The U.S., and in fact, the world, apparently faces the worst economic conditions since the Great Depression of the 1930’s. So the question is: why would the modern world, with all its technological and institutional sophistication, succumb to such economic pain? The answer is at once so complex that most highly intelligent and experienced economists and leaders don’t understand the causes — and so simple that most won’t accept the truth of the situation.

In the recent Presidential contest, Republicans offered as a cause the Democratic encouraged practice of lowering traditional qualifying economic requirements for mortgage loans in an effort to expand home ownership to many unqualified minority citizens. This is a true claim but the practice was a symptom and not the cause of the problem.

On the other hand, the Democrats accused the Republican Administration of abandoning regulatory norms to the vagaries of the “free” market, in effect, pulling the traffic cop out of the mix and allowing the most aggressive forces in the market to get away with whatever short-term benefit the market could provide, such as adjustable rate mortgages and derivative “investment” devices. This claim is true , but again, is only a symptom of the problem.     

Understanding the real cause for this economic recession is not rocket science. It is because we, as a nation, and as a world economy, insist on ever higher rates of growth, and to promote this, grant ever looser credit. As a result, the average Joe now has a house full of stuff, his yard is full of relatively new vehicles. This sounds like it is the consummation of the American Dream. Then we look at the facts behind it — most of his future income is committed to paying for all this inventory of goods. In short, he’s in debt up to his eyeballs. It was the jobs of many people that produced all this stuff and he supported those jobs by joining in the debt/consumption stampede. And then came the housing bubble and the mortgage loan debacle, which are both symptoms of growth enthusiasm. On top of that came the shock of $4.00+ gasoline (now $2.00 but almost guaranteed to go back up. No one wants to buy his gas guzzler so he can’t buy a more efficient vehicle, and there’s not much chance he’s going to buy another gas guzzler because he owes too much on the one he has.)

Some of the new stuff being advertised would be nice to have but he doesn’t really need any of it. He’s decided he can get by for a while without buying anything except some food items. Add to this a constant barrage of reports that his neighbors may lose their jobs and homes and that he may be next. This makes him afraid to commit to any more spending, and therefore to any more support for the jobs that make and move this stuff through the commercial channels. In essence, his inventory of stuff is too high and he fears for his future ability to pay. If lending institutions have not already lowered his credit limit, he is voluntarily doing so and cutting off his own credit. 

His situation is replicated across the economic globe in a preponderance of households of economic means from modest to wealthy, each of which bought into the idea that credit is a tool that should be wielded at every turn. If one wasn’t in debt up to the maximum of their imputed ability to repay, then life was passing them by. Human nature being what it is, they mortgaged their economic future. Now they must pay off the debt.

If only a few did this it would be of little import in the bigger scheme of things. But in the aggregate it is a disaster, for many of the jobs that manufacture and move stuff are no longer being supported by the army of former purchasers of their output. Our inventories are too high. Those jobs have built too many houses, cars, refrigerators, etc. and commercial constipation has occurred at the end of the supply line — the consumer. We’ll have to work this off over time before the there is a need for the jobs to produce and convey these goods and refill the sales channels.  

While the economy is expanding, everyone enjoys the fruits of growth. Yet when we strive for growth to be increased every year we are building an economic bomb that needs only a trigger like one or more of the economic shocks as listed above to send it into a tailspin.

Wouldn’t it be more sensible to aim our economic activity goals near the point of zero to one percent growth rather than have these cycles of boom and bust? One way to promote this would be to curb our abuse of credit and move toward a pay as we go system. This is not to advocate elimination of credit, but to promote an attitude of living within our means, making wise use of credit for only purchasing items with long life cycles and put the future economy on solid ground.

Using this approach, we would tend to buy with large equity down payments and short credit payback terms, and only for major items. For smaller items we would use debit cards or their equivalent. Then our purchases of stuff would likely be made with more gravity of thought toward its quality and durability, and the precious jobs to produce and convey stuff would be more stable.                

On an equivalent national scale governments could aim for leveling out expenditures for infrastructure such that we would have continuous paid-for maintenance rather than leaving bridges and roads to crumble then having to enact monstrous debt/inflationary programs to catch up, such as what we have to do now. Our governments, federal, state and local, could lead the way by getting back to living within their means. Borrowing is an act that mortgages the future, no matter what project it is for. We should go back to being careful in signing on to such commitments. Un-repaid Federal borrowing draws down the value of the U.S. dollar. That is a tax we all pay on every economic transaction.

It appears that as a nation we are in such dire economic straits that we have to borrow for temporary programs such as the aforementioned infrastructure maintenance projects to stimulate our way out of this economic downturn. If so, it would behoove us to put extraordinary efforts into gradually turning the situation around to get back on the road to stability. Tighter, more thoughtful credit policies will be imperative down that road.   

© 2008 R. Leland Wald.rip