Literary Economics

In this Daily Reckoning classique, first published on Feb. 28, 2003, Bill Bonner examines the differences in America’s economic structure since the last decade of the 20th century. He points out that the world very rarely does what we want it to do, and more often it does exactly the opposite.

It all seemed so logical, so obvious, and so agreeable back in the last half of the last decade of the 20th century. Stocks went up year after year. The Cold War had been won. There was a new "information age" that was making everything and everybody so much smarter…and richer too.

The world was a happy place, and Americans were the happiest people. American consumer capitalism was the envy of the entire species, whose peace and freedom were guaranteed – if not by Americans’ goodness, intelligence and foresight, at least by their military arsenal…which could blow any adversary to kingdom come. Francis Fukuyama, a bit ahead of his time and perhaps overly impressed, announced that the "End of History" had arrived; for it scarcely seemed that any major improvement was possible. Fukuyama was, of course, not the first to believe that perfection had been achieved. Hegel had proclaimed the End of History nearly 200 years before, after Napoleon Bonaparte imposed the benefits of French republicanism on a reluctant Europe.

But "it’s a funny old world", as Maggie Thatcher once remarked. Ms. Thatcher might have meant "funny" in the sense that it is amusing; she probably meant that it is peculiar. In both senses, she was right. What makes the world funny is that it doesn’t cooperate; it doesn’t do what people want it to do, or what they expect it to. In fact, it often does the exact opposite.

Nor do people do what they "should." Other people don’t seem to act "rationally," especially those who don’t agree with us. And even we do not always follow a logical and reasonable course of action. Instead, we are all swayed by tides of emotion…and occasionally swamped by them.

Literary Economics: Thoughtfulness

The world is funnier than you think. And the more you think about it, the funnier it gets. Close inspection reveals the ironies, contradictions, and confusions that make life interesting – but also make it frustrating. Men of action despise thinking – and rightly so, because the more they think, the more their actions are beset by doubts and arrière pensées. The more a man thinks, the more modest he becomes, because he sees more clearly the limitations of his own plans. Exploring the possibilities, he sees more and more potential outcomes and problems…and he recognizes more and more how little he actually knows. If he keeps thinking long enough and hard enough, he becomes practically paralyzed…a man of action no more.

Will the stock market rise?

"I don’t know," replies the thinking fund manager.

Can we win the war?

"It depends on what you mean by ‘win’," answers the thoughtful general.

Here at The Daily Reckoning we write in the spirit of runaway modesty. The more we think, the less we think we know for certain. If we keep at it, we will soon know nothing at all. (There are those, of course, who think we know less than nothing already.)

We are, frankly, far too much in awe of the world…and too deeply entertained by it…to think we can really understand it today or foretell tomorrow. Like its most attractive components, love and money, life is far too complex for reliable soothsaying. Still, we cannot resist a guess.

Our approach at The Daily Reckoning is, in case you hadn’t noticed, is a little different from the typical investment advisory. Instead of econometrics or stock analysis, it is an exercise in what is known, derisively, as "literary economics." While you will find statistics and facts, it is the metaphors that are important. Facts have a way of yielding to nuance like a Texas jury to a trial lawyer. Under the right influence, they will go along with anything. But the metaphors remain, however imperfect, ready to turn almost any set of "facts" into the shape they want. People understand the world and its workings by metaphor, not by facts. As Norman Mailer put it in the New York Times, "there’s much more truth in a metaphor than in a fact."

Literary Economics: How the World Doesn’t Work

We cannot know how the world works, but we are immodest enough to think we can know how it doesn’t work. It is not, for example, a simple machine, like an ATM into which you can merely tap in the right numbers and get cash out when you need it.

Nor does the world ever work the way people think it does. This is not to say that every particular idea – or metaphor – about how the world works is wrong, but that any particular idea will prove to be wrong if it is commonly held. The trouble with metaphors is that no matter how true they may be when they are fresh and clever, when they get picked up by the multitudes, they almost immediately become worn out and false. The whole truth is always complex to the point of being unknowable, even to the world’s greatest geniuses. Only simple ideas can be held by large groups of people – so the commonly held ideas are almost always dumbed down to the point where they are practically lies…and often dangerous ones. And once vast numbers of people come to believe the lie, they adjust their own behavior to put themselves in sync with it – and thereby change the world itself. Soon, it is no longer the same world that gave rise to the original insight in the first place, and a crisis develops. People who have been guided by a lie suffer the consequences. They get, not what they expect, as we say, but what they’ve got coming. Then, they look for a new metaphor.

Thus, we cannot help but notice a pernicious and entertaining dynamic…a dialectic of the human heart, where greed and fear, confidence and desperation constantly confront each other like women mud-wrestlers: an insight about how the world works gets taken up by the masses and simplified…leading them to misdirect their efforts and ultimately getting them into trouble. A crisis then develops, which brings them to a new and different insight…one which is, ultimately, just as disappointing. In the financial markets, this pattern is well known and often described.

After reaching absurd levels in the late ’90s, investors came to believe that stocks always go up. Many were the reasons given why they should, but the main reason was simple: that was just the way the world worked. But after they had moved their money into stocks – to take advantage of the insight – there were few buyers left…and prices had risen so high that there were no longer enough profits or growth to support them.

Investors were deeply disappointed in the early ’00s when stocks fell three years in a row. How could this be, they asked themselves? What is going on, they wanted to know?

Mainstream economists have no answer. Paul Samuelson, popularizer of the economic profession for NEWSWEEK magazine, admitted that he and his colleagues didn’t even have words to describe this "baffling economy".

