Ten Years Ago, How Predictable Were Our Current Economic Problems?

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.

Thinking about our economy and what to do

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I read “The Postcatastrophe Economy: Rebuilding America and Avoiding the Next Bubble, by Eric Jansen” It may seem to be out of date.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.

A key distinction

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.

Earning versus getting money

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.

  • The people must want to participate in the economy. If they do not participate, then new jobs and reduced government involvement won’t come to pass.

2022 – Why is it hard to find people who want to work? Why has the workforce participation rate shrunk from 67% to 62%

  • 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. Neither do I think that all regulation is good. Much of the regulation is not required, or it’s imposed poorly. You cannot legislate perfection, and you cannot anticipate all the conditions that will be present.

Consider reviewing the regulatory environment. Take businesses and discover the cost of complying with the mandates. Sort them into three categories.

    1. Worthy regulation. (Employee safety, Product integrity, Truth in advertising, etc.) Most businesses would be willing to pay.
    2. Regulation that makes sense for the industry, but some are already doing it, so there is no added value for them. They are generally willing to pay so those who do not behave responsibly have no cost advantage.
    3. Regulation and compliance reporting that’s not appropriate or far more costly than necessary

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.

Economics relies on incentives.

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.

How did the government get to this point

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:

  1. If you buy something for yourself and pay for it yourself, you first decide need, and then you seek both quality and price.
  2. If you buy for another and pay for it yourself, quality and need matter less, but price remains important.
  3. If you buy for yourself with other people’s money, quality matters, but need and price do not.
  4. If you buy for others with other people’s money, you do not care about need, quality or price.

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!!?

Did we cause the problem?

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.

The bits to take away

  • Adjustment 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. Things are not free if someone else pays.
  • Learn about time frames. Impatience has killed more than a few worthy initiatives.

I fear it will be interesting times.

Help me, please. Please subscribe. If you have found this article helpful, forward it to others.

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.

Be in touch at 705-927-4770 or by email at don.shaughnessy@gmail.com

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