Wednesday, December 24, 2008

Recession psychology

I doubt all of the stories about how tough times are for many Americans. What I think happens is that people take every opportunity to express their frustrations about their life at a particular moment, while finding every caveat for the good news.

When gas prices were over $4 per gallon, people were supposedly not able to function.

Just a short time later, gas prices are under $2 per gallon, and no one hardlymentions it.

How can a commodity that is so essential to our daily lifestyle rise so dramatically and fall so steeply, and it not cause a noticeable change?

If it really isn't a burden to pay $4 per gallon or a big blessing to pay $2.

Our demand for gasoline for instance is so elastic that these "large swings" aren't enough to force a change in our routines.

I think the media stories had more impact than the actual prices.

If there really was a crisis, we wouldn't need the media to tell us.

Now, with the prices so low, there should be a noticeable exuberation.

The reason not is because I think this "recession" is all on paper. It's all psychology.

That is as opposed to a recession caused by a scaricity of an important good.

If there was a 50% drop in the available crude oil, then there would be real pain.
Instead what we have seen is price fluctuations due to speculation and probable market manipulation.

Also, in the real economy of goods and services, we are seeing the natural "creative destruction" of a free market. Weaker companies, those built on lies and scandals, and those that were mismanaged are all suffering.

The public's low tolerance for pain, coupled with the government's insistence to always "do something" creates a circumstance where limited problems can actually spread.

But again this is more psychology than real economic factors.

For instance,

Let's say the Detroit automakers really did go bankrupt. We would still have automakers here in the U.S. The popular brands of those automakers would still sell well either within the current company or at another.

Right now, those companies are trying to compete with a cost structure that doesn't make sense, so they are being savaged with high debt and business problems.

Even good companies are having trouble, but bad ones are on their way to extinction.

The problem is it seems the public and then the government doesn't want to tolerate the failure of anything big. This leads to people in the business world taking unnecessary and unwarranted risk (hoping, knowing?) that they will be bailed out in the end. If if works, they keep the profits, if not they are bailed out.

What we need is a return to smart economics of supply/demand; trying to enlarge profit and limit costs.

We need to get stronger as a country and be able to deal with the change that comes in life rather than constantly trying to "cushion the blow". This will allow us to clean out the old and bad and let the new and good flourish.

All in all, we will not only survive but succeed as a nation because of our inherent belief in the strength of the American people and system. That is an optimistic note to end our 2008 year.

Craig Farmer
making the word "liberal" safe again!

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