Monday, December 22, 2008

Our Falling Economy

Our current economic crisis is startling. It appears to me, a non-professional in the field of economics, that it all began with a borrowing frenzy here in the U.S. As middle-class incomes fell (due to the loss of jobs to overseas production and the loss of good-paying union jobs), folks out there in our middle class, turned more and more to home equity loans and credit cards to finance their middle-class lifestyle.

And in order for the government to keep up, after cutting taxes we couldn't afford to cut, the government went on a borrowing spree as well. Under the Bush administration the national debt has doubled.

All of this cash flowing into our economy kept our GDP growing - but at great expense for those in the middle. Those at the top never saw such great rewards - getting fat and rich off of all that borrowed money flowing into their bank accounts.

With all of that money, people began to speculate. People bought houses they couldn't afford believing that they would be able to sell them in a few years at great profit. Others with wealth began to speculate in oil and gasoline - thus the huge spikes in prices as crude oil was deliberately held offshore in tankers while the speculators waited for the price of gas to soar even higher.

Now all of it has crashed. It will probably be five years or more before any confidence is restored to the economy, and in the end, the middle class will probably be much worse off than they were just 2 or 3 years ago. The economy will have to adjust to less borrowing and more saving over the next decade.

But this is not all new. Robert Shiller, a professor of economics at Yale wrote an interesting article (Blowing Bubbles, P.52) in the November issue of Playboy. I found the following clip from that article to be of great interest. (Click on the image to view larger.)

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