Category: Wealth

“Well, Eunice is depressed and Corinne is depressed and I was just debating whether or not to join them.” – Soap

Some things are better with beer.  Okay, that’s a lie.  Everything is better with beer.

Economic systems are nearly like a living organism, which makes them utterly unlike Nancy Pelosi, who is comprised of wholly of spare Abraham Lincoln parts from Disneyland’s® Hall of Presidents™ exhibit.  Like a living organism, economic systems start with raw materials and energy and produce products that people consume, like malls, bicycle-powered smoothie blenders, toddler grease, iPaws™ Apple® music for pets, and McDonalds® “food-based products.”  And like any living organism, economies grow, get sick, age, and eventually apply for Social Security.  When economies get sick?  We call that a recession.

How do economies end up in a recession? Describe it with a metaphor that incorporates cars, coyotes, Brad Pitt, and mullets.  (40 pts)

Economies have the potential to become unstable systems.

On a crisp, Christmas morning way back in time, I was driving due east on a straight, flat paved road.  It had snowed a few days before, and the county had been out with a snowplow and had opened up a lane.  On the parts of the road that had been plowed, a thin layer of snow had been compacted by passing tires into a very solid base.  It wasn’t slippery like ice, but it certainly didn’t grab on to a tire like dry pavement does.

But the plow didn’t clean off the entire road.  It left two inches or so of snow on the shoulders of the road on either side.  It was very, very cold, probably -20°F, and when it’s that cold and dry, snow behaves differently – after a few hours snow tends to become more compact, solid, and crunchy, almost like Angelina Jolie’s hair when I pet it when she’s sleeping, before she found me living in her attic and got that restraining order.

I was moving along at about 70 miles per hour – I figured that even if a sheriff pulled me over, he’d give me a Christmas morning break.  Nobody gets tickets on Christmas, right?  Without thinking I gradually drifted over onto that two inches of hard snow on the right shoulder.  Then?

Chaos.

I’d been moving down the road, but now everything was spinning.  The car kicked up a cloud of snow as it spun, and all I could see was white.  The car kept spinning.  Now it was up on two wheels, and I could feel that the car was tilted at about a 45 degree angle.

And the car kept spinning.

As suddenly as the car had started spinning, it slowed rapidly and stopped.  But it was still only supported by the two wheels on the driver’s side.  As the spinning stopped, the car hesitated with the wheels paused above the pavement, like a coyote running off of a cliff.  Gravity finally won out over rotation, and the passenger wheels slammed back to the ground, dropping three or so feet.

I’m not impressed.  I’ve survived worse.

The car stalled.  The defroster was still on, spraying a mist of powdered snow into the interior of the car.  Every window of the car was covered on the outside with a thin coating of powdery snow.

I opened the door and got out.  I had been travelling east, but the car was pointing due south toward a three-strand barbed wire fence.  I looked west, where I’d come from.  A very complicated set of tire tracks described the arcs and whirls my car had made as it pirouetted several hundred yards en pointe to where it sat.  The car had continued to follow the very straight road.

This is the same model, more or less, mine came with optional mullet enhancing. 

Know that feeling you get when you just missed death by ounces and fractions of a degree and your system is flooded with adrenaline?  It feels good.  Much better than being dead.

I brushed the snow off the outside windows – the entire car was covered in a fine powder.  I let the defroster melt the snow that had blown inside though the defroster.  I got back in.  I drove on.  I needed to find a poker game or a lottery ticket or an honest lawyer – no use wasting a lucky day like that one.

That spin out, though, was the automotive equivalent of a bad recession.

Everything was going along fine.  Sure, it looked stable.  And, as long as nothing changed, it was stable.  But when one little variable changed, in this case the friction on two tires on one side of the car, the illusion of stability vanished in a cloud of rotating snow that looked like the an Olympic™ figure skater trying to drill herself into a television announcer contract.

That’s generally the case with the economy.  Everything looks fine.  It’s moving along.  Then?

• Interest rates spike, or
• Someone sticks a pin in a Dow-Jones voodoo doll, or
• Bubbles pricing in stock that people paid way too much for I bought become apparent, or
• It becomes obvious that nobody needs a seventh iPhone®, or
• Housing prices suddenly do the impossible and go down.

What happens then is the economy comes out of the spin, looks around, and starts moving again.  Sure, it was close to disaster but it turns out that, just like the car, the economy is okay.  We can start the ignition and keep rolling down the road, our collective mullets blowing in the wind.

Okay, this is probably the first time you’ve seen a mullet used in an economics metaphor.  You’re welcome.

