As one may have noticed, many of the strange financial instruments blowing up world-wide deal with risk. The sheer complexity of these instruments makes understanding them completely almost impossible, but a few generalisations can be made. Typically, these exotics disassociate the risk usually connected with a certain investment, packaging them into a 'security' and selling them off as an investment in their own right.
The how and why these instruments are blowing up is not particularly important, merely that the nuclear mushroom clouds are appearing across the world. It is our opinion that these exploding instruments are indicative of a major shift in the world's economy. Namely, a shift in how investment risk is managed.
For (a somewhat oversimplified) example, to ship cheap plastic crap from China, a manufacturing company will hire a freighter from a shipping company, since the manufacturing company does not own any shipping. The shipping company, at the same time, doesn't own the ships it rents out! It leases the ships from yet another company, which only owns commercial freighters and doesn't actually operate them.
This circuitous system is, at its simplest, merely a way the manufacturing company can avoid the risks associated with owning freighters. The risk of ship ownership is held by one company, the operating risk another. This particular intermediation is already breaking down: shipping companies are losing access to credit to finance their cargoes, and having difficulty making their lease payments to the actual owners of the ships proper. At the same time, the ship owners are having trouble making their financing payments...
It is our observation that one of the effects of the 2008 Depression is the collapsing of risk. This can be seen in the shipping example, as well as exotic investment vehicles. We posit a bubble of risk intermediation is popping. The symptoms of this bubble should become more apparent in the coming months, as the companies which depend on sloughing off their risk feel the squeeze; and in the coming years, as organisations who took on the risk of others cannot meet their obligations.
On the positive side, we feel there will be opportunity in the disintermediation of risk. Having intermediated risk is similar to credit leverage, and if one can avoid it at all costs, one likely has a higher chance of economic survival in the 2008 Depression.
In an extreme example, this is why holding one's money in one's mattress may be far better than leaving it on deposit in a bank. If a true bank run develops (i.e. every bank has its own run), cash and deposits will be rationed-by-queue. One only needs to look at Zimbabwe today to see how bad that sort of thing can get. People in Zimbabwe right now are queuing up at banks every day to withdraw the equivalent of 25 cents U.S., the maximum withdraw allowed by law. One shouldn't think it will never happen in the United States, or in other developed countries.
Sunday, November 30, 2008
Saturday, November 29, 2008
How Likely is Hyperinflation in the USA?
Hyperinflation is certain in Zimbabwe, but can such a thing happen in the USA? Typically, hyperinflation occurs quickly when economies are under extreme stress such as during wartime. The USA had that experience during its Revolution, and many European countries did so during and after the World Wars, and after the collapse of the Soviet Union and its satellites.
Are present economic conditions suitable for the formation of hyperinflation in the USA? The use of paper money creates chronic inflation, but what speeds up inflation to the point where doublings of prices occur not over decades, but weeks?
Typically two factors occur to induce hyperinflation. The first is when governments spend money well beyond their ability to collect taxes. This can occur when spending increases significantly (such as for a war). The second is when tax receipts fall significantly such as during a depression, and the government is unable to borrow money, and yet the government maintains, or even increases, spending.
Clearly, the first factor may come into play since the USA is presently engaged in expensive military campaigns abroad, and is undertaking a nationalisiation of the financial system. More subtly, the federal government has liabilities of over $60,000,000,000,000 (or $200,000 per person) - and growing. There is no way to tax the population sufficiently to honor this commitment in full, so 'printing up' money will be a temptation. Whether debasing the currency will continue at a fairly moderate pace, or will get out-of-control, waits to be seen.
The second factor has come in to play only so far as tax receipts are falling and spending is increasing. The USA still maintains its ability to borrow, at least for a time. Three things may come to pass that may end that privilege. First is the unwillingness of lenders - though at present that seems unlikely since Treasury Debt and Federal Reserve Notes are highly regarded. The second is the incapacity of lenders. As foreign trade crashes, foreign central banks and other corporations will simply have less money to invest in the USA. Increasingly poor domestic investors will be similarly unable to buy. Finally, the knowledge that increasing public borrowing at the expense of private investment (e.g. more money for unemployment benefits and less money to dig new oil wells) would likely make the Depression worse, may prompt the government to 'print' rather than borrow.
We do not care to make specific predictions of how much prices will rise and how quickly. We do believe that hyperinflation in the USA is a definite risk, as the 2008 Depression causes increasing income loss. At the moment, hyperinflation is not imminent, but stand by for further updates.
Are present economic conditions suitable for the formation of hyperinflation in the USA? The use of paper money creates chronic inflation, but what speeds up inflation to the point where doublings of prices occur not over decades, but weeks?
Typically two factors occur to induce hyperinflation. The first is when governments spend money well beyond their ability to collect taxes. This can occur when spending increases significantly (such as for a war). The second is when tax receipts fall significantly such as during a depression, and the government is unable to borrow money, and yet the government maintains, or even increases, spending.
Clearly, the first factor may come into play since the USA is presently engaged in expensive military campaigns abroad, and is undertaking a nationalisiation of the financial system. More subtly, the federal government has liabilities of over $60,000,000,000,000 (or $200,000 per person) - and growing. There is no way to tax the population sufficiently to honor this commitment in full, so 'printing up' money will be a temptation. Whether debasing the currency will continue at a fairly moderate pace, or will get out-of-control, waits to be seen.
The second factor has come in to play only so far as tax receipts are falling and spending is increasing. The USA still maintains its ability to borrow, at least for a time. Three things may come to pass that may end that privilege. First is the unwillingness of lenders - though at present that seems unlikely since Treasury Debt and Federal Reserve Notes are highly regarded. The second is the incapacity of lenders. As foreign trade crashes, foreign central banks and other corporations will simply have less money to invest in the USA. Increasingly poor domestic investors will be similarly unable to buy. Finally, the knowledge that increasing public borrowing at the expense of private investment (e.g. more money for unemployment benefits and less money to dig new oil wells) would likely make the Depression worse, may prompt the government to 'print' rather than borrow.
We do not care to make specific predictions of how much prices will rise and how quickly. We do believe that hyperinflation in the USA is a definite risk, as the 2008 Depression causes increasing income loss. At the moment, hyperinflation is not imminent, but stand by for further updates.
