Am I smarter than a Professor at MIT?

No I am not smarter than any M.I.T. Professor. Sadly though being smart doesn’t mean you grasp problems. This morning around 5:15a as I was driving to work I heard Dr Simon Johnson on NPR. He is a very decorated economist and currently a professor at M.I.T. Previously he was a member of the U.S. Securities Exchange commission in the Clinton administration and the Chief Economist for the IMF till August of last year. There’s no way I’m smarter than this guy. However he amazingly has no idea what is currently happening with the economy. I was able to deduce that when he said “The U.S. doesn’t currently have too much debt so we can afford the bad bank program”. This site will scare you if you have no idea how in debt we are. It’s a very fluid situation but it’s safe to say it’s over 10 trillion dollars, while some estimates have us at over 50 trillion. But let’s use the lowest figure. 10 Trillion dollars makes us the most in debt country in the world!

Perhaps Dr Johnson developed his position on percentage of debt compared to our GDP. Then we’re way better off compared to every country in Europe, but still running at about 100 percent. Yes what we make every year is how far we go in debt every year. By a 3rd graders comprehension this can’t be healthy, and can’t be sustained for an extended period.

Dr Johnson and the Obama team are suggesting the reason we’re in this problem is a lack of confidence in the banking industry and by consumers in general. If we can get the banks to lend money and consumers to start spending like they did in years past then companies will start hiring again. That would be true except for one major flaw. We are out of money.

What I mean by that is for years Americans consumed more than they earned. The average American since 2004 spent $1.02 for every dollar they earned. Most did that because they were able to get home equity loans. House prices were rising at record rates, so why not take out some that equity and spend it on trips, clothes, home improvements etc? The government policies of tinkering with the free market drove up home prices, and kept interest rates artificially low. If the Government had not taken an interest in trying to get every American to own a home, there would be less buyers. That would have kept prices stable. Which would have stopped people from getting home equity loans. It also would have slowed the economy to a real rate. Car sales wouldn’t have exploded, Construction wouldn’t have exploded. Computer sales, retail, service industries all would have kept growing at a much slower pace than the explosion that has taken place since around 1995.

The artificial growth of our economy also grew our tax base, and as we know government at any size will spend every penny. Now that our tax base is shrinking local, state and federal government is scrambling to find new ways of taxing us.

Recession is another way of saying our economy is shrinking. It’s shrinking to it’s proper size. Millions of people will lose their jobs. That doesn’t change the fact that we need this recession. The economy will grow again when some of these people who are currently out of work start new businesses. It will take years for us to right ourselves, but we will do it. The worst thing we can do now is try to “stimulate” the economy. This not only stalls true recovery but adds to the problem by adding more debt.