US Economic Recovery 2009 2010 2011
An introduction by way of Palm Oil Estates to explain US economic recovery
This article is about the US economic recovery from 2009 to 2011. But before I carry on, I would like to mention something about planting palm oil trees and you will see the similarity to the US economic recovery, later.
Many years ago I was a Real Estate Agent chasing every land deal I could get my hands on. I would pick up stories from palm oil and rubber estate investors, contractors and other agents. Many plantations converted from rubber to palm oil because it was a less difficult to handle. With rubber, someone had to get up early and be at the estate by 4:30 am to tap the rubber trees. It is a labour intensive process and more suitable for workers or owners with a passion for this thick gluey sap, working in the dark among creepy crawlies, cobras, scorpions, wild boars, termites, ants and other dangers. A Palm Oil plantation, of the same acreage, requires about one fifth of the manpower. Furthermore, Palm Oil plantations are harvested in broad daylight. They are not covered in undergrowth where dangerous creatures can lurk. So many landowners switched to Palm Oil when their rubber trees were too old for tapping.
Unfortunately, many landowners were not aware of the cons and scams of contractors who replant their estates. The bad ones would cut cost at every available opportunity. To cut cost and save time in order to move on to the next plantation the bad contractors would cut the roots of samplings shorter so that they did not have to dig deep holes in the ground. Then they would lessen the nutrients to be placed in the hole. Thus they ended up using less sacks of nutrients then required. They would sell the excess sacks of nutrients in the market and make more money out of this sale. The resulting crops were stunted palm trees with low yields.
The unsuspecting landowner would end up with low yields for at least the next 20 years. As an agent I found out that the experienced planters could identify problems trees and estates from a distance. Planter offered very low prices for these estates. There are two types of investors. Some investors were willing to buy cheap plantations and sit on their investments and do nothing extra. They lived the next 20 years with a low yield plantation. Others like Guthrie, Golden Hope ..etc, have a more professional approach. They chopped down the low yield plants and replanted with the correct planting procedure and high yielding crops. That means they reinvested in a low yield environment to generate better growth. Similarly, to promote US economic growth you need to encourage the second type of investor.
The danger of cutting cost indiscriminately
This is the danger when people indiscriminately cut cost. You end up in a low yield, low return on investment, low growth environment for the next twenty years. The land owners just couldn’t get reasonable prices for their estates and if they had taken bank loans to purchase the land and to plant palm oil they ended up in a debt crisis. Foreclosure would mean not enough money from the sale of the plantation to pay off the debts but waiting for the return on investment from the sale of the fruits would mean not enough sales revenue to pay off the bank loans. What do you do? Grin and bear it? Wait for palm oil prices to climb? Replant certain areas with high yielding cash crops? As you can observe the US economic recovery is in this situation.
You see, the landowners could not do anything about the debts but they could do something about generating alternative sales revenue, alternative growth. They could push for it. The alternative sales revenue could be used to pay off the debts.
A similar situation occurred with the cocoa plantation early last century when cocoa prices dropped to rock bottom. Those who cut cost or abandoned their coca plantations lost everything but those who searched out and invested in alternative revenue sources lived to tell the tale.
Isn’t this a similar situation in the US economic recovery? Don’t you think we should be searching for alternative growth sources to bring about US economic recovery than worrying about debts? There is nothing you can do about debts; they don’t go away without any payments. Hence the answer to the debt payments is to create alternative revenue sources. Please read my article on causes of recession to understand the debt crisis and the US economic recovery.
Let us go back and visit US economic recovery of 2009.
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Please download a clearer 1676x 852 pixel chart showing the US economic recovery
The chart showed the potential for strong US economic recovery in 2009
If you see the chart, property foreclosures began as early as 2006 or 2007, I could not find the exact date. Property foreclosures before the stock market crashed would have been understandable. Once the stock market began to crash bankers should have ceased all property foreclosures. During this period many programs such as cash for clunkers brought about an optimism in the US economic recovery.
