Economic Depression Hits 12-year-old

by Michael Lombardi, CFP

Last night, when I returned home from work, my young 12-year-old son asked me why the government just doesn’t print more money, give the money to people, and get us out of this depression.

Firstly, I was surprised to see my son use the word “depression,” as he had never used that word before. When I asked him about the word, he told me learned it from kids at school. He says many kids are not returning to his school next year because the “depression” is making it difficult for parents to pay tuition. The economic “depression” is sending his friends away. As he says, “recess won’t be as much fun without all the guys.”

The difficult part was explaining to my son that the government does effectively have a printing press going, but the money it prints is not going into the hands of the public, but into the hands of banks and companies that are in trouble. He had difficulty understanding this concept. If the parents are the ones paying income tax, why is the government talking our money and giving it to banks and other companies instead of giving the money back to us so we can spend?

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Good point, son. But the government doesn’t work that way. If a company comes to the government and says they are going to lose 140,000 American jobs (GM) if they don’t get a bailout, the government will give that company billions — even though it is taking those billions from tax-paying Americans who are at risk of losing their own jobs. Like many companies struggling today, the U.S. government has resorted to crisis management…putting out daily fires as it best sees fit.

If the government is not going to help people directly, my son thinks we should take things into our own hands. “Dad, if you lose your job, we need to cut spending. I’ll give up my blackberry, my laptop computer; you can cut the cable, and no more going out for dinner.” Unfortunately, that is the root of the problem. The more consumers there are who cut spending — and many have no choice but to do so — the deeper the economic contraction.

Michael’s Personal Notes:

The more I think about this FIAT and Chrysler merger, the more I think it is a big mistake for FIAT. Chrysler makes large cars and minivan type products. FIAT makes small cars. What does FIAT plant to do? Put a Ferrari motor into a Town and Country Minivan? Daimler AG lost $30.0 billion when it was married to Chrysler. FIAT, after the wonderful success story of turning its brand around, in my opinion, will make the same mistake as Daimler AG in its effort to take over Chrysler. Unless FIAT walks away with billions in U.S. taxpayer money to do the deal, this non-strategic merger will be a mistake.

Where the Market Stands:

The march to break even for the stock market, as I have been predicting, continues. The Dow Jones Industrial Average is now
only 1, 014 points away from being flat for 2009. While America
gets as close to a depression as we’ve known in the past 80 years, while the purchasing power of consumers evaporate as jobs disappear, as banks continue to hoard their cash, the stock market rallies on. Enjoy the ride while it lasts. Get ready to dump those stocks you didn’t have a chance to dump when the market crashed. If I ever was witness to an enticing bear market rally, this is it. The Dow Jones is now down only 11.5% for the year.

What He Said:

“When property prices start coming down in North America, it won’t be a pretty sight because consumers are too leveraged. When consumers have over-borrowed so much that they have no more room in their credit lines to borrow more, when institutions start to get tight on lending, demand for housing will decline and so will prices. It’s only a matter of logic, reality and time.” Michael Lombardi in PROFIT CONFIDENTIAL, June 23, 2005. Michael started warning about the crisis coming in the U.S. real estate market right at the peak of the boom, now widely believed to be 2005.