Friday, November 28, 2008
Preventing Deflation Won't Stop the Depression
The world's monetary authorities are, at present, desperately trying to stop "deflation." Deflation is a complex and controversial topic, but suffice it to say deflation is the perception of falling prices. The theory behind central bank actions is that when prices are perceived to be falling, one becomes reluctant to invest or even spend on consumables, when just waiting will get one a better deal.
Obviously, stock and commodity prices have fallen dramatically in the last few months. Most real estate has been falling for a couple years now. Consumer prices are beginning to fall as well. Can this process be stopped? Actually, yes. Central banks can ensure that the money supply rises fast enough to devalue the money in one's pocket, making assets, goods and services again an attractive use of that money.
Can arresting deflation stop the 2008 Depression? No, it cannot. Depressions are a self-reinforcing process of declining income. Wages have been falling in purchasing power for decades. Households responded at first by sending more of the population into the workforce to support the household. Families with a single 'breadwinner' are now quite rare. Lately, workers have taken to eliminating savings, borrowing against the value of their homes, as well as taking on increasing amounts of consumer credit in an attempt to fund their spending. This is, of course, not sustainable. In fact, defaulting consumer debt will be a serious drag on the world economy for quite some time. A further drag is rising unemployment, and over all personal income in decline.
At this point, the economy will not recover until several things happen: the losses from bad investments are recognised; failing undertakings have been liquidated; savings rates return to healthy levels; employment and the purchasing power of wages begins to rise. Current government policies are not promoting any of these conditions. If anything, the policies are working against the first two conditions.
It is possible that we are witnessing an effort to 're-inflate the bubble.' Perhaps if the public sees that their houses and investments have stopped falling in value, they will pull out their metaphorical charge cards and dig themselves even deeper into debt. Leaving that central banker fantasy aside, we believe that conventional economic theory is incorrect. The current decline in prices is a symptom of economic contraction, a destruction of purchasing power. Alleviating the symptom will not cure the disease. Denominating prices in a debased currency will do nothing to help the current situation, and even risks igniting an economy-destroying hyperinflation.
Obviously, stock and commodity prices have fallen dramatically in the last few months. Most real estate has been falling for a couple years now. Consumer prices are beginning to fall as well. Can this process be stopped? Actually, yes. Central banks can ensure that the money supply rises fast enough to devalue the money in one's pocket, making assets, goods and services again an attractive use of that money.
Can arresting deflation stop the 2008 Depression? No, it cannot. Depressions are a self-reinforcing process of declining income. Wages have been falling in purchasing power for decades. Households responded at first by sending more of the population into the workforce to support the household. Families with a single 'breadwinner' are now quite rare. Lately, workers have taken to eliminating savings, borrowing against the value of their homes, as well as taking on increasing amounts of consumer credit in an attempt to fund their spending. This is, of course, not sustainable. In fact, defaulting consumer debt will be a serious drag on the world economy for quite some time. A further drag is rising unemployment, and over all personal income in decline.
At this point, the economy will not recover until several things happen: the losses from bad investments are recognised; failing undertakings have been liquidated; savings rates return to healthy levels; employment and the purchasing power of wages begins to rise. Current government policies are not promoting any of these conditions. If anything, the policies are working against the first two conditions.
It is possible that we are witnessing an effort to 're-inflate the bubble.' Perhaps if the public sees that their houses and investments have stopped falling in value, they will pull out their metaphorical charge cards and dig themselves even deeper into debt. Leaving that central banker fantasy aside, we believe that conventional economic theory is incorrect. The current decline in prices is a symptom of economic contraction, a destruction of purchasing power. Alleviating the symptom will not cure the disease. Denominating prices in a debased currency will do nothing to help the current situation, and even risks igniting an economy-destroying hyperinflation.
Thursday, November 27, 2008
The Delusion of American Exceptionalism
On occasion, when we have argued about such things as the collapse of the United States, we have been presented with an interesting rebuttal. It typically runs along the lines of "that can't happen here." When we press for why the United States won't someday fall apart, we hear merely a repetition: "This is America, that can't happen in America."
Well, we beg to differ. No country, or society, in all of history has ever proven immune to disruptive events. Never has a society forever improved without downfall. Great debates can erupt over, say, the nature of the peak of the Roman Empire, or the British Empire, or the Russian Empire... the list goes on, but each has an eerie similarity. One could argue a nation's development follows a bell-shaped curve: a nation starts from obscurity, rockets to its height of power, and then falls again to obscurity.
That's not to say a country's trajectory downwards is a one-way trip. Some countries have reached a hight of power, gotten trashed, pulled themselves out of near or utter ruin, and went on to best their previous peak. Places like Germany and Japan come to mind. These two societies have been through more than one peak-and-bust cycle, and today are considered some of the most stable and industrious countries on the planet.
The United States is a country, a society like any other. It is subject to the same possibilities of decay and collapse as any other country. It is also the longest-running experiment in democratic government, and experiments do not always result as one expects. The United States, one way or the other, will eventually end and become something else. To declare otherwise is tantamount to hubris, which was a favourite plot device of Ancient Greek tragedy. Those plays always had messy ends.
Well, we beg to differ. No country, or society, in all of history has ever proven immune to disruptive events. Never has a society forever improved without downfall. Great debates can erupt over, say, the nature of the peak of the Roman Empire, or the British Empire, or the Russian Empire... the list goes on, but each has an eerie similarity. One could argue a nation's development follows a bell-shaped curve: a nation starts from obscurity, rockets to its height of power, and then falls again to obscurity.
That's not to say a country's trajectory downwards is a one-way trip. Some countries have reached a hight of power, gotten trashed, pulled themselves out of near or utter ruin, and went on to best their previous peak. Places like Germany and Japan come to mind. These two societies have been through more than one peak-and-bust cycle, and today are considered some of the most stable and industrious countries on the planet.
The United States is a country, a society like any other. It is subject to the same possibilities of decay and collapse as any other country. It is also the longest-running experiment in democratic government, and experiments do not always result as one expects. The United States, one way or the other, will eventually end and become something else. To declare otherwise is tantamount to hubris, which was a favourite plot device of Ancient Greek tragedy. Those plays always had messy ends.
