Not the Time to Be Optimistic about Future of U.S. Economy

The latest edition of TIME magazine (The date March 16 on the cover is the last date that the magazine is sold in news stands) has a short essay called “Call me Mr. Sunshine,” written by columnist J. Fox. This author does not agree with the five reasons J. Fox gave for believing in the future of the U.S. economy.

1. The statement that the stock market is at its lowest point since 1997 reflects that most people agree with the analysis – that this recession is widespread and long-lasting. This is the same as saying that previously overestimated stock prices have not fallen back down to a “reasonable” level. In addition, after the continuous drop in the housing market, it has reached its “lowest point.” Therefore, it can be considered attractive. However, it is not uncommon to see stock prices continue to fall even from a “reasonable level.” Seeing stock prices fall after they have seemed to finish falling is something that all investors have experienced. The U.S. housing market is now beginning to enter the “foreclosure” stage or cheap sale stage, but if you plan to enter the market, you should be careful. One thing’s for sure: after having gone through this financial tsunami, investors are having palpitations about bank stocks and real estate stocks, and they understand that the “philosophy” of long-term investments is not so reliable. They understand that from now on, the fluctuations in the stock market will inevitably worsen and be detrimental to small investors. In addition, there are the hedge funds, credit card borrowing, car companies, and Eastern European countries’ financial time bombs. Now, the pension crisis, which few people are mentioning, is brewing. (Merril-Lynch’s statistics show that up to the end of last year, the pension funds for the U.S.’s 40 largest corporations were all in a deficit, the largest being Lockheed Martin’s $9.1 billion deficit and the smallest being Kraft Food’s $1.1 billion deficit.) In other words, the market definitely does not look bright and clear. It’s the investor’s biggest fear. In this type of situation, even if you have some remaining money on hand, it is best to take full advantage of government-insured savings to preserve capital. It is better to lose a little interest on savings than act rashly.

2. The government has learned from bitter experience that people must stay put and do the best they can. This author does not believe that interfering in the markets in a high-profile way is good news. Since taking office, Obama has assembled a diverse all-star team, and U.S. political circles have been reborn with a fresh new look. Confident and eloquent, Obama is full of vigor and vitality, but in the end, he is not an economic expert, and he lacks experience. Even if there is an abundance of talent in the White House, whether Obama can choose an effective policy is still in question. Nobody knows if he can fulfill his big promise of reducing the financial deficit in half by 2012. Of course, government intervention is not completely ineffective. For example, large-scale infrastructure development can definitely create employment and increase prices of construction materials. Currently, the U.S.’s largest financial problem is that the government is playing the permanent role of benevolent “Huang Da Xian,” granting whatever is requested. Any industry in trouble goes to the government. (Even the pornography industry is requesting that the government allocate $5 billion for them. The reason is that with the economic recession and rise in unemployment, salaried people with financial difficulties and depressed spirits are all waiting for comfort, and this occasion calls for pornography to liven up people’s lives. Therefore, the government cannot let this industry fall into desperation and must act as its benefactor.) The result is that the currency supply is skyrocketing without bounds. In other words, the government is acting as the Savior, building up many economically ineffective public projects, and even directly issuing “joss paper” on a large scale. The aftermath of hollowing out the foundation of the economy will certainly come soon.

3. Although the American tradition of “spending money you don’t have” has already passed, the savings rate in January of this year was 5% (the highest since 1995, a commendable savings rate triggered by unemployment and pay cuts). If this trend continues, Americans over time will again have buying power. This type of deduction is correct, but the Americans’ “bad habits” are deep-rooted. Can they be changed? Will the savings rate continue to increase? It’s all still in question. Besides, what spurred the consumer spending craze in the past was the “wealth effect,” a driving force that vanished into thin air long ago. Now the “negative wealth effect” is extremely common. This means that the consumers must rest quietly to nurse their wounds and that economic growth, spurred by consumer spending, will not happen in the short term.

4. This author agrees, but has some reservations, i.e. although the U.S. is the “epicenter” of this crisis, the dollar, which can be issued anytime, is still accepted anywhere in the world; therefore, the foreign reserves of almost all countries with a surplus have an “overload” of U.S. dollars. The position of the U.S. dollar has not weakened because of the financial tsunami, and the U.S.’s economic strength has not been damaged substantially because of the disasters caused by Wall Street. However, due to the oversupply of the U.S. dollar, this author believes that the U.S. exchange rate will undergo large changes in the second half of the year. In a report from The New York Times on Monday, March 9t, Warren Buffett pointed out that the U.S. economy has plunged into an abyss. In the end, it will recover but will bring about a runaway inflation that is much worse than that of the 1970’s. Recently, the U.S. dollar has been strong, but the present monetary policy is equivalent to accumulating weaknesses. Moreover, the author has complete faith in the American people’s ability to stay calm in this crisis and find a new economic driver in the midst of fast changes. Learning from this lesson, making a complete transformation, and creating good values and traditions for the new age will allow the U.S. economy to regain its vitality. This author agrees with this, but to recover from the current predicament and to even go a step further will be very difficult. The old financial system has suffered complete destruction, and before the new financial system is set up, the pace of development will not be quick.

5. This is a saying that investors all understand. With all the bad news and pessimism, it is the best time to enter the market, and it is the start of the market’s recovery. This type of traditional wisdom has a certain amount of usefulness, but this author believes that it will not be effective for the current economic environment because bad news is coming one after another. Although the impact is not as great as AIG falling into a crisis and Lehman Brothers going bankrupt, the expectation of a stream of bad news deprives the market of all vitality.

This author believes that what worries people the most is that the “bail out” of banks by national governments will make the financial crisis turn into a fiscal crisis. Because of limited space, this topic will be discussed in a different essay.