All Better Now?
Sharon April 20th, 2009
The song being sung by the public faces of our economy is the old refrain - the one we heard in late fall, when stocks rallied “It is definitely better now, it wasn’t that bad anyway, and we’re sure this time is for real.” President Obama now does infomercials hawking great deals in refinancing and stocks, and the cheerleaders are telling us that fundamentally, we’ve turned the corner, happy days are, if not here again, coming soon, along with the new Green Economy.
In New York City for Passover, I could see on people’s faces how badly they want and need this to be true. Even though they’ve been burned and lied to before, even though the people telling the lies were the same ones telling the story now - it doesn’t really matter, because all their hopes of the long term future they’ve imagined for themselves, on the whole life they’ve conceived for themselves and for their children depend on these investments to fund their retirements, education plans, etc…. Or rather, it does matter that these people lied - no one expressed trust, or belief in anyone who was saying this. Instead, they expressed hope that this one time, the liars are right. And that’s something rather different.
James Howard Kunstler has written about the ways that the “psychology of previous investment” ties us into projects that are fundamentally doomed - and I think there’s no better place to see that operating than the stock market. Look around you - despite the fact that the stock market is (even with the rally) down 6000 points, give or take for today’s adjustment, over its peak, most people are holding their money in the markets. Even though many of them might get a greater rate of return, even with penalties, by taking the money out and paying off their mortgage, or using the money to invest in infrastructure that would lower their costs they don’t.
And they don’t because psychologically they can’t. We’ve been told that the market always, always goes up. And this is true - but up over what? It took nearly 30 years for markets to return to adjusted 1929 highs, and more than 20 to pass them absolutely. How many baby boomers can wait that long? How many people saving for college have 20 full years before their kids are freshmen? And yet, as I’ve pointed out before, there is no rational backup plan for the long term future of ordinary people but the stock market - our entire society’s long term sustenence is based on the stock market will always go up, and that everyone will always believe this, and thus ensure near-universal participation.
And it is the expansion of participation, more than anything else, that fueled the last few tenuous years of growth - fundamentally, the real estate bubble was, as we all know, created by our now deplored cheap and predatory lending. But what most people fail to think about is that the real estate bubble, and the larger growth that fueled it, *could only have happened* by pulling more and more people into the market, by convincing them they could have a house, and that real estate values would rise forever. That is, the very things we deplore about the market were necessary to keep the economy booming.
And this is true across the board - the other things that fueled growth, on a world scale, was the industrialization of agrarian people in the Global South - the moving of people off their land and into slum housing and factories in cities - the much vaunted process of “development” that people like Larry Summers and Thomas Friedman claimed would “lift all boats.”
But of course globalization’s root mechanism was cheap fossil fuels - and the process of industrialization of poorer nations inevitably results in a lot of new competitors for fossil fuel supplies. This drives up prices, creates exciting new bubbles for people who see something going up just as things begin to destabilize, creates a host of new “eaters” as food turns into fuel to meet growing demand, and, at least according to James Hamilton, crashes the global economy, not to mention pushing us very near to a climate tipping point. The very thing we most need to constrain, for a host of reasons - ie, rising use of fossil fuels - is precisely the thing needed to get us out of the hole.
Which leaves us with a big problem - in order to get economic growth going again, it will have to be based on something. If something could actually be done to lift us out of what seems to be an increasing spiral of deflation, and it is based on expanding Global South development, we will have deal with rising fossil fuel use there, rising climate damage and food insecurity, and rising food and fuel prices from increased demand - ie, precisely the things that drove us into our present crisis. The expansion of participation is itself the root cause of the boom and deep bust. And it is a boom and bust cycle of diminishing returns - we’ve all seen the figures that show that most ordinary people didn’t get much better off on anything but paper during the last period of growth - and while paper gains make us feel good, it is real gains that will be needed as the baby boomers hit retirement, and start drawing down those resources.
If a recovery were based on growth here in the US, the problem would be that because we have even fewer actual resources now than we used to, any expansion of the economy is going to depend on giving credit to people who can’t pay it back. For all the talk of increased regulation, in the end, if we’re to push an aging population who seems to be rediscovering thrift into spending like mad again, we’re going to do it by convincing them not to care about whether they can pay things back.
