Occam's Razor

Haiti is our harbinger

Perhaps it is just winter, always a dark time of year. Or perhaps I have spent too much time reading Joe Bageant who lives life without the rose colored glasses on so well he makes my head groan. Republicans winning a special election for Ted Kennedy’s seat didn’t help either. I am finding it hard to escape the feeling that our species is toast. We are rearranging the deck chairs on our Titanic. The ship is going down but conventional wisdom is it is good somehow. “You know, we are ten feet deeper in the water than we were an hour ago. But it’s good. It gives us more ballast. Gives the crew something to do pumping out all that bilge water. Another margarita anyone?”

Then terrible tragedies like the Haitian earthquake occur that reinforce that not only are bad things happening all around us but also that they are getting worse. The human toll from the earthquake is but a wild estimate at this point, but 200,000 deaths seem to be the current working number. For many Americans, or at least some Americans like that usual jackass Rush Limbaugh, it’s like who cares about the freakin’ Haitians? Oh, and by the way, Obama is using this for his political advantage. But what else would you expect from Rush? This same guy checked into a hospital in Hawaii recently complaining of chest pains. Of course, he used it as an opportunity to gush about how we have the most wonderful health care system in the world, at least for self insured multimillionaires. As for the rest of us, well since we are not multimillionaires I guess we don’t count. In Rush’s mind, we’re just Haitians. If a 7.0 magnitude earthquake struck downtown Washington D.C., Rush would doubtless be calling for us to do no more than bulldoze the whole city under. God bless his compassionate soul.

Our world is rapidly devolving into the dystopia Neal Stephenson chronicled back in 1992 in his prophetic novel Snow Crash. Unable to afford to live in our own homes, or even an apartment, how long will it be before we, like Hiro Protagonist, call a room in a U Store It home. In fact, newspapers periodically chronicle people in my area doing just that. Ask any homeless Haitian and they would be thrilled to call a room in a U Store It a home. At least it is clean and in many cases heated. Those Haitians who are still alive are fleeing the capital Port-au-Prince. Tent cities full of refugees are emerging, but international aid can address just a tiny portion of the overwhelming need. Those who survived for the most part cannot find clean water and food. If the earthquake didn’t kill them, perhaps the cholera and dysentery which will soon be rampant will do the trick. It sounds like it would make Rush Limbaugh happy.

Meanwhile, Pat Robertson believes Haitians made a pact with the devil. That’s why they died in such large numbers. Seriously. This is what religion can do otherwise sensible people. And this guy somehow runs his own university. I guess that long established fault line running though Haiti had nothing to do with the earthquake. Or God told all the sinners to build houses right above it. Any illiterate and starving Haitian has more sense than this Robertson fool, including those who believe in Voodoo.

The sad reality is that hardly anyone without relatives in Haiti gives a shit about Haiti. We do our best to keep Haitians out of the country so their impoverished relatives won’t join us in the states and lower our property values. To the extent that we have cared over the years, we have used Haiti as an experiment in our capitalist values. Organizations like the International Monetary Fund loaned money to Haiti then turned the screws, making repayment virtually impossible.

It’s not like in the best of times their lives were not already miserable. They have the lowest standard of living and life spans in the Americas. They also sit in the middle of hurricane alley. When hurricanes arrive, like earthquakes, they tend to collapse an already fragile infrastructure. Now this: half of the buildings in and around the capital are destroyed or unusable. Of course, they could be rebuilt to modern building codes. Think that is going to happen? In your dreams! Building codes take money you can’t afford living on a dollar a day or less, and Rush Limbaugh certainly doesn’t want to give the ingrates any more. As for Robertson, it would be the same as giving money to the devil. After a year or so, we will have largely forgotten all about their plight, but they will still be as miserable and hopeless as always. Incredibly, when there seems no possible way to make their lives any more miserable, a subsequent disaster proves us wrong.

No, we will soon go back to ignoring Haiti, as will most of the world, because we will need to become xenophobic. As the health care debate has demonstrated, in America we believe in every man for himself, come hell our high water. We are not far from a time when we will leave the uninsured bleeding to death outside our emergency rooms because we won’t want to shoulder even their emergency room costs. With our national wealth quickly moving overseas to countries like China, America continues to be one big fire sale. Soon we are going to emerge from our collective hangover to discover that we are no longer a first world power. This is what happens when you neglect your infrastructure and human capital costs long enough because you are intoxicated by ever lower taxes. The whole neighborhood just goes to hell. We will realize that we can no longer afford our military, our international commitments, or even Social Security and Medicare because our creditor China says we can’t. And that means when we have no more means to beg or borrow, we move toward second-class status, which is sort of like Mexico. America will become a harder, meaner, more intolerant, more polluted place that will border on anarchy. The gated communities will go up just like in Snow Crash, but this time there will be armed guards patrolling the fence and manning the gates.

What we can do, like almost every country in the world, is keep adding recklessly to our population, which today guarantees a lower standard of living. More natural wilderness is transformed into ugly sprawl. With more mouths to feed, we have more reasons to punt issues like global warming because trying to maintain our standard of living will always trump over serious action on the environment. We are already there. The social contract is fraying. Living on social security alone means you are living in wretched poverty. At best, so long as you do not get sick you can afford to inhabit that trailer somewhere. However, there won’t be enough left over to fix that hole in the rusted trailer roof, let alone buy your heart medicine.

I see it in my own in-laws. To the extent they have a middle class lifestyle, it is thanks to a reverse mortgage on their house in a burb outside of Phoenix. It was not worth that much to begin with and is worth even less now. Most likely their equity is gone. When their air conditioner broke down, they were looking under the sofa cushions for money to get it fixed. About the only thing they can count on is Medicare and getting that monthly social security check. They allow them to exist, but certainly not to live. It’s been more than a decade since they took a real vacation. Instead, you eat light and watch a lot of Fox News.

A chain always breaks at its weakest point. In the western hemisphere, that has traditionally been Haiti. The conditions that caused Haiti are leaching all over the hemisphere. This includes here in the good old United States of America. As is well documented, in the 2000s when we had the bliss of Republican rule, our wages stayed flat, our net worth declined, our stocks lost value and we added no more jobs to the economy. Naturally, upper class Republicans did well. Their plan worked great, for them, as it always does because they are experts at screwing those who make less than they do and getting applause for doing so. Those jobs that we did add were at Wal-mart instead of IBM. However, our waists expanded. Perhaps that’s progress. All that extra eating and lack of exercise though helped cause health costs to explode.

No wonder that these days we prefer to escape reality, if not in traditional vices like booze and drugs, then, like Hiro Protagonist, in our virtual worlds in cyberspace. There we make our own pretend reality. We kill demons online in multi-user role-playing games while our first world status crumbles around us. It’s true in the U.S.A. but is also worldwide: collectively we have exceeded our resources which means we are all driven to figure out how to get a bigger share of a smaller pie. We already sense the truth. There is no magic technological fix. Anyone whiz bang new technology invariably brings with it other hidden costs. Nuclear power begat vast quantities of nuclear waste and tragic nuclear accidents. More recently, our new compact fluorescent lights carry the burden of all their mercury vapors, most of which leaches back into our already toxic atmosphere.

