Tuesday, November 16, 2010

Our day of reckoning may never come

Everyone likes to talk about our nation’s deficit, the national debt, unfunded liabilities. Politicians and pundits declare the situation unsustainable and predict dire consequences for inaction. Yet, inaction continues. I believe that in many cases, individuals in a position to fight for change decline to do so because they believe that eventually, things will come to a head and we’ll be forced, as a nation, to take drastic action. There will be a day of reckoning. A day when we wont be able to take another step, or draw another breath, without first fixing our financial problems. Unfortunately, it’s probably not going to go down that way.

The evidence is all around us. There has been no reckoning in North Korea, Cuba, Venezuela, Burma, Somalia. These and other chronically impoverished nations illustrate that things are never so bad that they can’t get worse. Even in countries where people resort to eating tree bark to try to avoid starvation or sell their own organs to pay back loan sharks, the powers that be remain the powers that be.

So how do you break the will of an entire nation’s population and keep it broken from generation to generation? There are many variations on the theme, but generally speaking, you convince people that self-interest is not only insignificant, but immoral. You sell them on the idea that they exist to serve others, which by definition is everyone except themselves. Then you become the interpreter, communicator and executor of exactly what “others” need them to do.

You can’t do it all at once. Especially if a country has had a taste of free market success. You start out small, with the simple idea that sharing is better than not sharing. Then you make sharing mandatory, through the tax code. Then you just continue to increase the amount of mandatory sharing, being careful to bestow the fruits of the sharing on people who are supportive of your agenda. By the time they realize that there’s very little left to share, you are in control of all the nation’s critical resources and much of the population is convinced that their own personal well being is not important anyway.

It’s also helpful to convince the population that the situation is much better than it really is, or that relatively speaking, they are doing alright. You do this with propaganda, misinformation and censorship. This worked pretty well for the Soviet Union for a long time. Then the fax machine came along and ruined everything. People behind the iron curtain started getting news about all the cool goodies in the west they didn’t have access to. However, if the developed world sinks into the muck of stagnation and mediocrity together, what are we going to compare our situation with? Future generations may just conclude that whatever they’ve got is as good as it gets.

Left to their own devices, individuals don’t operate exclusively in self-interest mode or common good mode. We switch from one to the other and back again as the situation changes from minute to minute, day to day, year to year. But the default mode has to be self-interest. We have real life case study after real life case study to show that making the common good paramount and imposing it from a central authority leads to nothing but misery. Yet we continue to pursue it because it’s what we’ve been taught in school, in church, at work, by just about everyone in a position of authority since the day we were born.

The collectivist movement is like carbon monoxide; sucking the life from the blissfully unaware. If we continue down this path there wont be a big climactic crash. There wont be an “I told you so.” moment. We will simply drift farther and farther down in quality of life as our sense of self and the will to fight for it gradually fade away. I guess the good news is that civilization wont last forever powered by a bunch of dull drones. It too will fade away, new alliances will be made and new societies will arise, but we’re talking centuries, not decades.

The alternative is to demand that the government take less and do less; a lot less. I don’t mean just not asking for more. I mean demanding less, because there will be resistance from those who actually want to promote that downward spiral. They honestly think it’s best for humankind to live as more of an orderly hive than a bunch of selfish individuals. Ironically, selfishness is the only thing that can save us from ourselves at this point.

Wednesday, November 10, 2010

How to manage inflation

With the Federal Reserve "monetizing the debt" or printing money and buying up Treasury securities from banks, it's time once again to review inflation strategy. Let's assume for the sake of this article that we're going to get an inflationary period in the near future. Maybe we will, maybe we wont, but let's just say we will. How do you deal with it? There are things that both retailers and consumers can do to cushion the blow.

First let's look at retailers. Assume that each time you place an order for inventory, it's going to be a little more expensive. For the sake of simplicity, let's say you normally keep a one-week supply of inventory on hand. Bump that up to about 8 weeks and keep it there. Why? Because once you've got that overstock, when you place your next one-week order and you see the price has gone up, you can raise your retail price on your entire stock and maintain a decent margin. You also will have the option of holding off on a price increase for a week or two and perhaps undercut your competitors for a bit. When the inflationary cycle dies down, and it will, and you notice prices haven't gone up for a few weeks running, start reducing your orders and getting back down to normal inventory levels. This is why inflation tends to drop off quickly when it's run its course. A lot of retailers will be doing the same thing and orders to suppliers will suddenly drop off a cliff. Your margin on your most recent purchases will be smaller, but your older stock should help make up for that. You'll also have a chance to build up some cash, since you'll have several weeks of smaller than normal inventory outlays.

What about the consumer? Well, retailers that employ the above strategy are going to be taking advantage of some nice profit margins on many of their products. They'll want to entice you into the store by offering "loss leaders". That is, they'll be willing to offer a few items at or even below cost in the hopes that you'll buy a few of the more pricey items while you're there. If you want to be thrifty, be flexible. Stock up on those loss leaders. Different stores will have different items on sale, so you may want to shop at several. You may also want to adjust to the idea that you may be having chicken for dinner 4 times in a week. An inflationary period is no time to be finicky. Take what they're giving. Stock up on sale items. If you don't have a pantry, make one. It might be a good idea to get a big freezer if you've got the room. You can apply the same strategy to more than just groceries. If the home improvement store has a super-sale on something related to a project you were planning on getting to "one of these days", jump on it. Your new kitchen faucet is still going to be worth one kitchen faucet no matter where inflation goes.

If you're on a fixed income, you may want to look for free-lance opportunities to supplement your income for a while. However, be careful. Fully investigate any offer before you sign on. There will be plenty of scammers trying to take advantage of consumer anxiety. If a deal sounds too good to be true, it is.

The most important thing to remember is Don't Panic! Keep a cool head and look for opportunities rather than obstacles. An inflationary spiral is a readjustment in the value of currency due to gross budget mismanagement. It wont last forever and you can navigate it. Knee-jerk reactions to this kind of financial upheaval almost always makes the situation worse. Politicians and policy wonks will be calling for things like price and wage controls. Don't go for it. Getting our currency situation back under control is going to be bitter medicine, but tighter government control over the free market is just snake oil. It's okay to be angry and frustrated and hold our leaders to account, but blame the player, not the game.