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It's becoming more widely
recognized that the present sunny economic conditions around the world are in
part due to "easy money" worldwide. As we've said, it appears that we've
entered a new era of inflation, which we may arbitrarily define as having
begun in late 2005, when the dollar moved beyond $500/oz. for the first time
in 24 years. "Easy money" isn't the whole answer -- there have been
very positive tax policies around the world as well, especially in Eastern
Europe but also Latin America, China, and Western Europe. Nevertheless, I
would say that the inflationary boost beginning in late 2005 is a big reason
why the US economy, certainly the weakest among the majors, has been able to
hold it together a bit longer, somewhat in defiance of previous recessionary
examples. We made the point that prevous recessions -- in 1975, 1982, 1991
and 2002 -- all took place in an environment of deflation/disinflation, which
is to say a rising dollar (against gold). I suppose you could add 1969 to
that as well. As I describe extensively in my book, when the world's major
currency heads down, it is virtually impossible for other currencies to avoid
devaluing alongside, lest they suffer the forex consequences to trade. There
are already a lot of complaints about a strong euro, despite the fact that
the euro has, for the most part, followed the dollar lower (ie rising gold
price in euros). This "beggar thy neighbor" effect is a major
complication for the establishment of new gold standards, which is why I
suspect countries who adopt a new gold standard might be those for whom trade
consequences are relatively minor. Perhaps either a place that is already
dirt-poor, like Peru, or super-rich, like Dubai. At the same time, a falling
dollar makes currency management relatively simple for smaller countries with
a history of currency instability. Well, "smaller" is a relative
term. India has been a big beneficiary of this recently, as the rupee has
been rising against the dollar for the first time in fifty years. Combined
with tax cuts, we have a low taxes -- stable money (more stable anyway)
combination, and you know what that means.
Will this inflationary
situation intensify? It would have already intensified, if not for rather
aggressive intervention in the currency/gold market, as has been amply
chronicled by the GATA group at www.lemetropolecafe.com. There are no
guarantees -- we reserve the right to be wrong -- but at this point, except
for that intervention which I suspect is unsustainable, there seems to be
little reason for it to stop. Historically, inflationary periods have stopped
when people have taken action for it to stop. This has begun in a small way,
with minor rate hikes worldwide, but that won't cut it if you ask me. A
number of market watchers have taken a somewhat cynical view, arguing that
continued monetary expansion (inflation) will continue to propel asset prices
higher, as has been the case for the last two years or so. Some say this
could go on for another five years. Oh really? I doubt it, but when would the
turning point come? I've been using the principle that nobody
cares until the Fed cares, and the Fed is perceived to care when
the Fed funds rate target is 6% and likely to head higher. We're not there
yet. The Final Go Go Year of 1972 transitioned to the First Year of
Inflationary Horror in 1973 when gold broke above /dollar broke down below $70/oz.
($700/oz. equivalent today) on its way to $120/oz. ($1200/oz.), and the Fed
chased it higher with rate hikes above 6%, ending up eventually around 13%.
That coincided with considerable currency turmoil, namely the breakup of the
Smithsonian Agreement framework of stable exchange rates and the beginning of
floating currencies worldwide in the first half of 1973. That sounds like
something that could sort-of happen again, considering the dollar index's
precarious situation above last-chance support at 80. Despite all that,
official "real" economic growth in the US in 1973 was 5.8% -- ha ha
ha -- so there wasn't an official recession. Stocks got pounded, in nominal
terms and especially in real terms, their value compared to gold.
My conclusion for now is
that it is not quite yet time. The gold/currency/Fed combo that served to end
the bull run thirty years ago has not materialized yet. This is about the
best example I can come up with of how inflationary situations evolve. I've
been early, not fully taking into account the Hank Paulson factor. I expect
the next inflation leg to appear over the next six months, but I believe I
said the same thing six months ago as well. Until then, we might see the
stuff where there is genuine growth and value, such as certain Asian
equities, head higher.
* * *
I like to throw in a
little up-to-date commentary here and there, as it helps show how our
economic principles can be applied in practical terms. A little easier for people
to chew on than more abstract concepts. Our real topic for today, however, is
the idea of "no growth economics." We're trying to expand the
concept of economics to a more flexible format, that can be applied to
various situations and goals.
I often use the term
"economic health" instead of "growth," as it gets closer
to what I mean. For probably the last hundred years, there have been
criticisms that "growth" has not really led to any apparent
improvement in livelihoods. This is becoming more pertinent as resource
depletion, particularly on the energy side, is looming as an unavoidable
barrier to furthering the ideas of "growth" that have become common
over the past century. By "economic health" I mean largely that
people enjoy prosperity and abundance. When economists talk about
"growth" they are often talking about avoiding unemployment.
