There is a Chinese curse that goes, “May you live in interesting times.”
A sister-in-law has told me that there is a worse one, “May you have interesting children.”
I think the first will suffice for today.
You should read “The Postcatastrophe Economy: Rebuilding America and Avoiding the Next Bubble, by Eric Jansen.” It appeared in 2010, so some may be a bit out of date already. No issue. It makes for more involving reading if you can see it unfolding.
Eric Jansen is a macro analyst who has had a good record of accomplishment on predicting crashes and opportunities. Tech bubble crash 1999, Gold buying opportunity 2001, housing bubble in 2007, global banking problems and more. It might be good to listen to him.
In the book, he shows how there have been two economies running at the same time. From 1971 until 2007, the productive economy did not dominate. Instead, a debt-driven economy relied on Finance, Insurance and Real Estate to generate wealth. What he calls the FIRE economy.
He estimates that this will lead to debt deflation and a central bank response. (Already underway.) He outlines the role of gold in all of this and considers the old bugbear – stagflation. An important part is that the crash is not over yet. Oh! Oh!
He believes that the old ways – tax and interest rate adjustments, inflation, and fiscal stimulus will not work this time. We need a new approach that does not rely on air.
I think what he is saying is that there are two ways to become financially successful. You can earn money or you can get money. Getting money means nothing has changed but the package and the value placed upon it. For example, a CDO enclosing thousands of pieces of mortgage debt is not worth more than the underlying debt. However, priced higher is how it turned out. Before the crash, the packagers were able to get money without adding any value. After the crash, the added amount went away but it was not taken from those who pumped the price.
If someone gets something for nothing, it is necessary that someone else must get nothing for something. It is a truly simple world. What the games theorists call a zero sum outcome. The money remains the same but changes pockets.
We cannot go that route. We need a way to add value not shuffle value.
In part two, Jansen points a possible way to fix the FIRE problem. What he calls TECI. (Transportation, Energy, and Communication, Infrastructure) Use both public and private investment to build projects that improve efficiency in the economy. Ideally, the new efficiency will spark employment growth and reduce both debt dependency and foreign energy supply.
In my view, that is a reasonable approach but the needed conditions may not yet exist.
The first of these is that the people must want to participate in the economy. If they do not participate then new jobs and reduced government involvement may not matter.
The second – free businesses from non-productive regulation. I have no problem with employment standards, food safety, weights and measures inspectors, licensing bodies that reduce conflicting claims, bodies that reduce lying in advertising, anti-competitive practices and so on. I do not think that all regulation is good. Much regulation is not required. You cannot legislate perfection and you cannot anticipate all the conditions that are, or will be, present.
Perhaps someone could study regulation. Take a business and discover the cost to comply with the mandates. Compile them in three categories.
- Worthy regulation. (Employee safety, Product integrity, Truth in advertising and so on) Willing to pay.
- Regulation that makes sense for the industry and costs us, but does not really apply. (Mostly things they already do.) Willing to pay
- Regulation and compliance reporting that is wasteful.
I have no idea how this would turn out but I am willing to bet that 2 and 3 would have a higher cost than Item 1. That is very inefficient regulation if true.
The best incentive for a business is not money.
The best incentive for a business is the absence of disincentives. The money and all the rest will follow and in much larger quantities.
The third is that you cannot borrow yourself rich. As long as people and government see debt as benign, it will not work. Productive debt is not a problem. Think borrowing to start a business or finance a transportation terminal or harbor as opposed to debt that pays for a vacation, designer jeans or a non-contributing public service. By non-contributing public service, I mean something we could do without at least for a while.
Milton Friedman pointed out four intersecting conditions:
- If you buy something for yourself and pay for it yourself, you first decide need and then you seek both quality and price.
- If you buy for another and pay for it yourself, then quality and need matter less but price remains important.
- If you buy for yourself with other people’s money, then quality matters, but need and price do not.
- If you buy for others with other people’s money, you do not care about need, quality or price.
We should have the wit to avoid 4.
Only one practitioner of method 4 matters. Government. Do you seriously believe all government departments and service operate on the need/ good value/ good price methodology?
We all share the blame. There needs to be a huge attitude adjustment and soon. It starts with understanding the difference between getting money and earning money. There are few legitimate entitlements. Learn the difference between price and cost and the way to assess the non-price parts of cost. Learn that there is no such thing as free value. Learn about time frames. Impatience has killed more than a few worthy initiatives.
It will be an interesting time.