Beth Belton is a Senior Editor for Economics at Kiplinger, the source for personal finance and business forecasting. The Kiplinger Letter has been around since 1923 and, as far as I know, the various Kiplinger publications are well known and respected. Thus, I thought I would ask them what the heck they thought about this economy. Beth was a great help. I canceled my plane ticket to the unknown Pacific island.
The good news is Beth is encouraging, not overly pessimistic. She thinks the economy is almost, maybe not quite, at the bottom. She does not believe we are entering a “great depression,” although we probably entered a recession a few months ago. She does not think the recession will last a long time, less than two years. Unemployment, currently around 6%, will go to 7.5%, maybe higher. Remember, it was 10.2% in the ’81-’82 recession, which was a bad one for Americans. For a guy like me, that has been thinking soup lines, this is pretty good news. I feel much better!
As for the stock market, it may go a little lower. She cautions against pulling money out of the market, if you don’t need it. If you can leave it in for 3 years, she believes things will turn around. She even says that if you have extra money (who does?), now is the time to invest, because there are a lot of good opportunities out there. You know, buy cheap! If my stock broker (I don’t have one!) told me to buy now, I would assume he/she/it was lying to me and trying to make his/her/its next mortgage payment. Since neither Beth, nor Kiplinger recommend particular stocks or make money selling stocks, her recommendation has a lot more credibility for me.
She mentions Alan Greenspan’s recent testimony before Congress in which he admitted that his basic assumption that banks and financial institutions would act in the best interest of their shareholders was wrong. Apparently, Greenspan’s brain is a lot older than he looks. This guy was Chairman of the Federal Reserve for 19 years! Had I known that was an underlying assumption of his economic policy, I would never have bought his damn book!
Was the baleout a good thing? According to Beth, it is not whether the baleout was ideologically good. It was necessary, unless of course, you prefer chaos and more chaos. Beth says the credit crunch was the big problem, not the failure of the banks, per se. According to Beth, companies like McDonalds and General Electric, good solvent companies, were advising the Treasury Department that if they could not borrow money, short-term, they were not going to be able to make payroll within the week. That would mean businesses close, workers are laid off, and instead of trying to solve a short-term problem, a long-term problem is created. Of course, I don’t even begin to understand how McDonalds could have a cash flow problem making payroll, much less a credit problem, but this is a good example of the degree to which confidence in commercial paper (short term loans) had evaporated overnight.
One result of these recent banking collapses is that we will return to credit standards that were in effect years ago. If you clearly can’t afford the monthly mortgage payment, you won’t be able to buy a house. No more buying a house without a downpayment.
Beth advises that it is going to take time for the banks and the Treasury Department to weed through all the good and bad mortgages and determine which ones will be subject to the terms of the baleout.
She notes that the recent decrease in the price of oil is going to make it easier for consumers to deal with a recession. It was $147 a barrel in July and is now around $65. She says that this wild fluctuation in the price of oil is due to the world markets, not OPEC manipulation. The economies of India and China have experienced a slow down and that is responsible for the decrease in the price of oil.
I feel better. Hope you do too!