We are doomed and we are in denial, but in Haiti, denial is not an option. Eventually we too will have to acknowledge the truth. If we ever reach that point, it’s unlikely that we will be able to summon the nerve to actually change our situation for the better. Instead, we’ll be eyeing our neighbor trying to figure out how to make his life more miserable so we can profit from his misery. This is the new American way: ask not what you can do for your country; ask how you can profit at your neighbor’s expense.

We should weep not just for the Haitians, but also for ourselves for Haiti is our destiny too. The more we deny our connection to Haiti, the worse it will be for us and the sooner we will share their misery. We have already laid out that path in front of us.

January 22nd, 2010 at 09:02pm Posted by Mark | Politics 2010, Sociology | no comments

Financial Winners and Losers

For most of us the current recession, already the longest lasting recession since the Great Depression, is an unpleasant reality. 345,000 jobs were lost in May, which raised the official national unemployment rate to 9.4%, the highest in over a quarter century. While the trend is improving, this is still very bad. The Labor Department estimates 14.5 million Americans are unemployed. If you include the underemployed and those who gave up looking the unemployment rate is 16.4%. Many of us can look at our investments and find they are worth half of what they were before the recession started. Stock market indices reflect this trend. Meanwhile, real estate prices keep plummeting. Surplus homes abound, as financially distressed people walk away from their mortgages. All these statistics document that the economic pain is pervasive and widespread.

Yet despite all this pain, there are winners out there, many of whom are profiting from our pain and losses. Fahreed Zakaria, a Newsweek columnist, recently documented some of them. China’s Shanghai Index is up 45%. Brazil’s stock market is up 38%. Indonesia’s market is up 32%. Retail sales are 15% higher in China this year than they were a year ago. In India, car sales are up 4.2% compared with a year ago. All these countries are expected to grow this year while most of the rest of the world’s economies will contract. Learning why these countries are bucking trends is interesting. What it amounts to is that they are not overburdened by debt. Consequently, they have plenty of money to spend and invest. For cash rich countries like China, right now the world is a bargain. That is why they are buying foreign energy companies and purchasing mineral rights. The effect is to rapidly extend their influence across the world, simply because they own more of it.

Americans are belatedly discovering that not all forms of wealth are equal. The value of stocks and homes in particular are directly tied to the current state of the economy. When the economy tanks, they lose proportionate value. When the economy tanks severely, your house can have negative worth, flipping from an asset to a liability. Stocks too have little value if you need to sell them in a recession. Many Americans today feel compelled to sell their stocks, usually acquired through a 401-K plan, simply to survive. They do so in part because whatever meager savings they had acquired have been spent trying to hold on to their lifestyle. On the other hand, savings are more tangible as well as reliable. Perhaps that is why Americans are belatedly getting the religion: an old-fashioned savings account is good, not bad. Savings rates, which were at 0% before the recession are now at 5.7%. However, savings accounts do not offer a complete panacea either. The reason we bought stocks and houses in the first place is that inflation often ran ahead of on the marginal interest we might have earned on any savings.

Like the Chinese, Americans who find themselves cash rich in this recession now have an opportunity to shop for bargains. Our nation is now one big red light sale. With a few exceptions like health care, there are bargains everywhere, but particularly in housing, stocks and commodities. The smart Americans who kept their jobs and have sizeable stashes of cash should be scooping these bargains up.

Like most Americans, I do not have huge sums of readily available cash to invest. What amounts I do have I am tempted to invest in good undervalued stocks. Take General Electric. GE is perhaps the best-managed company on the planet, having sat on the Dow Jones Industrial Index since 1906. Its stock price actually slipped below $6 a share briefly in March, largely due to its financial subsidiary. It is currently trading at around $13 a share, but over the last decade, its price has been $30 to $40 a share. Shrewder investors than me may see red flags in owning GE stock, but I suspect it is a bargain. Likely, many other well-established companies out there can be purchased at a substantial discount too, only because the current economy substantially discounts their long-term worth. Their worth is discounted in part because people have to sell stocks to turn into cash to pay immediate expenses.

What lessons can we learn from this miserable experience so we do not repeat it? One may be a lesson I learned in 1988: unemployment sucks. I have remained fully employed since then because I have remained a civil servant. Private industry is certainly important, and in the short term often pays better than the public sector, but it is also inherently chancy. Having a steady paycheck during turbulent times is a great blessing. In my case, it is also a blessing to know there is little likelihood that I will be fired if the economy tanks further. As a civil servant, I will never be a millionaire. On the other hand, I should have steady employment. Moreover, when I retire I will have a pension to draw from, as well as social security and investment income from my 401-K. While I am unlikely to retire to a lavish estate in the Hamptons, neither am I likely to eat dog food in retirement. I am likely to have what now seems to be vanishing: a real retirement that should include occasional trips to exotic locations as well as good medical benefits, which are increasingly important as I age. I was not thinking about these things nearly thirty years ago when I first joined the civil service, but in the current economy, my decision looks smart. If you feel like a piñata from the last couple of years, perhaps it is time to consider some place other than private industry as a career, whether it is government service, a religious institution, a non-governmental agency or a nonprofit. There is no requirement that you have to spend your life in rough career waters.

Speaking of careers, if you have looked behind the unemployment numbers, the value of advanced education should now be clear. While people with bachelor or better degrees were affected by the recession, as usual they did better than those with just high school education. Where were the most jobs lost? Simply drive through the rust belt. Manufacturing took the biggest hit, and manufacturing jobs tend to require fewer skills. Also disproportionately affected were service related jobs that depend on the economy. When people have less money, they travel less, so we have lots of unemployed pilots, flight attendants and baggage handlers. When people have less money, they are not buying houses, which is why many realtors are working part time at best. With less money in circulation, there is less need for bankers, stockbrokers and securities dealers. The lesson: advanced education reduces risk of unemployment as well as usually pays better. Advanced education is needed not just because it pays better but because our world is more complicated. It needs increasingly more people with the advanced skills to manage and understand it.

I hope that some of us are learning to be thrifty. As someone raised from children of the depression, thrift came naturally to me. Apparently, it did not to many of my generation, because so many are overleveraged. The recession should teach us that many of the things we thought were necessities are luxuries. A family does not necessarily need two cars. My family survived on one car until I was out of the house. You don’t have to shop at Harris Teeter when a Shoppers Food Warehouse will do. You don’t need to buy shoes at Neiman Marcus; you can get a decent pair at Payless. If you are smart, you will funnel the difference into savings.

And speaking of savings, if you are rich enough to put in money for retirement but not rich enough to have at least six months of expenses in a savings account, perhaps you should at least be channeling some of that investment money into a savings account instead. In actuality, six months of living expenses is considered on the low side. You would be wiser just match your employer’s contribution into a 401-K (or perhaps put just 3% if they offer no match at all) and funnel the extra into high yield savings accounts. Unless your job is very secure, have the goal to accumulate at least 75% of your yearly expenses into a savings account.

