The Economy

There is little doubt that we are in a severe recession, but the cause is more important than the fact. In my opinion, there is not much wrong with our economy, nor our ability to build and manufacture things. There are, however real problems of fear and unnecessary worry about the economy.

It is apparent to me that much of the hysteria has been fueled by the news making media. Of course, what happened caused the lenders to shy away from even perfectly good loan requests, crippling small as well as big businesses the banks and lending agencies themselves. We should pause, take a deep breath and suck it up.

Answers being proposed essentially drains our national treasure, through bailouts, and giveaways, and execution of FDR tactics which worked well for a short time, then plunged the economy back into a crushing recession, only to be bailed out by WWII, and all of the equipment and supplies needed to support it. Stimulating the economy through programs to improve infrastructure will put more people to work, but it will squeeze budgets of other critically needed national priorities and swell our national debt. The cost of such actions may approach a trillion dollars in cost, over a short period. This approach parallels just printing more money.

What is the usual result of such actions? Very high inflation, which will be costly to those who do not have seed money to invest after paying for much increased costs of daily needs. Businesses will have to pay much elevated costs to operate and produce. Will this really lift us from the doldrums and set us on a path to recovery?

I say, “No!” But, there is a bright side. I am no investment guru, but I believe that equities will stand still or keep going down, perhaps through 2009. However, there will be fierce competition for operating funds at very high interest levels. If that is true, then those who have money to invest can do well in such environment, and I will practice what I preach. Wait and watch for much higher interest rates on Certificates of Deposits, Municipal, State, and some Federal Bonds. Also, buy trusted equity stocks that pay high dividends. While interest rates are escalating, the issuers, in general, will not recall them, but investors may want to, so get the shortest expiration dates possible and make sure that you can sell them after holding for a short time, because you will want to get into higher interest yield bonds. It stands to reason that interest rates for housing loans will quickly increase as well rising home and real estate prices. So, if you want to buy a house, do it now, while the prices are comparatively low as are mortgage rates. Gold will ride high until the value of the dollar increases, which cannot be envisioned in an inflated economy, so some security can be realized through purchasing of gold. I started six or seven years ago on buying good stocks with high dividend yields, and will continue.

The panic has created major layoffs and manpower reductions by corporations and businesses at all levels, creating more fear. This creates another problem, for no matter how much money is thrown at the problem, the means of production has been somewhat debilitated and restart greatly complicated and time consuming. So, do not look for rapid recovery in most categories of investments.

Of course, you should be consulting with your investment advisor, but my lay opinion on how you can prevent too much future harm to your savings is to hold a good share of your assets in cash and search out the highest interest paying bonds, whether federal, state or municipal. Make sure that they have a high rating, such as AAA, and insured by appropriate high level agencies. Pay attention to when the bonds may be recalled, and duration of the bonds. Buy them for the shortest term possible, because the rates may be quickly increasing, and you want flexibility of selling and repurchasing of a better deal.

Buying such bonds create some problems on their own. The value of the bonds is lower than the purchase price, through much of the duration of the bonds, making it a loss to sell for a number of years. The bonds may be recalled at some specified time, because they can get a better deal. Usually you do not lose money on these transactions.

I consider certificate of deposits as cash, because they are almost always certain to pay off on schedule, and you can build your cash resources and be ready when equities start responding to real stimulus, instead of created or exaggerated bad news.

People who hold their money close to the chest and buy less or refuse to buy hi-value items, only worsen the problem for themselves and others. Banks who refuse to make loans are admitting that they have not been vetting customers seeking loans. Most of them are good candidates for loans, and lenders know for how much. They need to get off of their “duffs,” and solicit those with good credit ratings, so they can get back on their feet, then be more lenient, taking more risks and so on. If the lending agencies do not institute a similar policy, they may not recover, and there is a limit to how many times they can be bailed out by the federal government, because that becomes welfare and a vicious cycle, not contributing to economic recovery.

A good share of people’s spending have changed little, but there are those who have lost buying power and, perhaps, earning power, to the extent that they may have no choice but to turn back perhaps to buying habits of the 1930s.

The SBA should step in and guarantee low interest loans, in earnest to qualified small businesses, encouraging expansion and more risk. Don’t forget that the layoffs are a two edged sword. Businesses can now replace low efficacy employees from the cache of well qualified laid off workers, greatly improving their production and operations.

We can recognize opportunity and increase our confidence by meeting the problem head on and using our imagination and management skills to blunt or reduce the hard consequences of the admittedly, potential disastrous situation. We should try to ignore as much as possible of the media’s sensationalism, and concentrate on our own situation and what we can do about it. We should avoid big explanations and answers to small problems, most of which do not apply to the small businesses that are the mainstay of our economy. I would be more than willing to explore any of this further with anyone interested.

(Signed)
Don L. Bice (Colonel USAF Ret., and Management Consultant)
139 Rorie St.
Batesville, AR 72501
(870) 251 2714