Five Myths the Recession Taught Us
I live on Wall Street. I'm not saying this metaphorically. I moved to the corner of Broad & Wall (the old JP Morgan bank turned residential a few years ago. The safe, which held all the gold, is now a swimming pool) on March 9 of this year, right at the bottom of the market. Rents were dirt cheap as people were abandoning the area to go to greener pastures in Montana or Kansas. Everyone had left Wall Street for dead. Even the rats that scurried up and down the street at 2 in the morning were feeling the emptiness as the scraps of leftover chicken wings that were normally the feast of profitable traders were now gone much like the 9000 points of the Dow that went with it.
Since I've moved in (and I'll take full credit) the market has gone straight up, closely followed by a largely improving economy. During the course of the past few months, several myths came to bear on the environment that will play out through 2010 to create enormous opportunities in the market and the economy.
- Myth #1: Savings is good -
One picture is worth a thousand words:
(source: US Federal Reserve)
From 1980 to 2000, the U.S. Savings rate went straight down. As we know, the economy and stock market boomed during this time. Did people go bankrupt from lack of savings? No, of course not: They became more productive, they started more businesses, they made more money and they enjoyed the fruit of those riches by spending more. A cycle which fed on itself, leading to more income across the economy. Look at when saving last spiked, in the mid-70s, during the worst recession, until now.
Right now, the savings rate is the highest its been in a decade. The economy won't truly improve until that rate ticks down again and Americans get back to their spendthrift ways.
- Myth #2: Inflation is bad
Uncontrolled Zimbabwe-style inflation is bad. Producers that make product today need to know what they are going to charge for it tomorrow. Else production stops. But if inflation was steady and highly predictable, as it has been in our economy for largely forever (except for in the mid 70s) then here are some of the benefits of inflation (as opposed to no inflation or deflation).
A) Our goods become more attractive to foreign economies, making our exports go up.
B) Consumers wish to buy at cheaper prices today than more expensive prices tomorrow, so our spending goes up.
C) The dollar gets a little weaker so a small amount of inflation acts as a way of subtly defaulting on our debt without actually defaulting.
D) Tax revenues go up because of "A" and "B", making it also easier to pay down our debt.
E) We feel more flush as the value of our assets (houses and stocks) and our income goes up with inflation, even if this is an artificial feeling of being flush.
- Myth #3: Debt is bad
For 4000 years, debt has fueled the growth of any capitalistic economy. Most people reading this have a high percentage of Debt / Assets since we were all able to buy our houses with debt. When interest rates are low and inflation is low (as it is now) it's good to borrow and put the money in real assets.
Eventually inflation roars back and those assets have gained considerably in value. The thing that kills capitalism is persistent deflation, as happened in the Depression. Fortunately we have a Fed that learned from the mistakes in that period (See Bernanke's book, "Essays on the Great Depression").
- Myth #4: Mark to market accounting is good
The economy began to spiral down in November, 2007 with the advent of FAS 157, the accounting rule requiring banks to mark their debt to market rather than to a more subjective notion of fair value.
Admittedly, the banks had abused that subjectivity. But here is a simple example of why mark to market in illiquid asset classes could be bad: Let's say your neighbor buys a house for $300,000 and his house is very similar to yours. Let's say two years later he gets a divorce and now he has to sell his house in a fire sale and can only get $200,000. Did your house really just go down in value to $200,000? No, of course not. But that's where all the banks would have to mark your house now according to FAS 157. And if enough houses get marked down like that then suddenly the banks assets are not high enough according to regulatory standards and the bank fails.
- Myth #5: Unemployment is bad
The other day I was at a restaurant and it took 20 minutes for the waiter to get me my water. That guy should be fired. Or my lawyer's assistant forgot to give my lawyer a message from me. She should be fired. For years, because the economy was moving up, that waiter and that assistant were not fired. Companies couldn't fire them because they were either afraid to (I've managed hundreds of people - it's hard to fire people. You feel bad afterwards) or because they would be too short-handed if they did. Well, that period is over. The "Great Recession" has given employers the excuse they need to fire everyone ("sorry, it's the recession"). Consequently, productivity has shot up considerably. This is a good thing that will have long-term positive effects on the economy. And as businesses replenish their inventories, companies will be forced to hire good people to help them create those inventories.
I'm excited. The next phase of this economic cycle is beginning and my gut tells me we're going to be pleasantly surprised at the outcomes. What myths am I missing?
Follow James Altucher on Twitter: www.twitter.com/jaltucher
Les Leopold: Obama's Choice: Jobs Now or Republicans in November
We face a true national emergency. More than 30 million Americans are without jobs or are working part-time because there are no full-time jobs to be found.
