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Why Both Economic Extremes Are Wrong

6 December 2011 14 Comments

It seems like you can’t get on TV and talk about your views of the economy unless you’re either in one extreme or the other. Either the American economy is great and the Dow is going to 15,000 or you’re a gloom and doomer and think the Dow is going to 5,000. The reality is that neither camp is right in my opinion.

I’m of the opinion that there are structural problems with the economy. First and foremost, there’s too much debt. The debt overhang of the general economy and at the individual level will be a burden preventing future sound growth. Think of it this way, the debt service at the individual prevents you from investing in other activities or buying other things. More of your money going to banks versus productive investments or consumption is good for the banks, bad for the general economy.

Second, because of advances in technology and cheaper labor overseas, American workers are too expensive and under-skilled. This means that high unemployment is here to stay.

Now, does this mean the economy is going to crash or the dollar will crash or some other catastrophic event? I don’t think so. First, the policymakers are very good at extending the problem and preventing an all out collapse. This doesn’t mean there aren’t consequences to “kicking the can down the road”. There are. But, the reality is that America still has more leeway on this than most other nations because of the power of America. Is this power and dominance deteriorating? Yes, I believe so, but it is a very slow process.

Expect the US government to continue to prop up the economy and offer various deficit spending programs to infuse cash into the economy. Debt will keep increasing at the national level, and inflation will likely continue to increase at a measured pace. Yes, your dollars will likely continue to buy less and the standard of living will likely decrease for the masses over time. But the key here is “over time”.

If you’re hiding out in a bunker waiting for chaos, I think you’re wasting your time. Find opportunities out there to make money. It’s not easy and they aren’t obvious, but there ARE opportunities. The economic conditions just warrant being more cautious and more frugal and might make you have to work harder to get ahead. So be it. And yes, have a little emergency stash just in case I’m wrong and the world goes to crap next year.

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  • kc @ psychomoney said:

    With economic uncertainty there is also so much opportunity for the entrepreneurs. Go start a business and create your own certainty.

  • Arthur Garcia said:


    I really sad to agree with you, but your second point is dead on. "…because of advances in technology and cheaper labor overseas, American workers are too expensive and under-skilled. This means that high unemployment is here to stay."

    So many people are focusing on the wrong things. We have to develop new skills and stop trying to save every company or government-sponsored that no longer can carry its own weight in the new economy. We have to be way more competitive and innovate – not just penalize the segment of society that is producing!

  • Amanda L Grossman said:

    We are non-mortgage debt-free, and love it. However, I still feel a small monkey on my back just because I live in the US and we are SOOOO in debt. I wonder what measures are going to be put into place, and how the next 5-10 years is going to look?

    I guess the one thing that is comforting is my husband have put ourselves in the best financial place we can be so that if anything tough happens to us, we're still better off.

  • Will said:

    Both extremes are motivated by laziness to do anything. The exuberant ones say it will fix itself so there's no need to do anything, while the doomsayers insist it will come crashing down anytime soon, so there's no need to do anything.
    This nation needs to wake up and realize there's no free lunch. kc @ Psychomoney is right: get out there and make your own certainty happen!

  • KarlFischels said:

    So well put, thank you. There is nothing wrong with someone buying 5 or 6 of something they will truly use in the next 3 months rather than greed taking over one person to hoard everything they can get their hands on. It is a sickness. As with most tv, that show is not realistic and I hate that it will and already is causing coupon policies and manufacturers to change what is beneficial to those of us who don't abuse it.

  • Nick said:

    I agree, too. If I hear one more person say "there are no jobs" or "it's not worth looking for a job because I get $400 per week on unemployment, so I'd be working for less than minimum wage" I'm going to pull all of my hair out…

  • Paul said:

    I agree. I think we are on a very slow path to recovery. I think another major slump comes from the housing market. Banks are trickling out the millions of foreclosures that they have, which will cause prices to stay low. Since housing wont lead the recovery, employment needs to. Scary if you ask me.

  • Wealth Manangement said:

    The media likes to play to both extremes because that is what draws numbers. Get people excited, or get people angry – whereas the realistic approach to understanding the market is boring. It's never as good or as bad as it seems.

  • Long-Term Returns said:

    Right on about economic extremes being wrong. The same is true outside of economy. For every extreme opinion that ends up being right or, at least, insightful (e.g. Einstein) there're several thousand very literally crazy ones.

    In fact you're still being quite pessimistic in expecting living standards to slowly decline because of debt or anything else. History of the world and many countries is full debt crises and burst bubbles even as global standards of living increased through the centuries. The same will continue into the future barring some Hollywood-style catastrophe. If you think that today's debates about how to tame healthcare costs or reduce budget deficit are going to be even remembered in 50 years you're kidding yourself. These are all local, self-imposed problems that will be resolved one way or another. There will be some bad years and then life will go on as it always has. I do agree that it's unlikely that the economic growth of 21st century will match that of 20th century, but there's no doubt that we will still see plenty of growth, both in aggregate and per-capita.

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