As Barack Obama and his newly appointed financial team attempt to salvage the US and global economy from falling into the depths of a depression, what should the leader of the free world do?
When all is said and done, the problem facing the US during the past eight years, and for many others the past thirty years, is the average net worth of our citizenry has not increased. And, most likely, has gotten materially worse.
To understand what is happening, do not look to the past but let’s look at the present. It is not unusual for a recent college graduate to be leaving school with over $100,000 in debt. And what does the recently hired student make? Maybe one-third of their debt level. Take a $36,000 starting salary, or about $3,000 per month, and subtract out taxes, take out rent of $800 per month (that could be conservative), the $1,000 per month of interest expense for the loans and the newly graduated student will have to steal for food. Or, more likely, depend upon his or her parents for support.
Another way to look at this, having graduated from college in 1986, a typical starting salary was $20,000, roughly two times what one year of college tuition cost. And, further, most people graduated without loans to pay off. This also happened to be when the cost of education started spiraling upwardly out of control. In my freshman year, annual tuition was around $8,000, jumping to $12,000 in four years. Today, that college costs $40,000 per year.
Add the pressure of getting master degrees and student could be stuck with $150,000 in loans upon graduation, if not considerably more.
This student then has to pay $50,000 to $70,000 to get married to be socially acceptable, pay for the $500,000 home where he or she will have to find $100,000 down payment since PMI insurance is so onerous (now over $400 per month) as the age of the 10% down mortgage is likely over.
The massive expansion of the use of debt during the past thirty years has led to an environment where the price of what we pay for things is materially higher than what we can afford to pay. This will mean, unless some creative things are done by Obama & Company, prices for mostly everything will be coming down. The recent drop of gas from $4.00 to $2.00 per gallon was nice. However, the recent collapse to $1.50 is almost becoming a bit unsettling.
The most creative thing Obama can do is keep on doing what the country has been doing, but do it more aggressively and more of it. If our citizens are scared to death by the volatility in financial markets and the US ten-year bond yielding just 2.6%, sell as much debt as you can at that interest rate and use the proceeds to buy all the bad mortgages and credit card debt. If people want to get out for debt, buy it and let them. This will quickly improve the net worth of the average American, increase their spending power, up their confidence and get the economy going again. As the economy stabilizes, tax revenue will go up to pay off the debt issued to repurchase the debt.
At the same time, develop new regulations so this mess will not happen again for another seventy years. Deregulation let people borrow at levels that they should not have been able to borrow. Also, continue to have the Federal Reserve flood the US economy with money and the US economy will begin to improve.
But remember Obama: Be aggressive! Be aggressive! Be aggressive!
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