Sunday, December 3, 2017

Economic Evolution Makes Many Comparisons Obsolete

With the passage of time, things change and evolve. This transformation can be seen in both society and the economy. Over the decades we have moved from an agricultural based society to an industrial centered manufacturing way of making a living. Now, without a doubt, we are moving solidly in the direction of technology becoming the main driver of cultural change and with it, the economy is again undergoing a metamorphosis. With the passage of time, we tend to forget or minimize in our minds what is too painful to remember and the way we were during times where growing pains battered us at every point. While we are undergoing this latest transformation and all the noise that accompanying it I ask you to consider the possibility the important adjustments the economy must make are lagging far behind our current "financial culture" or that the economy has evolved in a way that simply no longer works.

The Titanic Was Herald As "Unsinkable"
Much of this has yet to become apparent to the masses and is masked by institutions papering over problems and a tradition of optimism that has served mankind well, however, something seems to be broken or out of kilter. When we look behind the curtain it is difficult to ignore the numbers simply do not work going forward. Ignoring the warning signs on the horizon does not make them go away and kicking the can down the road can only delay the inevitable for so long. Many of the comments I read concerning the current stock market and companies such as Tesla and Amazon remind me of the following statement, "Not even God himself could sink this ship." that an employee of the White Star Line made during the launch of the Titanic on May 31, 1911.  The truth is as we move forward we are in uncharted waters at any time a surprise might shock us into the reality.

Much of the economic distortions we are experiencing today harken back to President Richard Nixon's decision on August 15, 1971, to close the gold window. It is a factor that changed everything. While US citizens had been forbidden from owning gold or from redeeming their gold certificates for gold coins since the early 1930s, foreign governments still had the privilege of redeeming their dollars for gold. Nixon's decision untethering the dollar from gold and releasing it from the promise dollars could be redeemed in gold, this resulted in opening the floodgates and allowed credit to explode from $1.7 trillion to $65.5 trillion at the end of 2015.

Exploding Credit Has Massive Ramifications
A question we must ask is just how relevant today's comparisons are with prior economic cycles? The situation today is in many ways "historically unique" due to the rampant expansion of credit in recent decades. Much of this has flowed from Nixon's decision to close the gold window and may be greatly responsible for the rising income inequality that has occurred in recent decades. After inflation soared in the late 70s America found the cost inflation in goods could be reduced by buying these things from low-cost producers located in other countries. This means imports soared.

A de facto policy of placing no restraints on trade deficits due to the removal of the gold window has encouraged the outsourcing of jobs. This policy dovetailed with America's decision decades ago to make China into a formidable ally that would act as a  counterbalance against Russia and the Kremlin. We did this by offering economic incentives and help to China's economy, looking back this was a watershed event which changed the way American companies conducted business. It has resulted in American companies outsourcing production and the mass exodus of manufacturing jobs from America to distant lands where labor was both cheap and abundant. This policy was sold to America's middle-class as a "win-win situation" and we were told the American worker would move up the economic food chain towards better-paying jobs that would be more fulfilling and require less toil. This did not happen.

Many Comparisons With The Past Now Obsolete
Returning to the main theme of this article this massive expansion has rendered many comparisons with the past obsolete. It has also resulted in the economy embarking on a rollercoaster-like experience where it encountered a series of events such as the dot-com bubble, which burst in 2001. In reaction, the Greenspan Fed stepped on the gas blowing the biggest housing bubble on record. In response to that asset bubble popping, we saw the Fed bail out the banks, the asset holders and the wealthy. The bottom-line is that in the end, this chain of events left the average American worse off than before. During all this time debt has grown, and to service that growing pile of debt the Fed had to keep slashing interest rates. This means that instead of allowing consumers to benefit from technological advances that tend to be inherently deflationary, the Fed sought to increase inflation by declaring inflation in the range of  2% to be in our best interest. This has benefited the banks and those already wealthy while at the same time increased inequality.

I came back to finish this article that I started some time ago because I found myself pondering the line, "outwit and outlast" that is often used during the popular hit television show Survivor. It occurred to me the winners in both life and investing often reflect these qualities and that this game is far from over. While investors are often urged to be cautious the excesses of today are in many ways not as "sector" oriented as those experienced during certain periods we have seen in the past and this makes it more difficult. It seems everything is encouraging and causing both savers and investors to take far more risk than they should in the quest for higher returns and yields. The "fear of missing" out is again running rampant and with the strategy of buying the dip having proven successful over almost a decade investors have become complacent to the risk they face.


  1. Normal Americans need to comprehend and believe how much they have been betrayed by our leaders in gov't and in business for basically selfish gain and power, and how today's economic suffering for many is the direct result of policies enacted at the highest levels. However, most Americans, while not stupid, are distracted by many things, including work, family, sports, TV, computer games,etc. Many, like TV and sports and games are in many ways deliberate distractions to keep us from really thinking critically and talking to each other about what has and is happening.

    However, a curious thing happened with Trump, in that some people started waking up during and after the disaster that Obama was. Could Obama have been less qualified to be President? Regardless, it will be interesting to see if Trump is able to do anything, or is serious about doing anything. Cautiously hopeful.

    TBTB have successfully divided our nations into two groups. The reality, we all have far more in common (at least from a economic standpoint) than we do with the elite wealthy who pretty much run the country from behind the scenes with their money influence.

    I don't know how to solve our issues. But good starts would be to immediately raise taxes on high earners, those making above say $1 million both in salary and in stock's. And eliminate the various schemes that wealthy use to pass wealth down tax free. We need to stop the hoarding and accumulation of wealth in the very, very top. I am fine with the $5 million inheritance exemption. But if you are worth 100's of millions and billions, then that needs to be taxed at a higher rate, to prevent all these sorts of dynasties from having too much power. Take those taxes, and give the bottom a bump in their salary if they are working. Or fund free child care, etc. I am not a socialist, but I believe we need policies in place to prevent the over accumulation of wealth (and power) in a very small group of people. And use that wealth for the common good.

  2. The super-rich and elite are in a class of their own. I have written about this is the past and agree growing inequality and the concentration of wealth in the hands of a few is not good for society. Below is the link to an article I wrote some time ago making a distinction between the working rich and the elite.

  3. One of the many things ignored is that artificially low interest rates in the midst of greater inflation rates crush private savers. This means fewer new businesses, individuals unable to provide for their own retirements or to send their kids to school. Debt "slaves" are not free to advance their own economic growth and thus the middle class drops behind in the share of the pie it can obtain.

    This is the major result of the current massive federal debt problem; it weakens the individuals' economic power in favor of the large entities.

    What a difficult problem to solve. Politicians cannot do so, as buying votes keeps them in office. Conservative economics decreases their likelihood of re election. Thus the democratic process serves the wasteful elite at the cost of the private sector.

  4. When people cannot fund their own retirement we all suffer. Not long ago if someone worked hard and saved they could look forward to retiring and living well on the interest but not today. I may be one of the few people that think thinks inflation will spike at some point and interest rates will do the same to reflect the reality of the "risk of loaning" money. That is why I have no desire to buy fixed-rate bonds. Below are a few thoughts on inflation.

  5. the problem of rentiers was solved by killing them tsars and czars all..? once in modern history...