IT IS THE ECONOMY, WISE GUY…

According to Wall Street gurus and financial market pundits, housing meltdown and mortgage crises have dragged down the economy into its current miserable slowdown, causing bank failures, market gyrations and significant losses of employment. I respectfully disagree. I believe that it is the other way around, in which, a

slowing economy has caused the mortgage crises and housing meltdown, bank foreclosures and losses of employment. Here is why;

Inflationary pressures during Jimmy Carter Administration have encouraged then Federal Reserve Chairman Paul Volcker and later, his successor Alan Greenspan to adopt deflationary policies that have severely limited the money supply to the consuming segment of the economy in order to control inflation and to repel stagflation. To further complicate the matters, Ronald Reagan, during his Presidency, adopted the principles of Supply Side Economics proposed by Economist Arthur B. Laffer, Sr., reducing the tax burden on businesses while following the strict monetary policies of the Federal Reserve. The expectation was that an economic expansion in the producing sector of the economy will trickle down to consuming segment, hence the term “Trickle Down Economics”, so often quoted by Ronald Reagan himself.  Unfortunately, the result of these misguided policies was a top heavy economy, in which, consuming segment of the economy suffered through insufficient money supply while producing segment had to concentrate into the export markets in order to function, with the help of government efforts to establish a global trading system called “World Trade Organization”, which, in turn flooded the U.S. markets with cheap foreign products, driving many  U.S. manufacturers out of business and exporting U.S. jobs to foreign locations.   However, despite all of these miscalculations, the economy was able to survive, in part, because the oil prices were low during the 80s and 90s and the inflation was in check. An ever increasing credit card money supply was also doing its share to shore up the shortage of liquidity in family finances.

Unfortunately, the whole balance of the economy was overturned after the election of 2000. Huge budget deficit incurred to support wars in Iraq and Afghanistan required a massive borrowing of foreign capital and an unlimited injection of newly printed money supply, which, in turn, forced the Federal Reserve to suspend publication of M3 money supply figures to prevent overexcitement in the financial markets. However, the global economy did take notice and the dollar lost ground against all other major foreign currencies, making imports more expensive to purchase, creating inflation concerns once again. The tipping point came when oil prices surged after global demand for oil caught up with the current production limits imposed by OPEC countries. This increase in energy costs, coupled with ever increasing credit card interest rates kept draining money supply from the consuming segment of the economy until there was no money left to pay the rent, the mortgage, the car loans, the credit cards and the other financial obligations of a typical American family. Despite that, current political leadership in Washington kept reducing taxes on the producing segment of the economy, hoping that their model of Reaganomics will resolve the matter to everyone’s satisfaction, while ignoring the real problem of insufficient money supply to the consuming side of the economy. They, sadly, have failed to realize that due to globalization, Reaganomics will no longer be able to provide a solution to our current economic problems. Today, in the global economy,  any tax cut for the rich will once again push the U.S. Dollar into a nose dive against all major currencies whereas a tax cut for the poor will result in another economic expansion in the Pacific Rim Countries.

Regrettably, the worst is not over yet. The economy is in a downward spiral and it will remain so until corrective actions involving both monetary and fiscal policies are taken. The measures that have to be implemented are not going to be easy, but our options are limited and the time is running out. The first order of the business will be to restore the right amount of money supply to the consuming segment of the economy in form of tax breaks for the low income wage earners and middle class families to counter balance the increases in energy costs. Income tax code has to be simplified and revised in order to reduce the tax burden on the 90% of working low income Americans. Credit card segment must be regulated, although a cap is not recommended, to prevent backdating ever increasing credit card interest rates onto existing account balances of previous purchases. Social Security income formulas have to be reworked to increase the low monthly payments to many while placing a cap on the maximum benefits for the financially secure in order to strike a balance on the overall expenditure. The cap on the social security taxes for the high end earmers must be removed to integrate baby boomers into the system. Corporate tax structure should be shifted from net profit base to gross revenue, incorporating lower rates, while introducing rules to prevent shipment of local jobs to foreign locations. A national health care system should be established to relieve U.S. businesses and corporations from shouldering the brunt of ever increasing health care costs to make them more competitive in the global markets. Tax incentives to corporations who outsource jobs have to be eliminated. Student loan debts should be forgiven up to a maximum of 90% of their outstanding balance, if over $100.000, and if under $100.000, they should be fully forgiven for those experiencing financial hardship.  Federal Government guarantees on student loans should be voided if the primary lenders choose to sell the loan to secondary lenders or other financial institutions. Latest bankruptcy laws should be reversed to allow hard working Americans a second chance in their pursuit of happiness. All government subsidies should be reconsidered and those are not necessary should be eliminated. In order to fight outrageous prescription drug costs, imports of pharmaceuticals from Canada, member countries of the European Union as well as countries with reputable manufacturers should be allowed. A workable energy policy that incorporates renewable energy sources including wind, geothermal, solar and nuclear power has to be drafted and implemented in order to reduce our dependence on foreign energy resources with the full participation and support of our government. Last, but not least, fiscal responsibility has to be exercised by eliminating deficit financing in all levels of government.

A healthy economy strikes a balance between supply and demand with the government in a regulatory role. When this balance is lost, as it is in our current economic situation, economies do shrink. It is becoming increasingly clear that our economic policies have moved further to the right, more than it should, creating the current economic crises. It is high time to realize that the world has changed and the business as usual is not going to solve our current problems anymore. The old ideas do not work in a new global order. If we can not take the necessary steps to bring our economy back on tract because of some rear sighted partisan politics, our economy will continue to shrink, raising the possibility of further economic discomfort down the road for many of us. I, for one, do not wish to see that happen.