By saving money instead of borrowing it, you make yourself more financially secure and you help turn the United States into a creditor nation again. Until 1978, we were the world’s largest creditor nation. Now we are the world’s largest debtor nation. The United States still has the world’s largest economy. These dynamics can be turned around, if we take time to learn from this recession. If we do it right, the next time a global recession rolls around we will be prospering like China and Indonesia instead.

June 8th, 2009 at 07:43pm Posted by Mark | Sociology | no comments

Death by Objectivism

Is Objectivism dead? Objectivism, in case you are unfamiliar with it, is a philosophy created and articulated by the writer and philosopher Ayn Rand, who died in New York City in 1982 at the age of 77. I became acquainted with the philosophy in my early adult years when I read her novel, The Fountainhead. It told the story of a brilliant but eccentric architect named Howard Roark. Much like Number 6 in The Prisoner, Roark lived life on his own terms. He would not compromise with this encroaching thing called the real world. I have to admit that for a while I liked the novel and the character, although Roark was so preachy he would put most ministers to shame.

I purchased but never finished Rand’s most seminal work: Atlas Shrugged. Not that I did not try. I plodded through it for several hundred pages then gave up. To call it a novel was charitable. Instead, it was a philosophical screed, which detailed Rand’s philosophy of Objectivism. If Howard Roark was excessively preachy, John Galt was an Objectivist supernova. I suspect most readers were like me and simply could not find the patience to endure its 1368 pages. However, a few key intellectuals of the 20th century did make it through the novel and absorbed it whole cloth. Sadly for America, two of them turned out to be prominent economists. One was Milton Friedman, who won a Nobel Prize for Economics. The other and far more important one was Alan Greenspan, who until a few years ago was the Chairman of the Federal Reserve and very possibly the most influential monetary guru on the planet. Markets trembled with every nuanced word that came out of Greenspan’s mouth.

I can see the appeal of Ayn Rand and Objectivism with certain economists. Economists by nature are enamored by numbers are less enamored with squishy artifacts like religion. Rand, an atheist, gave voice to the secular capitalists of the world. They latched onto her key idea, immortalized in the words of the fictional Gordon Gekko and spoken by the actor Michael Douglas in the 1987 Oliver Stone movie Wall Street, “Greed is good”. The “greed is good” mantra, formally sanctioned by President Reagan in the 1980s has been the philosophical cornerstone of the last few decades. Its unchecked version called Objectivism has now been proven bankrupt, much like many of us Americans.

In short, Objectivism became something of a sanction to charge forward with the reckless accumulation of wealth by all means, fair and foul. It is a “Me First” philosophy that really could care less about anyone other than “Me”. According to Wikipedia:

Objectivism holds: that reality exists independent of consciousness; that individual persons are in contact with this reality through sensory perception; that human beings can gain objective knowledge from perception through the process of concept formation; that the proper moral purpose of one’s life is the pursuit of one’s own happiness or rational self-interest; that the only social system consistent with this morality is full respect for individual rights, embodied in pure laissez-faire capitalism; and that the role of art in human life is to transform man’s widest metaphysical ideas, by selective reproduction of reality, into a physical form—a work of art—that he can comprehend and to which he can respond.

As a practical matter then, Objectivism is individuality gone amok, i.e. without boundaries. It does not care about the consequences of extreme selfishness. Embracing pure capitalism is more important than minor things like whether as a consequence we also wreck the planet, or impoverish whole other classes of people.

As we watch our economic house of cards dissolve I am also seeing, in part, the pure philosophy of Objectivism, articulated in policies by its rabid followers, proven utterly and catastrophically incorrect. This is to the detriment of nearly everyone, including Objectivists. For at its core Objectivism is in denial about the way things actually are ordered. It is in denial that we really are all connected to each other, and that what affects you in fact really does affect me, everyone else, the planet and even the universe. In fact, consciousness does change reality and when it does, it affects everyone else who lives because we too are inextricably tied to reality. Consciousness and reality are not wholly separate domains, as Rand postulates, but intimately connected. If you mess too much with reality by trying to change the way nature ordered it, the consequences can be dramatic and not very pretty. See it in global warming. See it today, for example, in Las Vegas neighborhoods where you can drive through neighborhoods where most of the houses on the street are in foreclosure.

Wall Street barons, worshipping the almighty dollar, emboldened by extreme forms of laissez-faire capitalism promoted relentlessly through the monetary policies of Alan Greenspan and by the Bush Administration, promoted policies that took our money and effectively threw it down rat holes. With a pure (or close to it) laissez-faire capitalism, where new financial instruments could be created without government intervention, all the predictable things happened. We were caught in our own greed and were purposely mindless of the cost our unchecked greed and unregulated financial instruments would have on the economy. In particular, extreme capitalists like Alan Greenspan, through policies like making money artificially cheap to borrow, created a financial chasm. We were encouraged to overextend our financial lives, living in the moment and remain largely heedless to the long-term consequences of our actions.

Fortunately for me, it did not take me more than a few years of pondering before I realized that Objectivism was unworkable. Little did I know though that this philosophy would gain critical traction among an elite number of economists who could actually put it into practice on a large scale. It turns out that when this is implemented the philosophy, rather than enabling self-actualization, has the effect of moving much of our national wealth to better-run countries overseas. Before Ronald Reagan was elected, the United States was the largest creditor nation. Now, we are by far the world’s largest debtor nation.

Our Secretary of State Hillary Clinton was recently in China. She deliberately downplayed our concerns about their miserable human rights record, but did speak up about the need for China to keep buying our U.S. Treasury bills. They have cash that we need to execute our economic recovery plan.

Atlas Shrugged should go on the shelf with the other lunatic books like Das Kapital and Mein Kampf that have proven unworkable and destructive to humanity and the world. Communism does not work. Fascism by Aryans does not work. The extreme capitalism articulated in Atlas Shrugged does not work either. Objectivists should never again be allowed to control the levers of our financial system.

Ayn Rand died surrounded by admirers with a big dollar sign above her bed. I kid you not. This devotion to unbridled selfishness even on her deathbed helped inspire men like Alan Greenspan. Instead, her life ultimately proves how meaningless the obsessive pursuit of self-interest actually is. It destroys rather than helps us see the connections between each other. It is the vitality of these connections between us that builds the kind of wealth that matters: peace, tolerance, mutual understanding, healthy relationships, harmony and love. These are the true measures of a healthy world and a healthy person, not the number of dollars in your bank account.

March 8th, 2009 at 03:08pm Posted by Mark | Politics 2009, Sociology | 4 comments

Putting the “bye” in bipartisan

It is clear that President Obama did not spend many years in the U.S. Senate. As an Illinois state senator, he was used to crossing the aisle in Springfield. When he came to Washington, he made a habit of crossing the aisle in the U.S. Senate too. He rarely crossed the aisle to compromise his own principles, but to try to find consensus so that the notoriously slow U.S. Senate would actually move on some issues. His goals were laudable although the number of times this approach actually worked was rather small. Few issues were sufficiently nonpartisan that significant groups of senators could be persuaded to put country or simple pragmatism ahead of party.

