elaboration on economic crisis solution
Dear Dr. Reich,
I see a problem with your analysis and everyone else's on the economy and why certain things are occurring now. As a magician, when people try to explain how a trick worked, they come up with these convoluted answers like, "He made it fly with magnets in his sleeves, that are charged with electricity..." The answer is always far more simple. My point is, everyone is looking with wide eyes at a failing housing industry and Leman brothers, and we are so baffled by these overt things that we miss the simplicity behind what has us tricked.
Bottom line: I am seeing that our country has a business cash flow problem. At the root of the cash flow problem is an attitude problem that it is ok to send all of our money to other people and countries. This is likely Bush's business attitude at work, if you look - it is the same attitude that says, "no matter what the economy will be better with tax cuts only. Anything else will murder the economy." One example of the attitude is that, while we have massive deficit - a negative cash flow nationally - Bush proposes reducing the positive cash flow into the accounts by cutting taxes. Consider that this attitude is pervasive and a lack of balance characterizes the approach because the understanding of a need for balance does not exist.
A strong place where this exists is the trade deficit. What I have determined is that we are funding our trade deficit with money we don't have in cash - American's are not saving. So, where does the money come from? Does it appear out of thin air? Magicians?
Theory: We are deflating the prices and value that our markets can support by sending 700 billion dollars overseas.
Housing prices: The market began with single worker families. Men were buying the houses, with their sole income.
Then, women entered workforce, the housing market saw room for expansion. With two earners, the market would support larger, more expensive houses.
If you look - that is the root of the macroscale long term increase of prices of houses. That is what supports prices going up.
What if we had a two earners family, who was sending $5000 a year to their next door neighbors. In 10 years, thats $50,000. This one family doesn't have 50,000 that they would have been able to put towards a house.
Blow this up to macro-scale and look at this structure in society. The two earner family is every family. The money sent to the neighbors is being sent when we buy things overseas.
What does this feel like? It feels ok to people because the money scraped off the top is disposable income. However, that family after sending that money overseas would only be in the market for a house that was $50,000 less, or in the market to buy $50,000 less in stocks.
That money going out, means that we cannot support our markets. If the total value of American assets is roughly 50 trillion dollars and for 10 years we send out 700 billion. Then in 10 years we sent out 14% of the total asset value of our economy.
However, because our asset holders - Lehman bros, for example - were leveraged buyers. The net worth of our country being sent overseas has calamitous effects earlier. The same is true with Americans who have more on credit cards then ever.
If we are reducing the money we have here, the impacts will be greater when the people are financially overstretched.
My concept here is: we are funding the trade deficit with the equity in our homes and assets in our stock market, not with cash.
Remember, we had an internet bubble. What occurred in that bubble is we spread communications globally via fiberoptics, business lost its borders, we lost the feeling of handing money, green cash to people, and began to feel free to spend electronic credits that we care less about losing.
So finding every solution that is the anti-thesis to this attitude that its okay to have a negative cash flow - I mean on the personal level, government level, and business level,
A summary is below.
I have also been researching for charts, graphs, and others with similar beliefs. Here is the clearest article:
Will you help Obama use this information to express an economic plan that will work with the immediate crisis? Give him the upper hand by giving him the root of the problem?
For example: 1) buy American. Stop buying everything from overseas until we get a grip on things. Thats one things that would resolve the trade deficit. Bush proposed higher consumption to improve the economy, but most consumables are now made in other countries, which compounds our current problem.
See how this all gets worse and we are digging a hole and seeing larger and larger results?