The economic crisis for dummies (pt. 1)

Dear readers,

After discussing with you a variety of political and economic subjects, I decided today that I should follow the example of George Bush,  John McCain and a host of commentators in admitting that I am not an economist.

However, seeing as economics is perhaps the biggest factor in geo-politics and a major issue in the American elections this year, I decided that I (and everyone else) needed a crash course in the subject–especially because lately the debate has been dominated by the candidates, journalists and political strategists, all of which spin the numbers and none of which are actually qualified to honestly interpret them.

And so, I turned to an independent source that I trust to give me a layout of some basics which I will now share with you. Randy Clayton, CFP, is the founder and a principal of Clayton Financial Services, Inc., a financial planning and investment advisory firm formed in 1984. He is also coincidentally my father.

“First a recession (official definition), is back to back quarters of negative GDP (gross domestic product). GDP is essentially the some total of all the things we produce. If we (the US) produced less this quarter than we did the previous quarter, then we would have a decrease. Since it is a trailing number (meaning we would have to go two quarters of less production to be “called a recession), I truly don’t know (and no one knows) if we are in a recession. The first two quarters of 2008 have been positive growth (although less than 1% growth). It would be correct (and safe) to say that we are in a period of slower economic growth. But, to put it all in perspective, last year the US and the EU both produced about $ 14 trillion of goods. Some statistics show the US, some the EU as larger, but both amounts are very close. In comparison, China produced 3 trillion (about 22% of that the US or EU produced), and Russia produced 1.3 trillion (less than 1 tenth of EU or US). So both China and Russia are growing faster than the US or EU, but they are a long, long way away from being equals economically. If US or EU grew production by .13 trillion (130 billion) this year, then we would say that thier economies grew less than 1% (stagnate growth). If Russia’s economy also grew buy .13 trillion (130 billion) then it would be “tremendous” growth. But actually both economies grew by the same amount.
Statistics always need to be examined and understood, because all countries and political parties use them to make a point. Let me give you another example.
We (the US government) planned to spend 2 trillion more on social programs this year. After Congress got through with it, we only spent 1.8 trillion more. Is this a cut in a government program, or simply a reduction in the increase? You can “spin it” anyway you’d like.”