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Tell It Like It Is

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There is a struggle going on in America and throughout the world about what is appropriate to say in public about the local, national, or world economy. Some are saying that the really bad news has to be leaked out in ways that the cognoscenti will encounter first, metabolize, and be prepared for when the rest catch on. I understand this point of view and understand that yelling "Fire!" in a crowded theater is not only naughty, but likely to cause injury or death to innocent people ... because of the way masses of people react to bad news. There is another point of view, to which I adhere, that says the cognoscenti are a much larger category of society than envisioned by the holders of bad news, that they are self-defining, not pre-defined by race, occupation, wealth, age, sex, or any other characteristic than their willingness to deliberately access information and process it responsibly. The first definition holds the belief that a restricted cognoscenti will react (more likely) in unison, because of values that are shared among them. There is some evidence that this is true, but not necessarily leading to a favorable conclusion. The so-called "paradox of deleveraging" is a classic of the sort of economic process that shows that an in-group of financial experts will all try simultaneously to divest themselves of "toxic" financial instruments thus driving down the price that each one hopes to get. It is, in other words, a case of the cognoscenti as individuals outsmarting themselves as a class. This paradox should, instead, be called the "deleverageing inversion," (or some such), to avoid the connotation that there is something irrational or paradoxical about the process. It is not irrational; it is totally predicable and it reassures observers that more fundamental processes like "supply and demand" are stable and ubiquitous. If the notion that a "restricted category" of cognoscenti are prey to self-defeating behaviors, then why restrict factual information to them? Is it just to allow them a five-pace lead in getting out of a burning building, when it is known that if any significant number of people rush out of the building the rest are sure to follow and trample one another anyway? Is it a "class consciousness" that assumes people with similar goals (and perhaps even similar values) have more rights than the rest? Is it an even purer form of arrogance? The truth about economies is that everyone participates to one degree or another. The poor and non-wealthy are important because of their amassed numbers, principally as consumers, where their mass action (or inaction) directly affects the "demand" side of the essential economic equation. But, they are also important as producers on the "supply" side of the equation, so when the poor and non-wealthy are willing to be employed at a certain rate, production takes place conditioned by the number employed and wage rates. The investors, wealthy and near-wealthy, are important because they provide capital to enterprise beyond the "sweat equity" of entrepreneurs and their initial cadre of employees, who by the way also "sweat." Investors are no more indispensable to enterprise than labor. A fully-invested person is like a fully-employed person, their commitment to the enterprise focuses their attention on the enterprise and they do what they can to keep their investment or their job from evaporating. I think the point is clear enough: everyone deserves to know the state of the economy and its direction and its momentum. Everyone who reads about the coming Depression is in the theater and needs to know whether it is on fire or not. The Great Depression of 1929-1941 was at least a decade long and full of human activities that both exacerbated and ameliorated the situation. Whether we are headed to a repetition of the Great Depression is not the appropriate question for clearly we are not that nation or world that existed back then. We are a more technologically oriented society, a vastly larger society, a better educated society, a more homogeneous society for all our differences. Poverty and disease are actually no worse than ever per individual, but wealth has evolved to a point where some individuals can actually try to insulate themselves from the vagaries of normal contemporary life. The number of those in poverty is different now. There are over twice as many people now living in the United States (306m v. 130m) and about 15% are living below the poverty line which is to say 19 million in 1930 v. 45 million today. I am trying to give you a sense of what percentages are in real numbers. In the United States at the statistical point when economic indicators were at their worst values unemployment was nearly 25% (of those able to and seeking work). The population was about 130,000,000 and denser in the mid-Atlantic states. The total number of those in the employment age groups was about 65,000,000, so the total number unemployed was 16,000,000. Today the total number unemployed persons is about 8% of the workforce (10% in California and three other states), or 12.4 million people. The U.S. economy is shedding jobs at the rate of about 600,000 per month. At this rate by the end of 2009 12.4 million unemployed will be 20 million, or about 4 million more individuals out of work than were out of work at the bottom of the Great Depression in 1933 even though the "rate" of unemployment will be less than half of the 1933 rate. That is a lot of people adversely affected by the economy!
