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.

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.

De-Mystifying the Secret

You’ve probably heard about the book/DVD/program called The Secret. Essentially it seems to suggest that achieving whatever goals you may have for yourself, your business or your personal life is a simple matter of having the right state of mind. It all seems very mystical and magical. I have a simpler, I think more rational approach to the phenomenon, which I wont call The Secret, because I’m sure that’s been trademarked and mine is a variation on the theme.

I do believe that it works and I believe I know why and how it works. The good news is, it’s not magic and with some practice, anyone can do it. My take is that it’s a kind of “top of the mind marketing” campaign. Your goals are the product and your subconscious is the target demographic.

It may be due to personal experience or a product of observation, but we often end up hard wired to believe that lofty goals are unachievable. Only a lucky few actually achieve the great things they set out to achieve. As a consequence we set the bar low. We immediately think of the obstacles to our success rather than the possibilities. The cumulative effect of our resultant behavior based on these underlying assumptions is that we don’t achieve what we want.

It’s not as easy as just making up your mind that you want to be a millionaire. You have to really sell the idea to yourself. Look at how companies like Coke, Pepsi, Google advertise their product and stay “top of the mind” with consumers. They splash their logos everywhere. They make you aware of who they are and what they have to offer and they keep you aware. You may not even notice the number of times you see a particular logo during the course of a day, but your subconscious brain sees it, and stores it, and eventually can influence you to act on it. That’s what you have to do with your goals.

Write them down. Believe you’re going to achieve them. Post them where you’ll see them every day whether you’re looking for them or not. Put a note on the fridge, on your computer monitor, above the stove. Set targets and regularly evaluate how you’re doing. The idea is to make spotting and taking advantage of opportunities to advance toward your goals automatic.

Your subconscious does not make things happen. However, you are bombarded with sensory information every minute of every day. You notice some things more than others. The collection of data that you choose to hold on to and process determines how you perceive the world, your day, your life. If you make yourself more receptive to input that will be of value to you in achieving the things you want, you will become more aware of opportunities and circumstances that you had been oblivious to before. Instead of unconsciously working against yourself, you’ll wind up unconsciously working for yourself. That’s why it seems like magic. You make better decisions which take you in the right direction without having to consciously process the information.

When Michael Jordan would drive the lane and make impossible slam dunk shots that thrilled millions, he didn’t ponder every step and measure every muscle movement. Constant practice, desire and confidence made it second nature. See goal; score goal. The subconscious and muscle memory did the rest with no overt input from Mike. Why did the tongue have to be hanging out from one side? Who cares? Don’t over-think it. Be the Michael Jordan of your destiny. Step one of course, is to decide what it is you really want and stop telling yourself you can’t do it. Then constantly remind yourself what you’re working for.

The more conventional approach to goal setting is to set aside some time to develop a plan and work on it at specific times while doing specific tasks. What percentage of your waking hours does that represent? If you can actually hard wire your brain to work on your goals full time like a software program running in the background, you can greatly increase the odds of success. The worst possible outcome is that you go about your day with a positive attitude and you don’t get a million dollars. What have you lost?

America Needs a Rival

I've often wondered over the years, why no other country has ever really tried to 'out-America' America. After all, the whole freedom and capitalism thing worked out pretty well for us for a long time. I imagined it might be because nobody wanted to look as though they were sucking up to the top dog. Well, now that America is in a bit of an economic pickle and continues to wander away from free market principals while expanding government at a break neck pace, how 'bout somebody stepping up?

Let's just go ahead and call the race to mediocrity a 38-way tie and get back to trying to out-do each other. A little less civility and a little more fierce competition is what's called for at the moment. Countries within the former Soviet Bloc were able to look to the U.S. and say, 'There is a better way.' Who will our grandchildren point to as they stand in line for their weekly toilet paper ration? Will they come to believe that's as good as it gets?

Yes, the United States is in desperate need of an aggressive competitor in the economic arena. And no, I don't call remaining stagnant for so long that an oppressive dictatorship actually catches up and passes us (China) aggressive competition. That's just pathetic.

C'mon world. This is your big chance.

Where's the Inflation At?

If you were to tell an economist, who had been sleeping in a cave for the past decade or so, that the United States was now $13 trillion in debt, running $1.4 trillion deficits and that the Fed was engaged in “quantitative easing” (creating more money), he or she would likely guess that we also had runaway inflation and sky high interest rates. We don’t, and it’s not because of anything the government’s doing. In fact, although they wont say it out loud, they’d like to see some inflation to help alleviate their debt problem. Instead, deflation now seems more likely. So where’s the inflation?

