I think that there may be some people who are interested in the economy but are not sure what's going on. I am by no means an expert, but if you are interested in my opinion here goes:
(This is not a jab at Wal-Mart. Most of you know how I feel about Wal-Mart anyway. That's the subject for another post).
Let's rewind to October 1929. The stock market is nervous. There have been many years (since WWI and the influenza epidemic) of rapid growth and expansion, fueled mainly by an excessive euphoria about America and her new-found industrial might. People were spending money like water and a lot of heavy speculation into heavy industry and other banking and economic interests. America was great and booming, things were looking great for the foreseeable future.
Underpinning all of this was a huge weakness in Europe. Inflation was so out of control in post-WWI Germany that people were writing party invitations on billion-mark notes because they weren't even worth the paper they were printed on. There were many signs that the future was not rosy and that the American prosperity was not going to last. The piper was about to come to call; the bill for the roaring 20s was about to come due.
But in the 20s the US had a strict isolationist policy! How could what was happening in the rest of the world affect the US? Despite the political isolationism, there was a large movement towards moving excess capital from the US to Europe in search of the bargains. The super-inflation in Europe meant that the dollar went further and further and deals were everywhere. The US economy crawled into bed with the Europeans. The US had another interest: propping up the capitalistic economies of Europe in an effort to resist the socialist and communist pressures coming from Russia and other eastern European countries.
In October 1929 the house of cards came down, and the US entered the Great Depression.
It is interesting to note, however, that similar to our current situation the economy did not crash due to a lack of investment capital. There's plenty of that to go around, just like in 1929. But no one's buying. And that's the root of the problem. If I sell something on Ebay, I can expect to get a certain price for my item. The more it sells for, the greater my profit. But unlike Ebay, if I want I can set a minimum price below which I will not sell. There is no such safety in the stock market. Many, many US companies were riding the crest of the 13000 point Dow and not hedging against the inevitable trough that would follow.
Let's look at GM for example. They rode through the miasma of the great depression, actually consolidating into General Motors from various imperiled auto firms (Ponitac, Cadillac, Chevrolet, Oldsmobile, etc). Hence - General Motors. GM wasn't panicking in the 30s - they were consolidating and strengthening. And they were waiting - they knew that the US would be brought into WWII. If they could wait it out long enough they would be sitting pretty. And they did and they were.
Following WWII, GM retooled and started selling cars to returning GIs. Enter the 50s - Korea and later Viet Nam made sure that the military spending continued, and vast ribbons of elevated highways extended across the nation. Enter the era of the automobile. GM looked like there was no end in sight.
The 60s brought a lot of political unrest, but people still needed a car. GM still looks good.
Then in the early 70s the scene changes. OPEC forms. A cartel organized to fix oil prices for mutual benefit. And the world experienced a series of energy crises that shook GM - still producing 500 cubic inch motors for its vehicles, even passenger cars! - and from which GM would never really emerge. Suddenly these small Japanese cars, which were well built and energy efficient looked more and more attractive. The revolution in Iran in 1979-1980 began the death knoll of the ultra-big cars.
In the 80s GM was playing a two-faced role, offering ever larger and less fuel efficient vehicles on one side, while scrambling to recapture the small vehicle segment on the other. There was a major paradigm shift in the way Americans thought about driving - it wasn't a luxury anymore. People were dependent on their cars to get to work and even to the store. GM shouldn't have been surprised - in the 30s they systematically bought out the commuter rails and trolley systems across the country to force us to that kind of dependence. But then they found themselves behind the proverbial 8 ball when Americans began demanding small, fuel efficient commuter cars.
In the 90s the two step continued. SUVs supplanted the ultra-huge cars of the 70s as a growing economy allowed people to pour more and more into their vehicles (some SUVs were over $50,000 - while in the 70s even a Corvette cost around $4000...) And fuel efficiency needs were glossed over. No one now thought of the US when they think of fuel efficiency. Even quality was starting to take a hit as highly engineered Japanese and Korean cars came to be known as reliable and fuel efficient. GM was in real trouble.
But as I have mentioned above, the trouble was mostly psychological. It is just a perception, and right or wrong, people are beginning to view GM as a dinosaur, a relic of a time long gone. GM has a real battle ahead, if they can pull out of this nose-dive of public perception at all.
GM is not weaker today than it was last year. It still has the same assets (factories, machines, resources) except cash - that it did last year. The potential is the same. The model is (unfortunately) the same. The only thing that's different is the perception. GM's reality has finally caught up to it's perception. Oldsmobile is already gone.
GM is indicative of the economy in general. The housing market certainly exacerbated the problem, as did the debt ratio of American households and other factors have played into it. But the main thing is confidence. Since we are now firmly entrenched in a global economy, what other countries think about the US is vital. The main source of confidence in the American economy, however, is from America itself. An economic stimulus package cannot financially pull us out of the lack of confidence, but the fact that the government is aware of the problem and is taking affirmative steps to rectify the situation (regardless of the outcome) can help start to influence the perception and move things in the right direction.