Wednesday, November 26, 2008
Two Macro Trends of the 2008 Depression
We have been careful to avoid detailed or specific predictions of what is going to happen during the 2008 Depression. Certain symptoms, like the housing price and tax receipt collapses, are 'baked into the cake.' In this post, we will look at some macro-scaled trends of this Depression, and what shapes they may take in coming years.
The first trend is a monetary crisis. This Depression, like every other, involves economic contraction. This was brought about by too many people and organisations assuming more debt than they could feasibly service. As these debtors inevitably began to default, the world economy began to contract. This process will continue until all untenable debt world-wide has defaulted or been renegotiated.
This unstoppable contraction is putting considerable pressure on all monetary systems. The world-wide paper money experiment is unable to cope in its present form with this force, and is in a state of crisis. Central bankers are aligning their respective policies to inflate the money supply in an attempt to combat the economic contraction. They may succeed in creating consumer price inflation, but they will not be successful in arresting the ongoing contraction.
This phase of the 2008 Depression does not necessarily spell the end of the paper money experiment, but it guarantees at least one large and unpredictable shift in policy. Whether this will cause rising consumer prices or falling consumer prices is unimportant to the macro trend. Suffice it to say that money as it is known today will be rapidly changing in the near future.
The second trend, which will serve to reinforce the contraction of the world economy, is that of increasing energy scarcity. Peak oil, long considered a crackpot theory, is indeed a reality: production of light sweet crude oil, the most potent and versatile natural energy source, peaked in 2004 and has begun an irreversible decline. There is no way to reverse this trend... but we will save more detailed discussion for a later post.
As energy becomes increasingly scarce, the world economy will increasingly contract. What energy is available will be increasingly diverted towards high-value-added processes. The world economy has hit the wall of falling energy availability, and will be forced to adapt to the new energy reality.
These two macro trends -- monetary crisis and energy scarcity -- are ones to be very aware of in the coming years. The 2008 Depression will make working against these trends ruinous. It would be wise to avoid institutions and investments which ignore these trends, or simply assume these trends will be managed without ill effect. If one recognises these trends are not temporary, one can plan more effectively for the future.
The first trend is a monetary crisis. This Depression, like every other, involves economic contraction. This was brought about by too many people and organisations assuming more debt than they could feasibly service. As these debtors inevitably began to default, the world economy began to contract. This process will continue until all untenable debt world-wide has defaulted or been renegotiated.
This unstoppable contraction is putting considerable pressure on all monetary systems. The world-wide paper money experiment is unable to cope in its present form with this force, and is in a state of crisis. Central bankers are aligning their respective policies to inflate the money supply in an attempt to combat the economic contraction. They may succeed in creating consumer price inflation, but they will not be successful in arresting the ongoing contraction.
This phase of the 2008 Depression does not necessarily spell the end of the paper money experiment, but it guarantees at least one large and unpredictable shift in policy. Whether this will cause rising consumer prices or falling consumer prices is unimportant to the macro trend. Suffice it to say that money as it is known today will be rapidly changing in the near future.
The second trend, which will serve to reinforce the contraction of the world economy, is that of increasing energy scarcity. Peak oil, long considered a crackpot theory, is indeed a reality: production of light sweet crude oil, the most potent and versatile natural energy source, peaked in 2004 and has begun an irreversible decline. There is no way to reverse this trend... but we will save more detailed discussion for a later post.
As energy becomes increasingly scarce, the world economy will increasingly contract. What energy is available will be increasingly diverted towards high-value-added processes. The world economy has hit the wall of falling energy availability, and will be forced to adapt to the new energy reality.
These two macro trends -- monetary crisis and energy scarcity -- are ones to be very aware of in the coming years. The 2008 Depression will make working against these trends ruinous. It would be wise to avoid institutions and investments which ignore these trends, or simply assume these trends will be managed without ill effect. If one recognises these trends are not temporary, one can plan more effectively for the future.
Tuesday, November 25, 2008
The Myth of Progress
A notion bandied about, both in the media and in academics, is that of 'progress.' The idea, put simply, is that society will always improve itself. A problem immediately arises: one cannot define 'progress' any further than this. It is even more nebulous than 'globalisation' in meaning, and just as contentious a subject. In order to more clearly define progress, we will give our personal version thereof. Progress is:
Fast forward to 2001, when 2.4 billion people lived on less than $2 per day. That's over twice as many people alive as in 1800... all completely or nearly destitute. Could you, Reader, live on about $730 per year, have only the clothes on your back (maybe a cinder block hut)? For the record, having less than $2 per day to live on is considered only 'moderate poverty' by the World Bank.
Another bit of 'progress' is the development of nuclear energy. It is argued that developing the power to split the atom was a 'good' thing - a 'good' thing which later acquainted itself with Hiroshima and Nagasaki. Is it a positive development that the planet could be rendered medically sterile several times over by fusion bombs? Even with 'peaceful' nuclear power generation, there is the deadly legacy of the radioactive waste; barrels of lethal crap which will exist for thousands of years to come. Progress?
Clinging to the idea that 'progress' is both a good and necessary thing is foolhardy. To believe that the old ways of doing things (a.k.a. business as usual) were the 'right' ways, is to be a casualty of the 2008 Depression. In the 2008 Depression, as with all past Depressions, one must adapt to the changes brought. For a closing metaphor, consider 'progress' the mirage of an oasis in the desert. One cannot afford to chase mirages; one must seek shelter.
An unending and inevitable process, moving the world towards a post-industrialised service economy. Society progresses towards an American-style middle-class lifestyle, and technology becomes both more efficient and less polluting. Progress is widely considered a 'good' thing, both a desirable and positive development.Before we go further, let us say we consider 'progress' a load of bunk. For example, in the year 1800, the world population was around 1 billion. The vast majority of people then (i.e. 'the poor') were landless peasants. They had houses, they had food, they had beer or wine. The phrase 'poor but decent' comes to mind, in a general sense.
Fast forward to 2001, when 2.4 billion people lived on less than $2 per day. That's over twice as many people alive as in 1800... all completely or nearly destitute. Could you, Reader, live on about $730 per year, have only the clothes on your back (maybe a cinder block hut)? For the record, having less than $2 per day to live on is considered only 'moderate poverty' by the World Bank.
