San Francisco Fed President John Williams issued his report today about the economy, and here a few key nuggets from the report:
- Efforts at debt reduction may reduce demand and already slow a precarious reconvery
- A huge supply of homes is available for sale, which keeps prices down. Add to that what might be called a shadow inventory of some 4 million homes whose owners are seriously delinquent on their mortgages or in foreclosure.
- Sixty-two percent of households expect their income to stay the same or decline over the next year, the worst reading in the over 30 years that this question has been asked.
- A full-blown financial meltdown in Europe would hit U.S. exports, which have been one of the economy’s few bright spots. Perhaps more importantly, it could slam U.S. financial markets and deal a further blow to already fragile confidence.
We have so many people talking about how it is the debt that is causing this country to be in recession, but there really isn't a lot of sense in this. For one, there is a zero risk the United States will not be able to pay its debt. We have the power to print money, which would cause inflation. However, outside of commodities like gold and oil, we are in a defaltionary environment with regard to wages for the middle class and home prices.
Moreover, there are big problems with demain. People aren't spending money because they have less money through lost jobs, lost equity, and lost wages. Reducing debt would hardly fuel demand. It would do the opposite, because it would mean a reduction in spending which creates a very unhealthy cycle. As the government makes cuts, they lay off government employees and reduce the circulation of money in general such as cuts in benefits, etc.
It could be argued that increased government spending would increase competition for workers, increase the amount of money in curculation and being spent, and reduce unemployment.
If inflation were to take place in home prices or wages, that would not necessarily be a bad thing. Banks may not like it. Companies having to pay hire wages due to competition may not like it. But if the economy improves, it helps everyone. Corporations have record profits right now, yet are not creating jobs. It's time to admit they are not going to come through for us right now until we bring back some healthy inflation, demand, and competition for jobs through government spending.
Then when the economy is back on track, we should cut government spending, which is the proper medication. Government spends more when unemployment increases, and cuts spending when employment is healthy. We have done the opposite in the last decade. It's time to change that.