Things to Do Before Killing Yourself

The bulk of this post has been relocated to my religion blog and revised there.

The part about the book by Professor Xavier Cortez, 100 Things To Do Before Killing Yourself In The Midst Of A Murderous Rampage, has been revised and converted into a review of that book on its Amazon site.

Sorry for any inconvenience.

-- RW, Dec. 12, 2012

A Few Thoughts on Deflation

Inflation is familiar to most of us. Inflation tends to occur when the economy is growing. People demand things faster than the market can produce them. To some extent, production capacity grows; but to some extent, smart sellers keep supply a bit tight so they can justify charging more. If you really want the thing, and can't get it at your preferred price, you may be willing to pay a somewhat higher price. Deflation is less familiar. Deflation tends to occur when the economy is not growing or is actually shrinking. People don't demand so much in this case. Sellers still have to pay their bills, so they don't have much choice but to cut prices, in a bid to keep some dollars coming in the door. Now, unlike in an inflationary scenario, there's more stuff than anyone wants to buy; and in the "worst" case, people just plain lose interest in buying. It's really the opposite of the shop-'til-you-drop mindset of the inflationary situation; it's people who realize it makes sense to mind their money carefully, not waste it -- and hold off buying that thing for a little longer, because prices keep dropping. The inflationary scenario is good for people who have enough money but not enough stuff. The economy is growing, the money is there, not much to worry about, so just buy whatever you want (relatively speaking). It doesn't work for everyone, of course -- there are lots and lots of very poor people in this scenario -- but it works for enough people to set a general tone or expectation for what is economically normal or average. When that goes away, as is now happening, it feels like things are no longer normal. The deflationary scenario is good for people who have enough stuff but not enough money. They weren't really feeling a desperate need to acquire more crap right now, so it's OK to postpone purchases while prices drop; and they become more aware that jobs are endangered (because the economy is slowing down), such that they may not be able to get money when they really need it, sometime in the future. When growth continues, it encourages continued consumption. When it continues for long enough, the notion of saving and being cautious can seem quaint. People who learned hard lessons from the Great Depression were sometimes too fearful to take bold risks that could have really paid off financially in, say, the 1960s. But eventually those people passed from the scene -- retiring, dying, being muscled aside by their numerous Baby Boom progeny -- and their restraining hand was loosened. We went from fear of risks to payoffs for wise risks to acceptance of all kinds of risks. It would have been nice if we Boomers could have bottled some of that advice our parents were handing us in the 1960s and kept it, like a vintage wine, to be opened in the 1980s, when the Reagan Administration began dismantling Depression-era regulatory safeguards. So debt became normal -- not only for credit card users, but for financial institutions and government. They fed us tons of debt, in mortgages and cash advances and student loans and military adventures. Debt continues to be the answer, this late in the day, as government tries to employ FDR's Depression-era spending as an antidote to deflation. People in power want to return to "normalcy" -- that is, to an inflationary economy. They have not yet made the transition to realizing that consumers are broke, indebted, and scared. If you gave each American consumer $100,000 right now, there is a good chance that half of it (if not all of it) would go into savings, hiring a bankruptcy attorney, catching up on some bills, and otherwise trying to undo the personal exposure created by the inflationary years. That sort of behavior is not going to recreate a growth economy. It could lay the foundation for a solid, savings-based economy in coming decades, except for that debt problem. Unlike the 1930s, the amounts of individual, corporate, and governmental debt are simply beyond anything that a deflationary economy can pay off. Debts taken out with an expectation of an income of $60,000 look very different when that income drops to $25,000, or below, and many people will be unable to avoid that kind of drop as we continue to transition to a world in which American workers compete against Asian and robotic workers. The U.S. government can continue to spend borrowed money, as long as people continue to be willing to lend to it. There are recent signs that China may finally be starting to back off from that, though, and in any event they should do so if repayment becomes more doubtful. The present impression appears to be that today's deficit spending enhances tomorrow's inflation. So if the lending from China and elsewhere did get consumers spending again, it would be counterproductive for those investors in the sense that they would have helped to arrange a return to a growth economy with, it appears, some potential for high inflation -- which would erode the real value of their investments. In other words, they would have loaned us $1 billion (or whatever), and that would have helped a bit to get things going again, but now that $1 billion would have lost maybe 10% of its value because the dollars with which it is repaid are able to buy less than before. Given the rate at which the U.S. government is now spending money, it appears the next step will be for the spigot to be partly closed. If Obama stumbles and/or if the economy continues to unravel, confidence in the federal ability to repay borrowed money will decline, and the government will have to pay higher interest rates. Other borrowers will have to pay even higher rates if they are to stay competitive with the "safe" rate of interest being offered by investors in U.S. Treasury securities. This will make it harder for the economy to stay in a growth mode, because loans to companies will become more expensive. This all happened because we developed a financial system that was too complexly interwoven for anyone to understand or fix. And that happened because transparency and other regulated behaviors were shut down. The go-go economy that developed under such circumstances is not likely to be replicated under the more restrictive regulations that will be emerging in the coming year or two. The "Roaring Twenties" were a legend even into the 1960s. It increasingly appears that the twin bubbles of the dot-com era and the housing frenzy will stand out, for decades to come, as historically remarkable phenomena. I suspect that what Obama *will* say, in his inaugural address, is that we all need to hope and pitch in and make things better again -- and that what he *should* say is that we may very well be at the start of a second Great Depression, and the remedy is to take a lot of bitter medicine immediately if we don't want it to drag on for years. The bad financial instruments have to be mopped up, regulations must return, a calming social safety net needs to be put in place, financial blood must flow in the streets, and then he will have credibility. They will say he wasn't trying to make it look better than it is; he was just no-nonsense. We need a 5.5-month time-out for bad behavior, with the goal of making this July 4 a heartfelt rededication to a fiscally solid, sensible economy and government. That, I think, is the sort of thing that would make a sufficiently strong impression on where we are and where we are going. One part of that bitter medicine is to accept that retailing has changed. We can get there the fast way, maybe, or we can get there the slow way. The slow way may involve some years of getting used to the sight of boarded-up stores, to the point where old movie scenes of busy downtown business districts look strange and even unrealistic. Slowly, the stores will be converted or bulldozed, malls will become skating rinks and indoor jogging tracks, or in other ways the whole face of the retail world will change -- and that new world will seem normal.

