Stoopid Stuff

Stoopid Economic Analysis II - The Expectation Gap

Americans, for better or worse, have developed into a society that thinks of itself as somehow fundamentally different from others. Some of this has led us to some obscene manifestations of exceptionalism, but a case could also be made that it created an environment where we internally artificially minimized the apparent risk of a given undertaking, allowing for great leaps. Of course, it's fair to say that another way to describe this unwillingness to see the world the way it actually is rather than the way we WANT it to be is delusion. In many ways, we are, as a people and as a culture, collectively delusional.

It has been said that it is nothing less than your best trait that results in your ultimate downfall, and when you listen to the discussion about the economy these days, you have reason to be fearful. These conversations and monologues tend to regularly include two key points. First, a discussion of how effective, or ineffective, a given economic stimulus program might be, and what the world might look like with or without that program. Proponents of any given stimulus methodology always paint a rosy, or at least rosier, view of the world if only their program is implemented, immediately and without alteration. The other point is at least a mention that there are natural cycles in play here, and we will return to economic growth in [insert point in time here].

So okay, pretty good arguments can be made for stimulus spending, and as long as that spending utilizes otherwise idle assets then it will certainly have a positive impact. If it is poorly targeted or just too small, it runs the risk of utilizing resources that would otherwise have been better utilized by the market, while failing to bring un- or under-utilized assets back into action. But it's become clear that the American legislative process is broken, and in it's current crippled state is unable to produce bold, effective action, only watered down symbolic programs designed to demonstrate the superiority of a particular political ideology.

What I'm worrying about today is the perception of those "natural economic cycles", and how Americans hazily foresee life after the Great Recession. For at least 13 years, America has lived in a bubble. First the fondly remembered "dotcom" bubble, with it's "irrational exuberance", technological breakthroughs and ill-considered business schemes. At the end of that period of massive wealth generation, we rolled right on into the "housing bubble". In this period of madness and overheated greed, we saw people with no experience get rich in the mortgage business, and young people with low-level jobs buying multiple houses. And as those houses increased in value, quarter over quarter and year after year, there was so much equity, so much cash, such unlimited sources of credit, that Americans spent like drunken sailors. They bought houses, sure, but they bought TVs and SUVs, they traveled and played, they laughed gaily in the eternal sunshine of a happy present and drank deeply of the promise of an unlimited future.

We now find ourselves hung over, broke, and surveying the wreckage of an economy built on a fairy tale. We tighten our belt, we do what we can to preserve our jobs, we lower our eyes even as we lower our expectations. But we all believe, no, we all KNOW, that we just have to weather this storm, that everything will go "back to normal" in a year, maybe two. Just one of those cycles, right? Oh sure, all the greed and fraud and madness of the mortgage markets made it worse than it should have been, but these things happen occasionally, and they never last forever.

But therein lies the real catastrophe. The fever dreams of Suburban Americans, fueled, as they have been by two consecutive irrational, unsustainable economic bubbles, do not represent "normal". Indeed, they are highly ABnormal. The world doesn't work like that. Economics doesn't work like that. Unlimited credit supported by skyrocketing equity is not a "normal" condition. Historically, a person's, family's or company's spending was required to at least recognize their actual MEANS.

So what actually IS normal? What will it look like? What can we hope our economy, and for that matter our lives, will look like when the downturn looks up? Coupled with the certain long-term rise in energy costs and the restrictions certain to ultimately be imposed to save the very planet, I think we are looking at a very different future. The twenty teens will very likely be remembered as a time of austerity, and the long, slow decline of America as a disproportionately powerful nation. 70% of the American economy is consumer spending. Just think about where that number might ultimately settle, and you'll begin to understand your future.

Now, we're not (hopefully) talking about living in tarpaper shacks, wearing burlap and growing corn in the yard for survival. We're simply postulating that the lives of ridiculous excess lived by most Americans will be talked about in a historical context the way the court of Louis XIV is remembered. Almost fondly, with a certain amount of awe for it's profligacy and shortsightedness. But I expect the collective delusion about the future to last a few more years, until reality can no longer be denied. Then we'll know...

posted by mikey @ 12:14 PM