Are We Currently in a "Recession?"

If you listen to today’s new media, you could easily come away believing that we are in the worst economy that we have seen in a long time and that a depression is on its way. Before I delve into the factors causing this bump in the road of our financial system, the true definition of a recession must be defined. A recession is defined as two consecutive quarters of negative growth in GDP.[1] This does not mean the economy just needs to slow down. Rather, it has to actually retreat. One estimate indicated that the four quarters of 2007 averaged 2.5% with the last quarter at 0.6%.[2] While this is not a glowing rate of growth, it is certainly not in the negative. Many people are under the illusion that higher food and gas prices automatically equal a depression. If consumers are feeling the pinch of price increases, is this a sign that our economy is faltering? Let us examine several factors that are contributing to some of the obvious signs that people first look at. Perhaps the most obvious problem that people hear about the most is the “mortgage crisis.” Many thousands of people are losing their homes through foreclosure because of adjustable rates translating into higher payments. The fallacy of this perception is that it is not across the board. Conventional loans and traditional mortgages are not suffering during this crisis. Frankly, the people who are losing their homes borrowed in the subprime market and were not eligible to quality for a good loan. Subprime loans are for people who have bad credit, minimal or no down payment, and questionable ability to repay. Many of these loans had adjusting rates that the borrowers were not aware of or not prepared to pay. Some believe that the government somehow has a responsibility to bail out these people because there is a popular belief existing that predatory lenders are to blame. While there may be instances where lenders misrepresented some terms of the loan, the fact is that people have to take responsibility for their own decisions. A signature on a line of a contract guarantees that the signer agrees to the terms and conditions contained therein. Decades ago, these people would not have qualified for conventional loans. Consumer advocacy groups and outspoken critics rallied behind the cause that lenders should be forced to extend credit to people who could not normally afford a home. One of the most well-known cases during that time was Michael Lomax.[3] Working for Fulton County in Georgia, Lomax was able to publicize his case of a loan rejection. The public incorrectly summarized that he was rejected based on the color of his skin. In reality, it was later discovered that his debt to income ratio was too high and he would not qualify for more loans. There emerged a sympathy toward people of questionable ability to pay and lenders were pushed and sometimes forced to extend money to less than savvy borrowers. We are now seeing the results of this overextension. Banks have massive amounts of money that are now bad debts on their books. I personally believe that people should have to qualify for conventional loans before they can purchase a home. If they cannot qualify, there are obvious indicators that they will not be able to pay. The market is now adjusting for this and we will have to live with the consequences. Excessive accumulation of debt is a contributing factor to harder economic times. The younger generation especially does not seem to appreciate the idea of paying for things up front. The most powerful wealth building tool is an income. When the majority of it is going out in payments every month that include interest, there is not much left over to save and invest. Although the actual number has been debated by different financial analysts, the average credit card balance owed by an American family is over $8,000.[4]Debt is often used as a leverage to accomplish bigger things. However, the problem is that we want everything right away and really big. What our parents have taken decades to accumulate we want instantly. To finance these purchases, options such as 60 months-same-as-cash, rent-to-own, credit cards, and other avenues are used. Having a car payment is a way of life and there seems to be no alternative. Just imagine for a moment being ahead and not having to worry about payments on revolving credit. The interest saved and being a step ahead allows great freedom to save and invest for the future. If you were to take $400.00 a month car payment and instead invest it for 40 years, you would have $2,500,000.00 at retirement! Hope you like the car! Until we learn to invest for the future, we will play catch up paying high interest rates on things such as credit cards. We have a whole different mindset than in days gone by. In 1910 the Sears catalog stated, "Buying on Credit is Folly." J. C. Penney department stores make millions annually on their plastic, but their founder was nicknamed James "Cash" Penney because he detested the use of debt.[5] In times of economic uncertainty, it is best to maintain control and power over finances. The best way is to minimize the amount of money owed to others. The best basis of building wealth is one’s income. As the popular saying goes, “When your outgo exceeds your income, then your upkeep will be your downfall.” While debt is often used to try and get ahead in life, it must be kept in mind that it can also be a great risk to the personal finances. The decline of the dollar has made many people uneasy and to doubt the reliability of the financial standard by which we measure against. Gold is at record highs and many people believe that it is the best investment to make at this time. However, gold is a very volatile investment and could be a costly mistake if it is purchased at high prices. On average, mutual funds and stocks have performed much better over the long run.