Bubbles and the American Frontier Mentality

In our experience, people seem to intuitively know when they are partaking of some great swindle or scam. An expression of this is a bumper sticker comes we seem to remember: "Please God, just one more bubble before I die," is how it goes in our memory. Also, the investors who gave Bernard Madoff all their life's savings often 'knew' that he was running a scam -- they assumed that he was operating on insider trading. Unfortunately for their belief in their own cunning, Mr. Madoff was running a swindle.

These are two isolated and recent -- in the case of the sticker, rather ephemeral -- examples, but the mentality is not far removed when semantics are considers. When things are moving up in a speculative orgy, the preferred nomenclature is a 'boom,' rather than a bubble. The movement only becomes a bubble after the fact, when it has burst and wiped out entire fortunes. After the burst, when the present-tense-boom becomes a past-tense-bubble, there is one question that is often asked: where is the next boom?

The United States, at its birth, was a tiny nation facing massive amounts of land of unknown qualities to the West. It was an experience wholly unlike anything that had been seen in Europe in recorded history. No one living at the time had ever enjoyed the experience of facing the sunset and thinking about the impossibly vast territory that lay beyond the borders of the Colonies.

It didn't take long for the nascent United States to figure out that great riches lay in the easily conquerable land. The infamous push westwards began, and with it a mythos was born: no matter what one's situation might be, one could always go somewhere else -- at the time, westward -- to begin anew. Fortunes could be made and lost, but there was always the knowledge that something else lay waiting on the frontier.

The focus on the West faded in time, but the sense remained that something was always out there. There was suburbia to develop, after all. Even if, say, the dot-com companies weren't the bubble -- sorry, 'boom' -- they once were, there was always housing in California. Now that the housing (ahem) 'boom' is over, the hoped-for next 'boom' is in green energy. And after that is revealed to be a bubble, it is assumed there will be another boom... and so on, and so forth.

Such a reliance on riding the bubble cycle is both illusory, and destructive. The illusion is that there 'will always be another boom;' the destruction is that such waves of exaggerated boom-and-bust is horrendously wasteful of natural resources. If Peak Just-About-Everything is past, or even nigh, the resources will no longer be abundantly available to perpetuate this frontier mentality. Attempting to continue this fetish with bubbles in the future will become more and more destructive of dwindling resources of all sorts. The peak of each bubble will never quite get as high, and the trough will be ever more miserable.

Diversification

We had a conversation with a friend the other day, about how to diversify one's portfolio properly. Despite how we may sound on occasion, we don't believe that having all one's wealth in anything -- even precious metals -- is a good thing. We're bullish, but we're not that bullish; when we start hearing 'sure things,' we get nervous... and we don't want to sound like the pushers for Bernard Madoff. The Uncle Bernie Affair is a good example of, shall we say, over-bullishness.

However, there is more to diversification than simply investing in multiple sectors of an economy. The likelihood of any one scammer, like Mr. Madoff, making off with one's life savings is decreased if one keeps any one investment to an acceptable percentage of one's total assets. We remember the stories of the people who gave everything to Mr. Madoff, only to lose everything... and we can't really feel sympathy for them. Greed got the better of them, and lo, the price of such greed was revealed.

We are often worried that, despite our best efforts, our investments may be in the loving arms of someone similar to Mr. Madoff. In the era of Peak Scam, one cannot be too careful. So, we are looking at more than just diversification within one economy: we are looking at multinational diversification, albeit on a small scale.

Why, you ask? Well, having all one's money is U.S. Dollars, or euros, or pound sterling, or Japanese yen, is effectively the same as giving all one's money to Uncle Bernie. It's betting the farm on that particular nation's ability to hold together and defend its national currency and economy. We are not at all confident enough in any one nation to have all our assets valued in its currency... and subject to its political caprices.

It's a question of scale, to be sure; one needn't have a ranch in Argentina, a fishery in Iceland, and a factory in Russia. However, we feel it is a prudent idea to at least have some assets outside of one's nation of legal residence. International diversification will be increasingly important in the years ahead, and, as we mentioned, it can be done on a small scale, even for the average individual.

The Era of Peak Scam

It seems that not a day goes by we don't read about some juicy new financial scandal. The latest is the embezzlement of billions from funds earmarked to help 'rebuild' Iraq. The total cost to the American Citizenry may never be known, but as the article from The Independent notes, it's probably bigger than Bernard Madoff's $50 billion Ponzi scheme.

As we've remarked before, the 2007 Depression is an out-of-control freight train, hellbent on crushing anything and everything that doesn't get out of its way. At the same time, the still-present squeeze of Peak Oil (indeed, Peak Just-About-Everything) is working its own magic on the world economy. Together, these trends are forcing the world economy to continually shrink; one can see the effects of this shrinking in the entire world, from China to Canada.

