People are creatures of fashion.
Most of us dress to fit into the roles we play in the dramas of our individual lives. The term fashion can be appropriately applied to far more than clothing, hairstyle, and footwear. Dress is only the proverbial tip of the iceberg.
Any act that appears to go beyond the strictly utilitarian minimum could be ascribed to fashion, and often such acts attain a degree of irrationality that can only be described as "herding behavior" by a disinterested observer. Tongue piercing might suffice as an example.
The behavior of investors often gives the appearance of irrationality. A view of the chart pattern for the NASDAQ Composite stock index from 1994 to the present would strongly suggest "reason" had little to do with investor behavior. In the first quarter of 2000 a steady string of market cheerleaders appeared in print and broadcast media to give numerous reasons why, though the market was a bit frothy, there were solid reasons to buy and hold common stock. Remember the party they had on CNBC when the index breached 5000 going up? The hangover has been murder.
From its peak, the NASDAQ Composite then fell 80% into October 2002. A rally of 400% was then required to return the index and its component stocks to their recent peak. That leaves 300% or so to go as of now, two years later.
Why were the experts and writers for business media uniformly bullish in early 2000? Because "up" was "in" and "down" was "out." The process for determining what would be news was and always will be governed by demand…by fashion. Bearish analysts were rejected because their conclusions didn't conform to the dominant expectation.
So much for the Efficient Market Hypothesis. Conversely, at the low point for the stock indices in October of 2002 there was considerable worry present in business reports. Reports of corporate malfeasance were everywhere. The fashion had changed.
Did the writers at CNBC and CBS Marketwatch make a determination that the content had to shift? Not likely. Such media outlets prosper in rallies, not bear markets. Like all entrepreneurs, they must offer what their audience desires lest the audience take its money elsewhere. No, it was the viewing public whose tastes had shifted by late 2002. Actually, since there must be a lag between the masses' changing tastes and the media's offering, the shift had occurred when the market topped and had run its course (obvious in hindsight) by October 2002. Then the fickle public changed again and, using the NASDAQ Composite as a barometer, has had quite a run of euphoria during the past two years. Today's refrain is of a certain kind of fear, that of missing a profit, that characterized life in early 2000.
Today's investor lives in a land of stunning complacency. In the stock market, the Chicago Board of Options Exchange volatility index, or VIX, offers one view of investor worry. A chart of the VIX for the past eight years reveals an unusual situation: Volatility, often synonymous with investor fear, has all but leaked entirely out of the market during the past year. People may talk about worry, but their actions reveal the truth:
The VIX was high at market bottoms and low near tops, and when it dropped below 20 it signaled little fear among market participants. What does it mean now when the VIX is closing in on single digits? It means that bad news is on page two or not published at all. The evolving scandal at Fannie Mae has so far elicited no more than a yawn from the corporate news organizations.
The same fashion affects politics, too.
When the public is in the mood for good news there's little coverage of the occupation of Iraq. Troop losses are noted but few details given, and reports of civilian casualties and U.S. atrocities are all but absent. The press as a whole is a tame pet of the Pentagon and the Executive Branch. Political leaders are given grudging praise from quarters thought usually hostile. Only a few stalwarts hew to principle and resist the fashion of showing respect where none is merited. When the pressure to conform is strong enough we see the political equivalent of plus-sized micro-miniskirts on the covers of fashion magazines. In fact, the pressure to conform in politics is far greater than in fashion. Trying to set your own style in politics can get you jailed, or perhaps even killed.
Thus does Victor Hugo's "No army can withstand an idea whose time has come" attain a slightly different meaning.
So what does this mean now?
Similar to investors, members of the public at large also appear to have lost all of the Founding Fathers' fear of that pervasive institution of legal force, government. Those who wish to live their lives free from hassles with petty dictators note that there is no groundswell of public opposition to National ID Cards, the Patriot Act, imprisonment of U.S. citizens without due process, or a host of other erosions of our supposed protections from the fist of government power. Recent LRC columns detailing how this Land of the Free and Home of the Brave imprisons a larger share of its citizens than totalitarian despotisms show how easy it is for our neighbors to ignore unfashionable facts – few care.
How might the typical LRC reader reconcile this state of affairs? Sometimes it seems like we've fallen through the looking glass and now live in a place where wrong is right and up is down. We risk ostracism if we are careless enough to broach this subject in polite company. One might as well show up to the office, not in a normal business suit but in a thong bikini (men included) with hair dyed fluorescent green and a stripe of bright blue paint from hairline to chin. After all, that's not the current fashion. People whose appearance (or political views) sticks out usually make others uncomfortable.
Fashion at the level of political discourse assumes attributes of superstition, where inanities like "We should trust the President because he has access to information that we don't," are akin to primitive peoples who rub blue paint on their faces to ward off evil spirits or protect them in battle.
At times our world seems not so much through the looking glass as it does a land of savages and superstitions. Many members of the tribe may wear expensive suits and sport advanced degrees from prestigious institutions, but their embrace of the inane notion that the whole (the state) is greater than the sum of its parts (fallible people) reveals their primitive perceptions. They watch news of tens of thousands of deaths in overseas military action and change the channel to a sitcom. Even people who voice opposition to the state often belie their own words by lobbying for some aspect within the state's monopoly, most often today for so-called national defense. Words mean nothing if they conflict with the reality of action.
