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January 19, 2009

Are People Afraid To Spend -- Or Just Can't Spend Any More?

-- by Dave Johnson

Earlier I wrote that there is a problem lending to people who are not "credit-worthy." Banks are looking for people to give loans to, as long as they can be pretty sure they will be paid back.

Today Warren Buffett said,

“We have fear which leads to people not wanting to spend, and not wanting to make investments. And that leads to more fear.”
OK, I can see how one of the richest people in the world thinks that people are just afraid to spend, and that's the only problem. But from where I live it looks a lot more like people are tapped out -- savings depleted, income stagnant or lost, debt up to the ceiling. And that is why they aren't spending anymore, because they can't spend anymore.

We have to come to terms with what happened. All the money went to the few at the top, wiping everyone else out. And so the economy finally stopped.

Trickle-down economics just doesn't work. THAT is why we are having a financial crisis. The few people who make a lot of money just can't see that. Until they do, their solutions and predictions will continue to be just wrong.

Posted by Dave Johnson at January 19, 2009 12:17 PM


Comments

Obama faces opportunity in crisis, as those before. And he has a key player as advisor:

"Since World War II, Americans have only once before experienced a similar economic trauma: the double-digit inflation of the 1970s (13 percent in 1979). Work and thrift were undermined because inflation threatened the worth of wages, salaries and savings accounts. Then as now, people were terrified; inflation seemed uncontrollable. Starting with Lyndon Johnson, four presidents had failed. No one knew how high it might go. Then as now, we seemed unable to chart our destiny.

What suppressed inflation was the brutal 1981-82 recession undertaken by Federal Reserve Chairman Paul Volcker and supported by the newly elected Ronald Reagan. Unemployment reached a peak of 10.8 percent, but gluts of jobless workers and idle factories broke the wage-price spiral and ushered in two decades of strong economic growth. Reagan won a landslide reelection in 1984; his campaign featured a signature TV spot that boasted, "It's morning again in America."

Up to a point, there are parallels for Obama. Today's misery is a political opportunity. Reagan's popularity soared on the belief that he had reestablished economic order. The country had reasserted control of its future. These gains offset the recession's severity and its hangover. In 1984, unemployment still averaged 7.5 percent.

If Obama can overcome the sense of helplessness, he will surely reap much political credit. There need not be a boom -- the economy must achieve just enough sustained growth to convince most people that it's manageable and that we have not descended into a new dark age.

Here, the parallels break down. Volcker and Reagan embarked on a deliberate effort to quell inflationary psychology; the question was whether the recession could be maintained long enough to do the job. Obama faces a global recession brought on by murky forces barely understood. The effort to counteract them and to prevent further economic damage is a grand and confused experiment. If it fails, Obama's burden will be back-breaking."

http://www.realclearmarkets.com/articles/2009/01/barack_obamas_great_economic_f.html

Posted by: Mace [TypeKey Profile Page] at January 19, 2009 12:42 PM

Thanks for being clear about things, Dave. It's so obvious what you said, but our 'elite' seem to be doing their best to avoid the obvious. Next, we'll hear more of blaming the victim arguments: the (new) poor are getting what they deserve.

Sorry, to hear about your wife losing your job. Sadly that is a likely lot for many of us. The present unemployment estimates are woefully inaccurate and propagandistic. It's more like 12 percent and we could get close to 20 percent by the end of the year.

(Me, I work w/o employment taxes and only can be sure of some work maybe one month in advance..and can estimate half time work for this year. So many self employed people are there not by choice but due to a contraction employment market that got worst all through George W. Bush's two terms.

You're right, all the money went to the top (one percent) and that's the problem.

Posted by: datadave [TypeKey Profile Page] at January 19, 2009 10:50 PM

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