With this world-wide crush ongoing, it will be very difficult for viable, legitimate businesses to survive. However, the crush will be even harder on the many, many scams of the world. Bernard Madoff was a smooth operator... but he was only the weakest hand in a whole world filled with smarter, bigger operators. The Galbraith Financial Principle comes into play at this point: the biggest and smartest fall last.

Scams, by their very nature, are unproductive and wasteful, and exist by leaching off of productive, honest endeavours. Time will tell if we are correct, but we suspect that the world has seen Peak Scam. Never again will the world enjoy such a perfect collaboration of cheap, widely available energy, and the impossibly loose financial environment of the past eighty years or so. There's a tonne of fat in the world economy, but that fat is being worked out... viciously.

Minimising the Risk of Personal Financial Catastrophe

We were having a conversation with a friend recently about the steps one can take to avoid becoming destitute in one's old age. It occurred to us that these same steps apply to everyone at all ages and are generally good advice.

#1 Keep your income sources diversified. No matter how good it seems to be, no basket should ever hold all your eggs. Consider the people who put their entire life savings with Madoff. This applies to jobs as well. Don't count on your career choice necessarily being there for you. If your full-time job leaves you no time for developing other income sources, at least have a back up plan.

#2 Live within your means. Aim to live on less than 75% of your income. This may seem daunting, but it is always do-able. The less you save, the more at risk you are.

#3 Live in a small, paid-for house, in an OK neighbourhood. If the neighbourhood deteriorates, move. If the neighborhood gentrifies, move (and reinvest the profit) - though this isn't too likely to happen for a while. If you can't afford to move, you have violated rules 1 & 2.

Some years ago, we were living in Duluth, Minnesota when the city went on a demolition spree. They started tearing down perfectly good houses. We were very perplexed until we discovered they were enforcing a minimum square footage zoning ordinance throughout the city - and there was no grandfathering! Long-term residents were being forced out of their homes for no other reason than the houses were 'too small'! In light of current developments, this policy was completely insane. People need to have the option of living in small houses, when they cannot afford big ones. If cities only allow big houses to be built, as people become poorer, fewer and fewer people will be able to live in their own private houses.

#4 Be physically active. It keeps you healthier and stronger. It sharpens your mind and increases your stamina for work.

#5 Learn new skills. It keeps your mind sharp.

#6 Maintain a social network. If you lack social skills, develop them.

#7 Don't opt for elective medical procedures. They are budget busters, and often do more harm than good. Learn self-care, and low cost management of conditions that require attention.

Trillion Dollar Welfare

We're certain that you have seen the recent flap about Ms. Nadya Suleman, from whose loins recently sprung a brood of eight premature babies. We extend our condolences to the people of California, whose tax-dollars will go toward the bill Ms. Suleman's fourteen children are piling up.

Honestly, we have to agree with the more negative views of Ms. Suleman's irresistable urge to breed: she is patently unable to feed and care for her previous six children, much less the additional eight. She should never have had any children, since she is unwilling or unable to work. If we were more impolitic, the term 'welfare queen' would come to mind. Thomas Malthus never seems quite so right...

But, we really must protest about Ms. Suleman's unfair treatment. Or rather, the unfair treatment of the bankers, the car companies, and the United States Government. Ms. Suleman's spawn will cost California tens of millions of dollars... but the unspeakable excesses of Wall Street and other scams are costing trillions, not to mention the integrity of the entire world banking system.

Let us be perfectly honest: Ms. Suleman is a leach, sucking money from productive people so that she can breed; Mr. Ben Bernanke, Mr. Bernard Madoff, Messrs. Timothy Geithner and Hank Paulson, Jr., and the rest of that lot... they are worse that leaches. They -- the Investorati -- are internal parasites, consuming everything of value from within, leaving only a dead husk behind.

Ms. Suleman rightly deserves the scorn she is receiving. But the Investorati deserve far, far worse than what she is getting. A sense of proportion must be kept in matters of welfare and bailouts; TARP and the $787 billion stimulus package is welfare of a grander scale than anything Ms. Suleman could ever absorb. American citizens should be rightly offended by Ms. Suleman, and frothing with pure rage at the bailouts.

Racing to the Next National Blow-Out

As the financial hydrogen bomb cloud over Iceland begins to fade, her citizens are beginning to adjust to life in a long, cold nuclear winter. Surrounded by a glow-in-the-dark landscape, and a currency that burns to the touch, they've begun to pick over the ruins of their previous life. With a new coalition government in the works, and the age-old practice of whaling to provide jobs, Iceland will probably pull through... though she will be vastly changed. We hope they can find some whales.