Either way, if it is possible if extremely unlikely to postulate that we will experience a recovery now (and I think most of the people doing so are simply trying to restore market confidence rather than describe a real and long term improvement), but even if we do, it isn’t going to be very long before we’re back in the same situation - worse, because climate change and fossil fuel depletion will have continued, while our population continues to age.
But what about Green Jobs and the new Renewable Energy Economy? Isn’t that going to give us a boom? Well, there are a couple of problems with this. First, as we’re seeing now, the renewable energy economy simply can’t be created purely with government spending - so the economy has to recover if we’re to get a really significant percentage of our energy, worldwide, from renewables. In order to do that, we probably have to go back to burning more fossil fuels - because investment capital and factories cost money. Some of that money could come from the US government - indeed, some of it probably will, and that’s all to the good. But there are so many other basic needs that at this point, much of what’s coming from the government is sliding back into coffers simply to keep things going - for example, California teachers want stimulus money to avert layoffs - but it can’t, because California needs the stimulus money to offset anticipated debts coming next year.
It is conceivable that we could enter into war economy model, where the one and only project the US engaged in was the creation of renewable energies and public service to that goal - conceivable, although not likely. But the Obama administration, despite its radical improvement on the subject of climate change over the Bush administration, simply hasn’t placed climate change or peak oil or any other justification at the center of its reasoning, so imagining that happening soon seems like a stretch. The justification for doing so would have to preceed the acts - and this seems unlikely. Moreover, the Obama administration has avoided any suggestions of using the troubled auto-industry as a means of manufacturing needed renewable enery or public transport equipment, as was done in WWII.
Without a war economy model, competing priorities are likely to prevent a government-created renewable economy. If renewables are to be created, they depend on growth - and it will be a long time before we start to see that growth offset by the renewables themselves either ecologically or economically. While renewables can and should be scaled up, doing so quite gradually seems more likely than rapidly, unfortunately - and the hope of the green economy is again, circular - it depends on growing everything else, including fossil fuel usage, including consumer spending, and the rest of the engines of the economy as a whole - but each of these things brings us back to the precipice of another collapse.
And that brings us back to ordinary people in the stock market, whether things are improving, and the psychology of previous investment. One of the reasons that the markets are doing as well as they are is that most people have simply not removed their retirement and college savings. Instead, they’ve adopted the “just don’t look” strategy. The question is how long they will go without looking. Certainly, as long as there are small rallies, and as long as they can be convinced to forget all the other times it looked like it was going to get better, sure. But how long is that. How long before the message, which some honest financial advisors already give - that you will get a better return from paying down debt, reducing heating and energy costs, or paying off mortgages and reducing expenses than from just keeping your money in the market? How long before they start to give up.
Because that’s when all hopes of rallying end - when ordinary investors finally give up on the hope that they will be able to retire early, spend their later years playing golf, and send their kids to college, and realize they have to find a new vision for the future. Will this come, sooner or later? I think so - because overall the American public has generally proved itself to take this present economic crisis *more* seriously, not less, than the average economist. Most of us knew we were in a recession even when the US government denied it. Americans radically cut consumer spending and rapidly upped their savings rate in response - these are huge behavioral changes, undertaken quite rapidly, even as the old song was playing “It isn’t a big deal, just go on buying.”
So the question becomes whether anyone listens to the new song. My own observation is that people are listening, at least a little - because no other vision of their future has been presented in the mainstream media (which so stigmatizes thrift as causing the problem and self-sufficiency as crazy survivalism), people still very much want and need things to get better, and are reasonably susceptible to the claim that it is happening. But I also think they will be enormously susceptible to a sense of monstrous betrayal, when, as seems very likely, it turns out that things aren’t better, that foreclosures and unemployment aren’t just lagging indicators, but fundamentally reshaping their landscape and their future.
I suspect that there are limits even to retirees praying for a boom, even for indulgent parents desperate to send tehir kids to college - there comes a time when the dreams of the future will change in the face of new realities. And then, the day comes when putting your money in the stock market doesn’t seem like such a good deal any more. And that’s the end of the game of endless market growth.