How property auction can cause prices to collapse
When you auction a property and there are no buyers the standard procedure is to after 3 months lower the price by 10% and re-auction. If there are no buyers than this procedure of lowering the price by another 10% and re-auctioning the property three months later is repeated. If you keep repeating this procedure for one and a half years the property would have dropped to 59% of its original price. After two years the auction price would have dropped to 48% of its original price. But the question remains to be answered is that if there were no buyers why do you try to re-auction the property. Auctions are for getting the best price and not to lose asset value. Didn’t the bankers notice that there were no buyers … even after one year or more? Are the bankers that slow? Don’t they know anything about running a business? For example, any small business owner will tell you that if no one comes to your shop, offering discounts will not attract any customers. It is like building a massive shopping complex in Timbuktu and then when you find that there are no shoppers in Timbuktu you promote heavy discounts for your products … but who goes to Timbuktu in the first place. Discounting will not work.
How the banks blocked US economic recovery
So now not only have the bankers repossessed your property but they have destroyed the market value of your property to the point the asset value is less than what you owe the bank. Remember you didn’t do, neither did the market do it, the bank did it. The bank not only destroyed your asset value but your neighbours too. Worst still nobody will buy properties until the banks stop the foreclosure process because the banks are causing the property prices to fall every three months. Who would buy? It is stupid to buy today when you can get it 10% cheaper in three months’ time, isn’t it? Then there is a secondary effect, you have waited so long why not wait another year or two or three or four, right? So the supply of money into the property market dries up. The property market is dead. That is how the banks blocked the US economic recovery because the property market has a huge multiplier effect on the economy - both ways.
An alternative approach would have lead to a strong US economic recovery
The biggest mistake the banks made was the failure to use their brains. Every business has a core skill and in the banking system that skill is to charge interest. What the banks should have done is to apply their skills of charging interest. Knowing very well there was a recession on, they should have taken a more compassionate approach and allowed people to sort out their finance in their own way. They should not have forced a collapse of the property prices but allowed the market forces to takes its own path. This approach would have allowed home owners to stay in their own homes and allowed them to miss a few loan payments with minor charges of additional interest. It would have allowed government initiative to follow through and bring about a greater US economic recovery. The banking mass foreclosure policy, instead, was a direct confrontational onslaught against government initiatives to bring about US economic recovery.
The US economic recovery programs
The US government came out with many programs like cash for clunkers which were very successful in spite of the recession. That says a lot for these programs. The economy was turning around and there was a mini boom going on - a really good prospect of a strong US economic recovery. People were just getting back their confidence when the media went on a ‘bad news frenzy’. It was so bad that it was affecting events and business decisions as far away as Malaysia. Malaysians were questioning whether the Malaysia economy would collapse. I had to explain to many of my Malaysian friends that we still grew our own rice here in Malaysia and not in the USA so we should not be affected by events unfolding over there. If the American media onslaught was affecting Malaysian public and business confidence, just imagine what it was doing to public confidence and business confidence in the USA. How do you get US economic recovery in such an environment?
How do you get US economic recovery when there is priority for bad news?
With so much bad news floating around in the USA, don’t you think that consumer confidence would be at an all-time low? Even the investment bankers, investors and venture capitalist left the country to invest in other countries like China. They sincerely believed that by investing in China they would bring about US economic recovery. ..huh..? Investment funds would have flowed out of the USA and would have bled the American economy dry of funding. How do you get growth when there are no funds for investment or for growth? American became a Third World Country overnight. They are in a low yield, low return on investment and low growth environment. This is the typical scenario of third world countries.
How to regain US economic recovery
In order to regain US economic recovery and growth, America should re-brand its self as an Emerging Economy and then only will investors flood back into America and we will see the boom times come back. The road to US economic recovery is to invest in yourself. America needs to attract the second type of investor who is more interested in getting growth going and bring about a strong US economic recovery, instead of cutting cost.
Did I answer your doubts on US economic recovery? There should be no doubts about a US economic recovery. Wait, there will be more articles on US economic recovery, later.
- Dr. Peter Achutha, on US economic recovery, 6th August 2011