Another bit of 'progress' is the development of nuclear energy. It is argued that developing the power to split the atom was a 'good' thing - a 'good' thing which later acquainted itself with Hiroshima and Nagasaki. Is it a positive development that the planet could be rendered medically sterile several times over by fusion bombs? Even with 'peaceful' nuclear power generation, there is the deadly legacy of the radioactive waste; barrels of lethal crap which will exist for thousands of years to come. Progress?
Clinging to the idea that 'progress' is both a good and necessary thing is foolhardy. To believe that the old ways of doing things (a.k.a. business as usual) were the 'right' ways, is to be a casualty of the 2008 Depression. In the 2008 Depression, as with all past Depressions, one must adapt to the changes brought. For a closing metaphor, consider 'progress' the mirage of an oasis in the desert. One cannot afford to chase mirages; one must seek shelter.
Monday, November 24, 2008
The Looming Tax Catastrophe
The 2008 Depression is lowering tax revenues due to investment losses, declining earned income, and falling property values. To raise taxes at this point, even to maintain revenue, will create even less investment if levied on business, thus hurting prospects for job creation; and if levied against individuals, will lower discretionary spending and further the crash in consumer spending.
Governments can cut spending, as is happening in most U.S. states, but the effects of that are also depressing - government spending is, after all, somebody's income. Governments at present are actually increasing their spending in a big way via the bailout mania both by 'investing,' and by covering the losses these 'investments' will inevitably bring. Additionally, there are plans in the works for a new, New Deal.
Governments tend to have pretty good credit ratings, so they can borrow quite a bit to cover the shortfall of tax revenues, but there are limits. There comes a point when lenders begin to doubt whether the funds will be repaid and that source is precluded. Currently the USA has a direct federal debt liability of about $40,000 for each and every person in the country. Evidently the USA's creditors (mostly trade partners) think that is a viable sum. How much higher will they let that go, especially as incomes start falling? We don't care to hazard a guess, but probably not too much higher. So while this option is open to the USA Federal Government for the time being, it is a temporary phenomenon.
There is a darker 'solution' to where a government could get money to spend - the printing press. This would, of course, cause a ruinous decline in purchasing power - furthering deepening the depression.
Raise taxes to cover spending - deepens the depression. Cut spending to match the fall in taxes - deepens the depression. Max out the Federal Debt 'credit card' - keeps the bills paid for the time being, but what to do when it's maxed out? 'Print' money - one way ticket to Zimbabwe. This is looking like a no-win situation.
Sunday, November 23, 2008
A Grim Prognosis for House Values
As you all know, the prices of houses has been falling in most of the "developed" world, but how much further are they going to fall? We are going to propose a simple model to estimate approximately what the prices will be at the end of the current Depression.
Let's say houses were twice times too expensive on an affordability basis (that is, the ratio of house prices to incomes was twice too high) at the peak of the mania, and let's say incomes will fall on average by half. So if housing then becomes appropriately priced based on affordability, the prices will fall by 75%.
Furthermore, if people decide they want to be more frugal, as they most likely will, they will probably opt to live in smaller quarters, or share larger houses with more people. Let's say the desire for space is reduced by half. Over a rather short period then, perhaps nearly half of the housing stock will become redundant. The prices on most of those units will likely fall to zero.
The price shock will likely cause the more attractive, non-redundant units to become "cheap" relative to income, and the 75% fall mentioned above is too little. Perhaps 87% would be a good guess. In summary a house that cost $400,000 in 2006 may end up going for between $0 and $52,000.
Furthermore, if people decide they want to be more frugal, as they most likely will, they will probably opt to live in smaller quarters, or share larger houses with more people. Let's say the desire for space is reduced by half. Over a rather short period then, perhaps nearly half of the housing stock will become redundant. The prices on most of those units will likely fall to zero.
The price shock will likely cause the more attractive, non-redundant units to become "cheap" relative to income, and the 75% fall mentioned above is too little. Perhaps 87% would be a good guess. In summary a house that cost $400,000 in 2006 may end up going for between $0 and $52,000.
Given this extreme drop, just about everyone with any significant mortgage balance is going to end up 'under water,' and very tempted to 'walk away.' The implications of this are severe. The entire global banking system, including central banks such as the U.S. Federal Reserve System, will probably collapse - not that it is doing so hot at the moment.
Even if money is 'printed' with abandon, too many houses will loose too much value due to redundancy to save the value of mortgages, values upon which banks must rely to stay in business. Homeowners must be prepared for the possibility of a shocking decline in value, though if you live in a reasonably prosperous town where housing has been and continues to be affordable for most of the population, then you are probably safe from the worst.
Even if money is 'printed' with abandon, too many houses will loose too much value due to redundancy to save the value of mortgages, values upon which banks must rely to stay in business. Homeowners must be prepared for the possibility of a shocking decline in value, though if you live in a reasonably prosperous town where housing has been and continues to be affordable for most of the population, then you are probably safe from the worst.
Saturday, November 22, 2008
An Introduction to the Gold Standard
There is some talk on the fringes of the media about a "Bretton Woods 2" being developed. If it sees the light of day, this system would be similar to the financial treaty established at the end of World War II. Put simply, the original Bretton Woods made the U.S. Dollar backed by Treasury Bills and gold (initially fixed at $35 an ounce), while the member nations pegged their currencies to the U.S. Dollar. This system was effectively gutted by President Nixon, when he effectively took the Dollar off the gold standard.
The United States' gold standard, loosely, was a monetary program where a bank issues paper notes (the certificate notes of yore). These certificates were backed by a preset quantity of physical gold, held by the bank. Due to other banking regulations (which we will discuss in a later post) the banks were not required to hold enough gold to cover all of their issued certificates, merely a certain percentage of them.
One of the reasons the United States went off the gold standard, and indeed one of the primary criticisms of gold-as-money, is that there is not enough gold physically in the world to have a smoothly-circulating monetary system. This is indeed true, both now and in the past. Historically, gold was not a form of money which circulated. Rather, it was more of a store of value, or for exceptionally large purchases (say, an apartment building or two). Gold has always been too scarce to serve as a day-to-day form of money.
