Savings Experiment: Snow Removal
Why Your 2012 Tax Bill May Jump By $8,000
The final quarter of the great national nightmare -- our 43rd president -- ended with the worst quarterly performance of our GDP since 1982, when Ronald Reagan was in office. The 3.8% decline in Q4 was the worst quarterly result since a 6.4% annualized plunge in the first quarter of 1982. But it was not as bad as some had expected. What's next? Probably a downward revision to that 3.8% and a much worse result for 2009.
The key factor behind the shrinking economy was consumer spending, which shifted into reverse. Consumers cut back on spending by 3.5% in the fourth quarter, following a 3.8% reduction in the third quarter. Spending on durable goods, which generally requires financing to close the deal, plunged 22.4% -- the most since early 1987. And non-durable spending, or spending on items like food and clothing, fell 7.1% -- the deepest cut since 1950.
Two pieces of surprisingly good news -- rising savings and wages. The savings rate rose to 2.9% in the fourth quarter, up from 1.2% in the third quarter. And wages, surprisingly, rose 2.6%, although that increase was the smallest since 1982 when the government first started tracking this data.
Our nightmare continues, though. That's because the 43rd president pushed hard for home ownership, tax cuts, and borrowing -- 30:1 in the case of the leading financial institutions. All this created the illusion of prosperity by making debt freely available to people who could not pay it back.
This illusion of prosperity began to shatter back in 2006 when subprime mortgage companies started to file for bankruptcy. In 2007, we had major financial panics that caused the Federal Reserve to slash interest rates. But that did not stop the implosion of the formerly leading lights of our financial system -- e.g., Lehman Brothers and the rest of Wall Street, which is on economic life support.
What does all this have to do with the GDP report? The numbers suggest that consumers and businesses are buying less because they can't get the finances to make purchases. There are two ways to fix this problem. One is to let prices fall so low that people can afford to buy without borrowing. The other is for the government to make loans directly to people who want to buy.
By creating the illusion of prosperity through debt, the deflationary spiral reflected in these latest economic numbers will continue to cause the mother of all economic hangovers for years to come.
Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College. His eighth book is You Can't Order Change: Lessons from Jim McNerney's Turnaround at Boeing.
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Reader Comments (Page 1 of 1)
1-30-2009 @ 10:32AM
daybobby said...
Please, recognize that it is the entire political process ( Democrat and Republican) that has created this mess. And not just one administration but many.
Americans need to have their true voice heard. Contact your elected officials and exercise your rights.
1-30-2009 @ 10:50AM
z4rock said...
That $750 Billion really did the trick. Now lets bail out some more losers. Can't wait to see what another Trillion will do to the GDP.
These massive "FIXES" are scaring consumers and business into inactivity. Maybe we could raise the tax on business income even higher. I'm sure that will encourage them to hire more people in the US.
1-30-2009 @ 10:50AM
my boy lollipop said...
revisionism is a great thing!
1-30-2009 @ 11:19AM
Stephen Sopko said...
Mr Peter Cohen,
Whoa, Wait a min. We need to clear up a few things here with this as you have your facts liberally twisted.
Who ran the congress and senate for the past two years? Let me help you The Democrats.
Who originally losened up credit rules for purchasing housing? Let me help you. Bill Clinton (Democrat).
Who decided to really see just how far the enevlop could be pushed allowing more homes to those who could not afford them? Let me help you Barney Frank and Christoper Dodd (Democrat)
Who received the most campaign funds from Freddie Mac and Fannie Mae? Let me help you. obama and the Democrats.
This list could go on and on. The facts are that the Democrats played with home ownership in anohter give away loan program which banks and financials institutions used as assets for other loans.
The democrat give away loan program has caused not only our economy to collasp but the world.
When you report you should report the facts and I say shame on you and most of the media for not bringing these facts to the public..
1-30-2009 @ 11:41AM
RICH is IGNORANT said...
AOL is not doing anyone a favor by hiring biased, ignorant morons like this writer, Peter Cohan to scribble partisan nonsense. How in the world are you (Peter Cohan) hold G.W. responsible for this financial mess that was sparked by greedy individuals in Wall Street, outsourcing by companies looking to save a buck, and Peter Cohan's own Bill CLinton who pushed so hard to make financing available to people who had no business getting qualified for loans, or any means to make those rediculous payments. The UAW Union with their Jobs Bank, 6-figure salaries for lazy people throwing together American cars with such sloppiness while being paid far more than foreign and non-union automobile manufacturers workers certainly don't help the situation in Detroit either.--But let's just blame Bush. Now we can start to move forward!
1-30-2009 @ 12:23PM
ontime9 said...
What kind of stupidity is this blog? Why doesn't Mr. Cohan go back to the Carter presidency which in rfact saw the worst economy in the last century?
1-30-2009 @ 12:27PM
Kent said...
I agree with Peter that deflation/stagflation is the worst kind of economic malaise our country can have as prices keep dropping but generating no economic growth. There's no fix other than to boost consumer confidence which is easier said than done. Right now, consumers are hoarders with tight fists.
1-30-2009 @ 2:50PM
tencan1944 said...
I'm Mr Average American and the direction this Country is headed really bothers me. If you just look at the currrent economic senario we have a perfect storm brewing. Perhaps the biggest collapse of an economy in history and our Goverment is willing to "roll the dice". If you consider global economics you must believe that foriegn countries will abandon American dollars as fast as we want to abondon foriegn oil.This will supersaturate the American economy with dollars that are vertually "worthless". It would appear to me (given I'm no economist) that we should trust the Amercan people to correct the problem rather than the Government flooding the Country with printed paper. I bet you are worried too.
1-30-2009 @ 3:41PM
cathy c said...
I know one thing they could do to help put American jobs back on track..Get rid of the millions and millions of these leaching H1B Visa workers all these big corporations are floating in over here stealing our jobs away.
Make corporations hire only American workers.
That excuse they can't find any sure doesn't float anymore since all you'll see in unemployment lines all over this country is our own engineers.
Can't find any...Maybe they need to stop putting up all the web sights offering jobs to H1B Visa workers from India. Silicon Valley has so many now one would think they've landed in New Delhi rather than San Jose, CA
1-30-2009 @ 3:40PM
Bnnyfunny47 said...
Don't go pusing all this mess today on "Bushie Boy", This all started way back in the early 80's when Ronald D'head Reagan was in office dereguating everything in sight and closing up most of this countries NUT Houses turning these patients out on our streets with a two week supply of meds. And we have to wonder why theres so many people walking the street talking to themselves today...
1-30-2009 @ 3:58PM
unfamiliar2 said...
I love it how the writer of this article slams former President Bush in the first sentence of this article. Screw you, Cohan, you left-wing-biased scumbag. Save your opinions for the op-ed section, jackass.