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Re Myth #4 - MTM and the effect on regulatory capital are two different things. MTM provides more objective value and value that shows what is readily available to meet obligations at the moment. Because not every obligation has to be met at the moment, it is a separate issue as to whether the amount of required regulatory capital should be relaxed in recsessionary or crisis times. Ideas that have been advanced for "automatic" countercyclical changes in required capital, rather than make believe regarding the numbers that go into calculating that capital make sense.
Another countercyclical idea would be to calculate value for regulatory (not investor financial) accounting purposes based on a rolling average of some laggin period. This might help tame the effects of bubbles on both the up and down sides.
For all purposes FASB's overhyped amendment last April made some sense, it still looked at what the asset could sell for today (perhaps in a private sale) without saying that the last sale is the price. On the other hand, if you cannot sell your house for more than $200,000 becuase you are competing against mulitple divorcees in the neighborhood, then that is the value.
Myth #6. Individuals who run hedge funds and write "25 Ways the World Could Be Destroyed And How to Profit from It" have something worthwhile to contribute to humankind.
"The "Great Recession" has given employers the excuse they need to fire everyone ("sorry, it's the recession"). Consequently, productivity has shot up considerably. This is a good thing that will have long-term positive effects on the economy. And as businesses replenish their inventories, companies will be forced to hire good people to help them create those inventories."
The problem isn't unproductive workers but incompetent business leadership. When the economy tanks, many of a business's most productive workers get laid off while incompetent leadership either rides out the storm or rides off into the sunset with their severance packages. Bad economies rarely make the rich poor but often make the less rich a lot more poor.
Definitely agree. Most of the a$$ kissers get promoted and the people who actually know something are side-lined. Corporatocracy, welfare for the rich.
bubble on.
I agree only because the geniuses who got us into this mess know only one game and they are still in charge.
Unfortunately, we are now owned more than ever by foreign powers who have their own agenda and quite real leverage this time. There are still pipers to pay.
A little inflation is like being a little bit pregnant.
When interest rates exceeded 20% drastic measures resulted.
Barring any better policies, we may see that number once again within a very few years.
For a challenging economic analysis, see the Human Investment Tax Credit 2009 Program.
It is free on: http://www.aesopinstitute.org
I dont buy this. This is more of the same unsustainable free market cr*ap that resulted in the greatest transfer of wealth to the rich (1980-present) in history.
Myth #7: A proposerous middle class is a good thing.
...yeh right
inflation did not cross over into higher salaries for employees (#2), but we were told to keep spending because this is a consumer economy by design (#1), through acceptance of debt (#3), which is partly what led to the current economic disaster when toxic debt owned by banks were falsely labeled (#4) and when 10% of people lost their jobs. Americans cannot keep a consumer market going (#5), meaning that banks will not lend to them (but corporations are always a ok) and the economy that is created is one for the rich who have liquid assets and can buy up an apartment on Wall Street at the lowest prices, as always, then congratulate themselves when they sell it to that same brainwashed consumer who instead of saving their money (#1), just bought an apartment at a highly inflated value (#2), only to be considered a "non-productive" employee when the next crash happens (every 10 years due to banks, ahem), that person is laid off and you can turn around and buy that apartment with your liquid assets from your profits in selling that apartment. I can see why some people love this set up.
The myth that only caring about the shareholders and share prices is of long term economic benefit.
I think your view reflects Fed monetary policy though. In short their recent policy has been to create moderate inflation to encourage consumption and punish savings.
But isn’t inflation understated? When we import 700+ billion dollars in goods and then borrow the money to pay for those goods isn’t the real price market + debt service. After all we are borrowing this capital from the surplus in the Asian economies. And they, despite their protests of the US “printing money , are printing presses. And those policies have caused market distortions and bubbles. And by your argument that is good. I disagree.
I think Geithner and Obama have to come to a realization that we can’t support an economy that is purely consumption based. I keep reading that our economy is 70% consumer spending and that a decline is consumer spending is bad. An economy based on 70% consumer spending and a 0% savings rate IS bad. Instead of praising bubblenomics we have to re-visit the purposes of markets. For example the futures market was designed to give the farm economy a planning tool. It’s now just a betting parlor. It does more damage than good. It bid raw material prices through the roof without an underlying change in supply or demand. Remember the 150 a barrel oil price or steel prices doubling in 3 months crippling the auto industry. All that was driven by speculation in the futures market. That destroyed real investment not promote it.
an economy cant loan what it doesn’t save. The reason banks aren’t lending IMO is due the understatement of their allowances for doubtful accounts. They’re essentially understating their future losses. At 10% + unemployment , Ccard defaults, mortgage delinquencies, and a deteriorating commercial real estate market are going to do a number on bank Balance sheets and they are preparing their war chests. That means by mark to market accounting their debt is overpriced.
