A Pamphlet from Don Stuart, Preserve Our Nation, LLC
Pamphlet #3 - 3/27/2009

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Economy: A Self-Fulfilling Prophecy

How does the Economy work?

If everyone participates, then the flow of money (Size of the Pie) is sustained and with available credit, risks (Investments) are taken that increase the size of the pie. But when one entity (group of participants) stops participating, then the flow of money slows down and the pie can shrink.

At first, the system (economy) tries to compensate, but over time compensation by one entity for another entity can accomplish only so much.

When the economy is shrinking, the solution is to identify the entity that has stopped participating, then analyze why they have stopped and take measures to reverse their trend (get them spending again). During normal times, our economy is 70% Consumer spending, 21% Government spending, with Investments and Net Exports taking up the remaining 9%. Small shifts over time amongst these entities are viable as long as the fluctuations are small.

When the Consumer stops spending then Trade can sustain the economy for a period of time if the change is small. If the change is large then the government may intervene temporarily. But government must be careful not to interfere with Investments or Trade. As an example, government can establish rules that hinder Trade, or, government can cause the private sector to withdraw or decrease Investments. If the government does this, then it attempts to make up the differences on its own by spending in the economy or spending on Investments (as in a stimulus package).

Fear is predictable when the Consumer shifts from spending to savings. Our normal rate of savings is in the range of 0.5% to 1.0% (not good but that's what it is - another subject). Today's savings rate is about 4.5%, which exceeds the normal rate. The Consumer is obviously fearful of these times and all efforts should be made to reduce this fear. The Consumer does have money to spend.

So, why is the Consumer fearful? The consumers have been receiving mixed signals. On one end of the spectrum the economy was growing: however, on the other end of the spectrum, certain political groups were denigrating the status of the economy. Congress was encouraging home ownership (mortgages) for all, whether they could afford it or not. But no one counted on was the oil crisis and the mortgage crisis. Combining all these has put the financial industry in a downward spiral. Thus this is where we are today.

  1. Build Consumer confidence and encourage consumer spending. This will be hard for the Democrats because they have cited President Bush for encouraging consumers "to go about their business" and spend after 9/11. To assume his position would undermine theirs!
  2. Shame credit card companies into reducing rates. Companies charging more than 30% should be criticized to reduce their rates to approximately 15%. Consumers have gone "COLD TURKEY" from borrowing and spending to savings. Consumers need to reduce savings this and return to spending and slowly move to be a more saving nation. A good thing for the economy is that consumers can't "not spend for a long period". Slowly we are moving back to spending and the economy is responding. Remember that 90% of workers are still employed. But right now the economy depends on consumers spending. Spending in January was up 1% and in February up 0.5%. The Consumer is returning slowly.
  3. Encourage refinancing at current low rates of default mortgages to be changed to 10 year interest only mortgages. This would allow owners to stay in their homes for years until the home value returns. At that time, they could sell their homes or perhaps they would be in a position to afford their mortgage payment.

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