We are in the midst of a difficult time, but I want to say this to you: Don’t overreact.
Our economy will take awhile to heal. I remember back in 2007 or 2008 when we were just at the start of what would become the financial crisis. As I’d do appearances, people would ask me when things would get better. I’d say, “Between seven and 15 years from now” and people would laugh nervously because they thought I was kidding.
Debt and deleveraging
But I wasn’t kidding. Just look at the genesis of our problems: You have excess debt and excess speculation leading to a sluggish recovery. It took a while to get into and it will take a while to get out of.
If you look at what happened at the individual household level, you find that we as Americans took on crazy levels of debt over a period of 15 years, spending $1.36 for every dollar we made when we hit the wall four years ago.
Today, thankfully, we are in the process of what’s called deleveraging. Deleveraging means resetting our personal balance sheets by reducing our debt and reducing spending. Now we’re at about $1.12 of spending for every dollar that comes in. That will keep going down as we save more money.
Economic sluggishness is the new normal
Like us as individuals, every state except perhaps North Dakota is in a tough time figuring out how to pay the bills. What should they cut? What should they tax more? Should they tax more?? This is the new normal for now.
But it won’t always be this way. Don’t fall into the pitfall of what’s called “inertia bias.”
In 1999, when the dot coms were booming, people believed the average stock market gain per year going forward permanently would be 20%. Today, people probably think it’s going to be more like negative 20% every year going forward! But they were just as wrong then as they are now. The hype was just as wrong as the pessimism. That’s the danger of inertai bias.
You see the same thing in housing. If you go back to 2005, people thought homes would go up 5% in value for the rest of their lives in some bubble states. Today, we laugh at that knowing what we know now.
Even though it is likely we will have a drag on economic recovery for seven to 15 years, we are going to be fine.
I also believe this: Eighty-four percent of us are still working in a job we want making similar money to what we did before, while 16% of us are underemployed or unemployed. But for the 84% of us, this is great time of opportunity.
Real estate is phenomenally cheap, making this best time to buy a home ever. Ditto for the stock market. While it’s not the best time ever for stocks, capitalism is on deep discount. Now is the time to buy so you can benefit when the recovery comes.
Editor’s note: Today’s broadcast originated in Hartford, Conn., at an event hosted by affiliate WTIC News Talk 1080. This segment originally aired in Sept. 2011 and subsequently on Oct. 11, 2011.