To remedy the problem, one can turn to 'lesser' metals, such as copper, nickel, and silver. These metals are more commonly discovered. Discussion of these other metals as money will be for a later post. Let it suffice to say that gold, due to its inherent scarcity, will never, ever work as the day-to-day money of any economy.
Indeed, the idea that it could work is foolish, and is a definite reason the entire world has entered the 2008 Depression (to say nothing of the 1929 Depression). The idea that a paper currency could be 'as good as gold,' and that gold could function as a day-to-day money, are both flawed. We will explore this concept, as well as others, in the near future.
One of the reasons the United States went off the gold standard, and indeed one of the primary criticisms of gold-as-money, is that there is not enough gold physically in the world to have a smoothly-circulating monetary system. This is indeed true, both now and in the past. Historically, gold was not a form of money which circulated. Rather, it was more of a store of value, or for exceptionally large purchases (say, an apartment building or two). Gold has always been too scarce to serve as a day-to-day form of money.
To remedy the problem, one can turn to 'lesser' metals, such as copper, nickel, and silver. These metals are more commonly discovered. Discussion of these other metals as money will be for a later post. Let it suffice to say that gold, due to its inherent scarcity, will never, ever work as the day-to-day money of any economy.
Indeed, the idea that it could work is foolish, and is a definite reason the entire world has entered the 2008 Depression (to say nothing of the 1929 Depression). The idea that a paper currency could be 'as good as gold,' and that gold could function as a day-to-day money, are both flawed. We will explore this concept, as well as others, in the near future.
***
We've posted more discussion about problems with gold standards on the Silver Money Report.
Friday, November 21, 2008
Legacy Capital
There is much ado made about saving one's money wisely. "Invest for the long run;" "get in early on a red-hot market;" and so on and so forth. Despite one's best efforts, investing in a 'good thing' often ends up being a hit-and-miss proposition. Sometimes one buys the right stock, or commodity, or piece of real estate, but sometimes one buys the wrong one.
For the sake of argument, let's say one makes a very good investment. What does it become? Some may say 'my retirement,' or 'a gift for my grandchildren,' or 'a source of income,' or what have you. There are many varied ways people seem to describe their invested money, but the way we would suggest to look at it is as future legacy capital.
Here are some examples of legacy capital: the Panama Canal; the New York State barge canal system; the remnants of the United States railroad system; the Interstate Highway system. These examples were massive investments of time, resources, and capital made long ago, and which continue to pay a 'return' to this day through their continued functional existance. Although not all legacy capital is so dense and recognisable, think about a few other examples: the downtowns of most cities built in the late 19th century; vintage or antique automobiles; the United States geological survey.
All these examples of legacy capital represent good investing from yesteryear; so good, in fact, that today the investment still pays out. Legacy capital, though, can also be irrevocably spent. One only needs to look at the collapse of the Minneapolis interstate bridge to see what happens when legacy capital is not maintained properly. In that case, the legacy capital had been 'spent' down to the point where the entire investment became mere rubble.
In the 2008 Depression, it will be difficult to make future legacy capital. However, it is indeed possible, as much infrastructure extant today is from the 1929 Depression, or even the 1893 Depression. Investment must be made very carefully: one must both preserve the legacy capital of yesterday, and create that of tomorrow. They will be sorely needed.
For the sake of argument, let's say one makes a very good investment. What does it become? Some may say 'my retirement,' or 'a gift for my grandchildren,' or 'a source of income,' or what have you. There are many varied ways people seem to describe their invested money, but the way we would suggest to look at it is as future legacy capital.
Here are some examples of legacy capital: the Panama Canal; the New York State barge canal system; the remnants of the United States railroad system; the Interstate Highway system. These examples were massive investments of time, resources, and capital made long ago, and which continue to pay a 'return' to this day through their continued functional existance. Although not all legacy capital is so dense and recognisable, think about a few other examples: the downtowns of most cities built in the late 19th century; vintage or antique automobiles; the United States geological survey.
All these examples of legacy capital represent good investing from yesteryear; so good, in fact, that today the investment still pays out. Legacy capital, though, can also be irrevocably spent. One only needs to look at the collapse of the Minneapolis interstate bridge to see what happens when legacy capital is not maintained properly. In that case, the legacy capital had been 'spent' down to the point where the entire investment became mere rubble.
In the 2008 Depression, it will be difficult to make future legacy capital. However, it is indeed possible, as much infrastructure extant today is from the 1929 Depression, or even the 1893 Depression. Investment must be made very carefully: one must both preserve the legacy capital of yesterday, and create that of tomorrow. They will be sorely needed.
Thursday, November 20, 2008
Ice Cream, Gold, & Consumerism
What would you, Reader, consider yourself? In the media, the individual is most commonly called a 'consumer'. It is an odd label, in our estimation: to be a consumer means one should be spending money on stuff. It isn't important what stuff is bought, simply that money is still flowing. It's just something one does, like breathing, sleeping, and eating.
To us, the concept of 'consumer' brings to mind a cow. A cow grazes, mindlessly eating grass because, well... that's what cows do. They eat grass, because they have no choice in the matter. A consumer, likewise, spends money mindlessly, because they have no choice in the matter. One tends to feel insulted when called a cow.
We do not mean to play with semantics; we only wish to make a point. To consume is to spend money, something one finds is forever in short supply. Money is something one receives in exchange for one's efforts, which one can then do with what one wants. Honestly, we prefer our efforts to deliver things of lasting value (utility, entertainment, or otherwise). It's a difference of mindset: rather than spending like a mindless cow, we study ourselves and ask what we really want.
We must admit, however, our ideals do not always come into play. For example: if presented with $100, we would desire a 1/10th ounce of gold far more than twenty ice cream sundaes. However, when we look back on our life, we remember far more ice cream sundaes than 1/10th ounces of gold. Our preference of ice cream over gold was a reaction, an unexamined urge. In the moment, we might have rationalised that an ice cream sundae costs much, much less than a 1/10th ounce of gold... but we were probably too busy drooling over the chocolate double-fudge. Gold was the furthest thing from our mind as we stuffed our face, but in the final analysis we'd rather the gold.
