Deflation Anyone?
Allow me to rant:
Floyd Norris has a regular column over at the New York Times. I often disagree with his analysis, based as it is on old school neo-classical mechanics and common or garden market dogma. So with that as a warning here’s a link to his blog today:A Bull Vanishes – Floyd Norris Blog – NYTimes.com
Typically, he looks to market conditions as some sort of magical entrails that might give us information about what the economy is doing or where it is going. Then he ends by saying he’s given up predicting the market.
The purpose of bringing this up, and sounding churlish in the process, is not to denigrate. It is to highlight the fact that the set of phenomena we clump together and call ‘the market’ is a woefully poor information source. It is a mix of guesswork, insider dealing, outmoded analysis, shamanism, wooly eyed optimism, opportunism, one-upmanship, and half-truths. All wrapped in the self-serving fog of smug hubris known as Wall Street. Notice how those folks are all ‘experts’? Nothing that flows from that mire can be viewed as an accurate information source until verified umpteen times. They lie for a living. Companies jig and re-jig earnings and balance sheet reports; analysts are in the pay of companies so they gloss over reality [if they even know it]; rating agencies take fees from those they rate and thus compromise themselves; bankers hand off bad debts to unsuspecting ‘clients’; shareholders sit passively while their stocks are trashed by arrogant CEO’s; economists cling to theories that are based on laughable assumptions, but still opine as if they knew real economics; customers buy trash and pretend it is worth something; advertisers pervert the language and then bemoan standards; homeowners don’t save money and then want to retire well off; and regulators are stripped of the resources to intervene and are staffed by friends of the inmates they are charged with regulating.
And from this mish-mash we are to extract information pertinent enough to opine sagely about exactly when the ‘market’ will bottom out?
Joe the Plumber would be a better forecaster than anyone on Wall Street. And he was an idiot. At least we know what a fool he is. These experts are yet to be de-frocked.
Look at the way asset prices have behaved.
While home prices were roaring ahead into completely unsustainable territory no one did anything. Nothing. All the various interested parties tried to make believe that the insanity would go on for ever. They were making a buck after all.
Look at the auto industry.
They persisted in making SUV behemoths even while gas prices surged on worldwide demand. And they have the nerve to use private jets to go cap in hand asking for our money!
Look at Wall Street.
It’s disappeared into a hole and will never come out. Yet all those gurus and experts still pop up with reputations untarnished and bank accounts bulging as if nothing happened.
Look at the journalists who covered the whole sorry mess.
They fawned all over the titans of industry in the good times; sold their souls for stories rather than analyse the data; bought the perpetual spin of government and corrupt politicians; and now want us to believe that they have value as critics of the establishment.
In short every single piece of our economy’s elite bought the inflationary cool-aid. Now they are scared as all hell about the result of their negligence: deflation.
Nothing could be more pernicious than a prolonged period of deflation. Yet there is a good chance these fools have steered the economy precisely onto the deflationary rocks. In deflation the assets you own are worth less in the future than now. Not through use or expenditure for productive purposes, but because the value of the product they produce is worth less. That house you bought drops, rather than rises, in value. The economy shrinks. That means there is less to go around. We all suffer from the effort to put the inflationary genie back in the bottle. Wages fall. Prices fall. Confidence and investment falls.
As the comedian said: its a right sorry mess you’ve gotten me into.
Let’s hope we manage to avoid it.
Our problem is sorting out the adults from the children so that we know who to give the keys to. Clearly Paulson is a child. His bailout plan turns out to have been no plan at all. First it was an asset re-purchase program. Then it morphed into a shareholder stake. Then it became funding for bank mergers and industry consolidation. And now we hear of bankers paying themselves off as they leave the job [see this article for an example: Cheating Banker?]. These ‘unintended consequences of the bailout are either not unintended at all or are simply the results of massive naivety. Either way the sooner Paulson goes the better off we are. Nowhere in his jumbled plan was there a directive to get money to bank customers. You know: via loans! Whoops. I understand we need to save the banks. They’re vital to the economy. But what about bank customers? After all just as we all need banks, they need us too! Where’s the plan to save us?
And the auto industry CEO’s? Every last one should be forced to live a a trailer park. And that’s being kind.
We do not need a bailout any longer. We need a strategic economic plan that combats deflation and limits the extent of the damage the experts have done. We need a new New Deal.
We also need to take a good hard look at those experts. Just what expertise did they have? And how can we avoid replicating that evidently awful intelligence and poor judgement? We need a new economic elite.
Less hubris. Less extravagance. Less time in the corporate jet. More time on Main Street.
Maybe then we can avoid deflation.
We can hope! … /end rant
Addendum: I realize this was a mess, but sometimes venting makes you feel better … no? And I also realize that I just spent a whole ton of effort ranting about the most important single thing in all our working day lives [getting the economy back on track] and felt no need to mention George W Bush once. Why would I? He has no relevance, except, maybe, to Barney.
