A Chinese curse goes, “May you live in interesting times.”
A sister-in-law has told me that there is a worse curse, “May you have interesting children.”
I think the first will suffice for today.
A decade ago, I read “The Postcatastrophe Economy: Rebuilding America and Avoiding the Next Bubble, by Eric Jansen” It may seem to be out of date. No issue. It makes for more involving reading when you can see it unfolding.
Eric Jansen is a macro analyst who has had a good record of predicting crashes and opportunities. The tech bubble crash in 1999, Gold buying opportunity in 2001, the housing bubble in 2007, global banking problems, and more. You will likely learn something valuable from what you could read about how he saw the world in 2010 and what has happened since.
In the book, he shows how there have been two economies running simultaneously. 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 estimated this would lead to debt deflation and a central bank response. It started around 2012. He outlines the role of gold in all of this and considers the old bugbear – stagflation. We avoided some of that after President Trump began to help a business make sense in America.
He believes that the old ways – tax and interest rate adjustments, inflation, and fiscal stimulus would not work this time. He thought we needed a new approach that did not rely on air. In the past two years, there has been far more air than even he anticipated. It is essential to see what works for economies and individuals, even though it would tend to minimize the usefulness of governments.
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. Businesses can get money. Nothing changes 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 could get money without adding any value. After the crash, the added amount went away, but it was not taken back from those who pumped the price. The citizens paid through a government bailout.
If someone gets something for nothing, someone else must necessarily get nothing for something. It is a truly simple world. It’s what the games theorists call a zero-sum outcome. The money remains the same but changes pockets.
Jansen believes we cannot go that route. We need a way to add value instead of pumping the price full of hype.
In part two, Jansen points out a possible way to fix the FIRE problem. What he calls TECI. (Transportation, Energy, Communication, and 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 debt dependency and foreign energy supply. Governments are not strong on efficiency.
In 2012, I thought that could be a reasonable approach, but the needed conditions might not yet exist.
2022 – Why is it hard to find people who want to work? Why has the workforce participation rate shrunk from 67% to 62%
Consider reviewing the regulatory environment. Take businesses and discover the cost of complying with the mandates. Sort them into three categories.
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.
Jump ahead to 2022 Regulation is more unpredictable, more persuasive than it was. Governments are involved in nearly everything.
3) 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 harbour, instead of 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, given its cost to value ratio.
The best incentive for a business is not money. Governments don’t have anything else to offer, though. Their offerings of money and regulation are ineffective. The best incentive for a business is the absence of disincentives. Without the heavy hand of bureaucracy, the money, the innovation, and the growth will follow.
There are two aspects
First, they enjoy the power. That is the ability to decide. What’s permitted and what is not. Bossy.
Second, they don’t care about getting value for money spent.
Milton Friedman pointed out four intersecting conditions related to that:
Only one practitioner of condition four matters. Government. Do you seriously believe all government departments and services operate on the “need – good value – good price” methodology? Really!!?
We all share the blame. My thought in 2012 was there needs to be a huge attitude adjustment. To date, there has not been such an adjustment. We still look to governments to solve problems even though they have generally been both inept and costly.
I fear it will be interesting times.
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I build strategic, fact-based estate and income plans. The plans identify alternate ways to achieve spending and estate distribution goals. In the past, I have been a planner with a large insurance, employee benefits, and investment agency, a partner in a large international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business. I have appeared on more than 100 television shows on financial planning. I have presented to organizations as varied as the Canadian Bar Association, The Ontario Institute of Chartered Accountants, The Ontario Ministry of Agriculture and Food, and Banks – from CIBC to the Business Development Bank.
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