America is strong. We will weather this storm. Our economy will rebound.
(This is not a jab at Wal-Mart. Most of you know how I feel about Wal-Mart anyway. That's the subject for another post).
Let's rewind to October 1929. The stock market is nervous. There have been many years (since WWI and the influenza epidemic) of rapid growth and expansion, fueled mainly by an excessive euphoria about America and her new-found industrial might. People were spending money like water and a lot of heavy speculation into heavy industry and other banking and economic interests. America was great and booming, things were looking great for the foreseeable future.
Underpinning all of this was a huge weakness in Europe. Inflation was so out of control in post-WWI Germany that people were writing party invitations on billion-mark notes because they weren't even worth the paper they were printed on. There were many signs that the future was not rosy and that the American prosperity was not going to last. The piper was about to come to call; the bill for the roaring 20s was about to come due.
But in the 20s the US had a strict isolationist policy! How could what was happening in the rest of the world affect the US? Despite the political isolationism, there was a large movement towards moving excess capital from the US to Europe in search of the bargains. The super-inflation in Europe meant that the dollar went further and further and deals were everywhere. The US economy crawled into bed with the Europeans. The US had another interest: propping up the capitalistic economies of Europe in an effort to resist the socialist and communist pressures coming from Russia and other eastern European countries.
In October 1929 the house of cards came down, and the US entered the Great Depression.
It is interesting to note, however, that similar to our current situation the economy did not crash due to a lack of investment capital. There's plenty of that to go around, just like in 1929. But no one's buying. And that's the root of the problem. If I sell something on Ebay, I can expect to get a certain price for my item. The more it sells for, the greater my profit. But unlike Ebay, if I want I can set a minimum price below which I will not sell. There is no such safety in the stock market. Many, many US companies were riding the crest of the 13000 point Dow and not hedging against the inevitable trough that would follow.
Let's look at GM for example. They rode through the miasma of the great depression, actually consolidating into General Motors from various imperiled auto firms (Ponitac, Cadillac, Chevrolet, Oldsmobile, etc). Hence - General Motors. GM wasn't panicking in the 30s - they were consolidating and strengthening. And they were waiting - they knew that the US would be brought into WWII. If they could wait it out long enough they would be sitting pretty. And they did and they were.
Following WWII, GM retooled and started selling cars to returning GIs. Enter the 50s - Korea and later Viet Nam made sure that the military spending continued, and vast ribbons of elevated highways extended across the nation. Enter the era of the automobile. GM looked like there was no end in sight.
The 60s brought a lot of political unrest, but people still needed a car. GM still looks good.
Then in the early 70s the scene changes. OPEC forms. A cartel organized to fix oil prices for mutual benefit. And the world experienced a series of energy crises that shook GM - still producing 500 cubic inch motors for its vehicles, even passenger cars! - and from which GM would never really emerge. Suddenly these small Japanese cars, which were well built and energy efficient looked more and more attractive. The revolution in Iran in 1979-1980 began the death knoll of the ultra-big cars.
In the 80s GM was playing a two-faced role, offering ever larger and less fuel efficient vehicles on one side, while scrambling to recapture the small vehicle segment on the other. There was a major paradigm shift in the way Americans thought about driving - it wasn't a luxury anymore. People were dependent on their cars to get to work and even to the store. GM shouldn't have been surprised - in the 30s they systematically bought out the commuter rails and trolley systems across the country to force us to that kind of dependence. But then they found themselves behind the proverbial 8 ball when Americans began demanding small, fuel efficient commuter cars.
In the 90s the two step continued. SUVs supplanted the ultra-huge cars of the 70s as a growing economy allowed people to pour more and more into their vehicles (some SUVs were over $50,000 - while in the 70s even a Corvette cost around $4000...) And fuel efficiency needs were glossed over. No one now thought of the US when they think of fuel efficiency. Even quality was starting to take a hit as highly engineered Japanese and Korean cars came to be known as reliable and fuel efficient. GM was in real trouble.
But as I have mentioned above, the trouble was mostly psychological. It is just a perception, and right or wrong, people are beginning to view GM as a dinosaur, a relic of a time long gone. GM has a real battle ahead, if they can pull out of this nose-dive of public perception at all.
GM is not weaker today than it was last year. It still has the same assets (factories, machines, resources) except cash - that it did last year. The potential is the same. The model is (unfortunately) the same. The only thing that's different is the perception. GM's reality has finally caught up to it's perception. Oldsmobile is already gone.
GM is indicative of the economy in general. The housing market certainly exacerbated the problem, as did the debt ratio of American households and other factors have played into it. But the main thing is confidence. Since we are now firmly entrenched in a global economy, what other countries think about the US is vital. The main source of confidence in the American economy, however, is from America itself. An economic stimulus package cannot financially pull us out of the lack of confidence, but the fact that the government is aware of the problem and is taking affirmative steps to rectify the situation (regardless of the outcome) can help start to influence the perception and move things in the right direction.
America is strong. We will weather this storm. Our economy will rebound.
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