Sunday, October 12, 2008

Confronting Your Inner Pessimist

I've been a bear for a long time. It's not as fun as it looks. Even when stock prices are falling faster than they have in 90 years. There's very little satisfaction one can derive from the utter destruction of nearly everyone's wealth. But I'm trying to look past the numbers and determine the bigger picture. Yes, prices of every asset worldwide are falling and people are losing their livelihoods. That is the easily seen. But what does it really mean? There are changes in social mood and in the acceptance of what was once conventional wisdom. There are changes in time preferences and in the valuation of certain objects. That is the hidden shift that is taking place under our noses. And it is far more important than the Dow falling 2000 points in a week.

I operate under the pretext of, "what everyone knows isn't worth knowing." So while everyone keenly watches the price of stocks tumble, foreclosures accelerating, credit markets closing and leaders of the world amassing to agree on a "solution," I am looking at something else entirely: The acceptance of a new reality - Deflation.

But are inflation and deflation merely a representation of prices or of the total supply of money and credit? No. They are psychological conditions.

Inflation encourages the "instant gratification" aspect of our society. Materialism in general, is rooted in inflation. So are political apathy, narcissism, environmental degradation and a host of other ailments that have plagued us for decades. Inflation represents a transfer of wealth from the poor to the rich. "Use it or lose it," is the phrase than could be used to describe one's savings.

Deflation is the cure to these unsustainable problems. It forces people to live within their means and to focus their energy on what is really important to them. That can only be a good thing.

So while I have made a living over the last couple of years being what some might term as a "professional cynic," I see opportunity in the sudden realization of this new reality. Even if that realization is not conscious, it is happening and it is a massive step in the right direction.

But in talking with others over the last few weeks, there seems to be only a vague understanding of this new reality. They only sense the shifting mood as an unfortunate symptom of falling stock prices, not the other way around. But I suppose that is to be expected. So many people have constructed their lives around the expectation of future inflation, they simply cannot see it's end as a good thing. Very much like a drug addict having to attempt being 'strait' when being 'high' was the new normal. To some it is the "end of days." To others, merely a frightening revelation that much of the 'old' reality wasn't very real in the first place.

To me it is the first step toward recovery from our addiction to debt.

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