New column: The fundamentally strong economy

But I did want to point out that we're having this financial crisis because we borrowed too much money, not because there's something fundamentally wrong with the U.S. economy. And at some point in the next couple of years--barring total financial breakdown--the fundamentals are going to start to matter again.

I don't think the problem is "too much borrowing", but what that money is used for.

We're borrowing way too much for "day to day expenses"; borrowing for "capital projects" and necessary "big ticket items" is justifiable, but when you borrow to consume/maintain a lifestyle, its bad -- and that's what we've been doing.

But I really don't think that its "borrowing" that is the reason for this crisis -- rather its the commodification of money itself. And while the example of that commodification of money is obvious when it comes to wall street, its just as true when it comes to day-to-day living.

Sometime during the last two decades, we stopped thinking about homes as "places to live" and thinking about them as "investments" -- and as a result, people stopped thinking in terms of what they needed in a home, and justified buying whatever they wanted "because its a good investment." So people mortgaged themselves to the hilt, and maintained their lifestyle through credit card debt, because it didn't matter if they could "afford" the house, it was a "good investment" and the consumer debt they accrued would be balanced out by the 'return on their investment' in their house.

Indeed, lots of people no longer "spend" money on all sorts of consumer goods, they "invest' it. They buy a new dress or suit, and call it an "investment" because they wear it to work. They buy a new car, and call it an "investment" because of the advantages of owning a new car (even if the older car would still be cheaper to run for the next couple of years at least.)

Its this commodification of money itself -- the change in attitude on both Wall Street (where money is simply used to make money, rather than produce anything of value) and Main Street (where consumption has practically become synonymous with "investment") that is the problem.

"None of this means we won't see sharply rising unemployment and falling economic output in the coming months as we work off the financial excesses of recent years. Higher productivity makes higher economic growth possible; it doesn't guarantee it. What's more, a financial breakdown can trump long-term fundamentals for years."

I think that, in general, you are correct, as is Mulligan. But McCain seemed to be saying that we weren't in for tough times, and downplaying the current crisis, which has been a very rough ride. After all, he changed his tune remarkably quickly.

In any case, I pray you're correct, and, if McCain turns out to have said something remarkably prescient, then he'll at least know that our downturn wasn't as bad as some suspected, and that should provide some comfort.

The phrase, 'the fundamentals are strong' has gained a lot of currency in business and economics in recent years (or it's always been popular and I just started paying atttention... whichever). But what does it mean? Can it possibly (in the main, not just in a defense of other utterances) mean the workforce is still capable? Afterall, the quality of the workforce is essentially fixed over the short to medium term. If this is what is traditionally meant, then the phrase should be put to pasture - quickly. Similarly, if the 'fundamentals' referred to the ability of our drills (capital) to drill, we're wasting our time using the phrase.

I have always been of the impression that fundamentals referred to the underlying activity - the flows of activities being advantageously directed not the stocks of resources available to be directed should a flow emerge. Is an economy which opts not to use the able American worker really fundamentally strong?

The fundamentals of productivity may be strong, but the fundamentals of personal consumption will be going through a major adjustment. That's good in the long run, if we can actually get back to the point where the country as a whole stops consuming lots more than it produces. In the meantime, those who took on lots of untenable debt to finance consumption of houses, cars, boats, vacations, etc. will be going through a lot of pain, as will those who are in the business of making and selling houses, cars, boats, vacations, etc. The "I just lost my job fundamental" hits closer to home with the public than the "worker productivity fundamental", which is why McCain's statement didn't do him any good on the campaign trail.

A fundamentally strong economy only requires three things (and you can take this to the bank, although I believe the Fed will accept just about anything as collateral these days):

1) a JOB

2) substantially unrestricted cash-flow (or credit)

3) a Consumer with access to a JOB and substantially unrestricted cash-flow (or credit)

You can check me out on this, but I don't think that I am missing anything.