Historically, when there isn't "growth" then there's unemployment,
and most everyone would choose "growth" right? I defined economics
previously as the study of how people make a living, which gives us a
wider scope of inquiry than nattering on about GDP or interest rates. Let's
take the pre-Columbian Native North Americans, for example. While it is
important not to idealize this group too much (the Aztecs sure seem like a
bunch of nutjobs), nevertheless it is also important not to fall into
careless relativism, assuming that they were equally as enervated, enslaved,
and warlike as Europeans of that time or people today, just because they were
humans. I would say that, for the most part, it appears that the simple
lifestyles of the Native Americans provided prosperity and abundance, on
their terms. They enjoyed "economic health," in a format without
apparent growth. At least they didn't need Prozac to get through the day.
They didn't pay taxes or work 9-to-5 either. And they were never unemployed.
As a line of thinking,
what if we changed the ideals of "success" from acquiring more
stuff -- it seems that everyone buys into this, from the poorest to the
richest -- to fostering prosperity and abundance? Aren't they the same? Or
are they actually polar opposites? Probably everybody understands the
futility of endless consumption on a personal basis, but on an aggregate
basis as well this is pretty close to what economists call
"growth." In my experience, not even people with rather high
incomes, in excess of $250,000/year, really enjoy prosperity and abundance.
They have more money, but they spend it all, and, after taxes, $250,000
doesn't buy as much as you might think. This produces anxiety, as they must
then continue to make $250,000 or their whole project comes crashing down.
They can't pay the mortgage, they pull their kids out of private school, the
Porsche gets repo-ed, and so forth. And then the divorce. It would appear
that, even if all Americans were able to enjoy incomes of $250,000 a year,
they would be just as overworked, enervated and anxiety-ridden as they are
now, prosperity and abundance just as out of reach, with walk-in closets and
three-car garages and a week off in Tahiti. One of the reasons why we
perceive the Native Americans as having enjoyed prosperity and abundance is
that, despite their rather low capability of creating stuff (productivity),
they were able to satisfy their basic requirements of living with almost no
effort. If they wanted a house, they would simply make one out of naturally
available materials. This might take about a week of labor, less with help.
No mortgage, no taxes. When they wanted to go somewhere, they walked. When
they were hungry, they produced food in some manner, and they didn't have to
go to a job interview for the right to do so. When the chief of the village
was getting on their nerves, they said "see ya bucko" and walked
over to the next valley. And when they didn't feel like doing anything, they
did nothing. The example of the Native Americans produced quite an impression
on the incoming Europeans, who had lived for centuries under one tyranny or
another. The American project as conceived by the Founding Fathers, with its
Constitution, no taxes, no standing army and so forth, was heavily influenced
by the Native American example.
We don't have to live in
teepees. Yet, if prosperity and abundance comes from making the hurdles to
livelihood very low, how might that come about today? In the poorer parts of
the US, many people live in "manufactured housing." A
"single-wide" is basically the dimensions of a truck trailer, or 53
feet by 8 feet. That's 424 square feet, a cozy one-bedroom apartment. A
"double wide" would be about double that, or 850 square feet, or a
three-bedroom apartment. A "single-wide" can be had for about
$15,000, which goes to show that the actual cost, today, of creating an
adequate modern living environment is really not very much. (The mortgage on
that would be about $100 a month, 30-year fixed rate with full amortization.)
I'm not suggesting that everyone live in trailer parks, which are really just
super-cheap suburbs, with all the problems of automobile slums plus the
problems of poverty. Rather, this shows that constructing apartments of
similar dimensions, in urban areas (remember that "urban areas" can
be very small), would probably be about in line cost-wise. Probably most
Amercans would rather live in a teepee than a 424-square foot apartment, such
is their delusion, but many people in London, Paris, Hong Kong or the tiny
medieval villages of Italy are quite happy with this arrangement. Germany has
passed a law requiring all new construction to have R-49 wall insulation,
which is certainly a more sensible approach than making automobile fuel from
algae. With such insulation, our 424-square foot apartment could be heated in
the Boston winter with the waste heat generated by a personal computer.
(Apartments should also come with lots of soundproofing from the neighbors.
This is cheap and easy to do during construction. Builders have some sort of
mental block here.)
The second element in
making the hurdles to livelihood very low is transportation. In the US
especially, the automobile is a basic requirement of living along with air
and water. Autos generally cost about $7,000 after tax a year all-in, more
for luxury autos, which is a very high hurdle for the majority of Americans.