This is a tongue-in-cheek example, but it goes to show the sort of decision-making one must make. For our part, we've written off a lot of future ice cream in the hopes of saving more money, which we will then turn into our more-desired gold... or something like that.
To us, the concept of 'consumer' brings to mind a cow. A cow grazes, mindlessly eating grass because, well... that's what cows do. They eat grass, because they have no choice in the matter. A consumer, likewise, spends money mindlessly, because they have no choice in the matter. One tends to feel insulted when called a cow.
We do not mean to play with semantics; we only wish to make a point. To consume is to spend money, something one finds is forever in short supply. Money is something one receives in exchange for one's efforts, which one can then do with what one wants. Honestly, we prefer our efforts to deliver things of lasting value (utility, entertainment, or otherwise). It's a difference of mindset: rather than spending like a mindless cow, we study ourselves and ask what we really want.
We must admit, however, our ideals do not always come into play. For example: if presented with $100, we would desire a 1/10th ounce of gold far more than twenty ice cream sundaes. However, when we look back on our life, we remember far more ice cream sundaes than 1/10th ounces of gold. Our preference of ice cream over gold was a reaction, an unexamined urge. In the moment, we might have rationalised that an ice cream sundae costs much, much less than a 1/10th ounce of gold... but we were probably too busy drooling over the chocolate double-fudge. Gold was the furthest thing from our mind as we stuffed our face, but in the final analysis we'd rather the gold.
This is a tongue-in-cheek example, but it goes to show the sort of decision-making one must make. For our part, we've written off a lot of future ice cream in the hopes of saving more money, which we will then turn into our more-desired gold... or something like that.
Wednesday, November 19, 2008
A Case for Optimism
As you can surmise from our posts, we are not hopeful that the world can avoid hard times. However, a true optimist is someone who will make the best of any situation, good or bad.
A depression is not merely a destructive force, but a force for change. New businesses and institutions grow out of the wreckage of the old. Emerging industries meet new needs, and more efficient operations replace obsolete models. Whether what new forms replace the old are "better" or "worse" is a subject of debate that we won't get into.
In the USA during the depression of 1929-1939, many major, traditional sectors of economic activity more or less completely withdrew from the scene and were replaced. For example, the family subsistence farm was replaced with specialised, industrial farming. The mom-and-pop corner store was replaced with the supermarket. The workshop manufacturing system was replaced with mass production. Horse-driven transportation was replaced with cars and trucks.
What industries of today are heading for the chopping block, or at least facing prospects of diminished significance? US auto makers? The "FIRE" economy? Big government? Public education? It's a difficult thing to predict, but if these sectors do not deliver value in proportion to their cost, they will likely shrink until they do.
Also, how will the forms of economic life change? Will online shopping grow in significance as the mall-dependent retail stores fail? Will globalisation increase or decrease - that is, will goods and services from around the world be a larger portion of one's spending? - or will import substitution grow as entrepreneurs discover how to use small scale technologies and the internet to beat the advantages of the mass market and global trade?
What this has to do with optimism is this: if you lose your main source of income, what will you do? We hope you won't simply join the bail-out parade. We hope you will turn on your inner entrepreneur and recognise the many activities all around you right now that can be done for a profit. Join forces with others who are on the ball, or create something new on your own. The possibilities are endless. Even if others around you go mad with bailout-mania, resist the temptation to have someone "make work" for you, unless you are just going to use that as a "day job" while you build up your creative work. You are never too old to learn a new skill - in fact, learning new skills keeps both mind and body sharp.
We have been reading many sad stories of people who have lost their jobs or businesses, but kept spending their way right into bankruptcy and homelessness. Wishfully expecting your income to be restored is not optimism, it is reckless delusion! One must always live within one's means, no matter how meagre. If you loose 70% of your income, you must cut at least 70% of your spending. This can be a hard thing to do, and depressing psychologically. We know, we have been there.
There's a Depression on, folks. There's a good chance you, Reader, are looking at an imminent, massive, and persistent decline in your income. You must be able to respond to that appropriately if you want to have a hope of restoring your sense of accomplishment in life. Economic depressions break people psychologically. You must prepare yourself to avoid involuntary homelessness and starvation. Soberly assess how much you could rely on friends, family, your church, or "the government" to prevent that eventuation.
There's a Depression on, folks. There's a good chance you, Reader, are looking at an imminent, massive, and persistent decline in your income. You must be able to respond to that appropriately if you want to have a hope of restoring your sense of accomplishment in life. Economic depressions break people psychologically. You must prepare yourself to avoid involuntary homelessness and starvation. Soberly assess how much you could rely on friends, family, your church, or "the government" to prevent that eventuation.
In conclusion, optimism is proactively managing a loss of income, and working towards its regrowth. We will further elaborate on both those tasks in future posts.
Tuesday, November 18, 2008
Ingredients for the 2008 Depression
'Why is this happening?' is a question that will defy a rational explanation. Our previous post suggested because the Depression is an unstoppable force, but that is hardly satisfying to the inquiring intellect. What are the ingredients that were thrown into the economic pot that triggered this Depression? There has been a bit of speculation on this subject, and as the Depression becomes increasingly self-evident, the attempts to rationalise it will become abundant, and politically motivated. One can never know for sure, but we shall offer our opinion of what the ingredients have been, both in this post and future ones.
Here is today's list: falling real median wages in the USA; too much debt just about everywhere; a speculative mania in housing in most countries; a speculative mania in housing -related investment securities; a speculative mania in securities backed by consumer debt; a speculative mania in exotic investment vehicles such as bond insurance and credit default swaps; a speculative mania in companies which separate speculators from their money such as mutual funds and hedge funds; corruption and mismanagement in financial institutions, their auditors, and their regulators. To this we could add some factors that are probably be at work: fiat (i.e. "paper") money; resource depletion issues; consumption of previously-formed capital, including social capital.
Every item in this list has quite a story behind it, and though they may seem abstract, their effects are most definitely present in your life. In future posts we will touch upon all these ingredients (and more). If you deem any to require expedited discussion, please leave a comment.
