Thursday, September 8, 2011

Dear Mr. Bernanke and Co.

Upgrade, Downgrade, GDP It’s all a foreign language to me!

When I was a junior in high school, my chemistry teacher warned us all that gas would be more than $2 a gallon soon. This seemed impossible and irrelevant to a bunch of high schoolers who had just begun driving. We knew nothing about how the world of oil worked, nor did we care. Not to mention, we all had disposable incomes and low, affordable gas prices. As far as we knew, gasoline had always been .89 cents a gallon. Oh! How I miss those days!
Clearly, my chemistry teacher, who happened to have a voice reminiscent of Kermit the Frog and said ‘fusion’ like ‘few-sh-on,’ was a man who understood the inner workings of Wall Street, the relation between that and the dependency we had on crude oil, and the complexities that hold together our seemingly non fragile economic structure. (He also lived through the economic crisis of the 1970s, when gas was rationed throughout the US). And he was right. Not only are we over $2 a gallon, we’re over $4 a gallon in many parts of the country, and there doesn’t seem to be relief in our future.

The rise in oil costs have not only made us have a second thought about taking that mini vacation to the coast, or to grandmas, it has also raised our electricity bills, our food costs, and given us less free cash to spend on things we both need and want. What is more is we were told don’t worry about it; take out a loan with a low or flexible rate and buy a house, a car, put it towards a big vacation, or that new business idea that you had last week. Anyone and everyone went out and found themselves not only receiving home loans, but loans for homes they were not exactly able to afford. The whole country was keeping up with the Jones’s and when the bills started coming in, and they were more than what people had in their bank accounts, the wave of defaults began to form. Add into that picture speculators and geniuses who hijacked Wall Street and turned it into a get rich quick scheme, and a number of world economic issues and political changes, and you get a very complicated, but very real mess, such as we’re in now. There are many other factors, of which I admit I am not educated on, but let’s stick with these for now, shall we? ;)

I have spent the last little while trying to better understand what’s going on in our world because it’s affecting us all. Hence, I thought I’d share my understanding with you all, because like it or not, it’s affecting you too.

Let’s start with understanding what in the blazes this “GDP” is. It stands for Gross Domestic Product. The simplest way I’ve understood this is that it is basically your country’s net worth. It’s a combination of all our annual incomes, plus what each company predicts it will make (and of course what it actually makes), and finally what the government sees itself making in that year. Part of what happens with our GDP is that the various governments use it to negotiate terms of loans given and taken. Corporations rely on this too, but that’s not relevant for us to get into at the moment.

Now, what in the blazes is the deal with the debt ceiling and that S&P credit rating downgrade? The bottom line with the debt ceiling is that it is the agreed upon number that the government has decided is the highest amount of money they can borrow. It’s kind of like the limit your credit card company gives you, only in this case, it’s more like your credit card company saying you can’t borrow any more than 10,000 dollars unless you need to. Then we can renegotiate that number to whatever it is you need to borrow. What’s the point in establishing a limit, if it can be exceeded? For the record, the debt ceiling has been raised an astonishing 39 times since 1980, according to an article written by Veronique de Rugy on nationalreviewonline.com. (click here to read the article) At this point, it really does appear that it takes little more than a public & heated debate in congress to raise the ceiling, which leads us to a credit rating company called, Standard & Poor’s downgrading the United States from the “best,” to “still pretty damn good, but you’re starting to make me think you won’t pay people back,” rating. Now, S&P publicly stated that this move was motivated by the politicking between the political parties, saying that “the gulf between the political parties was becoming unbridgeable, and that policy making was becoming unpredictable,”  according to an article I read on economist.com. Many economists are saying it was a bit dramatic, but they do agree with the downgrade. It does seem that politicians are more concerned with getting re-elected than they are with doing the things they were elected to do in the first place. 

So, what does all of this mean to you and I? Well, it means there’s a pretty big risk of inflation, meaning everything will cost more -- food, clothes, electricity...everything. It also means that there could be more businesses closing, which means more people out of work. Now, I really don’t like the hysteria that comes with this line of thinking, so while I’m pointing out how this affects us all, I need to point out that we’re not there yet, and we have a very real opportunity to make sure that doesn’t happen. This is why I wanted to share what I’ve learned about what’s happening in our economy at the moment.

We have the ability, the resources, and the potential to keep our economies moving forward, and I truly believe we all have a part to play in it. It’s not up to one person to fix it. We might not carry the brunt of the load, but we’re all accountable to pay for the fix somehow, whether we like it or not. The way in which we can do these things is multi-layered. And to me, the only way these silly politicians are going to start paying attention  to their work and stop worrying about their re-election status, is to keep the ones in place who are following through, and vote in new people in place of those who are copping out. If you and I are steady in paying off our debts, living within our means, and looking for those opportunities to expand what we have (even if only a little), then I’m confident our part will have been well played and impacting. In the mean time, let’s also put a little pressure on our representatives & leaders to stop bickering and get to work. Shall we? ;) And please, please, can we find a way to either move towards the use of alternative fuels, or just flipping get these oil prices down!? Amen.

1 comment:

mc said...

thanks for this post, the way the economy is heading has definitely made me fearful of the future(tv news networks also helped with this)but breaking it down and learning more makes it less so.