Economic Suicide

Why are we in a melt-down?

Just in case anybody has any doubts, we did this to ourselves. How? Some of us, who are supposed to know better, came up with a bunch of financial models that all had one thing in common. All were flat out wrong! Contrary to basic scientific principles, these lovely people came up with an economic model that is so far off reality as to be explosive. Then some wonderfully misinformed political leaders bought into this explosive model and turned it nuclear. With only a few exceptions the rest of us just went along without question.

How did that happen? For the majority it happened because we assumed that the model builders knew what they were doing and didn't bother checking it out. Of course, ten years ago we were in a boom and it seemed we were all getting richer by the second. So, the assumption for most of us was, "times are good, these guys know what they are doing, I think I'll get another credit card, etc., etc., etc." Five years ago you could sell a house for five to ten percent more than the asking price before the listing even got published. It was crazy and nobody thought to question what was happening. A huge part of the situation came about because on top of general acceptance of the flawed model, we all assumed that those in the know in the financial community did not need anyone looking over their collective shoulder. Big OOPS!!

So, what is wrong with the financial model? The biggest false assumption is embedded in the "Trickle Down" theory which assumes that money injected into the top end of the economy will find its way down to the bottom. Except for charitable donations made by people and corporations, that does not work. But let me show you an example of why it doesn't work.

Thanks to Wikipedia, the above chart illustrates the individual and household earnings in the US through the year 2006. What it shows us is that the vast majority of people earn less than $50,000 per year. If we take the total of individuals earning less than $25,000 and families earning less than $50,000 that comes to approximately 47% of the working population. Ignoring children and the unemployed, that amounts to roughly 70,000,000 people. Because of their earnings these are the people most likely to spend every dollar they bring home every week! What that means is that for every dollar invested in that end of the spectrum, 100% is immediately on the move through the economy, benefitting another indiviual or family at every step of the way. Simply put; the rich don't need parachutes; the poor need elevators.

To those in power, whether it be the government or the private sector and in every country in the world. I have two simple messages: GET REAL and GET BUSY!

Just a quick closing note; in future postings I will be looking at what it is about the human animal that caused this to happen and, in fact, causes a lot of other problems we face in today's world.