Tuesday, April 28, 2009

Financial Vortex & Possible Happy Effects

There's arguing amongst the money people over what to call what we're in. Some of them go with "Depression," noting that deflationary pressure, sharp and sustained job losses, and lack of money supply warrant the use of that word. Others cite that few prices have dropped, on the contrary most are still increasing, and we're going through a Recession perhaps akin to Japan in the 90s. Still others recall Stagflation, a coin termed in the 1970s when inflation raged and stimulus had little desired effect.

Stagflation would seem a better avenue to understanding what we're experiencing, and it resulted from structural similarities. From 1973 onward, America's economy reeled, net wages dropped, wealth was transferred offshore and overall quality of life diminished. Vietnam War expenses caused Nixon to nix the Gold Standard in 1971, eroding confidence in the currency. Domestic energy production had peaked, so OPEC struck with disruptive embargoes. The Fed printed money for stimulus, but it didn't get to consumers and inflation took off. Trade deficits widened and businesses failed as political policies and corporate strategies were exposed for having been out to lunch.

Meditating on these slow-motion explosions, however, Stagflation doesn't begin to capture the magnitude of events for which the languages of economics or finance themselves are inadequate. Those disciplines too are in the midst of altering precepts and analytical frameworks, struggling to keep up with commoners in the wake of an unprecedented World Property Bubble. The experts haven't seen this beast before either.

So, what is it? We have a hyper-inflationary spiral and a demand-destruction (thus deflationary) spiral going on at the same time. When you've got two strong opposing spirals, you've got a tornado. Or a Vortex. General Motors, the twentieth century's greatest company, is getting sucked up into it, the cold air keeps hitting the warm air and when it comes time to rebuild, we'll have to call the East Asia Insurance Company. This when we're in massive debt, are printing tons of hundred-dollar bills to drop out of helicopters, and are stuck in unwinnable "dumb wars" whose cost is already comparable to WWII. Call me a neophyte, but I'm not seeing a handy storm shelter to climb into.

Maybe the dollar will get sucked through that Vortex along with GM and get spit out as a minority slice in a basket of international currencies, one which prominently includes China. For many of us going forward, this will be good news. It will mean we can't finance wars or more complex weapon systems by selling bonds and then paying them off with funny money, and we'll have to figure out how to peg the dollar's value to something other than the world's oil reserves. Our economy, imaginations and energies might be forced back to living within its means, to making helpful things, real things of actual value. Would that be so terrible?


Bee said...

I don't have a good name for what we're in economically, but I hope it starts to improve soon and becomes a moot point, before I get laid off and end up on the Monster.com-lines.

MarcLord said...

amen, we are now officially treading water over here.