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Analysis of America’s Problem & Solution For Grade Four

By Shlomo  Maital   

  

   

 

 Will Smith’s 10-year-old son jaden

My fellow economists specialize in complicating what is essentially very simple. 

   Can we simplify America’s current slumping economy, and explain a solution, at a level that a 10-year-old (Grade Four student) can understand?

   Let’s try.   If you know a 10-year-old, try this on them.

   “So, some pretty smart people say they did a study and they found that ordinary American families have gotten a lot more poor between 2007 and 2010. (2007 was when you were five years old).  *  Why?  Well, about seven American families in every 10 own their own home.  Mostly their wealth is in their homes.  And lately, since you were 5, the price of those homes has gone down a whole lot.  So, if, say, your family had a $500,000 home in 2007, then just three years later, it would be worth about $300,000.   That’s a lot of money to lose. It’s like several years of your dad’s or mom’s salary.  So people feel poor, because of that, and they don’t spend and buy things and take trips and go shopping.  So, when they don’t spend, people can’t find jobs to make the things people would buy if they did spend.  That makes people even poorer…and we are on, say, a roller coaster, going down, and it never seems to go up.  So, how do you get the roller coaster to go up again?  Change direction. If people aren’t spending because they feel they are poor, make them feel rich again. How?  Make their houses worth more?  How?  Get banks to stop selling houses that they grab because the people living in the houses can’t pay the bank what they owe it.  How?  Well, make the banks sell the mortgages to the people who run the city.  And then, stop kicking people out of their homes and stop selling those homes, so the price of homes can go up again and everyone can feel richer.  It’s pretty simple, right?   So, if it’s so simple, why don’t all those smart people do something about it?  Well, Picasso (a great painter) once said it took him his whole life to learn to paint like a child.   It’s taking all those smart guys and gals a whole life, just to learn to think like a child…and they still haven’t figured it out yet.  Hope they figure it out soon!”

  •  The Federal Reserve released a study showing that the median net worth of AMERICAN FAMILIES fell by 39% between 2007 and 2010, to $77,000, a level last seen in 1992. This was except for the top 10% of earners, whose wealth rose slightly. Most of the decline was a result of the collapse in the  housing market.
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The German Side of the Story

By Shlomo  Maital  

  

 

As a part-time journalist, blogger and columnist,  I try hard to present strong views, but at the same time offer fair and balanced analysis.  When it comes to Germany’s role in resolving the euro crisis, I fall far short of this goal. 

  Hans-Werner Sinn, president of the Ifo Institute and a Univ. of Munich economist, presents a powerful argument for more sympathy for Germany and Merkel, in an Op-Ed commentary in the Global New York Times today (Thursday June 14).  Taking a long historical perspective, he notes that when American Treasury Secretary Alexander Hamilton had the federal govt. take over the debt of the states, after the Revolutionary War,  “socializing the debt”, this caused the states to over-borrow, leading to bankruptcy of eight states and territories in the 1830s and 1840s and seriously threatening the very existence of the federal United States of America (they weren’t very united).  No-one will bail out California, notes Hans-Werner, today, even though it is nearly bankrupt; it has to find its own solutions. 

   We are in the fifth year of generous liquidity to help Europe’s deadbeats, he notes (he doesn’t call them deadbeats, only ‘uncompetitive members’).  Since 2007, the European Central Bank has given target credit, and Germany chipped in $874 b. worth.  Since May 2010 the ECB gouth over $250 b. in govt. bonds, with another $500 b. coming from emergency programs an the IMF.  Add to that two European rescue funds, “and you have a total of $2.63 trillion!”.  Should Ireland, Greece, Italy Portugal and Spain go bankrupt, he notes, Germany will lose over $1.35 trillion, more than 40 per cent of its GDP!  “Has the U.S. ever incurred a similar risk for helping other countries?” he asks.

   Germany got 0.5 % of its GDP, for four years, or 2% of one year’s GDP, from the American Marshall Plan, in 1947-8.  Greece has received $575 b. in assistance efforts, which amount to a staggering 115 Marshall plans, relative to Greece’s GDP.  And the situation still gets worse. 

    Why, Mr. Obama, asks Hans-Werner, is that not enough?   

Blog entries written by Prof. Shlomo Maital

Shlomo Maital
June 2012
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