Inflation is a loss in purchasing power of the dollar. In the past this has occurred when there were more dollars in circulation than the economic activity at the time necessitated. We have an economic slump going on in much of the developed world, but we also have a massive number of newcomers to the world economy who value a buck much more than we do. Their influence seems to be making itself known in the form of deflationary pressure. With today’s technology, goods, services and information travel around the world more frequently and faster than ever before. Most people on Earth live far below the level of income of the average American or European. Even in China, the average annual income is $3,600. It’s much lower in other countries. If you’re running a global corporation, the $5 you take in selling a tall latte in a paper cup can buy you 20 man/hours of labor in some countries. Hence, the competition for dollars among international corporations is still fierce and will remain so as long as this wage disparity exists. That is likely to go on for many many years. Sorry Federal Government. No, inflation for you.

Does that mean our government will collapse under its debt? No. It means the government is going to have to hold its spending level steady or lower it for a decade or decades. Now, if a developing country or two became strong and vibrant enough to create a new currency that was widely accepted across the globe, that could be a game changer. But for the time being, the world is short on currency and that means the value of what’s out there is going to go up (deflation) not down (inflation) even in the face of massive debt held by the issuers. Ultimately, when we get closer to parity in global living standards and wages, countries with massive debts will face hyper-inflation. For now, it looks like that will be a challenge for a later generation.

Information control is bad economic policy

The Chinese want increased ability to censor Google, Saudi Arabia, the UAE, India and other countries have recently threatened to cut off Blackberry service if they don't get access to encrypted customer information and communication. They claim they need access and censorship for national and regional security. But it could prove to be an economy killer.

Information is perhaps the most closely guarded asset global corporations have. If they can't trust that their information is safe, especially in countries where piracy is already a problem, they may ultimately decide that the risk of losing precious intellectual property is not worth the potential reward of establishing themselves in emerging markets.

Countries and regimes that work too hard to control information may or may not achieve increased security, but they will not achieve increased prosperity in the long run. Entrepreneurs, risk takers, producers will go where the risk/reward equation makes the most sense. Nobody wants to see the fruits of their labor simply taken from them, without warning or compensation. Not even in the name of security.

Governments and by extension the populations that enable them to remain in power, must decide if they want a vibrant economy because their government needs money to enforce control or because they want a higher living standard for individuals within the country. Order and control are not virtuous ends in and of themselves. They can be a consequence of good policy, as a happy and satisfied population can be peaceful and orderly. They are not primary goals. Any idiot with a weapon can impose order. It takes wisdom and leadership to enable and inspire creativity, production, trade and freedom.

Too Many Economists Spoil...Everything

Ask 3 or 4 economists what’s in store for us given the national debt, the recession and other current data and you may get 3 or 4 different answers. Why? Because predicting human behavior via a reliable mathematical formula is a pipe dream. People’s behavior changes as their experience, knowledge and awareness changes and the behavior of people is ultimately what economics is all about. There are also opposing forces within our financial system which ebb and flow from day to day, week to week and year to year.

You may have heard the financial collapse in late 2008 caused a “liquidity crisis”. That’s because most of the money we use in every day transactions is not actually Treasury issued U.S. dollars. It’s I.O.U.’s from banks to other banks. The amount of I.O.U.’s any bank can have outstanding is dependent on their deposits and other assets. If someone fails to pay back a loan, it has an exponential effect on the amount of money a bank is allowed to loan out. Your $1 default can cost the bank $10 or more in available cash flow. That’s why a default rate of 5, 6 or 7% can be enough to make a bank insolvent.

The Federal Reserve has attempted to counter the loss in total currency resulting from defaults by engaging in “quantitative easing” which is a cool way of saying “creating money out of thin air”. They don’t even go to the trouble of printing it. It’s just an adjustment to the balance sheet. They use this new money to buy assets like Treasuries and corporate bonds from banks, which gives them more cash, which they can leverage to make more loans using something called the “deposit multiplier”.

Countering the Fed’s counter measures is America’s increased savings rate. As people grow more and more skeptical of our government’s ability to competently manage the nation’s business, they start squirreling away cash. They borrow less and some even horde cash at home, rather than in banks. Remember, the bank can loan out several times the amount of money you deposit, so if you put $1 under your mattress instead of in your bank account, the bank loses several dollars in potential cash flow.

Another factor at work in the economy is the fact that profits from the financial markets have accounted for as much as 41% of corporate earnings in recent years. Financial sector profits come largely from fees on transactions (as does government tax revenues). Fewer transactions means fewer opportunities for fees. Hence both the banks and the government have a vested interest in creating more transactions, whether they lead to any actual added value or not. They view any activity as stimulus, when in reality, much of it is just waste.

Ultimately you create a thriving economy when you give people incentive to work harder and/or smarter to create value for one another. You have to make trade easier and more rewarding at all levels, from individual to small business to mega corporation. Creating more money, more rules and new fees isn’t going to get us there. The best thing the government can do for the economy right now is to quit trying to direct it and just sit back and observe for a while. Trust in the cumulative effect of individual decisions. You’ll be amazed at how efficient it really is.