The Economy - Segment 1

As a Reminder I am covering these topics:

1. A Land of Opportunity
2. The Economy -1 (Current Topic)
3. The Economy -2
4. Energy
5. National Security
6. Education
7. My Experience with an Election for "Change" in 1970
8. The Change We Need
9. Growth, Challenges, and Choices

This is a huge topic and will require a two or more entries - If you really want to try and understand you will read it, if you want to be lead by others you will stop now.

I started this prior to the big issue that recently surfaced related to the need for the Bail Out of financial institutions. However, it highlights the same issues.

Even before the very recent credit industry crisis and bail out, both parties had talked about the bad state of the current economy? Current unemployment statistics of 6.1% is declared by some as record unemployment. A concern for jobs having gone overseas, for a weaker dollar, lower relative income levels, rising costs, lower home values, higher cost of fuel and now the difficulty of getting credit are all issues related to the economy that affect all of our lives.

Today's typical citizen understands very little about the economy. It is a complex topic that at it's base includes supply and demand of all products, resources and services that we produce and use. It includes international trade balances, taxation, national debt, imposed legislative controls or manipulations, and much more.

Unfortunately most citizens accept as gospel what they hear and read from the most convincing source, without giving it any more thought and trying to find the facts. Few have a broad perspective nor look at it from a historical perspective. What they are told and what they see in the moment must be true!

Many believe that the US President is directly responsible and also has the ultimate ability to dictate it's path. At any point in time, he is either to take blame or receive credit for the current state of the economy.

Any President Really Has Little Direct Control. While credit and blame for the economy are usually placed on the President, he really has little control. The events of the last week with the President pushing for a Bail Out bill, and then having to wait for Congress and the Senate to agree on what type of bill they will provide. It is true that the President initiates a budget and tries to set policies, but the budget that results is more a factor of what gets added and/or subtracted by congress before they approve it. Likewise, the affect of legislated attempts to drive more and more taxes, exemptions, spending, credits, etc. have significant affects on the economy, that the President can only veto, twice. If congress wants them bad enough, they will get through many times attached as a part of a bill the the President wants to pass and knows that if he does not approve it, he will never get what he originally wanted. The key is to understand that a President with a bad agenda can be controlled, but a President coupled with a congress that is willing can bless and curse the state of the economy.

Election after election, the US populace listens to the same pleas from both candidates, highlighting how they will bring a difference to Washington. This election, what Obama promises is big change, and hope through talking about how he will implement policies that will provide healthcare, new energy sources, more jobs, and help for the middle class. McCain promises that he will bring change in Washington, by getting rid of wasteful spending, getting bi-partisan cooperation, and removing obstacles and barriers to progress. These are the same types of promises that have been made by candidate after candidate for at least the last 10 elections. What Obama suggests is nothing new, nor is what McCain suggests. The question, really is who has the best chance of making it happen, and if they were to succeed, what will be the affect on the economy, security and well being as a country. The Economy affects our day to day life styles, security allows us to have a life. Our well being as a country, is our ability to continue succeeding.

Since, neither candidate is really promising anything new, we can look at historical trends to determine what the impact of different implementations of economic policy have been. To do so we really must first understand some basics about the Economy.

The Base Principle or Natural Law of Economy is Supply and Demand

The principle applies to all things. If we want something enough (demand) and there is little available(supply), then we will pay what is required to get it. If there is an over abundance of availability (supply) the owner will have to charge less to generate enough demand to sell it.

This is true of Oil(price per barrel), Credit (high or low interest rates), Salaries & Wages (availability of people with required skill), Dollars (the more in circulation(supply), if not invested(low demand), the lower the value).

A recent example of Supply and Demand is the price of Oil. While there are many who would try and convince you that the price of oil is controlled by the big oil companies, it's price is controlled by the natural law of Supply and Demand. The global expansion of consumption by emerging countries like India and China are driving up DEMAND, while the owners or Suppliers (OPEC, Venezuela, Mexico, Russia) determine how much they will produce to control the price. (It isn't supply until it is out of the ground.

When the (SUPPLY) of money is more available than the DEMAND for loans credit is cheap both in terms of Interest Rates and ease of conditions. In the 1980-83, when we went through the last big recession, mortgage rates went above 13%, because companies did not have money to loan. For years afterward, the current credit rates of 6-7% rates were considered very good. You had to have a minimum of 5% down for first time buyers, and there was no such thing as a no income verification loan.

Salaries - Jobs that requires special skills and training result in lower numbers (SUPPLY) of people skilled to do those jobs, and as long as there is a DEMAND for them salaries are high. While jobs that require less special skills and that anyone can do have less value.

The Interrelationship of Different Economic Market Elements

While each element, like Salaries, Credit, Commodities are governed by their Supply and Demand constraints, they also are influenced and are dependent on each other.

As an example, lower supplies of oil mean higher prices for fuel resulting in higher costs of doing business, and higher prices of the business products, resulting in lower demand for the product, resulting in either fewer jobs available or lower salaries.

Another example: higher cost of credit, means higher costs to business, resulting in a higher product prices to the customer, resulting in fewer sales/customers, resulting in less jobs or lower salaries

A World Economy

In today's world, with rapid and relative inexpensive forms of transportation, the economy is global. Global markets compete for the same SUPPLY of resources. Global markets create more competition for Products, Commodities, and Services at competitive prices. Businesses now supply products across the world and to stay in business a company has to compete with other businesses from around the world for the customers who demand the product. In the US we have seen the demand dwindle for our automobiles, because we were too slow to adapt the same quality focus as Japan and because because of our higher salaries we had to reduce local plants and accept production of many parts overseas to stay cost competitive. Korean companies provide quality lower priced products because they use lower priced labor, and to compete we must use lower cost labor as well. I will discuss the problems associated with legislating against supply and demand in a later topic.

Chaos Theory - Uncontrollable and Consequential Events Happen

This principle became popular in Jurassic Park to explain that trying to control nature was impossible, and that nature will find a way. The same principle applies to the Economy. There are unexpected events which occur that the Government has no control over. Events like the 911 attacks, weather events, and earthquakes can severely disrupt the economy. After 911 the Airlines almost all went out of business because few people would fly them. Almost all business had to cut back. Costs were high, and jobs were lost. 911 had almost an identical impact as the sudden surge in the price of oil, due to global demands being higher than global supply.

Sometimes events are also the result of trying to control the natural law of supply and demand, and eventually natural principles find a way to dish out the consequences. These events can be years from when the policy was put in place. We are experiencing this today, with the global credit crisis. I will discuss this later related to the impacts of governmental regulation.

My next blog will address the affects of governmental regulation of the economy.