Literary Economics: Alan Greenspan Doesn’t Know, Either

Nor has Alan Greenspan been much help. In the late summer of 2002, the most celebrated economist in the world addressed an audience in Jackson Hole, Wyoming. He explained that he didn’t know what had gone wrong. He wouldn’t know a bubble if it blew up right in front of him. He’d have to wait, he told his fellow economists, and check the mirror for bruises – for only after the fact could a bubble be detected.

And what difference would it make, anyway? America’s favorite bureaucrat explained that it made none; even if he had known, he said, he couldn’t have done anything about it.

After enjoying the unqualified reverence of nearly the entire literate world, Mr. Greenspan suddenly found himself a laughingstock. He had stood by Hilary Clinton at her husband’s State of the Union address…and helped his re-election with an easy-money policy. He was the key man, along with Robert Rubin and Larry Summers, of TIME magazine’s "Committee to Save the World." He was even awarded France’s highest honor – the "Cravat" of the Legion of Honor…and later be-knighted by the Queen of England.

And now, the poor schmuck is treated in the press like a fool. He should have known, they say. He should have done something. At the very least, he should not have praised the boom and pretended that it was permanent.

But we do not write to carp or complain. Instead, we offer it in the spirit of constructive criticism…or at least in the spirit of benign mischief. We do not know any better than Alan Greenspan what the future holds. We only guess that we are at one of history’s crisis points – where the metaphors of yesterday no longer seem to describe the way the world works today. The financial markets are not the congenial ATM machines of investors’ fantasies, after all. Nor is the political world as safe and as comfortable as people have come to believe.

Life is always complicated, often perverse, and occasionally absurd. But that doesn’t mean that events are completely random; though unexpected, life’s surprises may not always be undeserved.

Regards,

Bill Bonner
The Daily Reckoning
February 25, 2005 — Nicaragua, Central America

Bill Bonner is the founder and editor of The Daily Reckoning. He is also the author, with Addison Wiggin, of The Wall Street Journal best seller Financial Reckoning Day: Surviving the Soft Depression of the 21st Century (John Wiley & Sons).

"Not yet," the markets said again yesterday.

After a sharp drop on Tuesday, stocks bounced on Wednesday…and again on Thursday. The big turnaround we thought we saw coming may not have come yet. We don’t know. We wait. We watch. We point and snicker.

The yield on a 10-year Treasury note is only 4.25%. Even emerging market debt pays little more than 7%. Why are rates so low? Because the whole world economy is sinking – possibly towards a form of stagflation.

On the one hand, the developed, consuming economies of the world are growing older…and more cautious. Japan and Germany may be in recession already. Demand, such as it is, comes from America – where consumers have no real purchasing power. They have to borrow the money from their suppliers. Thus do some of the world’s poorest people finance consumption for some its richest. Nobody seems to worry about it; but it strikes us as unbecoming to the rich…and unlikely to continue.

On the other hand, the price of oil is over $51 and gold is over $430. If a thing can’t be made in China or India, chances are its price is going up.

Oil is a special case. It is probably the single most important ingredient to a modern economy. The world’s largest nations, India and China, are becoming modern nations. They are growing at 8, 9…even 10% per year. Add in a few other countries in the fast-growing Asian region and you have three billion people whose appetite for petroleum products increased every day.

The world’s oil production is not keeping pace. In fact, many experts think oil production is peaking out. It may have taken the earth 100 million years to make the stuff, but it only took three generations to use up nearly half of it. From here on, oil is going to be hard to get…and, well, expensive.

It will surprise us if oil doesn’t hit $100 a barrel before the end of this decade. What is keeping pace is the apparent supply of the money in which oil is quoted. In very round numbers, there may be about 100 million owner-occupied houses in America. If each one had a price around $200,000 and they all went up 10% per year…that would mean a theoretical increase in purchasing power (assuming all "took out" 100% of the increase in "equity") of $2 trillion per year. It is a lunkhead’s illusion, of course, but it is hard for the average homeowner to see it. He thinks he has more money to spend – and there are dozens of Ameriquest-style lenders willing to prove it to him.

Mortgage debt has doubled since 1996. Total credit market debt has reached 305% of GDP. This, too, may be an advance indicator of stagflation. The debt is a drag on future spending; it must be serviced…even paid back. But it also represents a huge new "flation" of dollar-based money and credit – which pumps up prices of oil, gold, copper and other global commodities.

We don’t know where this ends up… nor when. But we advise readers to expect that it won’t be pleasant…and act as though it comes tomorrow.

More news, from our team at The Rude Awakening:

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Tom Dyson, reporting from Long Beach, California…

"Walking around with $7,500 in your pocket is unwise. But in Long Beach – rap star Snoop Doggy Dogg hails from here – it’s a particularly bad idea. No matter, our chosen gold coin vendor would not accept credit cards. Margins on gold coins are so thin, he explained, that the small processing fee a vendor must pay to accept credit cards makes gold coin transactions uneconomical."

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Bill Bonner, back in Nicaragua…

*** We received this from Dan Ferris, who is big on the contrarian "magazine cover" indicator…

"I subscribe to about 20 magazines, most of them financial. The March 2005 issue of Business 2.0 arrived in yesterday’s mail. The cover says it all:

"MAKE YOUR MOVE IN REAL ESTATE

"8 WAYS TO CASH IN NO MATTER WHERE THE MARKET GOES"

*** The prices of crude oil, heating oil and natural gas have all been on the rise this week.

According to Kevin Kerr, "Since the U.S government has been printing money like crazy to jump start the economy and stave off inflation, there are more dollars chasing commodities, and the demand for raw materials like oil and natural gas is soaring. However, there has been limited production of raw materials over the past 20 years…so you can imagine that with skyrocketing demand and limited supply, prices are going through the roof."