I had a dream recently. I dreamed that the President of the United States and Congressional leaders decided to shut up and stop messing with the economy. (Not this administration; any administration past, present or future.)
They said, “We screwed up, but gee, nobody’s perfect. For the past 20 years or so all of us, citizens and government alike, have spent and borrowed beyond our means until we hit the wall. And now we can’t do it anymore and now we all have to pay the price. Just like a family that has gotten into financial trouble, we’re going to have to cut back and live within our means. Austerity is the word of the day. We’re not going to intervene anymore, or prop up failing businesses, or bail out people who made bad investment decisions. We can’t postpone the inevitable anymore. It will be tough and painful, but we’ll get through it and we’ll all eventually be better off and our economy will grow again once we hit a sustainable level.”
Then I woke up. Of course, you and I know something like that is never going to happen. Unfortunately, many of us are our own worst enemies because we would never allow it. There are always calls for government to “do something.” We’re accustomed to quick solutions. Take a pill, pass a law, create a tax, or start a new agency to monitor something. Just make the problem go away. If the stimulus isn’t working, it must be because it hasn’t been tried long enough, or with enough money being spent. We want to do anything but take responsibility and fix it ourselves.
For the past three years that I have been writing this column, I have made the case that people, in their own small, individual worlds, make decisions that cause huge effects in macroeconomics. Economists, policymakers, market pundits, money managers and just about anyone who can grab a microphone are all debating the reasons for our continuing problems, or as Bill Gross has labeled it, the new normal.
Nobel Laureate Edmund Phelps recently claimed “there is no sign of deflation or a drop in aggregate demand, just a lack of ingenuity, investment, and inclusion of low wage workers in the profits of companies.”
I guess the fact that the largest asset owned by most Americans — their homes — has dropped 20 percent to 40 percent somehow didn’t make the list of deflationary items. Neither did the falling incomes of workers over the past two years, or even the trend of consumers to save more and pay off debt. I’m not sure what counts as deflationary in his book, but a systematic de-leveraging of the economy while prices of assets fall and incomes decline looks like deflation to me.
There are endless theories about what is causing the new normal to persist — uncertainty about taxes, uncertainty about jobs, not enough stimulus money, too much safety net for those out of work, not enough safety net, etc. Is it confidence? Or is it consumer or business uncertainty? The answer is a combination of all of these, but it starts long before we ever get to these ideas.
Consider this. As an individual, before I can worry about the U.S. government taking more of my money in taxes and reacting to it, I have to be in a position of determining my spending versus just living paycheck to paycheck. The same is true of any “uncertainty.” Before it can be a major factor in curbing my spending or causing me to spend more, the ability to change my spending according to what I want must exist. If I have no extra money, there is no decision on discretionary spending. This is a concept that is important to understand.
Our nation is now at a point where the largest generation in history is in control of a large part of their income. Not everyone of course, but most. They can decide whether to spend or not. Should I buy this thing, or wait? Should I invest or consume? They are no longer competing to consume the most, fueled by their family situation and social circles. The game has changed. This group is acting exactly as they are supposed to. They are looking at the future with trepidation. Do I have enough money to retire? Can I afford this or that? Maybe I should save more. This is what we want people to do, right? The problem is, when a few people do it, things are good. When a huge number of people do it, the economy slows. This is what John Maynard Keynes called “the paradox of thrift.”
We can make up lots of fancy reasons as to why, but the simplest reason is the best — People are spending less because it fits their stage of life.
This has been compounded by many things, mostly the deflation of bubbles (debt, asset prices, etc.) that grew out of feeding the most recent stage of life these people occupied — that of the largest consumer. So here we are now living through the most predictable of economic seasons with all of the markers of a long, tough grind in front of us. Everyone seems bent on either trying to change it (stimulate the economy) or blame someone else for not changing it.
There is another way — manage down to a lower level. This is the path I have always pointed to, as it is the only sustainable path, the only one that makes sense. Stimulus doesn’t work when the biggest generation in history is trying to reduce spending. Giving taxpayers more money, hoping they will spend it, doesn’t work. The path out of our current situation is unfortunately neither quick nor painless. We will continue with slack demand, we will continue with deleveraging, and it will take time. We will be much better off when we finally accept our situation and begin discussing how best to use this time of contraction instead of chasing pipe dreams of “expansion just around the corner.” Thanks for reading.
NICK MASSEY is a financial advisor and owner of Householder Group Financial Advisors in Edmond. He can be reached at www.nickmassey.com. Securities offered through Securities Service Network, Inc., member FINRA/SIPC.