, I am a foreigner so it is easy for me to write about this as I tend to think of myself as a third party -hopefully neutral- observer.

The US debt is not new. Domestic consumption has been driven by credit for quite a while now, so the “bubble” could have burst at any time. What’s new is that people / economists / media outlets are now talking about it and consumers are worried about it.

What has been driving the US economy for so long, and especially consumption was the hope that tomorrow was gonna be a better day. “Buy now, pay tomorrow”. An hopeful view of the future, very much entrenched in the US optimistic mindset and entrepreneurial spirit. In short, I am talking about the American Dream. The US economy was never really that much more competitive than that of other countries. It was (partly) funding its growth through consumer credit, with the belief that borrowing to consume / to invest was ultimately creating wealth; this actually worked for a while and did create a virtous cycle. But the bubble has always been waiting to burst. Only hope and optimism, translated into further credit and hence consumption, was preventing it to do so.

Now, the dream has been shattered, and consumers are not believing anymore that tomorrow can be better. Their confidence is altered, maybe forever which is a uniquely new parameter. So that’s part one of the Obama plan: fund the job creation and hence the “good news” at any cost. That’s pretty much what it is: “The consumer is depressed. Let’s artificially bring his morale up, even if it could cost us in the long-term, because if we don’t do so now, there is a strong risk that the consumer will never recover and then we can all give -up any hope for neither a short-term end to the recession nor a chance to regaining economic leadership in the long run.” Yep that’s my translation of the Obama stimulus package, and frankly, if I were him (not that anyone asked me…), I would do exactly the same thing, if not spend even more, just to make sure that we will read some good news in the papers, sometime soon.

What’s next? Well, I believe that we should first prepare ourselves for more bad news; Chrysler could go down (which would be VERY bad news as the whole auto chain is 9m Jobs overall), the market will too, we’ll read about further rise in unemployment numbers every month for the next 9-months or so, and most likely we’ll have a few additional Madoff-like stories which will further affect the consumer confidence and contempt towards the system.

I say, Keep’em coming!

The impact of the stimulus package is likely not to be seen before 9 months if not a year. That’s just how inelastic things are (based on no scientific fact rather than my empirical observation of the general impact of policies over 15 years of reading the news or so; feel free to provide more science to refine my assessment of timing). When the stimulus package effects finally kicks in, the worst thing that could happen would be that the good news (say xx thousands jobs created) be diluted by further bad news. So, we’re better off taking all the hits now, while crossing fingers/praying/all of the above that the consumer ends up groggy yet, not K.O. in the process of getting 9-12 months of bad news. A tricky balance to achieve, but doable. Then, if this works, once all bad news are behind us and we can read some good news, then the economy can start, if not picking up, at least stop its decline, as consumers can again hope for a better day.

If I could use a metaphor, it’s like a patient who learns that he /she has multiple cancers and needs to receive treatment. While I am not a medical expert (and apologies in advance to all cancer victims / relatives/ friends. I do not mean to offend anyone here), I heard often that for any treatment to work, patients also need to fight against the disease and hope for recovery. Well, I think that using that image, it is better to hear all the bad news at once, and then hear that the cancer has stopped spreading, rather than a rollercoaster of good and bad news which could ultimately wear the patient’s hope off. That’s just my theory.

The title of this post contains the word “policies” with a plural. That is not a coincidence. Indeed, the Obama team has slightly been under some pressure recently for not pushing investigation on some questionable actions (say torture for example) of the former administration. In my mind, that is not because Obama does not want to go there. The issue is timing.
Remember my mention of the American Dream? Well, what if those investigations -if pursued today- were to uncover a very ugly side of the former Administration, if not of the US? I for one, believe that this would even further shatter consumer confidence, since it would appear that The US might not be the best country in the world anymore. That’s just my interpretation on why Obama is not going there, and definitely what I would do if were him (Ok. I wish I could work for him. Just shoot me now:) ).

Rescuing the economy by preserving a shattered dream, at any cost . Not the most compelling plan, is it? But what else can we do? How in the world did we get there? …