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Frank A. Weil

Frank A. Weil

Posted: July 27, 2010 03:50 PM

What Columbus Must Have Worried About

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When Columbus set sail for what turned out to be our shores in 1492, he was not altogether sure whether or when he was going to see dry land again. It turned out much later that some Chinese explorers had already scoped out a lot of what he found, but neither he nor most sailors at the time had any idea -- though he did believe there was something there. Despite Copernicus, there were serious people who really believed the world was flat and that if they went too far, they just might fall off into a void of space.

So what does that have to do with today's world? A lot, because we too are sailing into unfamiliar, uncharted waters, even though the GPS is omnipresent. Some of the questions that are bruited about at the moment are:

--Do we have too much debt? Are we going to be pushed into bankruptcy by our foreign creditors?

--When will we lick the problem of 10% unemployment?

--How can we avoid the Depression trap of a double dip and accelerating deflation?

--Without a growth rate like the past 20 years and massive consumption how do we recover?

And on and on in that vein. There is no iron clad answer about the future, of course, so the flat world people today use the rear view mirror as the best proxy they can find to see ahead. And while it is true that past has in fact been prologue many times in history, this time it is most probably not true -- simply because (to stick with the metaphor) the new continent just over the horizon from us now has never been explored.

The new continent, or the future, is really different. Some of the differences are quite surprising and even profound:

--The availability of adjustment in the modern world, when the excesses have been wrung out after the credit crisis, is simply amazing. With the internet and all forms of modern communication, including Google, our whole system is adjusting among regions, sectors, and substance daily. That was not true in the past. This kind of continuous, constant adjustment practically assures us that, if anywhere near the right macro policies are managed by our government, it would be impossible for the economy to collapse as it did in the 1930s.

--Despite the recent credit crisis, corporate America has large amounts of cash stashed away, which it clearly intends to deploy to its advantage, particularly when costs seem relatively reasonable due to deflation. Perhaps to a lesser extent that is also true of American consumers when they see something they want. Witness: iPhones and iPads, which are not inexpensive, being bought by the millions. Little of that purchasing power was readily available in the 1930s when consumer credit barely existed.

--Despite the decline in manufacturing in recent decades, in part due to exchange rate adjustments, American competitiveness is increasing. That increasing competitiveness coupled with a relatively well-educated work force suggests that we will gradually see new forms of employment incrementally adding to the work force, as part of the continuous adjustment process mentioned above.

The contours of "the new continent" that is just over the horizon may not yet be quite clear, causing many doomsayers to look in the rear view mirror and say "watch out below." For two centuries, the wisest investors in America have been saying "do not sell America short." They continue to be correct. Even though we may be looking at a long, slow recovery, which will of course have short term bumps in its path, it almost certainly will continue to favor people who remain believers.

Columbus fought with some of his captains and crew who had grown scared as the days passed without sighting land and were ready to turn back. We do not have a Columbus on our current ship of state who can command us to forge ahead. Too many people are losing faith in Obama because he has not yet "sighted" land." We need to find more patience to recognize and appreciate what he has already done to keep us on course. What lies ahead will surely make what lies behind fade into insignificance as the new future unfolds its magic.