5 Reasons Why the Economy Might Recover Faster Than You Think in 2009

Deflation is the death spiral of capitalism (correction).

The sentence

"For example I just read another article that indicated that housing prices fell an annual rate in speaking percent in November. "

Should read

For example I just read another article that indicated that housing prices fell 18% percent in November.

Dale Casto of GA @ Dec 23, 2008 14:53:51 PM

Deflation is the death spiral of capitalism.

One of the subjects that fascinated me the most was a phenomenon known as the "Liquidity Trap" which was caused by deflation and was the reason for depression lasted so long.

Then, as now, there was no shortage of money. The rich of the day had millions upon millions in the bank, just as the rich of today have billions or trillions in the banks. For example the government had no problem coming up with $850 billion at the drop of a hat.

The problem then, as now, is that those with money are reluctant to spend it today when they can buy so much more tomorrow.

This applies to rich and middle class alike.

For example I just read another article that indicated that housing prices fell an annual rate in speaking percent in November. Thus even if the mortgage interest rates dropped to zero and the downward trend continues (as is expected),and the effective “interest rate (cost of buying a home today vs next year) ” would be 18%. Actually more. Given that the interest paid on a home mortgage is tax deductible, the net result is roughly equal to an interest rate of 24% or so if home prices were stable.

Related to this is the reluctance of banks to make loans even with the billions given to them by the Fed. Govt.

They are understandably reluctant to loan money secured by an asset which may decline 18% in the next year.

Therefore the rational approach for prospective buyers is to wait until next year, or the year after, or the year after -however long it takes for the house prices to stabilize, and stay that way long enough so that you’re confident that the bottom has actually been reached. All in all this could take years. Or decades.

Yes, lower interest rates will cause a lot of people to refinance their homes and put more money in their pockets. But if they are rational and they will not rush out to spend the money. They will first pay off the existing debts and then put a little aside for a “rainy day”, something they should have been doing all along, but which they quite often failed to do thinking the “increased value” of their homes made up for a lack of savings.

In the long run this is good for them and for the economy, but it does not bode well for those who are expecting a large increase in consumption spending in the near future.

Thus the only thing that will stop this deflationary spiral is when people are forced to spend regardless of the cost. And that assumes by that time they still have cash reserves because, as everyone knows, “the only way to qualify for a loan is to prove to the bank that you don’t need it”. And that was in when credit was easier to get.

Dale Casto of GA @ Dec 23, 2008 13:55:15 PM

Economy and recovery

Government is the problem not the solution. It was the Government that legalized the high risk mortgages and then failed to regulate them. Thanks to Bill Clinton passing legislation that required lending institution so have a certain part of their portfolio as high risk loans and liberals like Barney Franks and Chris Dodd that blocked mortgage regulation of Fannie and Freddie.

Exporting American JOBS such has ENERGY and MANFACTURING has been going on for years. Our Government leaders tell us oil is bad, coal is bad, nuclear is bad. The NIMBY Society (not in my back yard) would and the governement would rather buy oil from OPEC countries supporting terrorism than to produce energy domestically by Americans.

Our tax code (the IRS) is the 2nd worst in the world for business. It exports American JOBS! Fix It! Implement the FAIR TAX PLAN! The FAIR TAX PLAN would make the USA the best place in the world for business and would bring those exported American JOBS back home. It is revenue neutral to the Federal Government and eliminates payroll taxes, income taxes, taxes on dividends, profits, profits, capital gains, and death taxes. It provides a monthly rebate check of $170 a month to all legal citizens to pay retail sales tax up to the poverty level. It reduces the cost of US exports by 22% due to removing the hidden taxes on USA manufactured goods. $13 trillion euro dollars would return to the USA and illgal citizens, the underground economy and 50 million tourists would all pay taxes under the FAIR TAX PLAN!

Thase changes will get the economy back on track. Real reform of goverment! April 15 will become another nice spring day. No more tax returns!

whs806 of TX @ Dec 23, 2008 07:21:44 AM

I hope you're correct...

But I worry about (3) the actions of the Fed and to a lesser extent (4) Obama's Newer New Deal. I fear the Fed balance sheet could reach $10 trillion or more. There's a real danger that will lead to 20 to 50 percent a year hyperinflation. That and the return of $5 gas will play whack-a-mole on any hope of recovery.

John S of NH @ Dec 22, 2008 21:54:05 PM

good sign

Let's our wish come true. God is good, all the time.

The resources is abundant. Watch out... We need good people to manage it in better shape.

Money machine will running in better process in a careful good goverment policy.

May God bless all of us. The important thing, we wish His guidance for every our sharp conscience decission.

Thank you

Andre Budianto @ Dec 22, 2008 21:49:22 PM

economy will bump again

yes that's true

US and world economy will bump again soon

I relly think about those five reasons are effective and can change today's economic situation.

Falling mortage prices,Federal help and most important Obama factor are going to turn economy towards top soon may be in next year.

And world economy is directly attched to US economy so world economy is also going to be better.

About falling gas prices, gas prices are not going to be so lower forever.It will hike again in near future but it's helping nowadays.

Ketan Patel of CT @ Dec 22, 2008 17:58:18 PM

That Medicine is Poison

"Brian Bethune of IHS Global Insight called the Fed's recent moves "exactly the kind of forceful medicine the economy needs as it plumbs the depths of the current recession."

Mr. Bethune needs to go back to school (and look at real world data). The Fed's are are removing the conditions that created the present crisis but (in at least one major case - priming the pump) exacerbating them.

We need more genuine capitalism, not more fascism in the form of public-private 'partnerships'. The Federal Government should get out of the way. Otherwise our 'saviors' are going to impoverish all of us.

Jeff Perren of ID @ Dec 22, 2008 14:29:41 PM

Almost Right

I've got to agree with it all except #4. There is no evidence that massive government spending and made up jobs have ever helped recover an economy.

tiger of WA @ Dec 22, 2008 14:04:04 PM