Tim's State of the Economy

Back in the late 1970s, when I was just a kid (I turned 13 in 1979), my father subscribed to a couple of financial newsletters. The newsletters were quite gloomy in their outlook, predicating another Great Depression, the collapse of the US Dollar, even the end of the United States as a nation.

Remember, the US had just arguably lost its first war (Vietnam). OPEC had quadrupled the price of oil, and the US was still smarting from the oil embargo itself. USA oil production had peaked in the early 70s. The USA was no longer on the gold standard (to the utter horror of newsletters' authors) and had even stopped minting its coins in silver. Inflation and interest rates were double digit (Jimmy Carter's stagflation). Unemployment was on the rise. Nixon's disgrace was still firmly in the public's mind. Communism's march seemed unstoppable and the USA had just given away the Panama Canal. And I am sure there was even more bad news that I am leaving out.

Little wonder that many financial and political gurus of the day were predicting the imminent collapse of the US economy and political system. But, the predicted collapse never materialized.

Today we face a similar long list of negative headlines, and a long list of doomsayers predicting total collapse.

Doomsday predictions of the end of civilization have been around since civilization first began. It is a wonderful money-making industry for the doomsayers themselves, with books and newsletters to publish, lecture fees to collect and investment & survival advice to sell.

The only drawback is that they are wrong 99.99% of the time.

Comparisons to the Great Depression

One thing I keep hearing over and over from all the talking heads on TV and the radio is claims that we are in another Great Depression, or at least are getting close. I don't know if they are just getting caught up in hyperbole, or if they are truly ignorant of history, but the truth is we are not in a Great Depression, nor or we even close yet. Let's make a few factual comparisons:

In the Great Depression, GDP in the USA fell by about 50%. Since the current crisis began in late September, GDP has fallen by about 4%. The fall in US GDP needs to be about 12x greater than what has already occurred to reach the levels of the Great Depression.

In the Great Depression, unemployment in the USA reached about 25%. Current unemployment is 7.6%. The unemployment rate needs to triple to reach Great Depression levels. Incidentally, unemployment in the recession of early 1980s reached just a fraction under 10%, so we aren't even at those levels yet.

Will the drop in GDP loss increase 12x? Will unemployment triple from current levels?

I don't know. I am not making a prediction. I am merely pointing out that comparisons of where we are at the moment to the Great Depression are greatly overblown.

All Job Loss Is Very Personal

Understand that I am not saying things are great at the moment. They certainly are not. Things are especially difficult for people who are currently unemployed with little if any real savings. All job loss is very personal.

Times are difficult. And likely to get more difficult before they start to get better. But the advice I've given in the past holds true now: Don't Panic.

Don't Panic

In my essay What To Do Now (Sept. 28, 2008), I wrote:

Don't Panic. There is no doubt that we are in difficult economic times. There is also no doubt that the economic news is being sensationalized and fear is being used to sell newspapers, increase TV ratings and to push political agendas. Don't get overwhelmed by the hype. Instead, start working towards solutions. Acting to make positive changes, even small ones, will increase your confidence and encourage yourself, your family and your friends.

Causes For Concern

Despite my optimism, a serious analysis of what has occurred during the last several months raises many causes of concern. We got into this mess because of policy mistakes and corruption. The policy mistakes are being compounded by more policy mistakes and the corruption is going largely unpunished.

The US, as well as many governments around the world, are printing money as fast as possible. Currencies are being destabilized. Many governments, including the US, are taking on massive debts and obligations they cannot possibly afford in the long run. The US federal government's debt has tripled in the last six months. And that tripling is from what was already all-time highs.

This is setting up the potential for massive inflation just a few years down the road. Not just in energy and food, but in all commodities and consumer goods. Much higher taxation in the future, even for the lower and middle classes, is becoming unavoidable (though it is likely to come in forms other than income taxes).

What To Do?

Wondering how to protect yourself and your family for the hard times to come? My essays What To Do Now and Ways To Get Ready For the Future are excellent starting points for answers to that question.

I will also be publishing sometime tomorrow an update to What To Do Now, which will be very helpful to most people (I sincerely hope).

Good Luck,

Tim Gamble