The End of the World -- one way or another
August 24th 2010 12:47
From the New York Times, 8/21/10: In Striking Shift, Small Investors Flee Stock Market. According to the report, in the first seven months of the year, investors withdrew $33.12 billion from stock market mutual funds, opting for the relative safety of bonds. Justin Fox, the editorial director of the Harvard Business Review, commenting on this in the Washington Post notes that in an ordinary business cycle, money should be flowing into equities, but “This could be the beginning of the end of civilization, in which case gold, canned goods and archery supplies (and maybe enriched plutonium) are the only safe investments.” He doesn’t explain what good gold would do in a deflationary scenario, but the point is well taken. While there is a transient jump in the value of bonds, fixed income investments have an implicit limit – as their value goes up-, their interest rate goes down. Equities, dividend stocks, may increase in value while maintaining a high percentage payout, making stocks, at least potentially a good investment against inflation. Bonds may be a better investment for times of deflation. As Mr. Fox notes, under the worst conditions, arrows are reusable, and so may have an advantage over bullets.
Other news stories tell the same stories. Real estate no longer offers the assurance of growth, corporations are hoarding cash, and while the Bank of Japan is being pressured to do something about that nation’s long term economic stagnation, there’s nothing it can do to reverse conditions. The price of oil is falling on international markets, although if the economy were growing anywhere in the world, the price of oil should be rising everywhere. Economic stagnation and deflation in the United States is a bad sign world wide, since many emerging markets relied on an export economy for their own prosperity – although this may be a simple case of the inevitable. As United States based corporations moved factories overseas, with the expectation of being able to sell lower cost goods on the American market, there was bound to be a point where the United States economy would be so weakened that it could no longer buy even products made in China or Korea.
There is some grounds for optimism in the mergers and acquisitions, with $200 billion of deals inj progress – indicating that corporate types think that prices are low enough to start buying other companies – but there’s implicit bad news as well. Mergers almost always imply consolidation. It doesn’t matter whether H-P or Dell get control of the storage company 3Par, somebody at 3Par is bound to lose a job as a result.
Finally, we’re seeing a political climate that is, at best, toxic. There is a way out of this mess, but we won’t take it, because it wouldn’t fly politically. In fact there are two ways out, but neither one would work. Basically, we need more economic stimulation – lots more. The initial stimulus package was ineffective, sacrificed to the gods of bipartisan approval. The total amount was smaller than it should have been given the depth of the problem, and too much of the money was misdirected to tax cuts which are ineffective. What we need is something on a par with the CCC and WPA – if industry won’t create jobs, then the government should. This won’t fly, because government jobs smell of socialism - but let’s go on. These jobs can be created either with more debt (but some politicians are overly concerned about the deficit, or by placing a tax on wealth, asking people in the top 2% to give back the money they’ve accumulated over the past decade from the Bush tax cuts. It would also mean closing tax loopholes that benefit shifting money and jobs to other countries. Business leaders would consider this unfriendly. These are the same leaders who are willing to invest in Venezuela and Russia, where there’s a chance that their entire investment may be nationalized, but won’t contribute to the revitalization of the United States economy.
It’s safe to say this isn’t going to happen. Based on current projections, we’re on the verge of handing the government over to people who created this mess, have no plans for repairing things, and are standing in the way of any reasonable resolution.
In 1932, John Maynard Keynes said “I can’t think of anything that President Hoover can do that an earthquake couldn’t do better.” In other words, given current economic prospects, the best we can hope for is the end of the world. On August 7, 2010 a chunk of a glacier measuring 100 square miles, broke off of Greenland. Given the inability of world leaders to deal with climate change, Keynes may have been right about this as he has been about so much else.
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Comment by Marty
Political Swat
Unfortunately, you're also correct with the statement they won't fly politically. Not because the message isn't politically viable, but because the Democratic Party lacks the courage to carefully formulate and deliver the message by staying on message.
The current group of political advisers are more adept at talking head status on cable networks as opposed to getting in the trenches and delivering The Message.
Excellent Post!