Scott Adams, Debt, and Economic CPR

“Could be worse.  Could be raining.” – Young Frankenstein

FERRARI

I heard Joe Biden was thinking of having a horse for a vice president, to make the economy stable.

Scott Adams is the creator of Dilbert® and a close personal friend who I bonded with during the Olympic trials for rhythmic gymnastics.  Okay, that’s not quite true.  Scott’s a long-time acquaintance and we go to some of the same parties.  Okay, that’s not quite true, either.  Probably a more accurate statement is that I have quite a few of his books and he liked exactly two of my Tweets® back when I Twittered™ on a more regular basis.

The last one is actually true.

Anyway, Mr. Adams used to be a blogger, and had some interesting written posts over the years.  Now, he spends more time doing a YouTube® show rather than blog (LINK).  I listen to him a couple of times a month as I drive to work.  I’d watch him, but the people on the sidewalk seem to mind.  I guess I’m not as bad a driver as Helen Keller.  But she had a real excuse, being a woman and all.

One comment I’ve heard Scott make at least twice during the COVIDanomic® crisis is that he’s optimistic about the economy restarting and taking right off.  More or less he has said, “Unlike a war or some other catastrophe, everything we need for a successful economy is still sitting there.  All we have to do is restart it.”

One thing I’ve enjoyed about Mr. Adams is that he’s incredibly perceptive, and the reason I listen to him is he’s a constant source of unique opinions.  He was one of the first to pick Trump winning in 2016. Adams noticed the way Trump uses the language of persuasion and thought it would be the difference in the election.  Me, I generally vote based on lawn signs, which is why I voted for my realtor last election.

JEB

Jeb was a pallbearer at his dad’s funeral, so he could let him down one final time.

Trump’s persuasion immediately frames and freezes the way people think about public figures.  “Low energy Jeb (Bush),” and “Little Mike (Bloomberg)” were the verbal equivalents of public political homicide.  Once Trump Tweeted® those phrases, ¡Jeb! and Little Mike could still campaign, but their chances of winning were the same as a belt made of watches – a waist of time.

So, when Mr. Adams speaks, I pay attention.  New ideas are fairly rare and I like to steal mine while they’re fresh.  As noted, many times he’s very perceptive in ways the news media forgot about being when they first caught Trump Derangement Syndrome.  In this case, I think Scott is wrong.  Everything may still be there, but you can no longer restart the economy to the previous levels than you could resuscitate Grover Cleveland by giving his corpse CPR.  I mean, I can give CPR to a steak, but it still won’t moo.

Just like Grover Cleveland, everything is there, but putting him in a lawn chair and propping him up with a tropical cocktail (with umbrella) won’t really help.  Everything’s there.

But it’s really not.

CLEVELAND

If only Grover Cleveland had Twitter®, I’m sure we’d still be laughing at the dank Benjamin Harrison memes.

Just like you can’t restart a heart after a few weeks of it sitting on the bedside table, you can’t restart an economy after months of it sitting dead in Coronapause©.

Let’s take the human body analogy a bit farther.  A business is an organism.  It consumes money and raw materials and produces goods and services as a byproduct.  You could even call that byproduct a waste if it had anything to do with Kardashians.  Companies eat metal and energy and use employee labor to pop out automobiles and beer and knee braces and fruitcake bloomers.  And where would we be without fruitcake bloomers???

A lack of oxygen makes cells in your body die.   No oxygen, no cells.

In business, a lack of money causes employees to die.  Oops.  They don’t die, they just don’t come in anymore, unless your business was in the Soviet Union, where ‘being terminated’ had an entirely different and completely Schwarzenegger-free meaning.

That lack of money for a business is called debt, and debt is what kills an economy.  Just as weak people like The Mrs. complains that she needs a constant supply of oxygen after being stuck in the car with me after a week-long backpacking trip, debt is a mechanism to make sure that people and companies require a constant flow of money.

Why would a company be in debt?

Well, for small ones, the same reason that you or I would go into debt, namely because they don’t have the money to pay for everything up front.  Debt can also provide money for the business to grow.

And moderate sized companies that you can buy on the stock market nearly have to be in debt.  Without debt, a guy from New York would buy them out using the cash that the company had hanging around for a rainy day.  They even have a name for this – a leveraged buyout (LBO).  In an LBO, the person buying the company buys it with money that he borrowed against company he’s buying.

It sounds complicated, but it’s really not.  An LBO is the same thing that happens when you sell your house.  The person buying the house uses the house as the basis of the loan to buy the house from the owners.

DEBT

And good news, it’s already several trillion higher than this!

