Tuesday, October 16, 2007

My Guess on the Economy

It's a dismal science, but that's what my MBA at the University of Rochester was all about - economics.

I retired before age 54 and I've toiled at a lot of volunteer jobs since then. I'm pretty secure, barring a catastrophic long term illness or a serious meltdown of our economy. Neither are likely, but nothing is impossible.

My prognosis for the American economy is far less rosy. Although the stock market is flying high due to the good profits being made by American corporations, the financial lot of main street Americans is on a downward trend and will likely continue on that trajectory for a long time. Why?

Two major hammers are poised to fall on the average American citizen - the impact of the cheap dollar, and the impact of tax increases to pay for entitlements.

The first hammer is falling as I write, and that is oil prices over $80/barrel and rising. If oil is valued in dollars, and the dollar falls in value, it takes more of them relative to other currencies to buy a barrel of oil. In other words, part of the gasoline price rise at the pump has nothing to do with supply, demand, or insecurity - it is simply that a dollar is not worth as much to those who sell oil. Soon we will be feeling the impact of dollar depreciation in the prices we pay for imported items from many countries, or in the prices we pay in dollars if we travel overseas to a country with a strong currency. Canada is no longer the land of a bargain vacation!

This week the first of the "baby boomers" retired, and 80 million more will follow her in the next 12 years. Unfortunately, there is no chance that Social Security and Medicare will be able to fund the benefits that these people feel they have earned. Either taxes will go up, or benefits will be cut. In either case, these funds will come out of the economy as reduced purchasing power - which means a lower standard of living for both working people and retirees.

Where did these hammers come from? Did they suddenly appear and catch us unawares? No. The first hammer, the depreciating dollar, reflects our government's lack of budget discipline especially during the Bush administration which has lived on a credit card. The lower dollar also reflects creditor nations' awareness that because the U.S. has not funded its entitlements, the U.S. economy will pay a significant future price to catch up.

The second hammer, the unfunded entitlements themselves, also became much more serious during the Bush administration. The president made a halfhearted effort to "fix" Social Security with a privatization scheme, but he retreated from the issue when this plan was not supported. We have now lost almost seven years of "catch up" time because the current administration has not settled the entitlements problems.

Lynn Cheney, speaking on NPR today, said that history would judge the current administration's economic record to be very good, especially considering 9/11. My view is that the administration will be viewed as having spent and dawdled away our economic future. How far can the dollar fall before Bush leaves Washington?

1 comment:

Woozie said...

Sounds like it's Hammertime for America.

Lynne Cheney is also overlooking that budget surplus that was turned into a deficit, and that national debt that has been nearly doubled from its 2000 number.