So I'm no economic expert, but everyone seems to have a economic gloom and doom scenario, and I thought I should post the one I have rattling around in my head.
I think there are going to be some very hard corrections coming to the economy:
- Credit card minimum payments are being doubled this month by law. They have to go from 2% to 4% starting now. One in four people only pays the minimum balance on their card, and this is going to hurt them hard. Worse yet, this is going to start trashing people's credit ratings.
- The housing market is going to slow down. It is. Period, end of statement, full stop. Other companies believe this to be true too. Recently Home Depot announced that they are looking to start buying existing convenience store chains. Now why would a hardware store chain want to buy convenience stores? Because they see a downward trend in the housing market and want to insulate their business from the shock. They're trying to diversify their income.
When the housing market collapses, and prices on houses depress, people are going to find themselves in houses that are costing them more than the house is worth. - Worse yet, all of these people that took out those really bizarre mortgages: reverse amortization, interest-only, etc will suddenly find themselves staring down the barrel of very expensive mortgages they can't afford, and can't refinance anymore. Home refinancing has been one of the primary injectors of new money into the economy, and people have been using it to make big purchases, even to just pay off credit cards and other bills. Overextending, with poor credit ratings, people will want to turn to bankruptcy.
- Bankruptcy laws have been changed recently to make it harder for people to file. It will cost more money to file, and people will have to pay more money back to their creditors before the bankruptcy is considered discharged. This will also suck more money out of the economy as it now transfers to law firms, and eats up people's disposable income.
- Our deficit is continuing to grow. Economics shows that when an deficit is growing, it usually has the effect of driving inflation higher. Higher inflation means that people's dollars are worth less, buy less, and people become poorer without even trying to. Higher inflation will lead the Fed to want to increase interest rates, which makes it more expensive to borrow money, and again, will hurt people with credit card debt.
- Medical expenses are going to become a larger burden on people as more companies will offload more of the cost of a person's health care onto their employees. This also will eat at people's disposable income. I think this will be further compounded by more people caring for their Baby Boomer parents entering into old age. I know personally I've been looking for long-term health care insurance for my parents and wife's parents. I think it's the only sane thing I can do to ensure that we're not completely swamped with the unexpected bills for home nursing care and nursing homes. Here's more information on LTC Insurance if you're interested. And if you've got parents that are going to be retiring soon, you should be.
Given that rosy picture, I'm sure you're ready to go out with a spring in your step, but I don't think it's all bad. I think that as the housing market implodes more and more people are going to be willing to part with their homes cheaply, which means more investment properties to purchase. I think that banks and biotech firms and insurance companies will still be good investments. Bonds will remain a stalwart place to stash money during dark times. International economies, like those of India and China will continue to grow at fantastic rates, which will make them good investments. Newer technologies like fuel cells and alternative energy will take on a renewed vigor.
And some of the social implications will be good in the long-term. I think that as the economy retracts and it gets more expensive for people to live, families will pull in tighter and we will see a return to extended families living together. People, maybe not my generation but my children's certainly, will be more money-conscious, and I hope smarter about their cash.
Despite my tone, I don't claim to be an expert, and I'd love to hear what feedback you've got.
