Economics 101

22Apr09

I will start by freely admitting that I am not now, nor have I ever been an expert in economics. I haven’t even played one on TV. My main experience with economics has been personal finances. And there was that Economics class back in high school, although the only reason I’m sure I took it is that it was required for graduation. My wife remembers more about it than me and she wasn’t in the class.

I have often found the way some people invest in the stock market to be ridiculous. People would buy into a company in the hopes that they will be able to get someone later on to give them more money for it. It worked for a while from basic supply and demand economics. Most companies have a limited supply of shares, so as long as more people wanted them than owned them prices kept going up. We’ve now run out of suckers to join the bottom of the pyramid. Maybe it’s because I only have that high school Econ class, but I always thought the idea was supposed to be to buy a company you thought was a good business and buy their stock so that you own a piece of the company and get a share of the profits in the way of dividends. Frankly seems simple, straightforward, and sustainable for extended periods of time.

Another market area that has been affected by simple supply and demand: the housing market. I get the concept of the mortgage-backed securities going south, which helped caused the banking crisis. Also, the plethora of sub-prime loans that people started defaulting on. Banks became a lot stricter about who they gave loans to. Fewer buyers in the market (less demand) means prices go down. It all makes perfect sense. I received my 2009 Notice of Valuation and Classification for Taxes Payable in 2010 and after having lost about 5% of the Taxable Market Value from 2007 to 2008, it’s slated for another drop of 15%. Things like this have caused panic; people are all up in arms about the fact that their house is now worth less. My question is, if I’m not looking to sell my house, WHY SHOULD I CARE? It isn’t a real loss until you actually sell. I didn’t buy a house as an investment as much as I did because I wanted a place to live. I’m genuinely not that concerned on whether my house is appreciating in value or not. Whenever I do happen to sell it, it will be nice if I can get at least what I paid for it, but even that isn’t as necessary because I will have gotten some value out of it the entire time I lived there. I have some benefits over renting. I’m paying about the same each month when you take into account the mortgage interest tax deduction. Also, I like the fact that I can change the carpet whenever I like and can paint the walls any (or every) color without asking. And as I said, no matter how bad the market gets I will have something of some value when I’m done.

You hear people afraid to use words like “recession” or “depression” as if by saying the words, they become true. Some are less afraid to say it than others.  It reminds me a bit of the Harry Potter books and how almost everyone would talk about “He-Who-Must-Not-Be-Named” or “You-Know-Who” instead of using the dark wizard’s actual name of Voldemort. “A rose by any other name would smell as sweet.” True, and if you call a pile of horse crap a rose it still stinks. It’s said that the first thing towards kicking a drug problem is admitting you have a problem. Only after you acknowledge the problem can you start to take steps toward fixing it. Same thing applies here.

It seems like we’ve ended up in a self-reinforcing cycle. People have stopped spending because they’re worried about the economy. The economy is getting worse because people aren’t spending. How do we break out of the cycle? Bush’s Economic Stimulus payments in 2008 did nothing—everyone either used them to pay bills and cover spending they had already done, or stuck them in the bank to save because . . . they were worried about the economy. (Since at the time it was just being viewed as a “slowdown” could the money have just gotten people more worried than they needed to be? Could that have just cemented this cycle in place?) Currently Obama is trying to threaten banks into lending more money for people to spend, but are people looking to borrow? Not really because they are worried about the economy. Last week on American Public Media’s Marketplace, commentator Robert Reich pointed out this problem; there is simple a lack of demand in the economy right now.

So taking Robert Reich’s theory into account, here is my brilliant plan for reducing unemployment and stimulating the economy. Congress needs to budget a pile of money to hire a bunch of people to go around and develop demand by breaking things.  I’ll supervise.  I even have some hammers.

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