Why the Economy Will Get Worse - a Lot Worse - Before it Gets Better

The housing meltdown has done more than hurt the housing industry. It has hurt everyone. Why it will take YEARS to recover is simple: this damage to the economy is caused by a damage to people's credit. For every foreclosure or delinquent account on the edge of foreclosure, bad credit marks appear for the borrower. Then there's the domino effect into other areas of the credit market. Credit card companies have tightened restrictions, giving fewer new cards issued as well as raising variable interest on many pre-existing accounts, bringing many of them into default or struggling to avoid it. Then student loan providers are tightening up on loans, so students are starting to bear the wrath of it.

One factor you don't see economists talk about on the news is the job market. I don't refer to the mass layoffs banks and lenders have done, either. I refer to credit's effect on the job market. Credit is increasingly being used to screen employee candidate suitability by almost everyone. When I applied at jobs that didn't require college degrees or even a high school diploma and a GED was all that's needed, even they too made me sign off on disclaimers regarding credit checks. Credit used to only be used for jobs with high-risk factors of compromise, but now credit scores are used by more employers than I dare to count. Funny thing with many employers is that they can't use criminal backgrounds against you, but they can use bad credit scores against you. Credit can even effect your ability to advance and get promoted to a position with increased responsibility at a job you're already at.

Where does this leave the economy? When considering the number of people in default or close to default on their mortgages is large enough to trash the market, the amount of damage done to credit is massive. Credit is not easily repaired and takes years. Because of that, it will take years for those who lost their homes in the meltdown to EARN their way out of this mess and pay off their defaulted debts. If they lose their jobs in the mean time, the difficulty they face at recovery is that much worst because finding a new job in those circumstances will take a long time.

Now I wish to digress a bit. People are pointing at the value of the dollar a lot lately, giving blame to Bush for a weak dollar. I wish to talk about oil prices. Oil prices effect everything because everything uses gas to get it to the stores. Food is first to go up when oil rises because food has to get trucked in multiple times per day. Other goods can get trucked in every week or even once a month. That allows them the advantage of lower delivery costs overall, and with some goods, retailers can weather gas prices completely or with minimum impact due to oil prices. Oil prices are rising due to simple demand. The world's population is getting bigger, and we're building more and more cars. In the past couple of years, China has also begun buying large quantities of oil, driving down quantities available to the rest of the world, which in turn drives prices up. Still, oil producers are not without fault. If prices were supply cost-driven, then they wouldn't be making record profits as their costs would eat those profits. Oil producers have made record profits for the past two years because the prices are demand-driven as they charge what they think you can pay. The days of even $2.00 per gallon are over not because of supplies, but because the oil producers now know what pharmaceutical corporations have always known: Demand is a constant increase, and demand doesn't bend with higher prices. People have to get gas whether they like it or not. Economically, it is called inelastic demand, where quantity consumed does not change much with price changes. There is where the oil producers have made their record profits. Like the pharmaceutical companies, they will never ever stop this practice either.

Where does it leave us? Inflation of the dollar, the decreased ability of the common person to afford other tings as gas eats away more at his or her income (stagflation), and an economy where recovering from the mortgage/credit meltdown is made even more difficult.

Overall, the market will adapt and invest in where it's strongest, which will look like a recovery, but "normalizing" a weaker economy is not the same as recovery.