Tension keeps lingering, at times not even allowing the slightest hope of bridging our conquering world views; my wife and I continue to lead a passionate debate over what has been and, more importantly, what we should expect to come. Our ongoing give-and-take, if it had to be defined in brief, is largely centered around regaining perspective on recent geopolitical and socioeconomic developments, led from the perspective of two caring parents anchored in a keen focus on preparing young children to be ready for a world that seemingly screams, “Divide!”
My pursued side of this argument is that it does not matter where one stands politically, today. As a global society, collectively, we have wrecked our opportunity and inherent obligation to maintain checks and balances. Quite undeniably, the world has become a better place over recent decades, bearing in mind the breakdown of restrictive political systems, mainly to the east, as well as considering the sustained increase in prosperity that has helped large parts of the world’s population. Yet, a shift in values has taken place in the so-called “old” world, compromising the commonly accepted benefit of a functioning middle class and, unavoidably, challenging the idea that our children will be better off than us (i.e., their parents).
Thinking about cause and cure, I will go further in my rather snap-decision style of assessment. The very core of our issues lies deeply rooted in an ill-guided and richly applied policy framework – mainly the one of modern central banking that is responsible for the complete breakdown of conventional business practices, values, and value, quite literally. Concerted “Kool-Aid” missions of bailing out greedy financial professionals, alongside investors faithfully banking on the fact that easy money could’ve and should’ve been made (in birthright fashion) as a byproduct of mainly superficial economic progress, were not only dangerous, but created a herd of disillusioned market participants. If the horrendous bust of the dotcom bubble was not sobering (or healing) enough, we had to top it off with a massive housing bubble; and from here we go: wash, rinse, repeat…
When I came to New York at the end of the boisterous ‘90s, every twenty year-old was driving a Porsche to work. Dreams of a promising new internet economy, matched with financial innovation to allow credit to be “sliced and diced” – specifically the emergence of credit derivatives – gave way to very relaxed financial standards. It was easy, in such an environment, to forgo the path of proper in-depth education and take a job supporting the financial wet dream. Everyone not part of the Wall Street machinery was left with the “cotton candy” of an enticing and fluffy (and unhealthy) credit-based economy fueled by deregulation and lax lending standards, leaving most of us feeling as if we had become part of a bigger thing. The quintessential American Dream was closer than ever before, even if anchored in “hardcore” credit-fueled consumption.
Eager minds searching the timeline for when exactly things started to go south will be faced with a daunting and vague task. It is my view that President Nixon and his ending of the Gold Standard in the ‘70s initiated the beginning of the end to an era of real value – thereby compromising ambitious pursuits based on quality and fair practices and, by extension, mutual respect among nations. The U.S., over the subsequent decades, went from a manufacturing to a credit-based economy, specifically the one we have been trying to revive at all costs; in doing so, eager policy ambition has created a massive pool of obligations that has turned into unproductive capital, fostering speculation and asset-price inflation, particularly in global real estate, select industries (think “tech” and overpaying for the opportunity), and financial markets (e.g., Government bonds).
For the less informed (or interested) observer of financial markets, the described dilemma can easily be condensed: If developed nations are viewed as a balance sheet, then it has become a near-impossible task to balance assets with (growing) liabilities – not only for the U.S., but on a global scale; this is precisely the reason why policymakers LOVE their inflation and will “crank” the machine for as long as a “match” has been made. Given this desperate position and, so far, rather unsuccessful approach, today’s political movement has turned to answers that are old-fashioned, e.g., the revival of manufacturing paired with a protective, even anti-global, mindset. Practices of demanding what is “ours vs. theirs” (aka beggar thy neighbor) are centuries old and, already in previous cycles of history, have not produced desired results.
We love our bubbles – the ones induced by unrestrained flows of speculative capital, and the ones in our heads always aspiring for more – but, at the same time, they allow for very little insight and subsequent change to take place. Current levels of credit-based spending (e.g., autos, education, etc.) and excitement over real estate prices are anchored in the same truth that led to excess before. I recognize the probable counterargument and enthusiasm over an increased U.S. savings rate when compared to pre-2008/2009 financial crisis levels, and, yet, acknowledging the current trend, it is an unsustainable phenomenon; this nation needs to “binge” on both personal and government levels, and has been willing to risk permanent change to maintain a less-corrective path forward.
Our policymakers love their bubbles, too: for one, price appreciation has diminished significant problems experienced by many (think of recovering home values and subsequent relief on bank and individual balance sheets); second, in absence of real change, heading down the inflationary route marks the path of least resistance. However, there are limited choices for accomplishing the monumental task of ultimately correcting a ballooning balance sheet (not only in the U.S.); it can be done either through market forces (allowing remedial down markets and crises to run their course, without the application of the overbearing “policy hand”) or, alternatively, through a dedicated return to sustainable positions.
Sustainability, in my opinion, can only be based on a few things: 1) investing in and improving the educational system, providing basis for widespread opportunity at a fair cost; 2) creating the right economic share across the full spectrum of all economic participants, especially targeting a much-needed improvement of real vs. nominal wages; and 3) aiming for a productive state of capital and mind, which allows market participants to succeed or fail based on economic choices made. It is time that policymakers remove their protective bubble wrap, allowing price formation to freely take place, while also educating the broad public that the state of the economy has and will continue to change, particularly considering advances in technology and automation.