Here is today's list: falling real median wages in the USA; too much debt just about everywhere; a speculative mania in housing in most countries; a speculative mania in housing -related investment securities; a speculative mania in securities backed by consumer debt; a speculative mania in exotic investment vehicles such as bond insurance and credit default swaps; a speculative mania in companies which separate speculators from their money such as mutual funds and hedge funds; corruption and mismanagement in financial institutions, their auditors, and their regulators. To this we could add some factors that are probably be at work: fiat (i.e. "paper") money; resource depletion issues; consumption of previously-formed capital, including social capital.
Every item in this list has quite a story behind it, and though they may seem abstract, their effects are most definitely present in your life. In future posts we will touch upon all these ingredients (and more). If you deem any to require expedited discussion, please leave a comment.
Monday, November 17, 2008
What a Depression Means
It is difficult to clearly discuss the 2008 Depression when 'depression' has an unclear definition. Building upon our earlier post about the 1929 Depression, today we will begin to look at some effects the 2008 Depression will have. We hope that this gives you, Reader, better insight into what is happening economically. This will serve as a foundation for later posts, when we will look at things you can do to thrive in this Depression.
First, we must make one thing very clear: there is nothing anyone can do to stop a depression. A depression is a natural action of any economy, and is a necessary thing from an economic standpoint. It will simply happen for any number of reasons, and when started must run its course, whatever that may be. Despite claims otherwise, no depression has ever been 'stopped' by any concerted effort, either by individuals or governments.
Simply put, a depression is an out-of-control freight train barreling down the mountain. The only thing you, Reader, can do is to try and get out of its way. There is no sure way to do this, though: the freight train may jump the tracks and plow right into you, even though you're running as fast as you can away from it. A depression, like the freight train, is unstoppable, destructive, and unpredictable.
With this analogy in mind, let's take a hard look at how it applies to the 2008 Depression. Nothing is safe, nothing is certain. You cannot assume that something will be unscathed by a depression: not your job; not your pension; not your investments; not your home's value; not even your money in the bank. Any number of these, or all of them, may fall prey to the 2008 Depression, and there is nothing that anyone can do to prevent it. If you have some privileged status, such as posessing a private fortune or being a highly paid professional, don't assume that this will protect you. Judging from history, the overall loss of income (wages, profits, etc. ) can be expected to be somewhere in the neighbourhood of 50%. Some will loose all their income, most will take substantial hits, although a fortunate few will even see an increase. However, things could be better, or worse, since a depression is unpredictable.
What you can do, however, is be alert and ready to make changes in your life at a moment's notice. Also, it is better to plan ahead than simply react after the event. What would you do if you lost your job, and couldn't replace it? What would you do if your pension went away? What would you do if your credit cards were all unusable? We realise these are all hard questions, Reader, but they must be asked. Although the answers will be painful, they are the most important pieces of information you can have in the 2008 Depression.
First, we must make one thing very clear: there is nothing anyone can do to stop a depression. A depression is a natural action of any economy, and is a necessary thing from an economic standpoint. It will simply happen for any number of reasons, and when started must run its course, whatever that may be. Despite claims otherwise, no depression has ever been 'stopped' by any concerted effort, either by individuals or governments.
Simply put, a depression is an out-of-control freight train barreling down the mountain. The only thing you, Reader, can do is to try and get out of its way. There is no sure way to do this, though: the freight train may jump the tracks and plow right into you, even though you're running as fast as you can away from it. A depression, like the freight train, is unstoppable, destructive, and unpredictable.
With this analogy in mind, let's take a hard look at how it applies to the 2008 Depression. Nothing is safe, nothing is certain. You cannot assume that something will be unscathed by a depression: not your job; not your pension; not your investments; not your home's value; not even your money in the bank. Any number of these, or all of them, may fall prey to the 2008 Depression, and there is nothing that anyone can do to prevent it. If you have some privileged status, such as posessing a private fortune or being a highly paid professional, don't assume that this will protect you. Judging from history, the overall loss of income (wages, profits, etc. ) can be expected to be somewhere in the neighbourhood of 50%. Some will loose all their income, most will take substantial hits, although a fortunate few will even see an increase. However, things could be better, or worse, since a depression is unpredictable.
What you can do, however, is be alert and ready to make changes in your life at a moment's notice. Also, it is better to plan ahead than simply react after the event. What would you do if you lost your job, and couldn't replace it? What would you do if your pension went away? What would you do if your credit cards were all unusable? We realise these are all hard questions, Reader, but they must be asked. Although the answers will be painful, they are the most important pieces of information you can have in the 2008 Depression.
Sunday, November 16, 2008
Looking Back
One difficulty in raising awareness of the 2008 Depression is the lack of a strict definition of an economic depression. There are some rules of thumb, but they allow for 'wiggle-room' in their application. This, coupled with denial about the situation, allows commentators to avoid directly saying the United States is in a depression. Although such hesitation is understandable, it is not helpful to those making decisions in this Depression. It is therefore extremely important that you, Reader, arm yourself with the tools to analyse the situation for yourself.
In identifying a depression, it is best to not look at arbitrary measures, but rather history. The most familiar example in the United States is, of course, the Great Depression of 1929-1939. To show the severity of this Depression we will use the Dow Jones Industrial Average as a primary example. The Dow, then as today, represented the largest and strongest corporations. The Dow reached its peak on September 3rd, 1929 and proceeded to lose 89% of its value, finally reaching its bottom on July 8th, 1932. Other, smaller markets fared even worse than this.
Unemployment in 1930 reached 25% and remained there more or less throughout that Depression, and was still at 15% at 1940. By 1932, the average income of the American household had fallen 40%. The depth of that Depression was finally reached in 1933, after American industrial output dropped by over 50%. Over 9,000 banks failed during the 1930's. Recovery was slow and arduous, and the catastrophe left its mark on the economy and citizens of the United States along with most of the rest of the world for decades following. For example, the Dow Jones Industrial Average did not sustainably reach its 1929 high until the 1950's, even with an exploding population.
What you, Reader, should take away from reading about the 1929 Depression is not the numbers. It is the scale of the collapse that you should remember: a near-total wipe-out of value on the stock market; vast numbers of people unemployed; and many businesses of all sizes failed. Most importantly was the pervasiveness of the Depression. It lasted ten years and its effects lasted for decades following, fundamentally changing the nature of the United States. So, too, will the 2008 Depression change the way Americans live.
