Now I think anyone who reads this blog is probably smarter than I am, so I want one of you to explain the economy and this current downturn to me. Let me lay out what I think of it, and you tell me where I’m wrong, or how nuts I am.
First, what is the economy? Wikipedia says:
An economy consists of the economic system of a country or other area; the labor, capital and landresources; and the the manufacturing, trade, distribution, and consumption of goods and services of that area. An economy may also be described as a spatially limited and social network where goods and services are exchanged according to demand and supply between participants by barter or a medium of exchange with a credit or debitvalue accepted within the network.
This seems like a fair definition. I looked up Merriam-Webster’s definition, but it added nothing. So we will use this definition/description. I couldn’t sleep the other night, and I’m thinking to myself, “this whole thing started with housing”. Now, your house’s worth is not a set thing. Your house is only worth what someone will pay for it. If you don’t keep it in a desirable condition, it becomes worthless. In this current situation, the houses in question were still desirable, people just couldn’t pay what they promised to pay for them. This happened in such high numbers, that there became a glut of houses on the market, bringing all house prices down. On top of this, people who “bought” those loans, who were counting on that money being paid back as part of their income and net worth, suddenly weren’t as wealthy as they thought. So now, you have all the people who lost their houses not spending extra money since they now can’t use their houses as piggy banks, and some are still trying to pay something of what they owe. Those that walk away are still trying to pay for some place to live. All the people who invested money in the loans, through banks, mutual funds or other investment means, now have less income, so they aren’t spending as much. All these people spending less money, means less jobs and hiring. Topping all of this off, trust has been broken. In good times, we trust each other to do as we say. This “mortgage crises” is actually a crises of trust. If I invest my money in something, will the person pay me back?
This is where I get into my own view of things. The economic downturn is a psychological downturn. We have lost trust in our major institutions. What we call “the economy” is the transactions we make with each other. People are scared and suspicious, so they are hoarding what they have, rather than transacting with each other. Those that have, don’t want to lose any more of it than they have, those that have not, don’t have any options.
Remember, our whole economy is mental nowadays. When my boss pays me, no one goes into his account and pulls physical money out, and put it in mine. Everything is trust and record keeping. There is no pot of money somewhere in a bank. While we still use cash for small transactions, all the big stuff- stocks, mutual funds, bonds, are all just numbers in ledgers.
What the government is trying to do when they attempt to “jump start” the economy is to get people in a better mood, more trusting, less suspicious, more sharing. The trouble is, they are looking more at the nuts and bolts, rather than directly at the psychology. It is hard to look directly at the psychology, we don’t want to draw too much attention to how ephemeral our system is. The other problem is, we are not experts in affecting each others moods and emotions. If someone is that good at manipulation, they would be very scary. It is like turning a herd, since we are talking about changing each other as a group.
My advice- quit worrying. If you’re worried, you’re part of the problem. 😉