Everything in the world was fine.  The factories are still there, the people are still there, and all we need to do is have enough confidence to start buying Johnny Depp® movies again, and we’ll be okay.  After a few years, we’ll forget that we’re headed down a snow packed road and spin it out again.  No real harm, no fouls.  And the recessions actually perform a service – a good recession causes poorly managed businesses to fail, and leaves room for well-managed businesses with great products to grow like a well-oiled mullet.

But what causes an economy to fail?  Describe it using a pickup truck for extra credit. (40 pts)

Time went on, and I traded out my car for a used pickup.  It had seen better days, but I was convinced it was solid.  It was making a rattling noise, and I was going to take it to a friend’s house so we could look at it, and it was again around Christmastime.  Sensing a theme?

As I drove down the interstate, the passenger in the car made the comment, “I’m not sure that this pickup is reliable.”

“Reliable?  This old truck is solid.  It’ll last for a decade!”  With that comment, I brought my fist down on the dash to show how solid the truck was.

Whatever sense of irony is buried in the universe activated in that second.  There was an explosion, a flash, and a 12 foot diameter cloud of grey smoke.  A piston rod came apart and shot down through the engine and the oil pan and onto the road below me at the speed of light – I think they found it in Australia when it came up through the ground and up into orbit.  All of the engine oil dropped onto the highway in less than a second.  Every red light on the dashboard lit up.  Oddly, the engine lasted exactly two more miles to a parking lot where I began to walk to a pay phone, which was a thing that existed before cell phones.

This is not the same Jeep®, but looks pretty similar.  Except for the “exploded” part.

Those were the last two miles I ever drove that pickup.  It was dead.

Whereas even large recessions like the Great Depression are hiccups of a functional system (I can get in my car and drive off), this failure was deeper.  The system was broken.

What breaks an economic system?

• Lack of people.
• Lack of knowledge.
• Lack of raw materials.
• Lack of energy.
• The French.

These are factors that will cause a civilization to fail, completely and utterly.  Let’s take them one at a time:

Lack of people.  Like any country, Rome encountered problems.  To fix the problem, the Romans made rules.  But, like Congress today, the rules that the Romans made . . . caused more problems.  Solution?  More rules.  Which led to more problems.  Eventually, it was so bad that the Romans had to make a law that the firstborn son had to have the same job as his dad.   This was fairly unpopular – eventually the people wandered away, which was also illegal, but by this time all the soldiers had walked away, too.  Other causes of depopulation include disease (like Ebola, LINK), bombs, and starvation.

But we still have the recipe – we can make more people if we need to.  One civilization may end, but another one is just a hundred years away, or 40 if you’re in Utah.

Lack of knowledge.  The secret of making concrete was lost for nearly 1500 years with the fall of the Roman Empire.  Knowledge of how to make plumbing out of lead, pyramids, Viking sunstones, and William Shatner’s hair have been lost and found again.  While these didn’t kill civilizations, they certainly contributed to the inability to quickly remake them to their previous glory.

We can experiment, though, and learn again.  As long as we learn to skip the lead plumbing this time and keep it in the paint chips that toddlers eat, where it belongs.

Lack of raw materials.  Ireland was deforested to make ships for the British Navy.  Ireland may have fewer trees, but certainly the British Navy was able to become even stronger.  There was a report issued in 1900 noting that the United States would run out of trees by 1920 because so many were required to make railroad crossties. The ability to treat them with creosote to make them last for longer was developed.  Heck, nowadays some railroad crossties are even made out of concrete, since we found that recipe again.

Humanity has regularly found substitutes for raw materials throughout history.  Soylent Green anyone?

I like the Bald Eagle and Panda Dip® best, myself.

Lack of energy.  300 years ago if your civilization was running out of energy that meant you didn’t have enough oats to feed your horse or your mule or your peasant.  Probably in that order.  Now with a global economy that produces trillions of dollars in food, products, and sweatpants each year running out of energy is something else entirely.  The fate of mankind is the fate of energy – coal, oil, renewable or nuclear.  It’s so important that I’m working on a series of posts on just that subject.  It is the single most important non-political question in the history of humanity.  This makes Climate Change® look like the kiddie pool, so much so that I’ve been working on a post (posts?) on just this question, which I’ll finish sometime before oil goes to $100 and Justin Bieber is elected president.

Without energy we would have all of the economy of 1420’s mud-hut dwelling Frenchmen.  Which brings us to:

The French. 

Well, we have to blame someone else.  They were convenient.

