Tuesday, January 13, 2009

My Metaphor

Let's suppose for a minute that you have a pretty good job.  You like what you do, and you are paid enough to keep your family happy.  Not enough to feel spoiled, but your family rarely has to worry about money.  

One day, your boss says to you, "I am giving you a promotion, and a 30% increase in salary".  You know that you aren't quite qualified for the position, but you accept anyway, because your boss knows what he is talking about and you certainly won't turn down the raise.  You go home and tell your family that all of your worries are over, and immediately go to a nice restaurant to celebrate.

Your next step is to order that DirecTV package that you always wanted.  Your wife gets that gym membership that she couldn't afford before, but now it fits well within the budget.  You get that Netflix membership that wasn't fiscally available.  You enroll your kids into the piano and dance classes that you always wanted them to take.

Things are going well at your job.  Sure, you are in a little over your head, but that doesn't stop you. After all, it isn't your fault that you got promoted.  Your boss isn't around much, and people don't say anything bad to your face, but whispers are starting to be heard about your performance.

Meanwhile, you think you deserve that new car lease that you have always wanted, so you pick out your low end Lexus and it's monthly payment.  You can still afford it, but money isn't as available as it used to be.  All of your kids now have cell phones and text plans, but they need them so you can communicate with them after soccer practice and dance class.

Your boss calls you into his office one day, and tells you that things are going just fine.  In fact, through no fault of your own, revenue is up!  So, you get another raise.  Not a huge one, but enough for you to join that cigar smoking club you have been eyeing for some time now.  Your kids can bump up to the unlimited text plan, and your wife gets that Blackberry Pearl she has wanted for some time.  You buy that plasma screen you have wanted, but you have to use the credit card because you don't have the cash to pay for it right away.

All of the sudden, one day your CEO announces that the company isn't doing as well as it once was and there will be layoffs.  You start to freak out because you know you have been living above your means for some time, but maybe it won't affect you.  Then, one day, your boss calls you into his office.  You aren't losing your job, but you are being returned to the position that you originally held, at your original pay.  How can you survive?  You have cell phone bills, DirecTV bills, car leases, all kinds of expenses now that you cannot afford!!  So you are faced with the harsh reality of getting your expenses back in line with your current pay.  Somehow, you always knew that you shouldn't have been making the money you were, but it was hard to stay true to your original pay.  So, you go to your brother.  He makes lots of money, so he is able to float you a loan to keep all of your stuff.  6 months later, you haven't made any extra money, so you ask him again.  He tells you that this is the last one, but things have got to change.  So, he comes into your house, cancels the DirecTV, takes your cell phones to the bare bones plan, and makes you quit the cigar club.  Your wife no longer can go to the gym, and your kids are going to have to learn to play piano themselves.  You feel shame, because you let your expenses get out of control, but you realize that this is what you have to do.  Your pay corrected itself, and you always knew it would happen.

This is my "metaphor" for what is happening to the economy right now.  I am by no means an economist, but in my humble opinion, America outspent itself.   Tons of small businesses started because Americans had more money than they knew what to do with, with a lot of them based on the premise that people will spend the extra money that they have.  And you know what?  They did.  Then the mortgage crisis hit, and everyone freaked out and put their money away, causing these non-essential businesses to close, and it starts a vicious cycle.

The US Economy just had to correct itself. What I see now is not a recession.  It is a correction.  People are finally realizing that they can't spend more than they earn (at least most of them are).  Hopefully, this trend will continue and the market will fix itself, but something had to give.  We couldn't keep doing this forever.
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