Sharon
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[…] News Sources wrote an interesting post today onHere’s a quick excerptThe song being sung by the public faces of our economy is the old refrain - the one we heard in late fall, when stocks rallied “It is definitely better now, it wasn’t that bad anyway, and we’re sure this time is for real.” President Obama now does infomercials hawking great deals in refinancing and stocks, and the cheerleaders are telling us that fundamentally, we’ve turned the corner, happy days are, if not here again, coming soon, along with the new Green Economy. In New York City for Passov […]
The chaos level is SO high right now- and we are heading into conditions for which there truly are no historical precedents- guessing what happens next is just too difficult. But it doesn’t look good, that’s for sure.
One thing to add to the pot- studies in the last 2 years have shown something surprising, and disturbing.
Guessing that people who have suffered by being “conned” would be more difficult to con a second time- researchers found the opposite was true.
People who have been fooled are easier to fool again. And people who have always been dealt with honestly- are more difficult to fool.
So. Now what?
Interesting post and certainly true!
Some progress is being made that deserves a mention. Over the past month there has been a noticeable change in how “preppers” and “prepping” are being reported. Reputable, if liberal, media if often disparaging, but some of the new articles talk about how is has been, and could be for many, a cushion against times of personal hardship. Even had links in one! Whether it is because the media is still pushing people to consume, and this is a good way to get people to purchase in hard times, or because it is finally being recognized as a smart thing to do is up to the reader to decide. I find hope in it!
The fundamental change in the market corrections for the non-real growth it experienced has been a long time coming. Some of the psychology for how we got this way is in the ever present desire of people to have what they perceive “their betters” to have. Whether it is aping the Rockafellers by purchasing knock-offs a few generations ago or feeling like a market player like Donald Trump, people always seek to have things the rich do, even if only in a cheap and less durable, overpriced copy. It is a shame, but always with us, generation after generation in one form or another. This time we simply got complicity in it from our government encouraging poor lending and spending practices. After all, when is the last time you heard of a teenager having their Sound Budgets for Households section in Home Economics? I think that left when I left high school 25 years ago!
A return to real is good, hard, but good. Not everyone is going to be able to afford college now and working while in college may become standard again. Not everyone is going to buy their own McMansion, but more will save to get it and truly appreciate what they have when they do, improving their neighborhood and city simply by caring.
Great post!
HMM… “Not everyone can afford to go to college.” You may accept that as a given but there are countries where your education, including college, is free. Here, unless you are lucky, that degree comes with a mountain of debt.
MSM may have lightened up a bit on preppers, but they are still deriding/diminishing the economists and advisors that are not on the “happy talk” band wagon. The piece on “pessimism porn” this week end was nearly too much to stomach. Oh they admitted that some of these guys got it right but were quick to point out that they were “way out of the main stream.” Now I may be a linguistic stick in the mud, but if you are RIGHT aren’t you a REALIST not a pessimist? There has not been one solid piece of reporting that asks the question, “Why did these guys get it right when the vast majority got it very, very wrong?”
I read one piece of advice at the very beginning of this mess that sticks with me. “The bottom is not in untill NOBODY is willing to call a bottom.”
Personally, I think it is going to take a while longer for most people to figure out that paying off debt, saving money, and living frugally is pretty much futile when the “government” is stepping up to spend money taken from you by the force of law as taxes to try to sustain the unsustainable. Whatever “improvement” we see will be short lived in the face of that reality. It feels like the eye of the hurricane to me, and the back side winds are always the worst.
Bewared of getting snookered into making short-term predictions!
All of your (Sharon’s) points are valid in the long-term, but for the next few years - who knows? Not peak oilers, not stock market gurus, not even the sage of Omaha, Warren Buffett. The better the investor, the more she will admit her uncertainty.
I could see a rapid recovery, a slow mild recovery and plateau, a continuing recession, or a drastic Depression. The economy is a complex system and there’s nothing certain about it.
Capitalism has proved incredibly resilient, especially when it backs off from the extreme policies of the last two decades and begins adopting social democratic and Keynsian ideas, as it is doing now. It will absorb ecological ideas when it is forced to (or when it can make a profit from them).
I think the main problems right now are specific:
1) Wars and military spending. The elephant in the living room. We actually do have a “war economy” now, considering the large % of our GNP that goes to the military and arms manufacturers. Can’t really afford to re-do our infrastructure, as long as we have military bases all over the world.
