Prepare for an Economic Meltdown
By: Matt Towery
In 2006, I examined a series of surveys we conducted nationwide and then predicted a collapse of the housing market. Plenty others followed with similar forecasts and postmortems over the following months and years. But my column was among the first.
I’ve made predictions about other slowdowns in the American economy. I’ve been mostly correct, although in 2010, I suggested that the stock market ultimately would plunge. Turned out that it climbed instead of descending. The fact is that it’s easier to predict the weather next month than to get an accurate read on the future of the stock market.
My timing was off in predicting a plummeting of the stock market, my but theory still stands. But the sobering news may extend beyond just that. A more immediate happening could be the sudden and silent rise in the cost of living for average Americans, thanks to continuing stagnant wages, plus unemployment that is higher than the official numbers. These numbers don’t take into account the many who have fallen off the unemployment rolls or have simply given up looking for work.
It’s true enough that some of those who predict oil prices may be overstating the severity and the extent of the unrest in the Middle East and North Africa. There is little question that the outcome of this broad geopolitical conflict probably won’t be decided for at least months.
Observers should recall that when the pro-American monarch in Iran was overthrown in 1979, most foreign policy experts in the Jimmy Carter White House believed that university students, bureaucrats and the educated classes in Iran would form a loose coalition that would transform that country into some kind of democracy. Then the Islamist Ayatollah Khomeini entered the stage. Within a year, Americans had been taken hostage in the U.S. embassy in Iran.
Although jobless claims were down this week and some other economic indicators now look a bit better than they have, we now face the possibility of inflation spiking, and of a lack of quality jobs being created.
Until we see corporations and especially small businesses enjoying sustained expansions, we’re going to keep chasing our tails in an ongoing circle of weak and weaker economic growth.
Now for a truly troublesome economic cocktail, throw in the instability in the Arab world. We can’t know yet who will be in control of some of the region’s immense oil reserves a year from now. The existence alone of this political instability may keep both the oil and stock markets in flux.
But the biggest economic moment of truth will be stateside. Corporations have squeezed their employees, their vendors and every other possible resource, all just to keep upping their profits year after year.
But all the blood already has been squeezed out of this ever-hardening rock. We are now seeing indications that, except for military outlays, capital expenditures are still lagging.
The big banks that enjoyed public bailouts are now recovering, but they are still hoarding too much cash. The result is a cutoff of capital flow. At some point, there will be an end to the benefits corporations have enjoyed from their rounds of cost-savings.
What this likely means is that in 2012, unemployment likely will stay above 8 percent. And that number won’t include all those who have given up looking for a job. Some economic demographic groups may see overall job gains, especially the college-educated and women.
But even as they and maybe some others start to climb out of the misery of the past few years, corporations probably won’t be able to keep pulling the white rabbits of continuing profits gains out of their hats. Profits will level off as quarters are compared to quarters a year previous. Fear and reflexive stinginess will again grip corporations and banks, and they will keep on with their boycotts of expansion. That could kick the economy back into another tailspin.
What to do? We could start by not taxing at high rates those who create jobs. The best temporary solution would be to eliminate capital gains taxes, or at least cut them drastically. That would free up capital and thus motivate corporations to use the new capital to expand their businesses and employ more people. Perhaps the only companies to get this tax break should be those that use the savings to expand.
Just a thought.