4Q GDP expected to be horrible

This coming Friday, we will see the US GDP number come out for the fourth quarter of 2008. The expected number is -5.1% annualized. That is pretty horrible.

Based upon a GDP of $14.4 Trillion that means we are looking at a loss of about $185 Billion in lost GDP for the fourth quarter alone. Since countries can only increase their GDP in two ways: increasing the number of workers or increasing the productivity of the workers, we are facing a serious productivity and employement situation.

Theoretically, if you increase the number of people on the job while keeping productivity the same, then you should have an increase in GDP. Likewise, increasing the productivity of workers while keeping the number of workers the same also increases GDP. In all cases, it is always a little of both. More workers and increasing productivity means more GDP.

Right now, it is pretty obvious what is happening. People are being laid off (less workers) and those that are still employed are producing less (lower productivity).

Normally, we could blame all this on consumer demand. But this time it is different. Over the past year or so, credit has tightened. As a result, projects and investments have been put off. Since people could not borrow the money to say, build a new office building, then that translates into lower GDP.

Way back in October, we saw then Treasury Secretary Henry Paulson make the case for the TARP (Toxic Asset Recovery Program). The idea made sense, buy up the bad assets held by banks and get the banks back in the business of lending. The original plan did not happen because of a problem with pricing the assets. So instead, the banks were given money in exchange for stock warrants. Thus partially nationalizing the banks.

Today, we have a new administration. I call on them to get back to the original TARP idea which is to take the bad assets off the books of the banks. If this is done, then the good loans can be pulled out and the bad loans can be renegotiated.

I don't expect anyone to listen to me, but it feels good to say so.

In Uncertain Times, Opportunity is Everywhere

Last night, I had a long talk with my 14-year old son about the current unheaval in our economy. For both of my sons, I talk freely with them about any and all issues. From economics to politics to religion, anything is fair game in my house. All I ask is that they have an understanding of the issues and back your position with facts not just opinion.

Anyway, John and I were talking about how the financial crisis will affect our family. He is understandably concerned about the future. My (hopefully) reassuring message to him was that we are in a major turning point in our country. This turning point is very similar to others in history: October, 1929; Pearl Harbor; the atomic bombing of Hiroshima and Nagasaki; the assasination of JFK, Watergate, Falling of the Berlin Wall, etc.

With historical understanding of present conditions, you will see that ultimately our country will prevail. I told him that with every change comes an opportunity to grow and fix the problems that face us. If life were boring, there would be no challenges. Without challenges, there would be no greatness.

Of course, these words come from a person who has be pretty conservative in his financial dealings in the past few years. As a result, we are reasonably prepared to deal with the economic changes. There are many in our economy who are not. For them, the changes are terrifying and they may need help from their friends and neighbors.

My final message to my son is that we are all in this together. Hopefully, we as a nation can come together to deal with the crisis and resulting economic downturn. We have done this before, and we can do it again.