2008: A Historic Year That Destroyed More Wealth Than Any Other Year
2008 will be remember for many things. The election of the first black president in the United States history, for example, will be long remember. There is a chance that 2008 might be remember even more for the amount of wealth it destroyed and the disastrous economic times that it ushered in. This past year, we saw the real estate bubble, the complex, over-leveraged financial system bubble, the American consumer bubble and even the entire American economic bubble pop. The result: more wealth was destroyed this year than any other year ever in our history.
I believe the most apparent thing that surfaced in 2008 is the financial state of our country. Let’s face it… we’re broke. The savings rate turned negative this year while home equity vanished and jobs contracted. Talk about a perfect storm. The average family has somewhere like $8,000 to $9,000 in debt, not counting mortgage debt. If we factor in mortgage and home equity line debt, it’s way uglier.
How Did We Get Here?
It’s common these days to blame various parties for the financial mess of our country. I watched an episode of NBC Dateline the other night that featured personal accounts of families losing their homes due to foreclosure. The reporting overwhelmingly blamed banks for “tricking’ individuals into risky loans. Some want to blame the Republicans, others the Democrats.
The reality is that this situation is bigger than all of the above. It is in our culture. We have a culture that encourages spending, consumption and high levels of debt. We discourage saving. Why? Because in our consumer driven economy, a drop in consumer spending is disastrous for our economy. When people stop buying crap, jobs get cut. Thus, we require more debt and more government stimulus to keep this unsustainable economic train on its track. Similar to the Madoff ponzi scheme, this was destined to collapse under its own weight.
What 2008 turned into was a massive unwinding of consumer and institutional debt. Meanwhile, our clueless leadership in Washington believes the answer is to provide cash to Americans to prop up consumption. Not only is this not the answer, because we need to get away from over consuming, but it merely prolongs the restructuring of our economy that is desperately needed in order to create sustainable economic growth for the years to come.
I fear that the remaining debt bubble to burst is that of the U.S. government. Basically, our government is spending money they don’t have to stimulate behavior that got us into this problem in the first place. I fear the future path of our country is high inflation. Rates are at zero, the Fed and the government have made it clear they will print money in order to stop falling home prices and get economic growth moving again. This is a massive expansion of the money supply.
2009 And Beyond
The next year will provide many opportunities to make money as well as many scenarios to lose more money similar to this year. It is very important to keep yourself informed of real economic facts of the current and coming situation. Don’t buy into the rhetoric of the CNBC folks or other bloggers. Make sure the advice you listen to is based on sound economic principles.
In my next article, I will make some specific predictions for the coming year.