Especially when you've got two or three. Burning biodiesel won't solve this problem
-- it would only make it worse, not to mention the environmental damage
implied by large-scale biodiesel/ethanol production. Compare this to a
typical monthly subway pass of $100 a month or so ($76 in New York City,
includes city buses), not to mention the extra effort involved in finding
parking, arguing over the mechanic's bill, not drinking too much, etc. Dense
urban environments are the solution. The automobile slum is a recent
innovation, a failed experiment. Humans have always lived
in dense urban environments, and when connected with a subway/elevated rail
within the city and high-speed rail between cities, the transportation issue
is easily resolved. Even in relatively rural environments, you can have good
bus service to the nearest city or train station and something like a scooter
to get around the neighborhood, avoiding the automobile problem. (This was
the case in rural Tuscany, by the way, so I am not just making this up.) The
point is to liberate people from automobile dependency. If you've got
the money, go ahead and have a car, but it should be a luxury item like a
powerboat or a jacuzzi.
A model of ancient Rome.
Do you see the Really Narrow Streets?
Not much different than Florence really. The present period of insanity is an aberration.
An ancient Roman
apartment building. Seriously, that's what it is. Probably not R-49 though.
A Roman bath. Romans used
to work in the morning, and then after lunch they'd dawdle away the afternoon
at the bathhouse. Most every day. Actually, a lot of business was done naked.
I know most Americans would rather throw themselves off the Empire State
Building than take a bath with their neighbors, but I used to do it in Tokyo
and there is something to be said for it. Of course I had my own bath -- it
was just for fun. Japanese used to all bathe together -- all ages, men and
women together. The Christians were horrified! The Japanese figured they
better cut that out or nobody would take them seriously.
An image of ancient
Babylon, circa 7th century BC. This plus a subway and a TGV and you'd be
there.
The Hanging Gardens were apparently quite nice.
Another image of Babylon.
Looks like Florence!
The third and fourth
major hurdles for livelihood, for most American families, are medical care
and education, two spheres which are in a state of disaster. Western medicine
appears to have hit a high mark around the late 1960s. Really, it was and is
only good for two things -- infectious disease and traumatic injury. If
you're in a motorcycle accident or have tuberculosis or dysintery, modern
Western medicine is a true marvel. Other than that, however, it is a very
expensive flop, propogated by people's slavish attachment to the idea that
all they need is surgery or another pill. Most modern ailments -- heart
disease, diabetes, cancer, depression, and all of the "cosmetic
surgery" flaws -- could be cured with a better diet and a little
exercise, both of which are nearly free and don't require a doctor. Most
doctors will tell you the same thing -- you remember your friends from
college that became doctors, they tended to be both smart and honest -- the
problem being, of course, that they can't get paid for giving good advice.
They only get paid if they sell you some surgery or pills. In fact, if they
didn't sell you some surgery or pills, they might get sued! And all those
debts from medical school. What would you do? Stay out of hospitals.
What of economists'
traditional concern, avoiding unemployment? Wouldn't there be a recession if
people stopped "consuming"? Certainly there would be an adjustment,
but in truth economies are always evolving so there's nothing new there.
Recessions, certainly the meaningful ones, tend to be caused by an impairment
of the process of production -- high taxes, unstable money -- not
insufficient shopping. I assert that it is possible to enjoy a healthy
economy without "growth." Otherwise, an economy is nothing more
than a sort of elaborate Ponzi scheme serving no-one except the corporate
overlords, which consumes people and the planet until it finally goes
kerflooey. How this transition would exactly come about is hard to say. Low
taxes and stable money -- which allow efficient cooperation between people --
would seem to be a part of it, but in the past this has normally resulted in
accelerated growth. Pehaps it is a matter of mindset, and the Europeans seem
to be making real progress in this regard. Theory aside, it appears that we
are coming to a time when these issues will be practical matters. I assert
that it is possible to have a healthy economy -- prosperity and abundance --
with less fossil fuel consumption, indeed with no fossil fuel consumption
at all. Just think of the Babylonians, with better plumbing and
high-speed rail powered by windmills, and afternoons off at the local
bathhouse.
Nathan
Lewis
Nathan Lewis was formerly the chief international
economist of a leading economic forecasting firm. He now works in asset
management. Lewis has written for the Financial Times, the Wall Street
Journal Asia, the Japan Times, Pravda, and other publications. He has
appeared on financial television in the United
States, Japan,
and the Middle East. About the Book: Gold:
The Once and Future Money (Wiley, 2007, ISBN: 978-0-470-04766-8, $27.95) is
available at bookstores nationwide, from all major online booksellers, and
direct from the publisher at www.wileyfinance.com or 800-225-5945. In Canada,
call 800-567-4797.
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