Literally the middle of the night. The darkest hour.
Stillness hangs over the neighborhood and the farm down the road. No one is awake except cops on patrol and…..babies.
I turn on the radio to contact the outside world. The books say babies like music at any rate.
A voice accompanied with a synthesizer flows into the room. An early 1980s sound. It’s a rap song and the first few lines catch my attention:
“Bill collectors they ring my phone
And scare my wife when I’m not home
Got a bum education, double-digit inflation
Can’t take the train to the job, there’s a strike at the station”
I wondered, if he was talking about the current situation? When was this song written?
After listening to a few more stanzas, I made a mental note to look up the song later.
Before we go further, we want to assure our readers that your dear author is profoundly aware of the hazards of gleaning economic wisdom from rap artists. Nonetheless, rather than rapping about cars or women, this song seemed to be a “man on the street” view of events.
A few minutes on the internet yielded the answer. The song is called “The Message” by Grandmaster Flash and Furious Five.
The song was written just before the stock market took off in the early Reagan years. As many of our readers probably remember, the economic environment prior to that time had been excruciatingly painful. They were the stagflation years, otherwise known as the 1970s.
So he was singing about his view of events. Telling the world how bad things were. We began to wonder if he (or anyone else at the time) had any idea that they were on the verge of an economic boom.
As the old saying goes, “The darkest hour of the night comes just before dawn.”
We also wonder at what point in economic history we stand today? With the recent stock market rally, the Fed and the financial talk shows have been yapping about “green shoots of recovery.” Some are saying the housing market has bottomed as well.
Are we at the beginning of a new dawn? Will a new economy emerge from the present rubble? Or have we mistaken the dawn for the sunset, with the darkest hours still ahead of us?
Our view is that the current stock market rally and calls of the bottoming of the housing market are a false dawn. There are too many structural problems with our economy. We do not yet have a basis for a recovery.
Those who are predicting a quick turnaround are sadly mistaken. Over the past years, there were too many anomalies that were propagated for too long. We have reached a point where the old way of doing things just doesn’t work anymore. Here are a few examples:
1. We had a massive trade imbalance. For years, China sent us hard goods and accepted IOUs (Treasuries). Now the Chinese are wondering if they will ever get paid for all the goods they shipped us. We quote from the NY Times:
“In another indication that China is growing increasingly concerned about holding huge dollar reserves, the head of its central bank has called for the eventual creation of a new international currency reserve to replace the dollar.
In a paper released Monday, Zhou Xiaochuan, governor of the People’s Bank of China, said a new currency reserve system controlled by the International Monetary Fund could prove more stable and economically viable.”
We will no longer be able to run massive trade deficits. At some point other countries will refuse to accept deferred compensation for their goods. They will demand actual payment.
2. Our ever increasing standard of living was fueled by soaring home prices. This was made possible by artificially cheap credit. Credit was cheap over the past years, not because we had an excess of savings in our financial system (heaven forbid!), but because interest rates were held too low for too long by the Fed. Interest rates will have to rise to reflect the supply of savings in the system (minimal).
3. We had abundant supplies of cheap energy (with a few hiccups) for decades. The world’s major oil fields, Venezuela’s Lake Maracaibo, Britain’s North Sea, America’s Prudhoe Bay, Mexico’s Cantarell, and the granddaddy of them all, Saudi Arabia’s Ghawar are all in decline. In addition, after the price of oil fell from $147 to $36 per barrel, many exploration projects were cancelled. We cannot rationally forecast cheap oil supplies in the future.
4. Government spending is out of control. Forget the intellectually insulting conversation about earmarks. We have two wars with no end in sight, we have entitlement programs that are insolvent and we are granting bailouts like the proverbial rich uncle. Tax revenues don’t even come close to funding these commitments. This money must be borrowed or printed.
5. Consumer spending made up 70% of GDP. It’s one of the wonders of the world to see so many people believe that consumption is a builder of wealth. We happened to be one of the “crazies” who suggested that an economy based on production (like we used to have) might be a better instrument for building national wealth rather than rampant and debt fueled consumer spending.
In light of the above, if the Grandmaster were to make a comeback today, he may be accompanied by a new Furious Five:
1. Price Inflation
2. Currency Devaluation
3. Asset Depreciation
4. Excess Litigation
5. Emergency Energy Allocation
A quick turnaround is not in the cards. We have to go through a painful process of resolving the structural issues we have with our economy.
The outlook is not good, but the dawn will eventually come. Life will continue. The dark hours may also be therapeutic for some.
After the consumer bacchanal of the past decade, we may be about to rediscover that the best things in life are free and the prerequisite for happiness is not the continuous acquisition of leased cars, cavernous homes and consumer trinkets.
Another epiphany we may encounter is that spending does not create wealth. Not consumer spending; not government spending. We’re going out on a limb here, but spending actually reduces wealth. Part of the problem is that we have confused spending with investing and…well that’s for another time.
We will eventually rediscover that hard work, savings and production are what a nation is built from. For now, however; too many of us are still holding on to the crassness of the past years. I think the Grandmaster summed it up best:
“Cause it’s all about money, aint a damn thing funny
You got to have a con in this land of milk and honey”
Until next week,
Michael Bechara, CPA
Granite Consulting Group Inc.