As president, Obama wanted to do the same thing. His thinking is that our economic crisis was grave and as large a national challenge as September 11th was for President Bush. After September 11th, Americans and Congress largely rallied behind President Bush. Democrats largely decided they would accede to him on foreign policy matters, but even on many domestic policy matters, such as large tax cuts, they acquiesced. Such accommodations though were rarely bipartisan. They amounted to capitulation. Democrats were rarely successful in convincing Republicans or President Bush to accommodate their ideas.

To show Republicans he was serious, Obama nominated three Republicans as members of his cabinet. He retained Secretary of Defense Robert Gates, gave the job of Secretary of Transportation to Ray LaHood (formally a representative from Illinois) and nominated as Secretary of Commerce New Hampshire Senator Judd Gregg, before he abruptly withdrew last week. He was trying to show Republicans that he was serious about running a bipartisan government. He then invited Republicans to tell him their ideas for this proposed economic stimulus bill. The final bill to be signed Tuesday incorporates many ideas pushed by Republicans including large tax cuts.

What did he get for all this effort? In the House of Representatives, every single Republican voted against the House bill as well as the final bill. On the Senate side, three moderate Republican senators crossed the aisle, the bare minimum needed to keep the bill from being filibustered into defeat. Two were moderate senators from Maine who have to win reelection in a state that like most of New England is trending blue. Pennsylvania Senator Arlan Specter, also from a predominantly blue state, was the only other Republican senator to break party ranks. He did so with some trepidation. This vote may well cost him in 2010 when he runs for reelection. His concern is not so much the general election as with the Republican primary. Americans in general support President Obama’s stimulus bill, but the Republican rank and file are up in arms.

Republican opposition is thus partially rooted in opposition from the party faithful. Most Republican politicians are also ideologically opposed to the bill. Considering the size of the tax cuts in the bill and the fact that for the last eight years Republicans have embraced deficit spending, you would think they would be in a more accommodating mind. However, this calculus assumes that Republicans want the economic recovery plan to succeed. Rush Limbaugh articulated their true feelings rather well when he recently said he hopes that Obama fails.

Of course they do! Obama failed to understand that for Republicans, party triumphs over country. This is because they cannot conceive of the United States as a “good” country unless it reflects their governance because they know what is right and Democrats do not. It is that simple. If Obama’s plan succeeds, and frankly, the odds are against Obama, it will mean larger Democratic majorities, more years of political estrangement and no clear way to get back power. If it does not succeed, or is perceived to have been ineffective, by voting No they can say “We told you so”, which sets them up for possible electoral gains in 2010 or 2012. In short, by voting No, there were few political downsides and plenty of potential upsides. It reinvigorated the party faithful, who were feeling dispirited and morose over their drubbing in the last two elections. It showed that they stood on principle, something they were not so great at during the last eight years. Standing on principle, they hope, positions their party to be seen in a new light. Since they are out of power anyhow, the way back into power is to be well positioned when the other party screws up. With a government as large and as unwieldy as ours it is not hard to screw up.

As I mentioned, Obama’s economic recovery plan is unlikely to yield the hoped for results. Like all legislation out of the Congress, it is ultimately a work of political accommodation. In this case, by accepting so many Republican ideas, the plan became watered down and is likely to be far less effective because it is less focused and coherent. Tax cuts have failed to stimulate the economy in the past but here they are yet again. While they won’t work this time either they do give Republicans something to take back to voters, while giving them cover because so few of them actually voted for the bill. It is unlikely that the nearly $800 billion bill, in spite of its huge size, will be enough to really jumpstart the economy. Most of the money will not be spent in 2009, and as a percentage of the nation’s gross domestic product, the amount of money is rather tiny. It is likely better than doing nothing, as it provides vital funds to extend unemployment benefits, food stamps and health benefits to millions of Americans who desperately need them, but it is more of a Band-Aid than a solution.

The reality is that bipartisanship is dead in Congress and is likely to remain so. Obama may want to bring about bipartisanship, but it is only possible if the parties want to be bipartisan. While the American people in general embrace the idyllic notion of bipartisanship, there is no sign that that our political parties want to govern in a bipartisan way.

Obama is a smart man but I am still surprised he did not see this coming. Bipartisanship has great promise, but the soil is not now right for it to grow. It is unclear if the soil will ever be sufficiently fertilized. Thus far, it has had no upside for him except possibly keeping his approval ratings sky high. As a means of effecting helpful policy changes, it is counterproductive. In the future, it is likely that President Obama will give lip service to bipartisanship and work with Democrats and a handful of moderate Republican senators to get the changes he needs. Clearly, Republicans are only interested in promoting their own political resurgence and are hostile toward any actions that might help Obama succeed in these perilous economic times.

February 15th, 2009 at 10:40am Posted by Mark | Politics 2009 | 2 comments

Scary times

On New Year’s Day, I wrote this post wherein I assessed my family’s financial situation. Like many of you, I determined that my family’s financial life had been sharply devalued. I had done the things that prudent Americans do to have the expectation of having a decent retirement only to find out that someone had pulled the financial rug from underneath us. I am likely doing better than most, but I am still wondering where half of the value of my daughter’s college fund went, particularly since I am now paying her tuition bills and other expenses.

We now have a new Administration and Congress. Congress is about to approve a stimulus bill with a price tag of $790 billion. President Obama claims it will add or save four million jobs. In addition, our new Treasury Secretary Tim Geithner is getting ready to spend the second half of the bailout that Congress hurriedly passed shortly before the last election. Meanwhile the Federal Reserve is looking for new weapons to deal with the financial mess. It no longer has the interest rate lever, as the bank discount rate is effectively zero.

One option the Fed has is to print money. They do not have to bother cranking up the printing presses. The U.S. dollar is a fiat currency, which means its wealth is not based on anything tangible, like gold. The Fed can simply declare that more dollars exist. Whoosh! They can use the money to do things like buy troubled bank assets. The money spent and obligated to try to solve our financial crisis is currently between two and three trillion dollars, depending on which news reports you believe. Bear in mind that Bush left office with about a ten trillion dollar federal debt. We are about to bump that up by another third in just a few short months.

All this money is to fix a problem that no amount of money may be able to fix. Frankly, even our best financial wizards do not really know what it will take to fix this crisis or the magnitude of its cost. There is the hope that if toxic assets can be taken off the books of financial institutions at least they will be able to value their assets with some accuracy again. If that happens then they will feel free to lend credit. Maybe. Whether these steps would actually cause the economy to rebound is unknown too.

During the Great Depression, President Franklin Roosevelt did not know whether his various initiatives would turn things around either. Neither does President Obama. The only imperative then and today is that government must so something. It cannot just stand back while millions join the unemployment roles. President Roosevelt created an alphabet soup of agencies that put people to work on worthwhile endeavors like the improving our national parks. Similarly, President Obama wants to put Americans to work rebuilding our society to fit the 21st century. Only we really do not know what the 21st century economy will look like. Perhaps we will know when we are done.

There are some unanswered questions. If the Federal Reserve can create money by fiat, doesn’t all this new money just devalue the dollars we already have? Could this be good? After all, if deflation is a problem, devaluing our money promotes inflation. We seem comfortable with inflation, providing it is in a manageable range. However, we are uncomfortable with deflation because it is toxic to growth. On the other hand, could all this new money ultimately scare off investors, who will be paid back in dollars that are worth less? Similarly, what happens if the U.S. Treasury puts new treasury bills on the market but not enough creditors snap them up? How do we turn things around then?