Inflation IS bad. Underlying inflationary pressures are not. For example, prior to the Kennedy Dillon tax cut, a strong labor movement and rising incomes caused demand inflationary pressure. The Kennedy Dillon Tax cut was designed to encourage investment, expand capacity and relieve inflationary pressures. Real capital investment in Plant and equipment increased. The stock market did not. They were more geared to long term growth as opposed to speculation as they are today. Todays’ Stock prices aren’t cheap by historical standards.
Not sure where the disagreement is coming from. Savings is pretty clear: when savings go up (in any country) that country's stock markets go down. Germany, Japan, the US, etc. Main Street is the investor in the stock market - not Wall Street. When the stock market goes up, Main Street's net worth goes up.
Of course unemployment causes pain and misery. But at the same time it provokes the government into providing stimulus. Obama would never have been able to pass his stimulus package if not for the rising unemployment. Stimulus that will benefit milliions of people.
The biggest problem now is that the banks won't lend money to Main Street. Banks have an extra trillion on the books right now. We (Main Street) needs to be able to borrow that money (take on debt) in order to create jobs, stimulate the economy, increase housing prices, etc.
Why all the hate?
How has "main street's net worth" gone up?
'Main Street" has lost the value of their houses, and their houses. It has lost jobs. It's average wages have been depressed. since 2000. It;s minimum wage was unchanged for ten years. It;s energy costs, food costs and education costs have all risen. It's health insurance costs have risen at three times the rate of the cost of living, and people are being bankrupted by the price and the industry's practices.
James, I am not one to be "hateful" nor condescending. My remarks are rebuttals and have substantiation in history. Take a long view and you'll see how and why those like Hayek and Von Mises are to be seriously studied.
I truly think the greatest danger we face today is an attempt to substitute the temporary and expedient for the long and sometimes painful necessity of hard work.
Most of your "myths" will inevitable lead to the destruction of the value of our currency, which is backed by nothing but faith. We are not alone in this world.
"Why all the hate?"
You've got a lot of nerve making that statement, pal. People are pissed because we just bailed out the top of society, you know, the ones who needed it least? People save because they don't trust the future that the monied elites are pointing to which may or may not occur. Few of these geniuses foretold the meltdown last Dec. People don't see their jobs coming back. But they see debt personal and public and they see their quality of life going down the toilet, while you admonish some waiter who didn't get you your water fast enough. Yeah let's fire all the dead wieght particulary that at the top of the heap, like the ones who want working people to walk the plank while they ignore the real screw ups.
funny stuff.
myth #6. manufacturing and manufacturing a employment is necessary for the health and stability of an economy.
manufacturingnd manufacturing employment has steadily gone down as the economy has experienced a continuous boom until from 1982 to 2007.
Let us put our heads together to take this guy down ... legally.
Do you even understand what he is talking about? I love how the progressives hate anyone who doesn't agree with them. Intolerance is not becoming
I fully understand what the author is talking about and I don't agree with his boosterism. If you want ot equate that with hate then explain to me how? If I disagree I should just politely decline from voicing my POV? I guess you're having fun by pointing out how ridiculous tolerance is, right? Otherwise you look pretty foolish defending rightwingers as somehow tolerant of anything that isn't white, christian and born in America.
Does this even need responses? A more accurate title would be bad for workers is good for wall street. I could explain why #4 is wrong but why waste my time. Everybody with a brain already knows this guy is full of it.
Don't be so angry. I'm actually saying the opposite. Good for workers is good for Wall St. Banks have stopped lending to workers. We need banks to start lending again. In order for that to happen banks have to acknowledge that its ok to take on more debt. Banks have to stop saving. Securitized debt has to be able to be marked more liberally. Etc.
the current rally is a smoke and mirrors agreement between the fed and the bailed out firms. A backroom political deal that will evaporate with the midterms and the next presidential election.
Heck if you read Status Syndrome, there is an excellent argument for taking the cap off of Social Security taxes... Simply put, the poor die earlier and the rich live longer.... Face it a black man dies 7.1 years on the average before anyone else....and he is not getting a break on the payroll taxes,,,,and then we have working couples paying more than a stay at home mom family and the SS reward fofr that....
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