{"id":217,"date":"2009-02-22T09:49:00","date_gmt":"2009-02-22T09:49:00","guid":{"rendered":"http:\/\/jimgworld.com\/blog1\/2009\/02\/22\/217\/"},"modified":"2014-09-09T20:16:07","modified_gmt":"2014-09-10T01:16:07","slug":"217","status":"publish","type":"post","link":"https:\/\/jimgworld.com\/blog1\/?p=217","title":{"rendered":"The FWREC Economy"},"content":{"rendered":"

This past week was pretty bad for Wall Street. The stock market dropped around 7%. Analysts believe that investors are losing hope of our economy making a comeback within the next year or two (my favorite source of such analysis is Bloomberg radio<\/a>). The soaring price of gold indicates that a lot of people with money are thinking “great depression 2”. <\/p>\n

I don’t have any cheerful thoughts to offer in response to that. Unfortunately, the American economy doesn’t seem to have an “engine of growth” ready to go right now, set to pull all the other sectors out of the ditch. (Wall Street has obviously lost confidence in the Obama Administration’s ability to do that, despite the financial stimulus package.) Over the past 10 years or so we had the real estate sector, personal consumption and the internet\/technology fad to keep things bubbling. In the long run, America still has some cards to play: it still has the best education infrastructure and a strong tradition of creativity and innovation. We can still sell those strengths to the world — once the world is ready to buy again. Remember, this economic crisis is world-wide. For now, the fizz is gone, the economic champagne has gone flat. <\/p>\n

All I can contribute right now is a semi-witty acronym meant to summarize how we got here (some might say it’s “quasi-witty” or “pseudo-witty”, or not witty at all!). That acronym is FWREC: Finance, World-wide, Real estate, Energy, and Consumer demand. Economic analysis is a dime a dozen these days, so I’ll just give a quick synopsis of our current “FWREC’d” situation. <\/p>\n

F – Finance:<\/span> Our generally unregulated financial system came up innovations like mortgages without income checks, down payments, and for the first two years, without principal and full interest payments. And credit cards were given away like candy. And then there are the secularized investment instruments that spread such mortgage and credit card debt over thousands of investors according to complex rules; these are now known as “toxic assets”. And mix in all those default swap agreements from the insurance companies. It all seemed so safe, so solid, so interconnected. Unfortunately, no one could see that all taken together as one, this was a house of cards ready to collapse once the right gust of wind came along. And come along it did.<\/p>\n

W – World-wide:<\/span> America and the world are now extremely tied-in and co-dependent. In many ways that’s good. But when America, the biggest source of global economic demand and the biggest receiver of global investment, goes down, the whole thing goes down. Again, the system had a tipping point that hardly anyone foresaw. Until the “black swan” landed.<\/p>\n

R – Real estate:<\/span> Real estate brings out the best and worst in people. Families that own their own homes tend to take more pride in the neighborhood and contribute more to civic life. HOWEVER, real estate also brings out a lot of greed and short-sightedness, both on the local and national level. Our political system assumes that real estate is an unlimited good, and encourages it (via tax deductions and money supply expansion and lending incentives to banks) beyond the point of economic rationality, both on the part of homeowners and mortgage lenders. And now the chickens have come home to roost — the dark side of real estate has reared its ugly head; i.e. foreclosures, bank failures, toxic assets, and rapidly declining consumer consumption. Unemployment is boosted because workers in declining cities like Detroit can’t sell their homes and move elsewhere in search of jobs. Furthermore, the hunger for large real estate plots in the exurbs has locked us into development sprawl and the high energy demand that comes with it — the next FWREC factor.<\/p>\n

E – Energy<\/span>: Oil prices are pretty low, at the moment. However, this recession began over a year ago, when oil prices were at record levels due to supplies leveling off while demand increased in the developing world (China, India, Brazil, etc.). That no doubt helped to drag our economy down. Experts say that as soon as the world economy starts picking up, oil prices will skyrocket once again, slowing or possibly stalling a fledgling recovery. Life and business in today’s USA was designed around cheap oil; due to suburbanization and development sprawl, you need a car (and preferably an SUV) to get to most offices, homes and shopping places. It will take many years to redesign the USA landscape in favor of denser urbanized settings, where mass transit (or cycling or even walking) can be used to accomplish the basics. For the next decade, we’re trapped in a high energy consumption mode that will sap a lot of strength from our economy.<\/p>\n

C – Consumer demand:<\/span> With all the easy money and chimeral real estate wealth (everyone assumed that real estate prices would continue to rise come what may), families assumed that there was no need to save money, and no problem with taking out more debt to spend on the finer things of life (vacations, SUV’s, entertainment systems, home improvements, etc.). Hyper consumption was caused by finance (easy loans), the world (below-cost consumer goods from Asia), energy (oil was relatively cheap until two years ago) and real estate (no need to put aside for a rainy day if your home value rises significantly each year); and each of those institutions in turn grew because of that consumption. It was an upward spiral based on good impressions; but it was not backed up by real economic productivity.<\/p>\n

And so the party is now over, and we all face a lot of uncertainty. I’m still employed at present but will have my salary cut via furloughs. As to my hopes to retire comfortably in 10 years, that too is up in the air, given that the current value of my retirement funds have been cut in half. I’m not sure what I will do if it all gets worse. All I can do right now is to curse the FWREC that our economy has become. But as to blaming any one person or institution, e.g. George Bush or the Federal Reserve or the big banks or the CRA — no, it was collective stupidity. Let’s hope that some collective wisdom seeps in because of all this.<\/p>\n

PS, here’s a good article<\/a> from The Atlantic on what the long-term effects of the FWREC will be.<\/p>\n","protected":false},"excerpt":{"rendered":"

This past week was pretty bad for Wall Street. The stock market dropped around 7%. Analysts believe that investors are losing hope of our economy making a comeback within the next year or two (my favorite source of such analysis is Bloomberg radio). The soaring price of gold indicates that a lot of people with […]<\/p>\n","protected":false},"author":2,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[11,13],"tags":[],"_links":{"self":[{"href":"https:\/\/jimgworld.com\/blog1\/index.php?rest_route=\/wp\/v2\/posts\/217"}],"collection":[{"href":"https:\/\/jimgworld.com\/blog1\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/jimgworld.com\/blog1\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/jimgworld.com\/blog1\/index.php?rest_route=\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/jimgworld.com\/blog1\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=217"}],"version-history":[{"count":1,"href":"https:\/\/jimgworld.com\/blog1\/index.php?rest_route=\/wp\/v2\/posts\/217\/revisions"}],"predecessor-version":[{"id":4597,"href":"https:\/\/jimgworld.com\/blog1\/index.php?rest_route=\/wp\/v2\/posts\/217\/revisions\/4597"}],"wp:attachment":[{"href":"https:\/\/jimgworld.com\/blog1\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=217"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/jimgworld.com\/blog1\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=217"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/jimgworld.com\/blog1\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=217"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}