No one seems anxious to spend too much time thinking about these scenarios, of course. If realized they could become catastrophic, leading to mass unemployment and hyperinflation that would make the late 1970s seem nostalgic. It could lead the unraveling of society as we know it.

One hopeful sign is the value of the dollar. Logically it should not be rising against other currencies when our economy is quickly contracting. Yet it is. This is true in part because this economic downturn is hardly just a United States phenomenon. It is global. It may seem counterintuitive to give your money to the U.S. Treasury at times like these. Yet, in a world rife with instability, our government is perceived as the most stable in the world. If you think about it, this is understandable. We had one civil war but are unlikely to ever have another one. We have no neighboring countries interested in invading us. And as we witnessed on January 20th, we have a tradition of peaceful changes in power, even during times of great trial. In a very uncertain world, the survival of the United States government is a good bet. So if you have money under your mattress and it doesn’t feel safe there, why not loan it to the U.S. Treasury? Even at niggardly interest rates, it looks safer in the federal government’s care than in any other place. So it is likely that when the U.S. Treasury auctions off the next trillion dollars in securities, there will be buyers. Perhaps we can ride this thing out by acquiring massive new amounts of federal debt.

It is hard to know how much of this crisis was preventable and how much is just a result of moving from a 20th century economy to a 21st century one. It is clear though that much of it was preventable but government chose to either ignore the problem or actively exacerbate it. Americans emulated their government by living far beyond their means. For myself, I find myself less ideological and more pragmatic. I have no patience for any politician who cannot see past their ideology.

We need leaders capable of impartially evaluating the present and taking pragmatic steps to address our present problems. The good news is that we have a ruthlessly pragmatic president. The bad news is that the vast majority of the Republican Party, and a small minority of Democrats, remain slaves to ideology. There were just enough of these people to gum up this stimulus bill. This means that the stimulus bill is likely to be half a loaf, rather than a full one. Let us hope there is enough sustenance in this half a loaf to actually revive our economy.

February 11th, 2009 at 08:38pm Posted by Mark | Politics 2009 | no comments

What’s causing that great sucking sound

There is plenty of bleak economic news among the recent headlines. Today I read online that housing prices are 18% less than they were a year ago. The last unemployment report showed 7.2% unemployment, but yesterday came a raff of announcements from major employers that they too were cutting jobs. These include Caterpillar (20,000 jobs), Pfizer (8,000 jobs), Sprint-Nextel (8,000 jobs), Home Depot (7,000 jobs) and General Motors (another 2,000 jobs). Even Microsoft is planning to lay off people. It will shed 5,000 jobs over the next eighteen months. In fact, in 2008 the economy shed 2.6 million jobs, the most since 1945 and 2009 is just getting started. We can expect even higher unemployment numbers to be reported in early February. One has to look hard to find any company that is beating the odds. IBM still made a profit and beat Wall Street expectations, but it is unlikely that their winning streak will extend through the current quarter. As for the value of stocks in general, the S&P 500 index is at about 62% of what it was a year ago.

The only thing we can say with confidence is that we have not hit the bottom yet. Many economists think that things will turn around when the government stimulus finally kicks in late this year. I am no economist but my hunch tells me that a real recovery is likely in 2010 or later, rather than this year. In short, this economic downturn may well be the 21st century’s Great Depression. It is dramatically altering our financial landscape and fundamentally changing our assumptions about how society is supposed to work.

Banks are supposed to be in the business of lending, but few want to lend to anyone but their most creditworthy buyers, even after getting huge capital injections courtesy of the U.S. taxpayers. Why? There is too much uncertainty in the market. Why lend out money when you might not get it back? Moreover, sustained deflation is a real possibility. If it happens, it means that banks that hold on to their assets may yield more relative wealth than by loaning it out, even with interest. Of course, if no one lends money the economy halts, which is clearly well underway.

How did all this come about? It all comes down to one word: trust. The global economy runs on it. We have to have trust in our institutions to play by a set of fair rules. Until and unless it does, the economy is unlikely to markedly improve. Equally as important to our recovery as the massive stimulus bill being debated in Congress is the establishment of a new set of financial rules to govern the country and the world.

You may have noticed that the new Obama Administration is working hard to be the most transparent administration in history. It is doing this by putting far more public records online and in a more timely fashion than ever before. By being open about the way it is governing, it is desperately hoping to foster trust.

Yesterday within an hour of belatedly being confirmed, President Obama swore in as Timothy Geithner as the new Treasury Secretary. The evening was well underway when Geithner was sworn in, but Geithner went swiftly from the ceremony to work at the Treasury Department. He did so because the sooner he could affect a new set of financial rules affecting the country, the faster trust could be restored. Geithner and President Obama realize that the new rules must be judged fair, transparent and must be impartially applied. This is how trust is restored.

When Ross Perot first ran for president in 1992, he talked about the “great sucking sound” that would result from the then unratified North America Free Trade Agreement (NAFTA). He predicted that NAFTA would cause more jobs to move from the United States to Mexico than would be created. Whether he was right or wrong was debatable, but in 2009, we are hearing a global great sucking sound as millions of jobs vanish and wealth disappears by the trillions of dollars. That is the sound of trust being lost.

The world is reacting like a wife who discovers her husband is a philanderer. Just as marital trust is hard or impossible to renew after an affair, when shady Wall Street deals abuse our trust (evidenced in diminished stock portfolios and plunging home prices), financial trust becomes hard to reestablish too. In most cases, the abused wife will divorce her philandering spouse. She may marry again, but only if she is confident that her new husband would have the qualities her old husband lacked. When a massive trust crisis happens to a populace, a depression can result.

President Obama, his administration and the Congress thus must work very hard to establish the trust and confidence of the American people and the world. Like it or not, our wealth and future prosperity now rests in their unproven competence. This is why President Obama is working so hard to find common ground with Republicans. Trust is enhanced if both sides of the aisle can embrace a new set of governing rules, and is diminished when it does not exist. This approach may be unpalatable to many on both sides of the political spectrum, particularly given the Republican’s recent and toxic record, but it may be crucial to our recovery.

The good news is that we now have a true grownup leading our country. He understands in this critical time what is required for the rest of us to regain trust. So there is genuine reason for hope. Let us hope that we can work through our jitters and through transparency, decency and fair play come out of this and into a better future.

January 27th, 2009 at 09:29pm Posted by Mark | Politics 2009 | 4 comments

Quantifying incompetence

I can understand why most Americans do not want to look at their financial statements. If you take the time as I did yesterday, it is scary. I do not have all the numbers for my household yet but a year ago, our net worth was around $938,000. Today our net worth is about $771,000. That means in just one year about eighteen percent of our wealth has vanished.

