How to Avoid a Recession: Cut Down on Foreign Oil

First, Goldman Sachs and Merrill Lynch are both already saying it is here, or virtually so. Maybe they are correct. I like to think they are not, and I have a lot of company. However, I am definitely worried about a possible recession. Just last week the chief of the National Bureau of Economic Research has said there is a "serious risk" of a recession.

However, we are not in one yet. The Fed has forecast very low growth for the first half of 2008 with the economy picking up in 2H 2008. The IMF has forecast a worldwide growth rate of 4.8%, virtually agreeing with the Fed about the U.S. growth. The Institute of International Finance (of which Goldman is a main member) has virtually echoed the Fed.

A Tuesday IDB article stated that Q4 profits were predicted to be off nearly 10%, but they would be up 12% ex-financials. To me this sounds like a recession. However, for the moment it is a recession which is really confined to the housing and the financial industries. It looks like retail may be joining the group, along with a few other industries.

What is the problem? The problem is that as a nation we have been borrowing too much. We have been investing too little. The housing crisis is one instance of borrowing. The trade deficit is another. The national, state, county, city, and individual budget deficits are another.

What can the Fed do? Essentially the Fed must make sure that a lot of money is available cheaply in order to stimulate the economy. It can decrease the Fed Funds rate and the discount rate. It can increase the money supply. These actions will mean that businesses will have money easily available to invest. This in turn will create jobs. The jobs will create spending. The spending will create more jobs, which will create more spending. It will be a cascade effect.

What can Bush and Congress do to help? Basically they can spend money in the short term. Tax cuts will also put money into the economy. This will feed the economy.

They can raise the limit for qualifying loans (from 437K to 500K or more). This will prevent losses both to persons and to the banks by making it easier for people to buy homes, as long as they have a reasonable down payment. It will help to prevent a huge erosion of home equity value.

One specific tax cut area the governments should consider is a tax break for solar energy and clean burning, highly efficient cars and trucks. One of the largest parts of the trade deficit is due to energy. Anything that can be done to stem the outflow of U.S. dollars for energy should be done.

Bush has some ability to negotiate with the OPEC countries to prevent oil from skyrocketing. He should do all he can in this area. Bush and the Congress should do what they can to stimulate the production capabilities of U.S. energy companies. Cutting the tax break for Alaskan oil was a mistake. That and other tax breaks should be enacted to stimulate oil production by U.S. companies.

It is only when money is spent on oil supplied by U.S. companies that it gets recycled back into the economy. We need to stem the flow of money out of the U.S. economy, or we will be in severe trouble. As other economies outgrow the U.S. economy, the demand for energy will go up. Longer term we still have a severe energy problem beyond this year's economic concerns, especially since energy is a huge part of dollars flowing out of the U.S. economy. The President and the Congress should do everything they can to address this problem.

Won't adding all of this extra money into the economy lead to inflation? In the short term you would expect that it would. Everyone knows this, but the alternative is simply deemed more painful (stagflation instead of just inflation). In point of fact, we have already had significant "real inflation" with the fall of the value of the dollar. To me it seems as if this fact is almost being hidden from the public.

What can the public do to aid in this cause? The individual should first do the best he or she can to balance his or her finances. Probably most of us have been lulled into laxity in this area.

Next we should continue to spend, but we should spend with some awareness. Buying oil, foreign cars, and foreign textiles (clothes, carpets, etc) are probably the three main areas where we could conserve. All three add heavily to the trade deficit.

You still need to go to work every day. However, if you commute a long way, look for a way to carpool. If you are not a top executive, this should pay off for you. If you are going on vacation, go. However, take your whole family in one car. Don't take two for the extra convenience.

Try to resist buying that new foreign car. Actually most cars these days come from many countries, even if they are from U.S. automakers, but you get the idea. Spending money on that foreign car is actually taking money directly out of your pocket because that money does not go back into the U.S. economy. The same could be said for oil, textiles, and consumer electronics. Try to favor a 'made in the U.S.' brand. The same could be said for offshoring jobs by businesses. Try to favor a U.S. employee.

Of all of these things the biggest immediate threat is probably oil. When the Fed cuts interest rates, it will cause a devaluation of the dollar. This will mean that both businesses and individuals will have to pay more for the same amount of transportation. It may well mean that people will spend less in other areas because they "have to get to work".

This will mean an increase in spending of money going directly out of the economy, and a decrease in spending of money being recycled into the economy. This will cascade into a recession. If people conserve oil (gas, etc.), they will cut the immediate demand for oil. This in turn will help to keep the price of oil from skyrocketing to $150/barrel, which will likely bring on a severe recession. Even if the price of oil goes up dramatically, the U.S. can keep from getting hurt too badly by making a big effort at energy conservation.

Short term we could keep the total dollars spent on energy the same this way, even with an increase in the price of oil. We might even be able to decrease the total amount of dollars we spend on energy.