What Seems to Have Happened to the Economy

We were using nonexistent money to buy things. Not exactly -- the money did exist on paper, and often that's as far as money ever gets -- but it was nonexistent in the sense that the valuations (for e.g., house prices, mortgage-backed securities) were not supported by actual money that someone had. There was not enough money in the world to support the valuations. For instance, when subprime mortgages began to go underwater, there were not enough buyers at the supposed price levels to maintain those prices. In this interpretation, we are now in the process of adjusting the actual amount of money in the world to match the paper valuations of everything. We are doing this in two ways: by reducing the paper valuations via deflationary market pressures (where prices drop because people are no longer willing to supply the same amount of money as before in order to buy something), and by increasing the amount of money available. At some point, we will reach equilibrium, where prices will have dropped far enough and/or enough money will have been created. We will presumably reach equilibrium at relatively higher prices if we create lots of money very quickly; or equilibrium will come later, at lower prices, if the rate of price drops exceeds the rate of money creation. Money can be created in different places, for the benefit of different people. A bailout plan for banks replaces their nonexistent money with existent money, insuring that the banks stay afloat. A bailout plan for other kinds of debtors (e.g., auto companies, school systems, individuals) would do the same thing for them. The decision of where to create the money is apt to be steered by politics, where the people who have money tend to complain louder and make more trouble if they lose money, at least to a certain point. Not creating any money would reward those people who valued assets conservatively -- who, for example, did not assume that the temporarily inflated values placed upon their homes were available to be tapped for spending. But it would reward them in a negative sense: they would be the only people who were not wiped out by financial calamity. If they happened to be surrounded by neighbors who went wrong, it might develop that many houses would become vacant, in which case the fiscally conservative individuals might experience a loss in the value of their own assets. Or, in the case of banks, if money vanishes to such an extent that there is not enough money to cover all deposits, then banking as a whole might suffer, as people began to consider it safer to stash their cash in their mattresses. The flaw of the conservative approach is that it fails to provide a safety net. If you are determined not to let banks, communities, or individuals completely fail and go belly-up, then people know that the worst case will not be absolutely horrible, and it becomes possible to imagine letting the bad planners take a bath. Let the smart ones win, flush out the dummies, but make sure everyone lives to fight another day. In other words, if your competition becomes too cutthroat economically, then eventually it will become unpalatable politically. You've got to balance penalty and safety for the losers. By that priniciple, the place to create money is wherever people are lacking a safety net.