Our real net worth is probably lower. How much is our house really worth? I will not know unless I actually sell it, so I go with our county’s assessed value, which was done before the sub-prime mess fully exploded. There are no bright spots in my portfolio. Our T. Rowe Price New Era fund is worth just 52% of what we paid for it. If this is what our “new era” will look like, it does not sound hopeful. This fund was supposed to be used for our daughter’s college education. We are drawing on other funds for now but unless stocks turn around dramatically over the next few years, we will have lost money set aside for her education, despite investing consistently for fifteen years. It suggests that we would have been much better off putting the money in a mattress.

Our other funds show a similar but less dramatic story. I can only hope that since most of our investments are for the long term that they will actually turn out to be investments rather than places to throw away our good money. Perhaps Michael Moore had it right all along: keep your money in government insured accounts only. Granted, the money may not grow that much, but at least it is unlikely to disappear when you need it.

A year ago, my personal financial adviser forecast that there would be a significant economic upturn toward the end of 2008. This was based on reading and listening to other people he respects. He was proven wrong of course. I cannot hold it against him. Even Warren Buffet lost money in 2008. This was a year when no matter what financial strategy you chose, unless you invested solely in bonds, you were going to lose money. The Washington Post today crunched the numbers and put the total loss on Wall Street during 2008 at $6.9 trillion. How much money is that? Consider that the federal government spent about $2.9 trillion in fiscal year 2008. In one year our investments, and consequently our national net worth, dropped by more than the federal government spends every two years. Gone. Poof.

Despite his prediction a year ago, my personal financial adviser is optimistic for 2009. “We are now convinced that the stock market has either hit its low, or is very close to it,” he tells me in his latest newsletter. He may have something this time. One measure, the Dow Jones Industrial Average, shows signs of bottoming out. It slipped briefly below 8000 and has floated between 8000 and 9000 for a while now. If we have hit a bottom in the stock market then now is the time wise investors should be purchasing stocks. Of course, there is no way to know. With all due respect to my financial adviser, anyone who tells you they do know for sure is bluffing. We will only know in hindsight when the bottom occurred.

Unless you need money from your investments right away, the current value of your investments should not matter too much. What is more important is whether you retain your job and lifestyle. One thing we have noticed in our family is that many information technology jobs have become commoditized. This is not good news for someone like my wife, who lost her full time job on an IT Help Desk in 2004. She was making close to $50K a year. Her job was outsourced to someone who did the same work for a lot less money and who conveniently was not on “staff”. She now has a part time job doing similar work but took a substantial pay cut to get the job. As for benefits, the doctor’s office she works for has little in the way of a 401-K other than a general profit sharing plan. Unfortunately, the money they contribute toward it would not let you live on dog food in retirement. I am more fortunate but even in the software and systems development area where earn my living, many people are hurting. The bottom line is that our standard of living was hurt too and our income (adjusted for inflation) is down substantially from the start of the Bush Administration.

Perhaps this explains why three out of four Americans are glad to see President Bush leave office in nineteen more days. Bush has been saying in interviews that he will be judged by history as a far wiser president than we give him credit for now. I would suspect him of sniffing glue but I think hitting the bottle is more likely. I am confident that historians will not be kind, for reasons I outlined here, but which you already understand.

Our falling net worth is a meaningful measure of the price of incompetence and of the failure of government to, well, govern. It is not as if we were doing stupid or risky things. Rather, our government was doing stupid and risky things by placing inordinate faith in a free market and by actively reducing its oversight role. Frankly though in this economy I feel lucky. $166K of my family’s worth may have vanished in the last year, but we are both gainfully employed and we have maintained our standard of living.

Like most Americans, I feel that January 20th cannot come soon enough. I admire Barack Obama for having the audacity to believe that he can move us out of the national wreckage of these last eight years. When the dung is piled this high, it is hard to see daylight. While I hope my financial adviser is right, my intuition tells me that the dung is much higher than we think. I suspect it will be quite a while before we see the sun. Good luck, President Obama. You will need not just exceptional competence but extraordinary luck if our country is to successfully emerge from the wreckage of the Bush Administration.

January 1st, 2009 at 07:58pm Posted by Mark | Politics 2009 | no comments

The end of the middle class

My thanks to commenter George who, five years after it was published, left the first comment to my 2003 post, The Dual Income Trap. George is one of millions of average Americans who has meticulously played by the rules and done all the prudent things. By doing so, he now finds his family preciously hanging on to its middle class existence. In a way, George is lucky. Millions of others are not so lucky. They have lost their houses and in many cases, their jobs too and are now scrambling. I hope that most have some place of refuge for hard times, perhaps just a spare bedroom in Mom and Dad’s house. Others have downsized their lives and are living in apartments, which hopefully are more affordable. It was clear that their house was not.

The pain Americans are going through can be understood not just in unemployment statistics but also by other shocking statistics. For example, one in ten Americans are receiving food stamps. Autoworkers are feeling in a particularly precarious position. It is not just the members of the United Auto Workers that are wondering how long they will be employed. Demand for cars, including foreign cars, is way down, despite gas prices at $1.60 a gallon. If you are a UAW worker, you have the sinking feeling that you are about to kiss a living wage goodbye forever. Yesterday President Bush approved $17.5 billion in emergency loans to GM and Chrysler. He did so not because he has any sympathy for the UAW and its workforce (whom you can tell he detests) but to ensure they do not collapse until after he leaves office. That way he cannot be blamed for their demise.

This economic crisis should pretty much kill off the middle class as many of us knew it. I define “middle class” as being able to own your own and maintain a single family home, have a car or two, raise a couple kids and live in a generally safe neighborhood. In reality, this life was going anyhow. George mentions that his family income is around $100,000 a year. The real price of admittance to the middle class these days is about $100,000 a year in family income. There are exceptions of course because there are parts of the country where the cost of living is remarkably low. Particularly if you live along one of the east or west coasts, if you do not have $100,000 in family income you can pretty much rule out a standard of living similar to the one (presumably) your family had growing up.

As for those with a family income in the $40,000 to $80,000 range, these people have now largely been priced out of the middle class. Unsurprisingly, they are the ones who have been predominantly getting the shaft during this severe recession. Our nation’s autoworkers have epitomized the collapsing middle class. However, their situation is hardly unique and is emblematic of a very broad problem.

There is little in the way of silver linings here. One lesson these people have learned is that they can no longer charge the difference between their desired standard of living and the standard of living they can afford. Now, assuming they are not in bankruptcy, many find that their credit limits have been reduced and their monthly payments have increased. Some sort of credit correction was probably due anyhow, but this is a hell of a time to go through it. Much of the economic shock we are now enduring is due to the collapse of credit. No wonder we are spending less. No one is willing to lend us the money to live beyond our means anymore. Frugality has become necessary. This means fewer dollars circulate, which translates into a large economic downturn.

Many of the formerly middle class are moving swiftly into what can charitably be called the lower middle class. I prefer to be more realistic and call them the working poor. You are in this class if you find that one or more of the breadwinners are working two or more jobs just to survive. Granted, finding any job in these times is going to be challenging. Good luck even finding a job paying starvation wages at your local Wal-Mart. Most likely, any health insurance, if you had it, has vanished. You may have been living paycheck to paycheck before this economic crisis. Now you are in survival mode, desperately trying to keep a roof over your head and your aging cars usable until the economy turns around.

