"It's all relative." You've probably heard this before, and it's true of everything except right and wrong.
But it's especially true of economics, and it's doubly true of all the recent scare-talk about the economy.
Simply put, the media and the short-sellers onare trying to scare us into having a recession. Since the nice people who read this have some interest in facts and figures, here are a few reasons why things aren't so bad.
First, the housing correction.
Now, it's true that we're having a very large housing correction. It may be the sharpest fall-off in housing starts as a percentage of the prior peak that there's ever been in the postwar era.
But housing is only about 5 percent of the economy at most. If it falls by half or a third, that's a big drop. In an economy like ours, though, where there was a severe labor shortage before the housing correction, the labor shortfall can be readily absorbed by other sectors, and it is.
Real unemployment has barely budged since the housing correction began more than a year ago. It will probably rise, but exports are shooting up so fast because of the weak dollar that overall unemployment may not rise by much at all. (It's currently at 4.7 percent of all workers, but barely 2 percent of full-time breadwinners.)
House of Cards
Second, there's the subprime "meltdown," as the papers like to call it.
This is a genuine problem. Unwary buyers were sold mortgages they couldn't pay for, and are now in trouble despite the president's new mortgage-rate-increase moratorium. And extremely unscrupulous people sold immense bundles of precarious mortgages to institutional buyers who didn't know what they were buying. In some sad cases, the investment banks that sold thebundles were selling similar instruments short even as they sold the bundles to the innocent.
That's a major moral problem, and the magnitude of loss because of defaults on the mortgages seems immense. There may have been roughly $80 billion in losses so far (before liquidation of the, which will greatly reduce the losses). There may be another $150 billion of losses out there, and maybe even another $200 billion.
Those numbers seem immense, and to you and me they are. But in the context of the U.S. economy, they're not large enough to do major damage unless the Federal Reserve Board makes serious mistakes. The total bank credit in this country as of October 2007 was about $9 trillion. That doesn't count credit from other sources such as bond issuance or foreign investment, which could easily bring the total to $30 trillion or more.
A loss of $50 billion, while immense to you or me or, is barely one-half of 1 percent of bank credit in the United States. It's hardly more than one-tenth of 1 percent of total available credit. Even if the loss rose to $250 billion, it wouldn't even be 1 percent of available credit. And, again, this number will be greatly reduced upon sale of the collateral and recovery by the lenders.
Next, there's the price of oil, and how it'll drive us all into an early grave.
It's true that the price of oil has risen stupendously in the last six years, and especially in the last two. But the cost of oil is less than 3 percent of the average family's budget. Even if it rises by 30 percent from its already lofty levels, the cost to the average family would be painful -- but not lethal. (And, of course, in, and , it's a bonanza.)
Plus, the surge in wealth of the oil-exporting sheikdoms is largely recycled into investments here. This offsets the effects of the losses from subprime and other risky investments.
Finally, there's the fear of the falling dollar and what it will do to us.
Frankly, aside from the rising cost of oil (the other side of the equation of the falling dollar), the typical family buys little from abroad. Most of what we buy are services, such as government, medical, utilities, and amusements, and then food, and these are almost all produced domestically (unless you're a champagne or other wine snob).
Theisn't affected because American corporations' are denominated in dollars, so it really doesn't matter how many dollars it takes to buy a . Moreover, perhaps 40 percent of U.S. large-cap earnings come from overseas operations. These come in as Euros, pounds, or yen, and add up to far more dollars for U.S. corporations as the dollar falls.
A Sadder, Wiser Future
I don't want to be Pollyanna here. There are real problems with our economy, primarily inequality and a looming retirement crisis for baby boomers. But facts are facts, and life is about "how many" as well as "how."
The truth is that we passed through a far worse crisis in the tech collapse of 2000-2002, when roughly one-sixth of the nation's wealth was erased. Now, with thecrisis and other problems, we're not even talking about a loss of one-tenth of 1 percent.
There's a lot to ruin in a nation. We'll get through this just fine. The road may be bumpy for a year or two, but we'll come up roses in a short time and will be ready to smile -- sadder but wiser.