What’s next?  Summarize your previous answers.  Incorporate girls drinking beer. (20 pts)

I fully expect that there will be a recession within two years, and at this point I think the recession will be a lot like my car spinning out – it will be a recession that doesn’t expose structural weaknesses in the economy, but it will be significant.  Reliable?  This old truck economy is solid.  It’ll last for a decade!

“In 1930, the Republican-controlled House of Representatives, in an effort to alleviate the effects of the . . . anyone, anyone?  The Great Depression, passed the . . . anyone, anyone?  The tariff bill?  The Smoot-Hawley Tariff Act?” – Ferris Bueller’s Day Off

Did George R.R. Martin study economics?  It certainly looks like he’s studied bratwurst.

Not that there’s anything to see here (yet) and I don’t want to go around spreading panic, but I just thought I’d dust off some information about recessions.  And depressions.  No particular reason.  Nope.  Just stretching my legs.

What is a recession?

A recession is a period of time when the economy gets a little smaller for at least six months or so.  Generally, the recessions of the past have seen the economy drop by no more than 5% in any three month period.  When you look at the numbers, even most years when there is a recession, the economy still grows overall.

Looks like this would be a good comb for Dwayne Johnson (The Rock®), or a really complicated game of Tetris®. 

The blue areas are the economic growth.  The red?  Contraction.  The average recession length since 1945 has been about 10 months, and the average economic expansion has lasted about five and a half years.  The general idea is that the economy is based on constant growth.

How much of the economy is geared to growth?

I’m not sure, but I estimated it using publicly available figures.  I guessed that 2/3 of construction work was geared towards growth, 20% of manufacturing, 10% of retail (Home Despot® and such), 20% of finance (can’t build if you don’t have cash), and 20% of hotel/restaurant jobs.  I did the math, and that comes out to 12,000,000 jobs.  How close was that?  It’s roughly 10% of the workforce, and unemployment can hit 10% after a recession.  So, as a first guess it’s probably not too bad.  12,000,000 jobs, at minimum are required for growth.  And those same jobs disappear when growth disappears.

But even with the economic hardship and dislocation, recessions are good.  Think of a small, quick fire in a forest.  After the dead brush piles up, clearing out the underbrush makes the forest stronger.  The strong trees survive, but the weak and rotten trees get burned down.  In this part of the Midwest, a regular feature of forest management is a burn off – some places do it every three years or so.  The fires are always small, and the danger of a larger fire goes away because all of the dead wood is consumed, but we do keep a supply of elephants on hand to stamp out the burning ducks.  Just in case.

Bad businesses fail during a recession.  Those on life support go away – they clear the way for growth and good, strong businesses to take their place – the end of a recession is a time of renewal, much like in Hollywood® when the Plastic Surgery Fairy drops by the homes of all good actors and actresses on George Clooney’s birthday.

A depression, however, is a wildfire in a forest that’s built up dead wood and standing dead trees for decades after a gasoline rainstorm.  Wildfires burn out of control.  Whatever is in the path gets burned.  Healthy trees?  Doesn’t matter – the inferno takes them along with the dead wood and no amount of well-trained ducks can stamp the flames out.

Healthy business?  Doesn’t matter.  Business failures start, and then cascade.  People panic, and hold onto money.  Companies panic and hold onto money.  One sign of a depression (besides a sudden drop in male underwear sales – this really happens) is that debt levels actually go down.  People don’t buy anything during a depression – they never know when they’ll be able to replace the money that they have.  Debt levels also drop because the debts are written off – bankruptcy is another way to lower debt levels.

What causes a depression?  A Soviet by the name of Nikolai Kondratiev had an economic theory – namely that the business cycle we stupid capitalists kept running into was based on debt and that the capitalists were stupid and over the course of decades would forget that debt was, you know, bad.  Lenin loved him, but Stalin?  Not so much, especially after a communist-sympathizing professor at the University of Minnesota ratted him out to Soviet authorities for a visit with an anti-communist when Kondratiev visited the University of Minnesota.

Minnesota has been a leftist state for a long time.  Wondering if we could trade it to China for a box of magic beans?  Or regular beans?  Or an I.O.U.?

It’s debatable whether or not Kondratiev’s economic theory is correct, but it certainly fits the technologically-driven cycles of debt and discovery that lead to boom and bust that we’ve seen in the United States over the last three centuries.

I told The Mrs. I would use these graph-ruled index cards.  See, I told you I would.  Bonus:  thinking about girls wearing bikinis.