[6] As with any investment strategy, it is always best to have a diverse portfolio. Just say the word Enron and this rings true. Many employees who worked for the company put all of their retirement savings into Enron stock and saw their savings depleted almost overnight. The value of the dollar is something that has to be watched closely. No doubt if other currencies become more valuable than ours, people have a right to be somewhat concerned. With this downside, there is also a benefit. Exports are doing very well because other countries are eager to purchase products at lower prices. This type of balancing act can be fragile and the dollar must be a reliable and constant currency to help growth. Inflation and higher prices seem to always plague consumers and this year is no different. With gas being at record highs, many drivers are cutting down on their consumption. Travel and freight costs are increased by the surge of oil prices. As a result, goods and services end up costing more for the consumer. As mentioned earlier, higher prices do not equal recession, but they do put a pinch on the wallet. For a commuter that drives many miles every day to work, the cumulative amounts of gasoline purchased can be translated into a higher gas bill. Food prices increase because the cost to transport it goes up. However, there must be a balanced perspective in all of this. Increased prices do not usually break a budget overall. Rather, cutbacks are usually made in other areas to relieve the pressure. There is another area of the economy that is usually not addressed and is perhaps one of the most important factors in discouraging growth. Our economy has a good track record of growth but it cannot always go up forever. There are weights that threaten to drag down the economy if they are not revised. Our current tax code is very discouraging to enterprising individuals and businesses. We have a progressive income tax system in America that needs to be reformed. It is alarming to note that a heavy progressive income tax is the second plank of Marxism.[7] While some believe that rich individuals should pay a much higher share, they don’t realize what a large segment of the economy is fueled by. Through multiple studies, it has been proven that lower taxes benefit everyone.[8] People who are wealthy seek more ways to hide their income when they have to pay high tax rates. Offshore accounts hold billions of dollars that are chased away from our coasts by our tax code. A little known fact is that the bottom 50% of income earners pay a fraction of the total tax load. The top 1%, who earn 20.81% of all income covered under the income tax, are paying 37.42% of the federal tax bite. [9] Politicians preach that the middle class pay too much in taxes and that the load should be shifted away from them. This all sounds good but it fuels the unnecessary fires of class warfare. Another argument that is used is rhetoric against big corporations. Somehow many Americans have a bad perception of corporations. They believe that corporations are out to hurt the middle class by taking advantage of workers. There would seem to be no better alternative than to tax them at higher rates. What is not realized is that corporations do not pay taxes. Readers may think that this is an outrageous and erroneous statement. I will assert again that corporations do not truly pay taxes. Whenever their tax rates are increased, they simply pass it on to the consumer. This is known as embedded taxes. By demonizing the rich, politicians appeal to the majority of the poor class and gain many votes. Perhaps the most radical and most researched tax proposal right now is known as the FairTax. The FairTax is a national sales tax that would replace all income tax with a 23% consumption tax. This would also eliminate embedded taxes and prices would immediately go down on products sold. Until we have a tax system that rewards hard work and encourages success, we will slowly drift toward the system of collectivism. So what steps have or will be taken to correct this slowdown? The Federal Reserve has continually slashed interest rates to alleviate pressure in the credit markets. Freeing up more money will help but can also bring about the threat of inflation. When the consumer confidence in the economy got somewhat shaky, the politicians came up with a seemingly brilliant plan to send out stimulus checks to taxpayers. This is supposed to spur consumer spending and shore up the economy. However, there seems to be a trend that people are more likely to pay off debt or put in savings. It is amazing to see how politicians who normally would not allow any tax cuts to pass joined rank in file to hand out rebate checks. This makes you wonder if deep down politicians believe that money in the pockets of the consumer does more to spur economic growth than in the hands of the government. The government spent over $40 million to mail out notification letters that the checks will be coming. This was a prime example of bureaucracy wasting our tax dollars. The perception of this rebate was that the government was being nice to taxpayers and giving them some money. The fact is that this was the taxpayer’s money in the first place! The only money that the government gets is money taken from taxpayers. And who decided that people earning over $100,000 were exempt from getting checks? Does this send a message to the younger generation that if you do well then you should be punished? This goes back to the flawed belief that wealthy people should be held more responsible for becoming successful. We encourage our children to get a good education so that they can get good jobs. Once they do, they can then look forward to being portrayed as one of those evil rich people. We can surmise that economies cannot always go upward. There will be times of market correction and we are seeing that currently. In a nutshell, the case can be made that our current problems stem from businesses and individuals over extending themselves and financing more than they had the ability to pay. If the government steps in and does too much, it will encourage future dependence when we come into hard times. It must be remembered that people who are smart and have their financial house in order do not worry as much during times such as this. Personal responsibility must be taken and smart decisions made to insure that our economy continues to be the dominant one in the world.

Marvin

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www.blogtalkradio.com/truth4amer

[1] http://economics.about.com/od/economicsglossary/g/recession.htm [2] http://www.frbsf.org/publications/economics/fedviews/index.html [3] http://powerreporting.com/color/1b.html [4] http://ask.yahoo.com/20040209.html [5] http://www.daveramsey.com/etc/cms/index.cfm?intContentID=4916 [6] http://www.daveramsey.com/etc/askdave/?intContentId=6240 [7] http://www.libertyzone.com/Communist-Manifesto-Planks.html [8] http://www.heritage.org/Research/Taxes/BG1443.cfm [9] http://www.freerepublic.com/focus/news/774663/posts