Are We Exaggerating the Severity of the Economic Situation?

We: fellow bloggers, readers, members of the media, financial analysts, and government officials such as Ontario’s Premier Dalton McGuinty.  This past Friday (March 27, 2009) Mr. McGuinty was quoted (in response to a possible freezing of the minimum wage in Ontario) as saying

“What’s happening here is big, really big,” said Mr. McGuinty. “We can’t keep doing things the same way. The world has changed.”

It strikes me as very important that we, as national citizens and citizens of the world, do not overreact to the current economic situation.  It also strikes me that many of the key actors, those in political and governmental power, are not experts on the economy. It is very possible that you or I, as committed students of personal finance and individual investment, know more about some aspects and principles of macroeconomics than some political officials do.  The same goes for the mainstream media: many just report what they hear; like investment brokers, they may not walk the talk.

If those with regulatory power start making changes and moves on the *more or less* free market global economy (bear with me here;… this is not a laissez-faire rant), it is clear that we are introducing a level of variables heretofore unknown onto the world economic stage.  The threat of US hyperinflation is real and the threat of global hyperinflation is, albeit somewhat more remote, a possibility.

One wants to say that if only things had been done right the first time, there would be no need to create all of this hullabaloo and structure on the part of people who weren’t even paying attention to the economy in the first place!  And now they’re the ones managing it and possibly paving the road to U.S. hyperinflation.

The upcoming meeting of leaders at the G20 on April 2 in London, England is going to be where most of this comes to a head.  There are going to be some game-changing decisions made.  Great! You say.  The game needs to be changed to get rid of all the rascals who stole from customers and lied to shareholders and erased billions of dollars of everyday peoples’ wealth!

Yes, there were some criminals in there, but: (1) the danger now is that the pendulum will be pushed to swing too far in the other direction, raising the worry for some about the possibility of Canadian hyperinflation and hyperinflation in other countries forced to “stimulate” their economies with the US  and (2) the main macro (i.e., bigger picture than Greenspan’s keeping interest rates low post-9/11) causes of the economic problems that originated in the U.S. are the most basic, everyday sorts of money management issues – which, if you can’t get a hold on these now, no amount of regulation is going to be able to make you do so.

Which brings me back to my initial question: are we, in general, in danger of exaggerating the economic situation worldwide and in taking actions on the basis of such exaggerations, opening up consequences with more dire repercussions than most people are capable of seeing at the moment?

Let’s face it; for those of us who were studying this storm two or more years before its arrival, it is somewhat painful to watch the growth of misunderstandings on the part of some people who have only just woken up to the macroeconomics of the world as a result of (1) it becoming an Obama campaign issue or (2) job losses of those they know or (3) the mainstream media making it into a 24/7 SuperBowl game since post-Lehman Brothers on September 14, 2008.

And with the gradual waking-up of many people to the economic situation, it’s a bit like the “telephone game” you played as a kid: the message gets passed from ear to ear, but each time – unwittingly or deliberately – the message changes a little bit more and more until it no longer bears complete relation to its original.  Our situation is not that bad, but in the media there are many indications of this sort of “distortion” of the picture. I’m not blaming the media – this sort of thing will happen anyway.

Why aren’t the real problems fixed, instead of introducing imagined ones and implementing new rules to fix those?  The real problems are overspending and a deliberate depreciation of the US dollar because economists are too afraid of “deflation.” Deflation is supposed to happen with more economic productivity.  Inflation is a misnomer and has nothing to do with the rising value of goods and services.  Don’t confuse rising prices with rising value.

So it seems to me that in retrospect we’re going to see new kinds of mistakes being made.  Depending on what happens at this upcoming G20 (among other things, they’re bracing for riots and “fake hangings” of bankers), we really are in for a new kind of era, or we’ll be on our way to simply correcting the mess that just happened.  What we really don’t need is hyperinflation of the US dollar or some kind of coerced global hyperinflation through stimulus.  It’s good to have preventative measures in place if they enhance overall productivity and well-being, but it won’t be if they inhibit creativity, honest, ethical innovation, and the means of the average citizen to simply get ahead with his/her goals and make the life they want.

In the meantime, as one of my readers commented below, individuals should just work to take care of their own “personal economy” — pay off debt and learn how to protect your wealth from hyperinflation.

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Tagged as: G20, international economy, media, US economy