Despite our grand technologies, awe-inspiring artwork and cosmopolitan lifestyles there is no real difference between the minds in modern society and those in prehistoric tribes. Any outward difference is merely a façade of rationality on top of shared fantasy. The only theory for this that makes sense is that in many capacities, the actions chosen by people are dictated by the emotional part of their brains. The urge to adopt the views of people surrounding them, to herd, is almost irresistible.
So what use is this?
If fashion, herding impulse, and emotion are the drivers of what ideas are accepted and what collective behaviors are ascendant, much is explained of the otherwise inscrutable trends we see around us. It may not allow us to know with certainty how far the pendulum of these trends will swing, but it offers hope that observation may reveal when the fashion has shifted. Since the kinds of fashion we're speaking of can carry the seeds of Cultural Revolutions, Bolshevism, and National Socialism, having a notion of what may be on the road ahead could be priceless on a personal level.
Imagine if it was possible for a nation's Central Bank to create credit from nowhere. New reserves would be credited to member banks that, while they represented no actual previous productive activity, could be loaned and thus used to place claims on assets either real or financial. As long as members of the public at large were relatively sated in their desires for trinkets or basic goods, or if manufacturing overcapacity for trinkets and basic goods was so great that a deluge of product supply prevented demand from raising prices across the board, CPI inflation might well be absent.
If fashionable, members of the public might see this situation as the best of all possible worlds. Prices for assets like stocks, bonds, and real estate would rise rapidly as these items received their fair share of the newly created credit. As long as CPI inflation was tamed, people would feel richer with each passing day. It might even be fashionable to use the increasing asset values to leverage purchases higher via additional borrowing.
In such an environment, what could ever upset this process? The Central Bank would have hit upon the ultimate invention: A Perpetual Motion Machine. People would get richer and richer while prices for financial assets and real estate took flight and left prices for food, gas, clothing, and possibly even cars behind. The only class of goods that might not remain static would be those in the luxury category. Luxury foods, luxury cars, luxury vacations, and luxury jewelry, all things at the highest end of the consumer's wish list might well begin to accelerate higher in step with financial assets and real estate.
If so, who'd complain? If anything, it would mean that people farther down the economic ladder who were willing to tap their available credit could emulate those on the cover of People Magazine and enjoy the same fashions. More and more people could join the ranks of the rich, if not the famous, by possessing some of the same things. Plasma TVs would fly off the shelves at Best Buys across the land. Bank branches would spring up on every street corner and offer mountains of credit to even the weakest borrowers. No one would be denied the American Dream of home ownership, and interest-only mortgages (presumably with infinite terms) would be offered to help manage cash flow.
Such a scenario, though unreal sounding, couldn't be more ideal for incumbent politicians. Happy, rich people are fans of the status quo, so politicians would be overjoyed to see H2's in every garage and big diamonds in every earlobe. Why talk about a chicken in every pot when the real dream is a vacation home in Telluride or a second condo on Clearwater Beach? The Congressman who delivers on that could count on a very rich retirement.
The question remains: If nearly everyone stood to gain from this condition, what possible cloud remains to rain on the parade?
- Would the factories that represent overcapacity go out of business when dollars are flowing in torrents their way, courtesy of the Central Bank?
- Would the torrent of dollars created from nothing be rejected by those producers who have no other ready market, when they can take those same dollars and join in the fun of owning U.S. assets that are the beneficiaries of the flood?
- Would foreign firms really care all that much about the value of the dollar relative to their home currency, when as long as they can get raw materials and pay their employees, nobody needs to repatriate those depreciating dollars anyway, at least in the short run?
If there's nothing to go wrong with this, why hasn't anyone done it before?
We all know the answer to that one. It has been done…time and again…always with the same result, from tulip mania to John Law's Mississippi Scheme. When financial prestidigitators are the ones getting rich and the welfare/warfare state redistributes ever more, the lesson taught is that personal prosperity does not require production, thrift, or hard work. People inevitably respond to this and change their lives to accommodate the new fashion, so conditions change – social pathology blossoms. Fortunately we haven't seen any of that yet.
But then the original question returns: What is the limit? Whose idea is it to stop spiking the punchbowl?
The late 1990's taught the rational folks among us a very hard lesson. The truth is, there is no way to know in advance how high is "up." Irrationality sets its own limits, and trends often last far longer than reason could possibly expect. Sometimes hemlines of skirts rise until more than just irrationality is revealed.
Recognizing the dynamics of this process is useful, however. Governed by collective emotion (for that is what animates fashion), we know the trend will end. Trees don't grow to the sky, despite the experience of the NASDAQ Composite from November 1998 through February 2000. We can use this insight to avoid getting trapped when the collective mood changes. We can continue to speak the truth and avoid the inclination to tilt at windmills. One can't know when Liberty will again be the idea whose time has come; only by maintaining its presence on the "fashion circuit" is there a chance for its adoption by the massed members of a society should the right time occur.
Most of all, we can understand how to live as social individuals surrounded by savages whose elaborate rationalizations cover a core superstition: That only by human sacrifice to an abstraction does the sun rise each day and shine down upon us.
December 23, 2004
David Calderwood [send him mail] a businessman, artist, and author of the novel Revolutionary Language, selected January 2000 Freedom Book of the Month at Free-market.net.