Even when the economy does turn around, do not expect that your financial situation will markedly improve. Perhaps with the collapse of housing prices you will be able to afford a single-family house again. The dual income trap though will not be going away and is likely to only be exacerbated.

The middle class has been destroyed. It was not an accident because to kill it you had to move money from the middle class to either the poor or the rich. It went to the rich because, unsurprisingly, they have power. Starting in earnest with the election of Ronald Reagan, the rich pulled every lever to make sure they paid less in taxes and you effectively paid more. Government costs what government costs, after all. Whether by increasing taxes for those of modest incomes or through deficit spending, the effect either way is to push the burden on the rest of us less capitalized. If your taxes were cut too but deficit spending made up the difference, it meant that wealth was moving overseas. The effect was to move our collective wealth elsewhere and since most of it was vested in the middle class, the middle class lost wealth. That is one reason why unsecured credit card debt kept climbing. Think of it: when President Carter was in office, we were the world’s largest creditor nation. We owned much of the world. Now we are the largest debtor nation. We are owned by much of the world.

How to change the situation? I wish I could be as optimistic as our new president, but I think he is on the right track. We have to transform our country so that it is the engine of a new 21st century economy. We have to offer products and services that this new resource-constrained world will need. Being the leaders in manufacturing clean technologies will be key, because these will be new technologies will be in high demand, hence profitable, hence wealth builders. If we can do this then perhaps the broken middle class will reemerge.

Our middle class needs to reemerge because our nation cannot be wealthy if its wealth is vested mainly in its aristocracy. Ordinary people power an economy. Until ordinary people have money to power it again, the economy is likely to remain poor. Unfortunately, this transformation process, if it can be done at all, will take decades. We have no choice but to start now. Let us hope our competitors are less adept at creating this new economy than we may be.

December 20th, 2008 at 09:09pm Posted by Mark | Politics 2008 | no comments

Kissing the Rust Belt goodbye

If you want to know why the Republican Party is rapidly becoming the party of the Deep South only, you only have to observe the votes this week by Senate Republicans to block a bailout of our domestic auto industry. Thirty-five Republican senators blocked the bill, which actually won in a 52-35 vote. However, Republicans chose to invoke the cloture rule, which meant that 60 votes were needed to actually pass the bill. Therefore, it died leaving President Bush in the ironic position of deciding that maybe he needs to find $15 billion of the $700 billion bailout of Wall Street to keep millions of automotive and automotive related jobs from vanishing in this country.

Senate Republicans effectively gave the finger to Americans autoworkers this week, while also scorning them by telling them that they were paid too much. (This takes a lot of chutzpah when a senator’s salary is $169,300 a year, and a senator’s pension benefits for even a short stint in the Senate would make autoworkers swoon.) Yes, a bankrupt GM, Ford and Chrysler would probably destroy the evil United Auto Workers. It would also destroy the livelihood of millions of Americans, not just the autoworkers themselves, but a vast network of suppliers, dealers and merchants that eke out a living based on Detroit. But hey, that evil UAW would sure learn a lesson!

Yes, color the Midwest blue. If it is not entirely that way today, it will be in the next election. Moreover, if the key to winning the White House is to win Ohio, I may be in my grave before the next Republican ascends to the White House. (That would be fine with me, providing I live to a very ripe old age.) It used to be that you were showing your patriotism by buying American cars. Maybe you paid a bit more and maybe your car was not as reliable comparable with a foreign model. Nevertheless, it was “Made in America”, and that helped put food on your table, your neighbors’ tables and kept your community vibrant. Now in the bizarre world inhabited by a majority of Republican senators, you are showing true love of country by killing off our domestic automobile industry!

You see this is love. When your father beat your bums black and blue with his leather belt, he was doing it because he loved you. It was tough love. Never mind this sort of tough love that many of us endured growing up would now be considered child abuse. But it is okay to do it with auto industry workers and the vast numbers of workers who earn their living off our auto industry because, well, they are all adults! After all, it is not child abuse if they are not children.

Now the truth is that those of us who did have their bums beat black and blue by our dads (or in some cases, our moms, or both) do generally love them, in spite of their past proclivity toward inflicting violence on minors. You cannot divorce mom and dad. However, you can throw your senator out of office when their term expires. If they just don’t get it, that they are there to serve the interests of the American people, you simply vote for someone who does.

It is unsurprising that those Republican senators that voted for the bailout seemed to represent swing states. Few Republicans from swing states voted for the bailout, but there were some, including Allard from Colorado, Burr from North Carolina, Coleman from Minnesota, Ensign from Nevada and Gregg from New Hampshire. One thing these senators do have in common is that there is little or no auto assembly in their states. I have some advice for these senators: do not expect much in the way of contributions from the National Automobile Dealers Association for your reelection campaign.

There is no question that Detroit has been a follower rather than a leader in the auto business. Its management has been abysmal. However, the United Auto Workers has been accommodating about cuts in wages and benefits, somewhat begrudgingly of course, just not enough to keep up with the competition. What is true is that American automakers cannot be as agile as the foreign competition. For in most other countries the government provides universal health care for all, liberating manufacturers from these costs, or at least allowing them to be controlled. In our country, they are generally borne by employers. However, American cars no longer really deserve a bad quality rap. As Consumer Reports has documented, American cars are now often as reliable as their foreign competition. Part of the problem is the perception, which is often no longer true, that buying American means you will get a less reliable car.

You would think that if American autoworkers were so well paid that they would be living opulent lives. That is clearly not the case. The average assembly line worker for GM makes $28 an hour in wages. This is about $58,000 a year, which is certainly nothing to sneeze at, but not outrageous for a skilled assemblyman. All this assumes of course that they have steady employment. The auto industry has many ups and down, so it is unwise to count on full employment. It is true that autoworkers receive benefits too, but so do many of us who are employed. The cost of benefits is nowhere near the inflated $70 an hour figure bandied about. The Big Three’s pension costs are so high because they also have the legacy of pension costs for existing retired workers and their spouses. Foreign car companies do not have this baggage.

We should look on the $15 billion bailout as an interim measure to help put in place a structure that will make our car companies competitive again. At some point, this will likely mean shifting costs for pensions off the car companies and onto the taxpayer. Then American car companies can compete on something like an equal footing.

Meanwhile, by their votes, Senate Republicans have simply gained the contempt of many in auto producing states. Once you hold someone in contempt, it is nigh impossible to be held in esteem again. This is why Republican opposition to the automotive bailout was so needlessly counterproductive. Even the White House gets it. President Bush understands that his legacy rests on very shaky premises. To leave the White House with the American automobile industry collapsing around him will seal his fate in history.

Based on Senate Republicans’ foolish votes, people like me hoping to see even larger Democratic majorities have new reason for optimism. Any Joe the Plumbers out there living under the illusion that Republicans actually care about people like them are now thoroughly disillusioned. Instead, Senate Republicans are reminding them of their dear old dad and his leather belt, and senators are telling them to lower their trousers and assume a right angle. Why is Dad punishing them? Apparently, they had the audacity to expect a living wage.

Maybe they should run for the Senate instead.