One Factor Auguring a Depression

It seems fairly clear, by now, that Ben Bernanke is very concerned -- almost preoccupied -- with the performance of the stock market. Since last August, his interest rate cuts have repeatedly proceeded for the purpose of saving the market, and despite warnings of potential inflation. The dollar is now at an all-time low against gold and is also very low and headed further downward against key currencies, including not only the euro but also the Chinese yuan, which is moving at a gradual but increasing pace toward becoming a freely traded currency. The low value of the dollar means that dollar-denominated investments perform poorly for international investors. As has been often noted, a foreign investor who entered the U.S. stock market five or six years ago, at the start of its recent and remarkable rise, would have *lost* money because of the contemporaneous decline in the dollar's value. Actual and potential foreign investors are not ignorant of this. They have funded the deficits of the Bush years, buying U.S. government securities because they have believed in the safety and profitability of investments in America. During the past year, however, such investors have become more audibly concerned about the sense of such investments. Steps are being taken -- gradual steps, but significant ones -- toward diversifying away from the U.S. economy. U.S. consumer purchases and government expenditures are founded, alike, on cheap credit. If money becomes less available and/or more expensive, consumers will borrow and spend less, and the government will be less able to afford to hire people, build and buy things, and otherwise stimulate the economy. Money will become less available if foreign investors supply less of it. Rationally, they should be doing so; and over time, by present trends, they will do so. It is not yet clear whether we are now in the opening phase of a massive readjustment to a more realistic world, one in which money is supplied to us based upon our present productivity and competitiveness, as distinct from faith in our future promise. But there is a good chance that that day has arrived. We face unprecedented competition on both counts, as rising economies (especially in Asia) offer seemingly endless supplies of people willing to work hard and live cheap. The market is confident that Bernanke's Federal Reserve Bank will again cut rates, two weeks from now, perhaps by as much as a half-point. (Some are betting on an even greater cut.) Foreign investors are undeniably paying attention. The standard wisdom continues to be that Asia cannot fully decouple its prospects from America's -- that, in other words, if the U.S. sneezes, Asia will catch a cold. But foreign investors cannot be expected to continue to invest where they will realize a negative rate of return. There remain an unacceptably high number of unknowns and negatives in today's stock market. Stocks may not be overvalued in historical terms. But there is a good chance that they are overvalued within a context of troubled times. It is not obviously a good time to cast a vote of confidence in the S&P 500 -- a vote that, essentially, things will return to where they were a year ago. That sort of renaissance seems unlikely in the near term. In short, the market and Fed policy seem to be based upon a worldview that says we have been coping with some difficulties, but that they will ultimately resolve themselves and good times will return. This is bull market thinking: it is the mentality in which everything finally turns out OK. Yesterday's market rout suggested that doubts are now emerging in the bull market mindset. Descriptions of that rout included the key word "panic." Panic is a bear market concept. It is the recognition that companies whose stock you own can go bankrupt, that you can lose your shirt, that the elevator to the penthouse also goes all the way to the basement. The stock market has been extraordinarily resilient despite repeated and growing pressures on multiple fronts. Some unknown portion of that resilience derives from the inexperience of a generation that has known largely good times. Even the recession of 2001 was mild, in contrast to the successively greater hardships known by previous generations, as one goes back in time to 1991, 1980, and, of course, 1933. If the American century were not over, one might expect a continuation of that pattern of successively milder national economic hardships. But this generation, unprecedentedly fortunate in its exposure to hardship, may yet encounter the novel thought that what goes up can go down. Panic remains possible for today's investor. People can reinterpret recent bad news through the bear's eyes. In that event, that grey expanse above us, presently perceived as a set of storm clouds over the economy's forward march, may instead come to be seen as the surface of the ocean, far, far above one's head. In such an event, thoughts go to survival, and standard valuations become rapidly recalculated. The U.S. government, including the Fed, does not presently understand the nation's capital markets, nor does it have the power to fix them. Nobody understands them fully; nobody has that power. Bernanke's consensus leadership style is, moreover, the wrong style for uncertain times. He is a brilliant man -- he is as competent as they come -- but the impression is growing that the Fed does not have the power and wisdom that investors were previously willing to credit to Greenspan's Fed. The impression grows that the Fed is becoming desperate, and that its desperation arises from its impotence. The Fed is behind the curve, and my hunch is that it will not (and could not) get ahead. What it can and apparently will do -- much to the lifelong regret of Bernanke, student of the Great Depression -- will be to alienate the foreign investors whose deposits in our economy have made the bull market possible. It does seem that there will be a wrenching readjustment, and that bear market thinking will come to seem more realistic.