At this point in history, everyone is talking about the economy and whether we are going to get out of the "most serious downturn since the great depression". Many people want to know how we got here. Well, I can tell you and it is very straightforward. First a little theory.
Economists talk about the "flow of money" being one of the keys to understanding how an economy works. If the economy were a human body, the flow of money would be like it's blood. As money flows, good things happen. Money gets skimmed off to pay salaries and paychecks, as well as taxes which support our governments. So, it's the flow of money that matters. The more money that flows and the faster it flows, the better. More people get paychecks and Governments get more taxes.
Now to history. During the 1990's in America, we had an incredible economy. Truely, we should talk about the "Gay 90's"; not in terms of same sex but in terms of the wonderful time we had. Employment was at an all time high. In fact, unemployment (the measure of how many of us are unemployed) was at a historically all time low and an unsustainable low level. Everyone was working, money was flowing, people were buying things, paying taxes, etc. Here in Silicon Valley, people were changing jobs every 18 months and getting 10-20% raises in the process. It really was a grand time.
But what no one understood was that it was a bubble.
Then in the first decade of the new century, we had a series of let downs. First and foremost was 9/11. But we had others like Enron and the Credit Crunch and the real estate bubble, etc. Each of these ratcheted us down. All leading to the "great recession".
To counteract these and to try to get us "back on track" governments have been spending enormous amounts of money (TARP, Stimulus etc). These have had very little impact because they have not increased or accelerated the flow of money. Businesses and consumers are paying off their debts and pocketing anything left over because they are afraid. And they have good reason to be afraid. And it is a GOOD thing they are paying off their debts, reducing their mortgages etc.
In some ways, we are paying for some of the abuses during the 90's. But the flow of money is not improving. Businesses are not hiring. Because no one is spending money, government tax revenues are way down. So governments are suffering.
During the 1990's, when life was good, the fantastic wealth gained through the high velocity and volume of money flow, caused consumers to ratchet up their expectations about the cost of living. People ate out more. A Starbucks coffee every day was considered part of their living expenses. Along with the gardener, the cleaning person, a new car every two years, etc. Our standard of living rose as our paychecks increased. It was wonderful.
Many, people today are looking forward to returning to those days. The expectation being that the daily afternoon coffee and cleaning person are "normal" and part of that inflexible portion of our budgets called living expenses. On top of that we have vacations and "splurge" spending. But the bottom line, the minimal spending level, became high during the 90's and people haven't given up on it yet. They are hoping they can hunker down until the economy returns and they will be back to "normal".
Furthermore, during the 90's, we decided that some jobs were worthy and others were beneath us. Food services, labor workers (things like ditch digging, landscaping, etc) and a whole slew of other jobs and career paths we've now defined as not good for us but, instead, good for the illegal aliens or the poor among us. Meanwhile, the "knowledge worker" jobs that we all decided were clean enough to aspire to became outsourced. As the technology improved, it became possible to outsource most of those to other countries where their standard of living is much lower so the costs to business are also much lower.
Also during the 90's governments, flush with this huge inflow of money in the form of tax receipts, created ever increasing entitlement programs and grew the ranks of bureaucracy; creating more jobs and government programs based on the large cash that flowed into government coffers. Citizens who became the beneficiaries of these programs became dependent on them.
So, it was the enormous flow of money that increased our standard of living (or our minimum living expenses) and the size and extent of government.
And it was all based on a bubble; an unsustainable flow of money based on many factors that I won't go into here but suffice it to say that the forces that created the "gay 90's" are not easily recreated. For example, one obvious thing is how "technology" created a new class of knowledge worker jobs that, ultimately, "technology" took away when it enabled these jobs to go offshore.
Both the large government (and by that I mean both the size and spending; i.e., government workers and entitlement programs) plus the high standard of living of consumers are going to be very difficult and painful to reduce. Both groups will complain bitterly in the process.
The problem now is how quickly we undertake to make these changes. Likely these will take a very long and painful time to come down to a level that is actually sustainable long term. During this period, there will be a lot of people complaining and a lot of anguish.
As we've seen during the past year or so when it is apparent that governments need to scale back, they delay and deny that it is necessary and political in-fighting is the norm as they all try to keep their constituencies entitlement programs and kill those of the other politician (who's votes they couldn't give a hoot about). Then as major cities and states near or even declare bankruptcy, then the public and our appointed leaders will have the guts to do what is necessary. But until public support is behind them, it will be nearly impossible to do the right thing.
So, what is my advice? Get used to spending less. Tighten your belt, eat at home, pay off your mortgage, work very hard to keep your job. Also, vote for the candidate that seems to understand what's going on. Now is the time to fix our fiscal house. We can debate the environment, same-sex marriage, the war in Afghanistan and any other number of issues later -- after we get our house in order. For now, I say, let's focus on getting fiscally straight. Trim the ranks of Government to where it can afford to pay the people based on the taxes they receive.
In your home, change your attitude about work. Make hard work "normal". (It's actually good for your health!) Spend your money on things that will help people. Don't ask Government to help the poor -- you do it! Turn off the TV -- it warps your perceptions. Get plugged into real life, real people.
Ok, I see that it's time for my trip to the coffee shop. Gotta go. But you just remember what I said.....
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