2) Subsidizing the banks and corporations. “Socialism for the rich” - subsidizing costs and privatizing profits. After we bail out the banks, there is not much left over for the infrastructure.
3) Bad investments in energy and infrastructure. The tendency is for us to spend money foolishly, on projects that make us feel good but are hopeless or counter-productive in the long run. For example, efforts to keep the car/highway system going. Or the many efforts for alternative forms of energy, most of which have little chance of success (corn ethanol, carbon sequestration, hydrogen, etc.)
So at this point, I don’t think the problem is that capitalism and the growth economy are in their death throes. The problems are short-sightedness and manipulation by lobbies.
best,
Bart / Energy Bulletin
This will all “fix” itself a lot faster than anyone can imagine. Economic Darwinism on steroids….. 2.71828 18284 59045 23536
it all smacks of the abusive relationship.
“well, he did hit me but he said he was sorry and promised it wouldn’t happen again.”
so you wander around, hiding the bruises from your friends and family so they won’t think less of you (never for a moment considering that they’re brusied as well) and telling everyone what a swell guy he is and how everything is getting better, all the while knowing in your gut that everything is not ok.
Every pyramid scheme needs, depends on, expanded participation. Once it expands, the original investors pull out with bags of money and the little guys are found out a bit later to be holding the empty bags. Check out the French Mississippi Bubble. Very clear, very instructive. Should be part of any teenager’s education.
It seems to me that that with the economy so down, that there will be a wave of commercial mortgage defaults that will be the next stage of the Great Unraveling. Just my 2 cents.
One of the bigger lies we’ve been sold is that we need to rely on MONEY, not family, not communities, not solid assets like farmland, for our support.
People who have believed that lie don’t have a whole lot of choices at the later stages of the game. If they have no kids - they can’t get kids and grandkids now who will support them after their 401K has declined 60 - 70%.
Because we have come to rely on money for a proxy for everything else in our lives, we have let our skills and communities decay and erode into nearly nothing. Although there is a solid core of volunteers who take care of the elderly and the kids (via PTA) and other vulnerable populations, “community” activity has disappeared from the lives of most people. It will take a lot of work to revive those traditions and habits now.
There is a lot of truth in the “psychology of previous investment” that keeps people in the stock market that has seen better days. Most people with professional jobs in this area either get Pfizer or General Dynamic stock because that is where they work. It doesn’t matter that both have tanked recently.
It is the same with suburban houses that have lost twenty percent of their value in the past year and will never gain back the lost value because they are part of the “greatest misallocation of resources ever.”
People will continue to hope for a rebound that will never come for just the reasons you stated. When it finally dawns on them that the money has disappeared they will look for somebody to blame and heaven knows what society will do. We live in a nation where nobody wants to do any physical work but I predict that they will get physical when their fortunes are lost.
“or using the money to invest in infrastructure that would lower their costs they don’t.”
Nothing else. Just thought that needed repeating. Probably preaching to the choir here, but…
A key priority in this climate of massive change is to help teenagers fashion an altered path; to help them have more realistic goals in the context of a radically altered reality.
If approached in the right way, the young can find a good path with few setbacks.
The standard: go-to-college-then-get-a-cubicle-job just doesn’t work anymore.
Thankfully!
With our 16 year old, we are helping him learn to read-mind you, he can already “read”; we’re talking rather about reading for meaning, between the lines, extracting ideas and discussing them etc.; the real business of reading.
We’re also focused on shoring up his math skills.
In terms of work, I think with him as well as many of his generation, work which combines the head and hands will be his security.
Frankly, not to downplay the economic hardship many are suffering, I’m delighted about the chance we all get in the future to (as John Mellencamp put it in the song “Check it Out”) truly “learn about living.”
Sharon,
Although I agree that many people are taking a “don’t look” approach with “investments,” part of the problem, at least for me, is that I can only withdraw money from the 401(k) (and pay the tax penalty) IF I quit my job. I need the job, so I’m kind of stuck. But if/when I can do something else, that’s the plan: withdraw, pay the penalty, use the money elsewhere. I know there are many people who would deem me a fool for doing so, but the myth of 401(k) “investments” as savings is just that-a myth, an unfortunate myth.