Frankly, though -- and not to seem callous -- Iceland was a weak hand. One can call upon the Galbraith Financial Principle: the best and biggest will fail last. Iceland was neither biggest, nor the best; she was merely the first country squashed flat by the 2007 Depression. The question one should be asking is not how will Iceland pull through, but rather, who's next. This piece has a very good list: Great Britain, Latvia, Greece, Ukraine, Nicaragua. We would add Mexico to this list; however, these are probably the next countries to go.

Personally, we would put our money on Great Britain: she's in rough shape, and with the annihilation of the pound sterling in the works, the Brown Government could very well go to pieces a la Iceland. When governments say they aren't concerned about the value of its issued currency, bad things can happen. The Brown Government may feel it's on top of the situation, but it's no more in control than Zimbabwe's.

Then there is the terrible crime of hubris: Mr. Paul Marshall recently told a Treasury committee that a Madoff scandal in the U.K. is "very unlikely." Funny, but we remember Mr. Madoff himself saything that very same thing... Big investors are assuring the Brown Government that there is no "U.K. Madoff," but if the government believes that load of lies... they're unworthy of governing.

Don't Buy a New World Map Anytime Soon

Due to circumstances beyond our control (i.e. we screwed up), we regrettably did not post yesterday. Rest assured that those responsible for this travesty have had their dessert privileges revoked.

With the increasing potency of the 2007 Depression shaking the starch out of the world economy, a surprising amount of dirt is presenting itself. Take Bernard Madoff, whose nimble fingers seems to have found every pie. But in this game of musical chairs, it won't be just individuals and organisations which end up with no chair beneath their tush. With the global implications of this depression, we expect some nations will be among those looking stupid when the music stops.

Take the obvious, our favourite whipping-boy for all things hyperinflationary: Zimbabwe. With several name-changes behind it in the recent past, this much-embargoed country may be due for another. There are also the faux nations of Somalia and Yemen, where the 'official' government draws lines on a map of where they'd like their sphere of influence to be.

However, the bigger threats, at least according to the United States military, are Pakistan and Mexico. Neither nations are the paragons of stability, as both are wraked with violent resistance against the central government: Pakistan is fighting 'The Terrorist'; Mexico has lost chunks of Chiapas to the Zapatistas. Mexico is also facing the collapse of their Cantarell oil field (which suffered a 36% drop in 2008 production alone), upon which the government is heavily dependent for its budget.

A facet of world events we've been missing for a while is the novelty of a brand-new world map. Our only wall-sized map, for instance, still has the U.S.S.R. on it. And just when we were beginning to think about getting a new one, the whole world goes into a depression. Thank heavens, we say: now we have an excuse to not get a new map!

Year of Our Depression 2009

As the calendar rolls over to 2009, we can smell the vodka on the collective breath of the nervous, the confused, and the despondent. The faux conviviality of eggnog additive long dispensed with, only straight shots will suffice for those who still have money. Only the deluded, the broke, and the swindlers can party with a clear consciousness: they have nothing to worry about. "What, me worry?" they seem to say, in a horrifying parody of Alfred E. Newman prose.

We worry, since we see nothing getting better, and a storm cloud of uncertain destructive qualities approaching in February. Deeper into the year, there are the looming predictions of, among other things, the demise of the U.S. Dollar. We take these things seriously, as the downward pressure on economic activity becomes ever more irresistible.

We are hesitant to make any specific predictions for 2009, other than the obvious: more bailouts. If you, dear Reader, think that you've seen the most disgusting, repugnant, out-of-control 'gimmie-gimmie'... think again. People will whine for bailouts; people will whine for 'tax rebates;' people will whine for free money of any sort for any excuse whatsoever. To put it simply, 2009 will be the Year of the Whiner.

On top of vast seas of whining, whining, whining will be the continued blow-out of swindles. Remember Bernard Madoff? In the world of the swindle, he was a loser and a screw-up. Why? He went down first. As John Kenneth Galbraith once sagely noted, "the biggest and best swindlers are not discovered until last."

Madoff was not the biggest, nor the best; he was just the weakest hand. We have pretty good ideas of who the 'biggest and best' are, but we don't expect them to fail... this year. But, there will be blow-outs spectacular of presently well-regarded 'enterprises,' which will be revealed as having been the walking dead.

The Trauma of Making Money in Hyperinflation

As we were working today, eking out our honest dollar, a thought occurred to us: how will we get that dollar when hyperinflation hits? Sure, we'll be making something, but as the people in Zimbabwe have discovered, that something might not be worth a whole lot by the time one gets to the store.

Let's look at a simplistic business model: buy inventory at price X, sell at price Y, lock in profit at a comfy 7%. What happens when the inflation rate in the time between the purchase and sale is 7%, or -- especially -- 14%? Not being able to replace the inventory for less than it sold for, one loses on every sale (but makes up for it in volume, we suppose).

