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The Most Pragmatic Way to Deal with the Economy is to be Realistic

By: Steve Johnson

7/6/2009 - 56 Comments

True, the economy is getting worse everyday and the end of the recession is an illusion.

The most pragmatic way to deal with the economy is to be realistic, but rational decisions can only be made with stable and predictable cash flows, coupled with healthy economy indicators. 

The first thing to realize is that the booming economy was a phony.  But that assertion leads to uncertainty, because it leads to the question of what is the real economy? 

If the economy was a phony, then consumer demand was phony. And if consumer demand was phony, and all major economic indicators (like the CPI, GDP) that are based on consumer demand were phony. And what is the real economy?  What is the real consumer demand? 

The answer to that question is the answer to your business survival.  But without stable prices and predictable incomes nothing seems to be certain. 

My company is reluctant to create projections of the rest of 2009 because of the uncertainty in the market.  Management is struggling to create the 2010 budget without admitting that whatever they put on paper is merrily a guess.  The only thing they are certain about is that we must live within our means.

Within Your Means

With the economy indicators in flux and no one certain which nations will rise and which will fall from the global recession, some early indicators seems to be pointing to the BRIC (Brazil, Russia, India and China) nations.

As is turns out, these nations have had unstable employment, limited government support of capitalism and have been dwarfed by the US economy for that last several decades.  These unsecure conditions caused families in these nations to save up to 30% of there incomes, just as a lengthy stable economy in the US caused many families save nothing.

Out of necessity from limited credit and unsecure employment, the BRIC nations saved their money and lived within their means.  Much of there saved money ended up getting borrowed to US consumers through bank investments. 

The result is that unstable economic and political conditions in other parts of the world helped create a US economy bubble with a massive expansion of credit.  Now, the tables are turning and the US is realizing just how difficult it is going to be to pay back all the money we borrowed from the savers of the world.

“Green Shoots” - and – “Money Trees”

It appears that as the new economy collapses, the old fundamental principles that date back to the beginning of time are the only stable indicators that can be trusted.  The cornerstone of every economy remains ‘you reap what you sow’ and the ‘borrow is slave to the lender’. 

Yet, the political powers continue to tell everyone that everything is ok, so that the public doesn’t realize the mess we are in and start saving 30% of their income.  To avoid the dramatic drop in GDP that we will soon be facing, the government is borrowing and spending money faster than ever before in history and talking about an economic recovery with ‘green shoots’ and ‘money trees’. 

There is no way to harvest what you don’t plant.  Talk is cheap no matter what anyone says, we will not be able to rebuild the economy on any foundation other than ‘you reap what you sow’ and the ‘borrow is slave to the lender’.

The question is, when are we going to stop eating our seeds and start planting them?  The only green shoots that I see are the one's in my garden.

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