But in the case of the company being bought out, the resulting company after the LBO is actually weaker and more likely to fail since it’s now saddled with debt.  Just because you can borrow the money doesn’t mean you should borrow the money.

Giant sized companies don’t face this problem nobody but Jeff Bezos has enough money to buy his stake in Amazon®, plus he’d send his android double to come kill you if you tried to buy the company or made fun of his girlfriend.  Apple® is similarly large, so they can have billions of dollars in cash on the books, too, but Apple™ doesn’t have a girlfriend.  Yet.

The chain of death of a business in after WuFlu looks something like this:

  • Lockdowns stop businesses from being open, which
  • Stops the money coming to Employees so,
  • Employees stop buying, therefore
  • Businesses don’t have money.

Keep this cycle up for two months and in some cases you’ve used up more reserves than the business has.  The result is either more debt, which the business still can’t pay because debt is the problem in the first place, or bankruptcy.

TP

Well, TP is one problem that’s been wiped out.

The same cycle can be seen with landlords.

  • A dollar owed for rent isn’t owed to a random person,
  • It’s often owed to a person who has a mortgage against the property, and
  • If the rent isn’t paid, many times the landlord can’t pay his
  • But when the landlord can’t pay the mortgage, the bank isn’t paid.

If you’re worried about the bank, don’t.  The old saying is that “Debt is always paid, either by the borrower, or the lender.”  In the case of banks, there’s the three Fed Amigos:  the Federal government, the Federal Reserve™, and the Federal Deposit Insurance Corporation (FDIC).

The reason the FDIC was created was that banks failed faster and more frequently than FUNNY during the Great Depression.  If people keep their money in Mason© jars in the backyard, it’s pretty hard for the other two Feds to track it, so they had to convince people the banks were safe.

They idea behind the FDIC is that if a bank goes bankrupt, the insurance will pay off the depositors.  I was going to look up the total assets of the FDIC to see how big a crisis it could cover, but decided it was irrelevant.  The Federal government (Treasury) or the Federal Reserve© or some group will simply print all of the money required to pay off the depositors.

PENNYWISE

I knew there was a reason that clowns scared me.

If my bank runs out of money?  Well, the Fed will just lend them some.  The FDIC is for amateur problems.

But lending money into a system where the primary problem is debt isn’t the solution, and it explains why things won’t just “start right up” after months where car sales are at 50% of last year, and airline flights are at 10% or less.  The debt is the reason that the economy was able to fall so far, so fast.  And you can’t loan more money to solve what is, at the core, a debt problem.

I do hope my close, personal friend Scott Adams is right.  But I fear he’s wrong.  But hey, we’ll always have those Olympic™ medals we won for rhythmic gymnastics.

Author: John

Nobel-Prize Winning, MacArthur Genius Grant Near Recipient writing to you regularly about Fitness, Wealth, and Wisdom - How to be happy and how to be healthy. Oh, and rich.

29 thoughts on “Scott Adams, Debt, and Economic CPR”

    1. Excellent post. (Again.)

      I’ve read several cogent-sounding accounts of how all this “money” creation doesn’t lead to Weimar-style hyperinflation. And, of course, I devoutly hope they’re correct. But I surely don’t see how. All the trillions of fiat-bucks chasing a substantially reduced amount of goods … as they say, “What could possibly go wrong?”

  2. John – – I nearly blew my morning coffee out my nose when I read your quip about Helen Keller’s driving (or was it Hell in Keller ?).

    Anyhow, I will probably steal it, like I do most of the jokes I dish out these daze.

    Another funny but enlightening submission. Kudos !! Mega-Kudos !!!!

    1. Be careful – it would be hard to explain to the doctor how you burned your sinus cavities.

      Please do steal. And thank you!!

  3. Fdic.gov has a tab for press-releases, and a big banner across the top of the site saying “DON’T PANIC!” … or, words to that effect.

    The FDIC seized two small banks, early this year, before the COVID-19 crisis hit. They had pre-existing comorbidities.

    About ten years ago, I heard a fascinating tale on the radio about how the FDIC secretly flies staffers into town, puts them up at nearby hotels, then, just before the close of business on Friday afternoon, they move in on a bad bank. They cut off communications, settle transactions, count the money, review the records, and figure out how much cash the FDIC insurance fund needs to kick in so that the bad bank (it assets and liabilities, and customer accounts) can be transferred to a cooperative good bank nearby. By Monday morning, business-as-usual resumes under the new management.

    How would they do that during a pandemic? Can they even do the background work to select a bank for seizure if they’ve been sent home for social distancing?

