How to Avoid a Recession: Cut Down on Foreign Oil

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 |  Includes: DIA, OIL, SPY, USO
by: David White

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.