Karl's Economics 101

I never took economics in school, and I hate math. So I'm not technically qualified to make any observations on the economy. But I digress. That never stopped me from commenting on crap I know little about before, right? OK, so bear with me....

Capitalism's success is based on spending. We're a consumer economy. The more people spend their hard earned money, the faster the economic machine operates. The faster it operates, the more jobs there are, the bigger the profits, the better the stocks do, etc. Government banks try their damnedest to control the machine, to keep it from red-lining and overheating, by adjusting interest rates. These same rates are used to speed things up when the machine slows down too much. The bottom line - the machine cannot slow below a certain point or we're all screwed. But it can't rev up out of control either. The world works (based on our existing system) when we're all good little consumers. Even our savings is simply money we put aside to make sure we can spend later.

So when moneygeddon hit in 2008 - you know - when the banks and brokers got too greedy and invested all our money in mortgages that never should have existed, a lot of people lost money, or their homes, or their jobs or any combination of the three. The press went into a frenzy. All you could see or hear in the news was the doom and gloom of a recession not seen since the great depression. And while very few of us were even alive back then, we knew that the depression was bad and the possibility of it happening again was a horrible thought. Suddenly and unexpectedly, everyone went into a kind of recession trance. Even the people who still had jobs and homes and savings were instantly transformed into misers. Suddenly the idea of going on that expensive vacation was put to rest. The new car could wait for a while. The new appliances aren't necessary just yet. The next house is too much of a risk, because we'll never get what our home is worth, and the home we want could still get cheaper in the next few months.

Speaking of houses, with all the foreclosures and people reluctant to buy because of their own homes losing value due to the sudden glut of available homes, home prices went into 'correction' mode. This was bad because even with homes at bargain prices, some people still couldn't afford them as a result of their precarious financial situation. Banks suddenly got stingy about who they lent money to - you know, kinda like what it should have been like all along. Even folks who could afford homes were more inclined to wait for prices to bottom out - and nobody knew when that would happen. This saturated the market with homes even more, driving the prices of everyone's homes even lower, which made some home-owners' mortgages now worth much more than their actual homes were worth. Big trouble. It became a financial avalanche. Nowhere did this situation get as bad as in the US. Which leads to the next problem - the spending.

If your house is now only worth half its initial value but you still have a mortgage for the original price, you get financially paranoid. You fear for your jobs, you spend much less than you normally would. The machine is decelerating at a tremendous rate. Because the world operates on just-in-time goods production, the factories shut down. The ships get parked. Empty containers pile up at docks. Stores go out of business. More jobs are lost. People spend even less. This behaviour has a ripple effect outside American borders, because most of the stuff Americans buy is made elsewhere. So the whole world's machine slows down dramatically.

What money people do have is going into savings. The government knows that the only way out of this mess is to get people spending again. Which is funny, because our government's been lecturing us for years that spending and debt were out of control and nobody's saving enough for the future. Now that spending is down and saving is up, the government is begging us to spend again. So they pump trillions of dollars of stimulus into the economy to prevent the machine from stopping. Well, the machine is starting to accelerate again. So do your part people - spend like there's no tomorrow. Snap out of that trance. Be the consumer the economy needs you to be.