  4. It isn’t really debt anymore, not really. There is no plan to ever pay it back or slow the expansion of the debt. Nobody even pretends we are going to ever actually pay it back. When the interest payments start to eat up too much of the budget, they will simply create more “debt” to pay the “interest” on the old “debt”.

    What we call money is so uncoupled from reality that it now exists somewhere in the realm between religion and magic.

    1. Exactly. And not the good kind like the “magic fingers” in the 1970’s hotel beds.

  6. I’m back to work full time, my wife isn’t.

    The unfortunate thing for the wider community is that we have discovered we don’t need two full time wages. The difference between what we were earning during the house arrest and what we will be earning when we both are back full time will go towards paying down the mortgage. Once that reaches a certain point we may move to part time employment. After all, as much fun as work is, I can think of numerous hobbies I’d like to pursue that don’t require gobs of money (during the house arrest we looked at those hobbies we enjoyed that cost money and decided we didn’t like the cost)

    1. That’s good for you, but I think lots of people will be that way. Which doesn’t bode well for an economy built on the consumer treadmill . . .

  8. Unfortunately, Scott is wronger than two boys fornicating.
    And as noted above in comments, he is, indeed, smoking industrial quantities of hopeium.
    I share his wish that things would be otherwise, but people can’t buy groceries with wishful thinking.

    The oil business isn’t going to bounce back. Probably not for near a decade.
    The auto manufacturing business – and 400 ancillary industries – aren’t going to bounce back.
    Airline travel drop-off is going to kill some major carriers.
    Tourism, hotels, and everything related won’t be back for a year.
    Hollywood is looking at the south end of a northbound worst-movie-summer-in-recorded-history since Thomas Edison invented the motion picture. TV production is on the longest hiatus since the last writer’s strike. People in the biz are losing their houses.
    Concerts? Gone.
    Trade shows? Gone.
    Sportsball? On life support.
    Farmers? Lucky to stay off of food stamps this year.
    Restaurants? This year will probably be the most closures and bankruptcies since 1929.
    Retail? Aloha. Malls are going to be the new ghost towns.

    And all those employees? The ones not working anytime soon?
    They’ll be the exact ones NOT buying all of the above goods and services.

    This isn’t going to be a V-shaped recovery.
    It isn’t going to be a U-shaped recovery.

    Welcome to 2020: The Year Of the L-shaped Recovery™.
    (Anybody can use that one, but *I* said it first.)

    And before this year is out, we’ll likely be happy if we could just get back to the Obozo economy.
    Getting back to the Trump economy from 2019 will likely be something that takes years and years.
    If ever.

    Ask Weimar, Zimbabwe, or Venezuela: you can’t inflate your way to prosperity.
    It fails every time it’s tried.

    1. Well, I thought of the L-shaped recovery right after I read that you had posted it. So I guess I’m second-er.

      Yeah. This never ends well.

  9. Never forget that it’s not just the government that prints money. Well, OK, they have a jealously guarded monopoly on actually printing money. But if all you care about are the numbers showing up in your bank account, then banks create far more currency than the government dreams about.

    Fractional reserve banking doesn’t work like it did back in grandpa’s time. If a bank keeps a 5% reserve, that doesn’t mean they are limited to lending out 95% of deposits. Oh, no. Not at all. What it means is that they are limited to lending out 19 times what they have on deposit.

    Obama killed the smaller banks and many small businesses by having the FDIC arbitrarily increase the reserve rate from 3% to 5% overnight at the start of the Great Recession. So the small banks had to call in their loans. Which the business owners could not pay, forcing them (and the banks) into insolvency. Plunging the country deeper into a recession caused almost entirely by government action. The big banks, of course, received waivers and government bailouts.

    1. Ha! I had FIVE HUNDRED words written on fractional reserve banking for this piece, but cut it out because it was toooooo long. I may get around to that next week. Because the reserve is now zero.

      What happens when you divide by zero?

      To Infinity and Beyond!

  10. Well, something will recover. Does it count if it’s a fascist ecomomic State?

    Because everyone has just discovered that the gummint can and will close
    your business and turf it out, on the flimsiest of pretexts. Unless the business is big enough and politically-connected enough to own a few Senators. Anyone who can get out, (and stay out) probably will.

    Interesting times.

    Here’s to the triumph of hope over experience, and maybe a miracle or two. D.V.

    1. Government now sees no limits on power. To ban alcohol? Amendment to the Constitution. To ban e-cigs? Not even a law.

    2. We may find ourselves choosing between an authoritarian economic state and anarchy. The interesting times are just getting started.

      1. I sure appreciate the edit, too! I fixed two mis-leading typos in an earlier post today. That is, two successive “oops, I need to edit that!” moments.

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