I read a transcript of the “60 Minutes” segment on 401(k)s and the lobbyist David Wray was so insistent that the losses are because of the market, nothing inherently wrong with the system. To me, an investment is really a gamble…investing IS gambling, and as with gambling, you better know how to play the game and you’d better play it only with money you can afford to lose.
I do not know how to play the game and I cannot afford to lose money. And I resent the fact that I have to participate in the 401(k) (I do not contribute). I do not like the idea of “my” money wreaking havoc by being distributed to companies whose principles, policies, and practices are unethical and create suffering for many species, not just us. The system itself is a “stranded asset,” a relic that we need to abandon. It’s really no different than a defunct, boarded-up gas station.
What I would be willing to pony up for is small amounts of money invested in local businesses that I want to support so that I can see/experience the effects of that money…maybe it’s a women’s co-op that makes T-shirts from local fibers and they need replacement parts for looms or sewing machines…or even money to start such an endeavor. Would the returns be small? If there are returns, yeah, they’d be small. But this idea that we can “retire” and just stop working doesn’t sit well with me anyway and I don’t like the way our culture basically turns off the elders, when they have (or should have) so much experience and knowledge to share with the rest of us. Now, there’s a stranded asset!
Why do people say the growth economy is dead? I continue to grow in self sufficiency (the informal economy?).
Bart, I don’t think that the public stock market is capitalism, nor am I an investor. And while I agree that some of these are long term issues, I think some of them are very short term issues - that is, issues likely to make any recovery very brief. Time will obviously tell, but no, I don’t think I’m going out on a limb here. Sure, capitalism has been extremely resilient - but I’m not sure that’s really useful in making predictions about the possibility of a recovery - in a very long term sense, capitalism was resilient after the depression, but it still took 30 years to really grow the capital markets over and above past performances.
Sharon
Tom Blees’ “Prescription for the Planet” provides the first plan to get off fossil fuels that will actually work. Integral Fast Reactors are unlimited by fuel supplies.
Thanks for responding, Sharon. I guess I’m making two points.
1. Short-term (next few years), we really don’t know what’s going to happen. Making predictions leaves one vulnerable to having egg on one’s face - when oil prices drop below $50, when the stock market rallies.
Peak oil people are as vulnerable to this temptation as the Business As Usual crowd. We make predictions based on the spirit of the moment, which is a strategy that’s guaranteed to fail over the long-term.
Long-term, one’s chances at prediction are much better. For example, I applaud your criticism of the accepted wisdom about stocks as a long-term investment for non-informed people. For most of the 20th century, it was true that if you could hold a diversified set of stocks for more than 10 years, you would almost certainly do well.. I think that is in doubt. US bonds, paying off debt, and investment in family/self-sufficiency probably should be the basic strategy for most of us.
2. If one wants to go beyond a basic “safe” strategy, then things get tricky and counter-intuitive.
For example, it’s true that it took many years for stocks to regain their Depression-Era losses. However, this only applied to those investors who bought at the top of the market, e.g. in 1929. If one invested at other times (e.g. in 1933, in the depths of the Depression), then one would have done very nicely much sooner.
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At a certain point in my life, I was surprised to have enough money to start thinking about investment, and I spent way too much time learning about it.
The conclusions I came to were similar to those of Nassim (”Black Swan”) Taleb. For the sake of security, invest heavily in those things about which you are certain. Optionally, you can try investing a part of your resources in less certain areas - just be prepared for the risk.
Investment people have been thinking about uncertainty and risk for a long time, and one can learn from them.
Unfortunately, 99% of the popularly available investment advice is garbage.
I’ve found good sources of info to be the some of the personal finance columnists like Scott Burns. Bad sources of info promise rapid risk-free returns.
I’m not counting on any sort of recovery, in the stock market or otherwise. Short-term or long, a system that fosters increasing exploitation of resources that are non-renewable is only planting the seeds of its own demise. Planning and acting in ways that attempt to resuscitate a dying paradigm—the “groth economy”—is, at best an exercise in futility. Insanity. Suicide.
Just to make it clear:
What I’m afraid of us is that we will be snookered into making short-term forecasts, and when they prove wrong, we will be discredited.
It happened in the 70s and it could happen again.
Bart