First, an anecdote. I had an interesting conversation with my grandfather this week that highlights this quite well. He is still self-sufficient, despite pushing a 9-handle and is very "with it," reading through the papers daily and even this blog on occasion (Hi Grandpa!). He was telling me how he has naturally started cutting back on his expenses, even though he admits he doesn't really have to. I told him I had been doing the same - without even really trying to. I started eating potatoes - a monotonous routine of my childhood that I learned to hate, but now like again. I found a really good bottle of organic french wine for 3 Euros that I have stuck with, instead of dabbling in the 7-8 Euro bottles. I gave myself a pay raise after logging better trading profits, but I don't use it. I'm spending even less than I was before. My grandfather's frugality should come as no surprise. He was a child of the depression. He learned to save what he had and to live within his means. What he has witnessed over the last few decades is extremely foreign to him. Our younger generations will develop the same attitudes toward debt and risk taking as his generation has.
This change in consumer behaviour is one reason of many that will ensure that any reinflationary efforts are futile - but one that I have never seen a mainstream economist acknowledge. Paradoxically, for adherents to neoclassical economics, this change in consumer behaviour will also sew the seeds for recovery. As the savings rate rises, people will eventually begin to use their savings for investment in productive capacity. I say "paradoxically for neoclassicals" because to Austrian Economists, changes in consumer time preferences are what the driver behind the business cycle should be. It is well understood. But for the neoclassicals, consumer choices in regards to their spending habits need to be controlled in order to prevent the twisted phenomenon of "paradox of thrift."
Depew writes in #5 of his daily "5 Things" article:
“It’s kind of funny, but I feel much more satisfied with the things money can’t buy, like the well-being of my family, I’m just not seeking happiness from material things any more”
- New York Times, "Conspicuous consumption, a Casualty of Recession," March 9, 2009
If the 90s and most of the first half of the 2000s were about accumulating and displaying "wealth," the next decade will continue the mean reversion toward something altogether more austere, if not more sensible. Debt reduction and the rejection of (and guilt projection toward) materialism will continue as meditations on not just doing more with less, but doing less... period.
All manias leave something undervalued. What has been undervalued for a long time now - reflection, quietude and time, to name but a few of the things "money can't buy" - will now enter their own bull market, which entails a different ordering of priorities and a more challenging view of what it means to "possess wealth."
While this may seem refreshing and positive in the way I've oversimplified it, the difficulties we face going forward will lie in how capitalism seeks to commoditize things that are difficult to measure and quantify, and what mediums of exchange compete for primacy in the market for these intangibles.
Changing attitudes are what Bernanke faces in his battle to inflate. Flaunting wealth is out. Frugality is in. I have been talking about frugality for quite some time. A Google search of this blog for the words Frugal, Frugality pulls up 88 instances (soon to be 89). I am quite sure this is not the end of it.
Those preaching inflation simply do not understand the role attitudes play on the the Fed's ability to inflate, nor do they understand the Fiat World Mathematical Model that also hinders the Fed's ability to inflate.
Truer words have never been spoken. If you have been led to believe that a few trillion in credit swaps are going to cause a Weimar-style hyperinflation, you have been misled. Chances are, those telling you this are trying to sell you something at the same time. "Stocks will rebound because of it. Home prices will bottom soon because of it. Gold is going to $5000/oz because of it. Oh, and by the way. If you want to buy any of the above, I'm your man."
When the next economic expansion takes place, it will not be on the back of asset speculation. The sooner we realize this truth, the sooner that expansion will take place.
Things that need to occur prior to recovery:
1) An increase in the rate of savings - probably to above 10%
2) A liquidation in all major asset classes
3) A reduction in the costs of operating businesses (via overhead costs, tax cuts, red tape reductions, etc)
4) A number of structural changes to accommodate 1-3
We can either do this the easy way or the hard way.
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