I hope I have given some people a little food for thought. This is really a serious problem, which has been dogging the U.S. for a long time. However, with the current emergence of major, fast growing, foreign economies, this problem is now extremely critical. We need to address it now. It goes beyond just the current recession fears. Contact your congressman, etc. It really is a serious long term issue for the U.S. economy. We need to avoid this recession, but we also need to avoid the long term downtrend associated with incurring more and more debt.

Comments

[BHK]

I'm curious, what do all those foreigners do with the dollars? If it doesn't come back into our economy, where does it go? Why would anyone outside the U.S.A. want a dollar if it can't be reinvested in the United States?

A recession is a time of eliminating malinvestment. Avoiding it with easy credit policies means more bad investment and higher inflation as the Federal Reserve injects more "liquidity" (i.e. creates more dollars) into the economy. Attempting to avoid recessions is what got us into this mess in the first place.

[David White]

1. It goes to the economy that sold us the goods. We have been fueling China's economy, if you haven't noticed.

2. When the alternative is stagflation, inflation is much preferable. As I said in the article, we already have over 10% inflation due to the devaluation of the dollar. However, the dollar has been held artificially high for years. It has needed to come down, so we can be more of an exporter. In this sense, the devaluation of the dollar (inflation) is a good thing.

[huangjin]

Inflation is never a good thing and relative currency values are not the problem. The long-run cost advantages and disadvantages will always reassert themselves. Lowering the dollar doesn't actually make America more competitive, it just takes money away from American consumers and gives it to foreign consumers. American prices are lower for awhile, but manufacturers will pay higher costs for raw materials and eventually the prices in America will increase, so the net effect in terms of trade will be zero. However, the entire nation will be poorer because it suffered economic disruption and inflation.

A trade deficit is not debt. It makes no more sense to say you or I have a trade deficit with the grocery store than to say America has a trade deficit with China or another nation. What matters is real debt, which comes from spending more than you earn. Easy money is what created the debt problem, therefore easy money cannot solve the debt problem.

Dollars cannot leave the American economy. The U.S. dollar only has value because it can buy things in America. In order for it to have no value and leave the economy, foreigners would ahve to want them for their artistic value and hang them on the wall. I don't think foreigners get dollars for this reason, but rather to buy things from America, like Treasuries. When they do this, dollars re-enter the U.S. economy.

You are right that increasing domestic oil production, which would be easy to do if Congress would allow it, will help the economy. But it might increase our trade deficit, because the new wealth from oil production will be used to buy flat screen tvs from Korea.

[glenn]

We continue to look for oil in all the wrong places (the Middle East) when we could today tap in to our own country for oil and energy products right now! There is a small company in New Jersey called Global Resource Corp (globalresourcecorp.com) that can produce energy and oil economically and at the same time be friendly to the environment!

[speculatorsSuck]

Ok, I'm confused! I keep hearing how we as a nation MUST conserve oil but in reality the amount of oil we use per day SHOULD be quite less then 2 years ago. The housing industry is in the dumps which means less fuel (gas, oil ect) to power the kilns for drying the lumber or less fuel for the trucks to deliver the materials or less fuel for the copper smelters or aluminium smelters or less fuel for the mining industry. Or less fuel that the unemployed carpenters, laborors, drywall, plumbers, electricians ect were using! So would someone tell me where in the hell all that oil we were using is now going?

[Solution]

I believe the most consumption of oil in US is in driving. Every American uses 2 barral of oil each month. $200 is about right of my monthly gasoline bill.

[jonesgroove]

We have the proven capability to explore for oil in a safe & environmentally friendly manner in ALL places in the U.S. . Declaring promising areas like offshore Florida & California plus parts of Alaska off limits to drilling is just like shooting ourselves in the foot. the U.S. is the only major country in th eworld to limit development of oil & natural gas reserves in this manner.

[Kunst]

"I'm curious, what do all those foreigners do with the dollars?"

Key question. The fact is, as huangjin says, US dollars can only buy things in the US. Of course, they can be swapped overseas, such as buying oil for dollars, but that doesn't change anything except which foreigner hold the dollars. Until they come back here, they are out there. As water flows downhill, US dollars flow to oil producers.

What can your overseas US dollars buy here? Not US bonds really. That's just a loan, parking the dollars in exchange for not even enough interest to make up for the dollar's decline. They still belong to the bond holder. You can buy goods, except that US manufacturing has been so hollowed out that I don't think we can produce enough goods to ever balance the trade deficit that way. Services, ultimately same thing. You can buy property. Lots of folks are buying second homes in the US. But that isn't going to absorb $800 billion dollars a year, is it?

So what's left? Sounds like US companies to me, stocks. There are trillions of dollars worth of those available. They represent productive value that can produce future earnings. It's fire sale time in America. That's what happens when you pay someone to work for you and give them IOUs. Eventually you have to redeem those for something of real value, and you wind up working for them. Only fair, don't you think?