Let’s talk about the economic cycle.  (That was one of my best pick-up lines in college, but I would add “baby” at the end to make it totally sexy.  Because, really, who isn’t put in the mood by discussion of aggregate economic activity?)

So, let’s talk about the economic cycle, baby.

In Spring, new businesses are formed.  As economic activity expands, existing businesses expand.  Optimism is the atmosphere.  And, since debt is low (and people don’t want debt), there is money to buy stuff.  And stuff is relatively cheaply as the currency gained a lot of power during the deflationary winter.  Social cohesion and trust in newly-rebuilt institutions is high.  And it’s nearly bikini weather!  Think 1945 to 1965 in the United States.

I’m sorry.

Summer=bikinis!  Who needs anything else?  Oh, and also relaxation, and growth, and profits, and expansion.  The greatest degree of questing for personal growth and whatever hippy course you want to take to validate yourself occurs in summer.  The focus on strong institutions passes – but the quest for self-gratification takes over, and it really doesn’t matter because inertia in the economy keeps things going.  1965-1985 is representative of Summer.

I’m really sorry.

Harvest happens in Fall.  You could call it Autumn if you have to be all East Coast, but if you do, I’ll call it Efterår, which is Danish for Fall and sounds like what a Viking could yell it at you before you got totally pillaged.  But Fall is a great analogy since at this stage the economy is harvested.  All the work that went on in Spring to prepare for economic success, all the growth that took place in the Summer, well, it’s time to harvest it in Fall.  And greed is good, right?  And debt hasn’t hurt us for the last fifty years, so, please, have as much debt as you can eat.  Yup, you got it.  1985-2005.

Okay, does this make it better?  And, Oktoberfest is in fall.  Or efterår.

And now?  If Kondratiev was right, Winter.  The last Winter in the United States was the Great Depression, which lasted 253 years if you listened to my Grandma.  But the Winter was difficult – debt collapse, financial panic, bank failures, tariffs, plant closings, unemployment, greater government control of the economy, breadlines, and no bikinis at all.  Oh, and war brought about by the crisis.  If Kondratiev is right, this would last from (roughly) 2005 to 2025.

Oh, sure, she has to top every story.  But she also dated Andrew Jackson when he was just a kid.

This graph shows the velocity of money – how it moves in the economy.  It’s clear that we’re in a place where money isn’t moving as fast as it used to throughout our economy – it’s at a record low since we’ve been measuring it.  The low velocity is not because everyone is wealthy, it’s because tons of dead dollars sit on the books of various banking institutions.  We’ve also pumped massive amounts of money into the system:

Now, if that money starts moving around like it used to, and there’s bunches of it . . . nah, that wouldn’t lead to inflation, would it? 

Kondratiev’s cycle is roughly as long as a human life – which makes sense.  Like a bad Arkansas carnival ride, you have to forget what you learned in the cycle in order to want to repeat it.  Kondratiev’s work was also picked up by Strauss and Howe in their bestselling book The Fourth Turning.  It’s a good book, and in some cases it almost reads like prophecy (it came out in 1997).  I’d toss a link to the book up here, but you can figure this one out, or at least your Mom told me you could.  She also said you could dress yourself, but she was pretty worried about your diet.

Depressions bring down banking systems, currencies, and governments – from Weimar Germany to the Russian Revolution.  The chaos from just a financial mess can last for decades.  But during the 17^th Century in Europe, things got even worse:

The massive quantity of silver and gold that the Spanish brought back from the New World distorted the economy of all of Europe, leading to inflation.  But then, the Maunder Minimum (LINK) hit.  The Maunder Minimum, a decrease in the overall output of the Sun, added poor harvests and exceptionally cold winters to inflation.  The regular resources that Europe depended on became scarce.   When accompanied by resource constraints like Europe during the Maunder Minimum in the 17^th Century, the chaos can last for a century.  I wonder what it would look like if oil were much more expensive?  (But that’s a future post.)

I think that we were pretty close to a financial system collapse back in 2008-2009.  The solution was to pump astonishing amounts of money into the financial system leading to distortions that have caused commodity prices like oil and grain to lead to the Egyptian revolution and the Syrian revolution, all while we wage wars in two countries.  I don’t think our financial system is remotely fixed at this point – debt continues to rise.  It’s up to $70 trillion dollars – thankfully that’s only about a million dollars of debt for each family of four.  We can work that down in a year or two, right, if we cut back on going out for dinner?

The kink in the curve?  That was what caused a worldwide recession and panic in 2008 and 2009.  Hope nothing changes.  Debt’s good, right?

Is there a draft in here?  Seems chilly.  Winter’s coming, I think.