A similar thing will occur in wages; one may indeed make $25 an hour, but by the time the paycheque is cut and the tasty eats (extra fries, hold the mayo) from McBurger Kong costs $25, the apparently higher pay is pointless.

We like our eats, and our apartment, 'n stuff, and we cheerfully work to keep all that going. Right now, with inflation relatively 'stable,' it's easy to budget our expenses as a percentage of our income. It'll be a different story, when inflation is burning through cash faster than Bernard Madoff. Contracts, rent, interest, profit margin... all these things will become very, very different in the coming year. And we are very, very worried about that.

You should be too, dear Reader.

Where's the Bottom?

It is now pretty much universally acknowledged that the world's economy is in decline. Even a leader of the stature of Canada's Prime Minister without a Parliament, Mr. Harper, concedes a depression might be possible (source).

Thus, collectively society begins to leave the denial phase and move towards anger. One can expect to see more riots as in Greece and China; more factory occupations as in the U.S. and China; vendettas against banksters such as Mr. Madoff; and who knows what else.

After anger comes bargaining, depression, and finally acceptance. Whether this takes months or years remains to be seen. Even when everyone accepts the fact of the 2007 Depression, it doesn't mean that the economy has hit bottom.

The bottom will be found when failed and failing enterprises and institutions cease to be a drag on society's resources. At that point resources can be applied to meeting people's needs, and the economy can begin resuming more or less healthy functioning.

Generalities aside, what will the bottom look like? Probably half or more of the population will not be working full time, but getting by with a combination of self-employment, odd-jobs, informal work (much of it for barter), and so on. Large numbers will be jobless, homeless, and otherwise restive. There will likely be many disruptions to important services such as utilities, government, retail and banking. There may be many grand gestures by governments to turn things around, but likely they will be mostly for show.

What will turn things around is when people draw on their inner resources to become entrepreneurial - to spot opportunities to meet people's needs, learn new skills, and make new connections. New and surviving institutions will of necessity be extremely frugal and resourceful.

This is a very long way from where society is now. All the way down, people will be clamoring for bailouts, job programs, loans, and whatever else they imagine will remove from them the burden of responsibility to create their own means of living. You, Reader, would be wise to become entrepreneurial or align yourselves with such persons, if you are not already. Affiliation with dying enterprises and institutions may be maintained, but only if you are building up self-reliance on the side.

"Say it ain't so, champ!"

A friend tells us this line comes from The Champ (1931), when the young Jackie Cooper finds that his hero isn't as heroic and upstanding as one would have hoped. So, too, are the best and brightest of Wall Street losing their stature. Today, for example, saw the discovery of what is probably the second biggest Ponzi scheme in financial history (bested only by the original, Charles Ponzi).

The mastermind? Bernard Madoff, former chairman of the NASDAQ. The grand total? Clocking in at around $50 billion or so. This tops the other Ponzi scheme recently ended, a measly $3.5 billion swindle orchestrated by Tom Petters, a Minnesota 'entrepreneur'-cum-felon. Both these men ran schemes which ripped off the gullible for fun and profit; both these men are criminals. Both these men were respected investors; the news of their unscrupulousness is "inconceivable" to their cohorts.

Hahahaha. As Bugs Bunny says, "aw, go on."

These two swindles are telling, however, for a trend of the 2007 Depression. A Ponzi scheme -- indeed, any confidence scam -- is inherently unstable, even in the best of times. The 2007 Depression is going to squeeze these sorts of swindles into non-functionality, and some may blow up spectacularly. There are, however, more swindles out there than just the average Ponzi scheme, and many of them come in forms one wouldn't necessarily expect.

Take banking: one puts one's money in an account, and then pretends it's still in the bank. Unfortunately, one's money does not simply sit in the bank's vault; it goes into, say... synthetic CDOs; or stock of Fannie Mae and Freddic Mac; or sub-prime loans. The point is, one's money is not in the bank anymore. In fact, we'd argue it probably isn't anywhere anymore. Yes, if one wanted to take out one's money, one can simply walk into a bank and withdraw it. But what if every depositor of the bank wanted their money? The bank never holds enough physical cash to cover its deposits; it can't afford to. The bank, like Mr. Madoff's and Mr. Petters' Ponzi schemes, would implode, and depositors would be left holding the bag, hoping that government insurance pays out.

But the biggest swindle, in our opinion, is money itself. We use it every day: these green pieces of paper get us our food, heat, and shiny, shiny gold. They're legal tender, all right -- every bill tells us so -- but who guarantees this? The Federal Reserve, we presume, since they're the ones who own them... but the Fed is just a bank. We ask: what happens when everyone metaphorically cashes in their dollar bills to hold something tangible? "Say it ain't so, champ!" will be the general cry.