Today, US President George Bush and Chairman of the Council of Economic Advisors, Edward Lazear are still stating that the US economy is "fundamentally strong."
Insanity: doing the same thing over and over again
and expecting different results.
-- Albert Einstein
Virtually everyone from Washington to Wall Street, Davos to Dubai and London to Beijing is discussing the US economy, the impact of the sub-prime mortgage crash on world financial markets and the existing/potential recession. Whether we are headed for, or are already in, a recession depends on who you ask and how much money they have in the bank.
In the United States the economic discussion is focusing on the actions of the Federal Reserve and economic stimulus plans. One of the most frequently cited "stimulus" measure is that of a "tax rebate" to American consumers as a way of encouraging consumer spending.
Will "tax rebates" resuscitate the economy or will they be like giving a blood transfusion to a vampire?
So, if you are an US consumer here are a few things to consider before you get excited about that refund check.
- How do the politicians propose to pay for an estimated $150 billion* in tax rebates?
Let's face it, there is no stockpile of money (or gold) sitting in a vault at Fort Knox or anywhere else in the US ( of course we'll never know what's been stashed away in the Middle East ).
The US budget deficit is estimated to be between $8-9 trillion.
According to a 2004 report by the Brookings Institute:
" Fiscal policy in the United States is on an unsustainable path. Under reasonable projections, the budget deficit is likely to amount to about 3.5 per cent of Gross Domestic Product (GDP) in each year over the next decade. Thereafter, deficits are likely to grow much larger, as health and retirement costs mount for the baby boom generation. Over the next 75 years, the nation's fiscal gap could amount to about seven per cent of GDP "
The Iraq war is being financed with borrowed money and it is estimated that the final cost will be in excess of $2 trillion.
In July, 2007 the US trade deficit with China alone was estimated at over $200 billion.
So where is the money for the tax rebates coming from? Which program are they going to cut to give you your $800 to $1600?
- When the Bush administration was still claiming (not so long ago) that the US economy was in "great shape" the President blamed the rise in consumer bankruptcies, foreclosures and excessive debt on "spend-thrift" consumers. He stated that Americans needed to save more. So now he wants to send you money so you can immediately spend it.
- Among the Bush administration's plans for reforming the Social Security system and providing health-care for uninsured Americans was a plan for encouraging Americans to save toward their retirement and health needs. Remember Bush's proposed plan for imposing a tax on employers that offered their employees premium health coverage. So again, now he wants to send you money so you can immediately spend it.
- And if you do get your rebate how will it really impact YOUR financial security?
So you've thought about it now and some of you are a little concerned. If you are feeling a little troubled, do not panic and do not get depressed. My friends, who are far more knowledgeable about finance than I, assure me that there are steps that everyone can take to weather the storm. So we got together and came up with a few ideas.
- First, decide not to be a passive observer. You can not control all of the factors that contribute to economic recession but you can have some control over how you respond to events.
- Second. arm yourself with as much financial information as possible. In the beginning, much of it will not make sense but if you are committed to researching, reading and asking questions you will gain wisdom that will last you a life time.
- If you are in financial trouble consult a professional financial advisor asap. And depending on your faith consult your spiritual advisor. You may want to do the latter first. After all you have to live with any decisions that you make.
- Don't get taken in by political rhetoric. Problems that have developed from decades of corporate greed, banking policies that preyed upon the most vulnerable consumers, a lack of government irresponsibility and, inequitable trade deals will not be fixed overnight. The economy will not turn around without sacrifices on everyone's part. A thought mentioned during last night's Democratic Presidential Debate. None of the presidential candidates, in either party, will restore the golden years of the automotive industry, bring manufacturing back to the US, completely end US involvement in Iraq or end America's dependence on foreign oil in one term.
- Think short-term but never lose sight of the long term. You may be in solid financial condition now but could you weather a lengthy illness or a job layoff. Do not dwell on the negative possibilities and draw them into your life. Just keep in mind that life is kinetic and plan accordingly.
- If you are married or in a committed relationship, make sure that you are in agreement on any major decisions. This sounds obvious but the leading cause of divorce is .......
- Make friends with senior citizens. This is not a joke, Those who have parents or who themselves have survived the "great depression" know how to survive in tough times. Listen and learn.
- Make friends with young people. Nobody can clue you in on where technology is going like a teenager or a twenty something.
- If you get a tax rebate what you do with it should depend on your circumstances. Obviously if you are facing foreclosure, utility shut-offs, liens on your property or, any situation threatening your immediate security use the money for that. If you are in a more comfortable position consider saving it or investing it in alternative energy or another growth technology. If you do decide to spend it do not spend it on an depreciable item. Think about home improvements or taking a class to advance your education.
- It you are facing moderate financial problems and have considerable equity in a home or other real estate, consider selling shares to a close friend or family member. I cannot emphasize enough a close friend or family member. In essence you will be making them a business partner by allowing them to invest in the future resale value of your home. For example, if your home is worth $150,000 and your friend or family member wants to help you and at the same time acquire a 5% share in your home they would give you $7,500. Then later if you sell your home for $180,000 you give them $9,000. There are various ways that this could work and all of the details would have to be worked out with a reputable lawyer.
These are just a few suggestions. For more ideas on reducing your debt, saving, surviving a credit crunch and coping with the loss of a job see: America, Maxed Out
and a final thought
Will Economy Lose Support From Abroad?
January 22, 2008; Page C1
As the economy reels from the busted housing bubble, questions loom about whether overseas investors' hunger for U.S. assets will weaken.
For years, the U.S. has run a steep trade deficit with the rest of the world. The so-called current-account balance, broadly speaking, measures the difference between goods and services imported and exported.
The scale has lurched toward the import side of the equation for the U.S., which means the country has been consuming more than it has been saving. Foreign purchases of U.S. assets such as Treasurys have helped finance that spending. This imbalance has inspired all sorts of doomsday forecasts about economic meltdowns and foreign investors dumping dollars and Treasury bonds.
If such scenarios have any merit, today's economic turmoil could test them.
Economists have wrangled for years about what created the current-account deficit -- a spendthrift U.S. consumer and government are favored targets, with productivity and out-of-kilter currency-exchange rates thrown in. Economists love even more to speculate about what could turn it around."All conditions and all circumstances in our lives are a result
of a certain level of thinking. When you want to change the
conditions and the circumstances, we have to change the level of
thinking that is responsible for it." -- Albert Einstein
*corrected 1/23/07 2:40am