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.
Our Government at Work!
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