CLARKONOMICS: The Federal Reserve has released a statement saying it won’t intercede in the economy going forward.
We all know the economy is really hiccupping and never had a strong recovery from the deep recession. The Fed has done everything imaginable over the last few years to artificially prop it up.
What we don’t know is if things would have been much worse if the Fed hadn’t gone crazy throwing money into the system.
What we do know is we have an economy where banks are afraid to lend to people who want to start small businesses. The banks are only solvent because of bailouts, yet they’re still troubled organizations. At the same time, we face high unemployment all because of the recklessness of the banks.
Our troubled past
The truth is regardless of what the Fed tried and all the federal stimulus money, these things did not lead to a roaring U.S. recovery. The reason is simple: The real problem is we have a long path ahead of us to wean ourselves off the amount of debt that a typical household has carried.
Beginning in 2000, Americans took on levels of debt that were unsustainable. We kept doing so right up until 2007. That’s when it became a house of cards that collapsed.
At the peak of the craziness, it got to the point that the average American took on debt of about $1.36 for every dollar earned, which was about twice as much as the historical average. Today we are at a collective debt level of $1.14 for every dollar earned. So we’re going in the right direction, but there’s still more to be done.
What the future holds
Normally, if you have an economy go into recession because of inflation, the fix is painful but simple: When the economy overheats, you raise interest rates and you cool it off, even though that may cause temporary unemployment.
But the interest rates in our case are already effectively at zero, so they can’t go any lower. We’re at a point where we are out of rabbits to pull out of a hat.
So what’s the solution? It will have to be an individual thing. One by one, each of us will have to resolve to change how we handle money in our lives. We have to decide we’re not going to live an anxious, leveraged existence.
I already mentioned our debt levels as individual households and how they spun out of control between 2000 and 2007. Then on top of that, you have the federal government. The amount we’re borrowing for every dollar of federal spending is about 40 cents right now. There are some economists who argue this is necessary temporarily. Unfortunately, I’m not smart enough to know if that’s true or not.
But moving forward, I can tell you that the emperor has no clothes. Our promises as a country are unsustainable. We either have to charge far higher tax rates or reduce the benefits we promise people.
Conclusion
As you hear me speak, I don’t paint a simple, happy, easy picture. As dieters know, it’s easier to pack on the pounds than to diet them off. We need to be fiscally fit, which is no different than being physically fit. It has to happen one step at a time, one day a time.
A true economic recovery cannot come with a wave of a magic wand from the Federal Reserve or by printing dollars we don’t have for Congress or the president to spend. And at the same time, we have to honor our own debt promises. If we issue debt, we need to honor it. Simply put, defaulting is dumb. Period.
So we need to make changes. The economic recovery will come, but it could take this whole decade. I want you to be prepared and control what you can control in your own life.