In identifying a depression, it is best to not look at arbitrary measures, but rather history. The most familiar example in the United States is, of course, the Great Depression of 1929-1939. To show the severity of this Depression we will use the Dow Jones Industrial Average as a primary example. The Dow, then as today, represented the largest and strongest corporations. The Dow reached its peak on September 3rd, 1929 and proceeded to lose 89% of its value, finally reaching its bottom on July 8th, 1932. Other, smaller markets fared even worse than this.
Unemployment in 1930 reached 25% and remained there more or less throughout that Depression, and was still at 15% at 1940. By 1932, the average income of the American household had fallen 40%. The depth of that Depression was finally reached in 1933, after American industrial output dropped by over 50%. Over 9,000 banks failed during the 1930's. Recovery was slow and arduous, and the catastrophe left its mark on the economy and citizens of the United States along with most of the rest of the world for decades following. For example, the Dow Jones Industrial Average did not sustainably reach its 1929 high until the 1950's, even with an exploding population.
What you, Reader, should take away from reading about the 1929 Depression is not the numbers. It is the scale of the collapse that you should remember: a near-total wipe-out of value on the stock market; vast numbers of people unemployed; and many businesses of all sizes failed. Most importantly was the pervasiveness of the Depression. It lasted ten years and its effects lasted for decades following, fundamentally changing the nature of the United States. So, too, will the 2008 Depression change the way Americans live.
Saturday, November 15, 2008
Denial
It is human nature to avoid stress, if possible. One healthily perceives ordinary happenings not as potentially dangerous and cause for alarm. To be locked into a vigilant viewpoint is incapacitating. When the time is right, however, it is critical to recognise signs of actual danger and respond appropriately.
Stock markets are crashing, there are mass foreclosures, bank failures, and mass layoffs. A whole nation – Iceland – goes from affluence to a basket-case in a matter of weeks. This is not a drill, ladies and gentlemen. And how are the professional firefighters – the Treasury Departments, the Central Banks – managing the crisis? They are, frankly, running around like chickens with their heads cut off. If a multi-building fire was raging in your city and its fire department was acting like Mr. Paulson, would you have much confidence in its ability to contain the fire?
The mainstream media aren't helping the situation. They couch discussion of the economy in terms such as “being at the brink of a recession,” or “there is risk of a deep recession.” It is time to stop pretending that the current situation is merely a problem of lack of confidence.
Chances are you have suffered some financial setbacks already, or know people who have. You wonder if things in general are going to get worse before they get better, and if so, how bad will things get. The answer is that things are going to get a lot, lot worse. The problem is, in a nutshell, that the world's economy has been built on an unsound basis. If you build a house on a weak foundation, it will come tumbling down. The unsoundness of the economic system is complex and reflective of unsound parts of culture. It will not be a simple matter to begin again, aright. There will be false starts and future depressions.
Here are a few components of the unsound basis: the illusion that wealth comes from money, or in today's credit-addled world, from access to money; the illusion that human beings may increase their numbers endlessly, and claim ever larger shares of the earth's resources; the illusion that the earth's resources are in any way, shape, or form unlimited; the illusion that shielding persons or organisations from negative consequences of their actions is a good. Future posts will discuss each of these points and others.
If you disagree with these points, we would like you to make your case. Please post comments and future posts will address them.
Friday, November 14, 2008
Introduction to the Depression
In both good times and bad, good information is a valuable asset. This is especially true when it comes to economic decisions, such as where to look for work, what jobs to do, what to invest in, where to live, and so on. Good information is needed for good decision-making, and from there one can build healthy personal finances; bad information can reverse years of hard work and careful planning.
When times are good, like what the United States have enjoyed until a few months ago, unfortunate decisions can be corrected relatively painlessly. In good times, a lost job can be replaced with a similar one in a different city. Failed investments can be rebuilt within a reasonable amount of time.
However, that was until just a few months ago. Now circumstances are quite different. The information one finds tends to be muddled, confusing, and just plain wrong. In this economic turmoil, unfortunate decisions are much more harmful to personal finances. Good information is more important than ever before, and is a scarce resource.
It is with this blog that we hope to provide good information to the public. We also intend to help enlighten you, the Reader, about the truly grave economic situation. The present economic downturn is not, as some claim, a mere correction with renewed growth to follow soon. Rather, this is the start of a new Great Depression. Furthermore, unlike the Depression of 1929-1939, this one is not an interruption of continual economic growth, but the first of a series of economic contractions lasting the rest of our lives.
Do not think, Reader, that we say this lightly. We are no doom-and-gloomers; we do not believe industrial civilisation is coming to an end, only changing form to fit new realities. The details we will get into in later posts, as well as advice about adapting on both personal and professional levels.
We are hopeful that society and the economy can adjust smoothly. To help this process, we hope to be level-headed voices of reason and optimism. Good information will be vital to make the choices needed to thrive.
When times are good, like what the United States have enjoyed until a few months ago, unfortunate decisions can be corrected relatively painlessly. In good times, a lost job can be replaced with a similar one in a different city. Failed investments can be rebuilt within a reasonable amount of time.
However, that was until just a few months ago. Now circumstances are quite different. The information one finds tends to be muddled, confusing, and just plain wrong. In this economic turmoil, unfortunate decisions are much more harmful to personal finances. Good information is more important than ever before, and is a scarce resource.
It is with this blog that we hope to provide good information to the public. We also intend to help enlighten you, the Reader, about the truly grave economic situation. The present economic downturn is not, as some claim, a mere correction with renewed growth to follow soon. Rather, this is the start of a new Great Depression. Furthermore, unlike the Depression of 1929-1939, this one is not an interruption of continual economic growth, but the first of a series of economic contractions lasting the rest of our lives.
Do not think, Reader, that we say this lightly. We are no doom-and-gloomers; we do not believe industrial civilisation is coming to an end, only changing form to fit new realities. The details we will get into in later posts, as well as advice about adapting on both personal and professional levels.
We are hopeful that society and the economy can adjust smoothly. To help this process, we hope to be level-headed voices of reason and optimism. Good information will be vital to make the choices needed to thrive.
Subscribe to:
Posts (Atom)
Posts