December 13th, 2008 at 08:56pm Posted by Mark | Politics 2008 | 2 comments

Weathering this recession

It is sadly clear to me that our current economic problems are going to be even more severe than they already are. They sure are plenty miserable already. The Labor Department reports today that the nation’s unemployment rate is at 6.7 percent. The real rate is likely quite a bit higher. Moreover, 553,000 jobs were lost in November alone. In the last three months, 1.25 million jobs were lost, which is fully half of the jobs our president elect says he wants to create or save!

Those of us of a certain age have lived through miserable times before. My most painful financial memory was surviving the stagflation recession of the late 1970s and early 1980s. In three years (1979-1981) prices roared ahead almost thirty five percent. The official unemployment rate hovered between six and eight percent and in 1982 peaked at nearly ten percent. When I graduated college in 1978, I joined a dismal labor market. I lived at just above poverty trying to sell lawn and garden equipment at a Montgomery Ward store. It was a miserable few years. It was not as bad as the Great Depression, but it was miserable enough. It was also a lesson that I could not take my prosperity for granted. I concluded I had to work real hard to reinvent myself because poverty sucked.

This recession, if it does not turn into another depression, is likely to be worse than those miserable years. It will almost certainly be the largest economic downturn most of us will live through. Fortunately, we learned a few things on what not to do from The Great Depression. Granted, we did not absorb that a lot of the misery we are currently experiencing was entirely preventable had the government been doing its job. Once our current economic masters dusted off their books on The Great Depression, they discovered that policies back then exacerbated if they did not actually cause the depression. Severe economic downturns are not times for trying to balance federal budgets. If consumers are not going to spend and businesses are not going to spend, you do not improve the situation by governments cutting back on spending too. As unwelcome as additional deficit spending is, there are unfortunately times when it is necessary. It looks like President Elect Barack Obama will follow many of the same strategies as President Franklin Roosevelt, and will massively invest in our crumbling infrastructure and in the technologies we will need to succeed in the 21st century. Whether this and other moves such as recapitalizing credit markets and creating cheap 30 year fixed term mortgages will be enough remains to be seen.

Some characteristics of this recession are unique. While recessions in America have tended to drag down other economies, this recession is truly a global phenomenon. The sole exception may be China, which is still growing rapidly by Western standards, but not fast enough for its population. Unemployment is increasing in China and the natives are getting restless. This means that investors looking for places to make short-term profits are probably not going to find any. In this market, you succeed by not losing the value of your money.

The outlines of our new economy are murky at best, but the old financial rules seem to have turned on their heads. Like most Americans, over the years my wife and I have been practicing what most regard as prudent financial investing. We have put lots of money into mutual funds, 401-Ks and IRAs on the expectation that they would grow over time. Having started this process mostly in the early 1990s and looking at the value of my portfolio today, I seems like I might have been better putting the money into a mattress. If I am to gauge the future value of my investments by what I have done so far, I should do something differently.

So, no question, people are being screwed now. The American dream is unraveling for millions of honest and hardworking Americans, who feel like they have been hit by a two by four. Large numbers of them have joined the unemployed. Others have lost their homes. Others are massively overleveraged, having bought houses at inflated prices only to see housing prices collapse. They have negative equity and negative net worth. If they can hold on to their jobs maybe they can maintain their standard of living. If they cannot they face bankruptcy, possible homelessness and generally bleak prospects. Four years ago, I wrote about the fading middle class. In 2008, we are watching its painful unraveling. There are only a few spots of good news. First, those of us watching our dreams recede have plenty of company. Second, we will have a pragmatic president that is assembling a team that could actually turn this colossal economic mess around. Third, if we have the cash, we can afford to drive our cars again. All it takes is a global financial meltdown to bring gas prices to under $2 a gallon.

I feel fortunate. Mainly, my wife and I are employed with little likelihood of joining the ranks of the unemployed, no matter how bad the economy tanks. It is true that our portfolios are down but so are everyone’s. We have a lot of money saved up for our daughter’s college education, which she started this year. However, the part that is invested in mutual funds is worth thirty to forty percent less than it was a year ago. I expect we will be able to finance our daughter’s education somehow, but it may be painful. While I feel fortunate, I also feel grateful. I am a baby born of parents who endured The Great Depression so I picked up their thriftiness. I have mostly succeeded in living prudently.

What do you do if you lost your job? Obviously, you should feel highly motivated to find another job, but the reality is you are like a salmon swimming upstream. You will face a lot of competition so your hope is to have a marketable skill and be excellent at it. You need to brush up your resume, your job interviewing skills and network your friends like crazy. Unfortunately, despite doing your best you may still find yourself unemployed for a long period. There is no sugar coating it. Your joblessness is likely to be a miserable experience. However, there are things you can do to survive. If you are a new member of the miserably unemployed class, you should read this diary on dailykos.com. It was obviously written by someone who has learned some painful lessons and had the courtesy to take notes for others.

For the rest of us who are just running scared, I have some suggestions. If you have a decent paying job, count your blessings. Do you best to stay in your boss’s favor by exceeding expectations. Second, if you feel overextended, you probably are, so you should try to find ways of simplifying your life. That means reducing expenses, paying down debt and deflating your lifestyle and your short-term expectations. You might want to trade down in houses (assuming you can sell your house) so it comes with a payment you can realistically afford. Third, realize that in the today’s wacky economy, cash is king. That is not to say that credit cards will go away, but credit will be harder to come by and you will not have as much of it. You cannot assume anymore that others will be willing to lend you money, particularly for unsecured debt.

So pay with cash, which these days often means using your check card. Start hording cash, which means you need to set aside a certain percent of your income per month into a savings account. How much? Enough so you feel your lifestyle is substantially diminished. I recommend at least five percent. You may need that cash should you become unemployed. Even if you do not become unemployed, you are likely to need a horde of cash to pay for expenses that invariably come up and for which you used to say, “Charge it!” You know, events like fixing your car. Wall Street has seen the light on the value of cash. Investors are spurning risk and figure the U.S. Treasury is the only source of safety. So they are buying Treasury Bills even though they pay almost no interest. If you are concerned about your finances in the short term, realize that it is better to hang on to your money you need in the short-term even if you are not earning any interest rather than watch it disappear in the stock market.

It is hard to imagine what America’s financial landscape will look like in ten years. We may have an experience like Japan had in the 1990s and much of this decade: a recession that never seems to go away. Nevertheless, it is likely that this current recession will be long behind us in ten years. Millions of Americans are going through excruciating financial pain right now. While painful, they are also learning important financial lessons. I hope that when the economy improves they will not revert to old financial habits and live beyond their means. Millions of us have been living with a hole in the roof of our financial houses, assuming that the weather would always be sunny. Now we know the rain comes eventually. If we live within our means, while we may feel poorer, in fact we will be more financially resilient.

If you are going through misery right now, it is likely that at some point the economy will improve to the point where you will find a job again. Your new life may resemble a downscaled and more hassled version of the life you had. With luck, tenacity and ingenuity, you may get it back. Also, realize that while it is raining heavily now the rain does stop eventually. This storm must eventually pass.

December 5th, 2008 at 05:44pm Posted by Mark | Sociology | one comment