This graph shows unemployment rate in percentages of the workforce. A better understanding of the human suffering and the political instability created by massive unemployment is to to know the numbers of those unemployed. If this chart were in numbers and not percentages the jagged line would incline dramatically upward to the right.
The Dow-Jones Industrial average (Dow) was valued at 13,021 on May 6, 2008. On December 31 the value was 8,149 (up from 7552 on November 20th). This is a loss of value of 38% (42%). Today the value of the Dow is 6,547, a loss of 50%. By 1933 the Dow had lost 89% of its 1929 pre-crash value. That loss was created/sustained over three years. The current 50% loss, (which is expected to go below 5,000 or down 62% this year or early 2010), has taken place in 9 months, most of the loss in the past 4.5 months. Analysts know that it unlikely that a 90% loss in the Dow will occur in the U.S., but the problem is that other economies may flat-line completely, throwing the more highly integrated transnational economies into additional turmoil. The market rallied on Tuesday, but you should understand that the good news that prompted this exuberance was the report from crippled CitiCorp that their "operations" turned a modest profit the last two months. Good for them! Have they figured out how to deal with their toxic assets? No. The Citi-pi├▒ata is full of razorblades and rusty nails, and that a few M&Ms spilled out is clearly the cause for celebration but not optimism. If you are an investor, you probably subscribe to one or more investment advice services. The advice you are getting now ... except from the vividly inept "reporters" at CNBC ... is to buy gold now, to scorn the Euro, to buy stock in industries and companies that typically do well in very hard times (like Dollar General Stores and the sources of "little luxuries" to which people retreat when cruises to the Greek Isles are out of the question). The commentary that comes from the investment advisers that I have access to is dire, indeed. You would hardly know they are talking about the same planet that President Obama's vocal advisers are talking about. This raises a very serious question. Is the new administration just more of the same, or are they really trying to find a way to let us all know what surely they must know by now? The answer is this: politics is the art/craft/science of the the possible. When politics holds illusions it is called ideology. When politicians lie, they already know the extent of the impossible, and you can be sure that it is unpalatable. Economics, on the other hand, is an inexact but dismal social science, which is to say that anything you do to affect economics in real world is like stirring pudding from inside the bowl. Barack Obama knows full well what a mess we are in and what an inept response to the situation the Bush administration mounted. They also know that the Republican public (say, 45% of America) does not quite believe what is happening. These people are in paradigm shock and will not recover soon. In this way the realm of the possible is severely constricted and the only way to change this is through pain. Meanwhile, of course, the rest of us have understood that deregulation is suicide. There is a TV ad out these days where a thirty-something woman says she is too afraid to really look at her investment situation. This is something of an exaggeration, but grazes the truth close enough to be instructive. Most people have looked at their nest eggs and found the experience extremely upsetting. They are now, in the aftermath, unwilling to look very often and have decided that at 35 they have at least 30 years to recover from whatever situation they are in. So, they have decided to weather whatever it is that is happening. Obviously, the older the investor the less time there is to recover and the greater the panic. The problem with the decisions being made is that they are based on the probably false notion that this is a U-shaped recession and that recovery will take place and they will only lose a few years out of their nest-egg-building regime. If this an L-shaped depression we are entering, though, all bets are off on how long it will take to recover, and moreover, what emerges on the far side is likely to be as different as 1950 was from 1928. Dwelling on the facts of the situation rather than on prognostications or deriding the truth-tellers is not counter-productive. You have to know how sick you are before you know what cures and therapies to apply. The point is that people have the right to know what the circumstances of their decision making really are. JB
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James R. Brett, Ph.D. taught Russian History before (and during) a long stint as an academic administrator in faculty research administration. His academic interests are the modern period of Russian History since Peter the Great, Chinese (more...)

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