My Two Cents - "Thoughts from behind the rear-view mirror"

 

08/29/2006

 

It is often said that hindsight is 20/20. It is also often said that anyone can be a Monday morning quarterback. These are both theories that I subscribe to in total, and while it is easy to look in the rear view mirror and give a play by play of the past, it is another matter entirely to predict the future. So begins the next phase of this column. We've spent a good deal of time going over the sins of the past, enumerating them and naming those responsible. The next phase is to use the information we have to formulate likely outcomes, and lastly to devise a means to avoid the upcoming unpleasantness.
This is not an effort that will end anytime soon. As a race, we've been on the edge before. Rome, Spain, France, and England are just a few of the Empires in history which have fallen to one degree or another because of the failure of their leaders and people to recognize that if you do what you've always done, you're going to get what you've always gotten. Some people call it complacency, others call it insulated utopia. It doesn't matter. The point is that history runs in cycles because of one generation's inability to import upon the next the magnitude of their undertakings.

In terms of the current conundrum, we know that the table has been set for perhaps the greatest economic failure of all time. Naysayers will tell me that 'this time it's different because....' You can read those words in any mainstream newspaper. Yes, inflation is high, yes the housing market is in a meltdown, BUT.. It's the BUT that worries me because that is where complacency does it's evil work. We all know that the real answer comes after the word 'but'. People can give you a thousand reasons why house prices will go up forever and why we can keep consuming without ever having to pay it back. I actually had one person email and tell me the world OWES us their savings! When you think about it in terms of what REALLY needs to happen for this charade to continue, it sounds insane. Yes, the people of the Far East (and others too) who save 20% of their incomes have to CHOOSE to send us those savings, then watch us blow it on vacations, SUV's and big screen TV's. That is what needs to happen for this lunacy to continue. If they stop sending their money, we either stop spending or say hello to hyperinflation a la the Weimar Republic.

So what is likely to happen? History tells us we're long overdue for a major recession if not an outright depression. Contrary to popular opinion, recessions and depressions are useful phenomena. They are the times when the economy purges itself of the poor investments and the excesses of the preceding boom. Generally the logic follows that fools lose money in a Depression while the wise accumulate it. The wise understood what was happening and prepared; the fools were too busy doing whatever. It reminds me of the story of the ants and the grasshopper. All summer the ants saved bits of food and worked very hard because they knew winter was coming. The grasshopper partied, relaxed and couldn't have cared less about winter. When winter came, the ants had food and the grasshopper had to rely on the charitable ants for survival. Such will be the case here in America as well. The only problem is that there will be far too few ants to support all the starving grasshoppers.

There is one nagging thing about recessions and depressions though. They are not good for politics and politicians, in particular. So politicians have a motive to delay these economic corrections as long as possible, usually only worrying about pushing them past the next election. This leads to downright reckless fiscal and monetary policy, with policymakers pulling out all the stops to keep the boom from going bust. This postponement of the inevitable is what makes it very difficult to predict exactly WHEN all this is going to happen. I've also had people tell me that I am wrong only because I cannot say exactly when the party will end. Maybe this is denial, or maybe they figure the powers that be will find a way to keep this thing together long enough so that it doesn't matter to them. And that may well be true. Politicians indeed might be able to find tactics that will push the sunset back another day. They might not. We only know that the ingredients for a meltdown are in plentiful supply.

This situation is beginning to represent a twisted game of musical chairs. Just don't be the one left standing the day the music dies.

 

Until Next Time,
 Andy

 

Graham Mehl is a pseudonym. He is not an ‘insider’. He is required to use a pseudonym by the policies of his firm when releasing written work for public consumption. Although not an insider, he is astonishingly bright, having received an MBA with highest honors from the Wharton Business School at the University of Pennsylvania. He has also worked as an analyst for hedge funds and one G7 level central bank.


Andy Sutton is a research and freelance Economist. He received international honors for his work in economics at the graduate level and currently teaches high school business. Among his current research work is identifying the line in the sand where economies crumble due to extraneous debt through the use of economic modelling. His focus is also educating young people about the science of Economics using an evidence-based approach.