Thursday, January 24, 2008

The US Economy

I haven't posted on here for a long time, but with so much talks of the economy everywhere at the moment, I really feel like I have to say something about this situation.

Every politicians, at this point, are talking about tax cuts to stimulate the economy by increasing consumers spending. A popular and politically safe response, but is that really a solution? Consider this; in a politically and economically uncertain nation, how willing are you to spend your money frivolously? It is true that current consumers' spending had gone down, but that is not a cause of the current economic turmoil, but it is a result of the turmoil. Restoring consumers and investors confidences are a must at this moment, but it is not done with tax cuts or by reducing the interest rate, as these things are only short term solution for a long term problem. The root of the current economic woe is something much deeper, something much more integrated into the American economy that must be fixed, and tax cuts are not the solution.

What is causing the current problem is a very simple concept known as moral hazard. The problem with moral hazard in the United States is that it run deep, deep into the very blood of the United States economy, the people. America runs on credits, money that doesn't really exist. What fuel this credits demand? Foreign credits, and bad mortgages, and when these two things unravel, the economy unraveling along with it.

America got to this point because our solutions to every problems is to throw money at it, and hope it will go away. We got hit during 9/11, our response was to spend as much as we can because if we don't, the terrorist win. Our economy started to contract, our response was a stimulus check to stimulate consumers spending. Our wars was failing, let throw more money into it hoping it will be better. Always the short sighted response, never an analysis of the problem. This is all possible because of moral hazard as it is very easy to spend money that isn't there. Just look at the US government and it almost 10 trillions dollars deficit, and look at the American people saving rate and how much they spend. The credits have to come from somewhere. The current economic crisis is not just the blame of Wall Street and the many financials CEO (that should be in jail), but it is the fault of America as a whole. Our fundamentally un-sounded system that merely tout market principles, but hardly operate base upon those principles.

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