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These little town blues, are melting away...

The pessimism in the media and on the street lately has been almost unbearable. The medias' unrelenting onslaught of bad news seems to be taking a toll on everyone, regardless of political persuasion. People seem to be running scared so here's my feeble attempt to calm some fears. Call me a starry-eyed optimist but here's how I see America's current economic situation and outlook for the future:

Energy costs. High energy costs are a real problem with a real financial impact on America's household budgets for heating and air conditioning, travel and food. There is little that the government can do in the short term about energy costs. Individuals can adjust thermostats and driving and dining habits but unlike years past, oil prices are not expected to drop significantly due to demand in India and China. The silver lining is that higher oil prices accelerate research and development of alternative energy. The outlook is short term pain but long term will be a huge gain as the U.S. moves away from its dependency on oil. The big winner will be the Nuclear Industry which increasingly is being seen by both the left and right as a safe, efficient, and cost effective source of electricity. The increased use of nuclear energy will get the the carbon hysterics off our backs but the respite will be short lived as they find new crises to beat us with.

Housing. A real estate boom followed by a contraction and a perceived crisis in financial markets are creating uncertainty, however bank loans have been rising at the same rate as before the crisis. Banks do not face a liquidity problem but the exact extent of bank losses is not yet known and rules and regulations require that losses must be written down possibly more than will be actually required. The actual number of non-performing subprime loans may be statistically insignificant.

But...
I heard a Wall Street Hedge Fund Manager claim that the losses would be around $1 trillion. He expects this to drag the world economy to go into a "moderate depression" which would idle even the factories of China. Most experts are not this pessimistic.

There is an excess of housing stocks which must be reduced by the system and until that happens, the traditionally "boom and bust" housing industry will suffer. Some experts say that real estate prices could see a 20% downward adjustment. This is seen as a reduction in wealth but in most cases, these are paper losses. If the adjustment is against the inflated evaluations of the bubble years, the good news is that housing will approach more affordable levels. Although it's just a hunch, I think the current housing crisis is more of a crisis of confidence rather than an actual economic disaster. It's a buyers' market.

"Weak dollar." Some experts say that the "competitive dollar" shouldn't be seen as a "weak dollar." They say a "competitive dollar" will serve the useful purpose of correcting our trade imbalance by making our exports more competitive and imports more expensive. Reduced consumer spending could increase the savings rate or offset the increased energy costs. Of course, reduced consumer spending could lead to a recession - a risk some experts say is 30% - 40% for next year. Other experts say that while they expect a weak economy through '08 they see a GDP growth rate of 2.0+%. A weak dollar may cause a temporary rise in prices but the risk of inflation is seen as very low. Ignore the doomsayers.

Long Term Outlook:

Remember, this is America. As bad as it may seem here, there are few places in the world which are as safe and stable as the US. Money seeks not only the highest return but also security and in that regard, America is Fort Knox to the world. Continuing chaos in the world will benefit the US economy as capital seeks safe harbor.

A competitive dollar means a revitalized, state-of-the-art U.S. manufacturing industry. This new American manufacturing will enjoy operating costs which enable it to compete in the International Market.

China, Russia, Japan and Europe are aging. Their low birth rates mean that long term, they will become less vibrant and productive. China may have more time than the others but whether they have enough time to realize the "Chinese Century" is questionable. India, the quiet overlooked sleeper is moving into the modern world but has a tremendous burden with its huge, abjectly poor and illiterate population.

Capitalism is alive and thriving. Communism has been exposed as an idealistic fraud and socialism is in the autumn of its years. Finally, even Democrats are acknowledging the dangers of unfunded liabilities such as Social Security and Medicare. Only the most rigid ideologues argue for the discredited Keynesian economics of higher taxes or the dying systems of socialist health care. Repeatedly, we have seen that reducing taxes leads to increased Federal revenues and reduced deficits. It is becoming increasingly difficult for Democrats to make their traditional arguments for a big government, nanny state.

"Go long" on the USA. It won't be a bed of roses and there will be pain but as long as we can maintain our "can do" American spirit and keep the transnationals out of our pockets and our heads, we'll be "king of the hill - top of the heap."

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Disclaimer: This advice and three dollars may buy you a cup of coffee and two donuts at Krispy Kreme.