I've always felt that the recipe of the US economy is one part business success — you know, the actual facts on business financials, people getting fired/hired, etc — and two parts consumer psychology. Here's your American pie. Economists get paid big bucks to read the crystal ball and may have some insight based on historical information, but how many times have you ever seen an economist, or anyone else for that matter, accurately forecast the future consistently. If their forecast was right after the fact, they'll be the first people to tell you they are great predictors, even I can do that with at least 50% probability.
The Ingredients (facts): The WSJ just reported that there was a further slide upwards of the jobless rate to 8%. There's no fallacy that businesses were living it big, making poor decisions, and hoping for the best. Sort of like the Dutch tulip mania of the 1800's, people bought, and sold beautiful flower bulbs without really understanding why people wanted the bulbs. Supply and demand forced prices ski high. But then the bubble burst. Fast forward…. Florida real estate is one present-day example. There was no real reason for the rapid growth of home prices. Automobile manufacturers are another, "I can keep selling SUVs 'til the cows come home, there's where the real profit is", without thought for the economy or fuel price risk. Did the mortgage exec really think that giving mortgages out to people with unverifiable income was a smart thing?
The Mixer: In the news today, Obama says he'll do whatever is necessary to fix the economy. Articles discussing the economic downturn are regular parts of the news today. You open a newspaper, or read an online politics or economy article and the theme's the same. The big downturn. People are afraid of the economy. And they should be, look at all the problems which have occurred over recent past: real estate dropping, major manufacturers in trouble, everyone's conserving cash. Mix it all together and its ready to be consumed…
The Consumers: The psychology of people is the driver. People have stopped buying stuff because they're afraid. They read the articles, see the facts, and want to save their money. They want to pull money out of the stock market and just save it. Loads of business who depend on receiving the extra cash that people have don't get it anymore, so bang, the self fulfilling prophecy: more businesses with decent models go down.
So we have our perfect "American pie". How do you change it? Here's a start…This fund manager says that we're at the bottom now, start buying stuff. Change consumer's thinking, make them want to buy products and services like cars, appliances, home renovations, lawn mowing service, etc. Everything else will take care of itself.
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