But be ye doers of the word, and not hearers only, deceiving your own selves. For if any be a hearer of the word, and not a doer, he is like unto a man beholding his natural face in a glass: For he beholdeth himself, and goeth his way, and straightway forgetteth what manner of man he was (James 1:22-24).
Earlier this month, I attended Burt Blumert’s gold conference. Burt runs the Camino Coin Company in Burlingame, California. He is one of the last sellers of bullion gold and silver coins, having operated for over four decades. It’s a small shop, but it does a lot of business.
At that conference, several people asked me what I thought would happen in Iraq. I said that Saddam Hussein would be wise to let the UN weapons inspectors back in. That would call Bush’s bluff. He would save tens of thousands of lives by doing this. It would also keep him in power. Now he has done it.
This has undermined Bush’s stated goals of changing the regime in Iraq by unilateral aggression. It means that he will not do to Hussein what his father did to Manual Noriega, another in-house dictator for the United States, just as Saddam Hussein was until August, 1990. Bush went to the UN to get the support of that impotent international bureaucracy. He thought the UN was the best place for him to build support for his invasion. This was one more example of the transfer of American sovereignty to the UN. Now his plan has backfired. If Hussein sticks with his side of the bargain, Bush will not get his coalition. He offered Hussein an out, using the UN as the escape hatch, and Hussein took the gift.
If the weapons inspectors find nothing, Hussein will be in a position to appeal to UN nations to start violating the US oil embargo. There will be support for that, since everyone wants more oil and cheaper oil. The case against Iraq will seem far less legitimate if Iraq is cooperating.
Bush backed Hussein into a corner: submit to the UN or else be removed from power by an invasion. Bush was not bluffing about the invasion. Afghanistan showed that. He may have been bluffing about the weapons inspectors because, as the pundits kept telling us over the weekend, Bush had put so many restrictions on the offer that Hussein would not take it. But, when the choice was between inviting in UN weapons inspectors vs. the complete loss of power, Hussein decided to maintain power. Isn’t that what Bush had led us to expect with his description of Hussein as a dictator? Why this decision comes as a surprise to anyone is beyond me. Bush gave him an escape hatch, and he took it.
It is not clear what Bush’s next move will be. Hussein has boxed him in for the time being. All the “axis of evil” rhetoric has been put indefinitely on hold, unless Bush is ready to invade Iran or North Korea. Bush has bet his presidency and the Republican Party’s future on dealing with the axis of evil, but now that program has been put on hold. Until and unless Hussein decides to toss out the weapons inspectors, he has Kings-X from Bush.
If Bush decides to invade anyway, the Democrats and our European allies will join forces to label him as impatient and needlessly reckless. Every body bag would hurt him. This would force Republicans in Congress either to vote with the Democrats (bad politics) or else side with an impatient President who did not keep his word to the UN. I presume that Bush knows this.
If the weapons inspectors find no weapons of mass destruction, then Bush’s case against Iraq will collapse. If they do find them, and Iraq destroys them under UN supervision, the same holds true. Hussein will get a new lease on political life. If he can outlast Bush II the way he outlasted Bush I, he wins. When Bush II is gone (2005 or 2009), Hussein can go back to normal. Bush’s successor will not have 9/11 to motivate him to launch a personal crusade against Iraq.
Bush can still be perceived as a statesman if the Iraq threat is eliminated, assuming there ever was an Iraq threat. He needn’t suffer politically from his offer of peace to Iraq. He can present himself as a man of peace. But he won’t get his war, and he will have to switch his rhetoric and his political positioning. He will have to go back to domestic issues. The main one is the economy. It isn’t a good issue for the Republicans. Not yet, anyway.
GOOD NEWS FOR THE STOCK MARKET
The avoidance of a war should be good news for the stock market. We shall see if investors assess this development as economists would. War is destructive. It reduces the supply of consumer goods and therefore consumer choice. So, the avoidance of war is good for the consumer.
If the market still struggles, then this will be evidence of underlying forces in the market that even the avoidance of war cannot overcome. It will indicate that the crisis in profits is so great that even the prospect of peace is insufficient to persuade business decision-makers to begin committing a large portion of earnings to capital expansion.
The key to prosperity is capital expansion: tools of production. Businesses have refused to expand capital for seven consecutive quarters — a record in our generation. Businessmen see that the U.S. economy is stagnant, even though consumers are still buying large-ticket items — cars and homes — because of low interest rates.
This is an economy driven by caution on the part of entrepreneurs and lack of caution by consumers. Businessmen see that the spending binge cannot go on indefinitely. They are holding back, refusing to commit to new projects. They are in duck-and-cover mode, like school children in the 1950’s, hiding under their desks. For school children, this was a drill. For businessmen today, it is more than a drill. It is a way to survive the shock wave of consumer exhaustion when it hits.
For consumer spending to continue in the face of low economic growth and outright capital contraction — using up the nation’s tools of production — there must be a continual extension of credit. The Federal Reserve is supplying it. We have seen this for over two years. Banks can borrow at 1.75% and lend at credit card rates of 20%. They will do this until their borrowing rates rise, or credit card rates fall, or default rates rise. The latter is happening; the former are not. So far, the default rate has not threatened bank profitability. But at some point, it will.
The problem facing borrowers is that the lack of investment by businesses will eventually lower workers’ productivity. The steady upward move of productivity and real wages will stall. At that point, the Federal Reserve will face its moment of truth. To continue today’s monetary policies will then produce price inflation. This will raise long-term rates. The housing market, driven by low rates, will stall. Prices will cease to rise. Some home prices will fall, especially those homes owned by the upper middle class, whose members do most of the investing. Home owners will find themselves saddled with long-term debt without much equity. Making their monthly mortgage payments will crowd out their other spending.
This is why I think the FED will continue to inflate the currency. It will not allow price deflation and the resulting economic contraction that is based on the fear of falling prices. That would threaten the solvency of the real estate markets, the way it has in Japan.
Today, the consumer computer industry has collapsed because consumers don’t need the latest and the greatest. They know that if they wait six months, they can buy a far hotter machine if they really need one. So, they have stopped buying. The advertisement revenue of the computer publishing world has collapsed. The FED does not want that experience to spread to industries beyond consumer computers. If consumers hold off in making purchases because they expect lower prices, this reduces consumer demand for goods and services. The good side of this development — rising thrift, debt-reduction — is considered a liability in Keynesian economic analysis.
DON’T BUY NOW, DON’T PAY LATER!
That old phrase, “buy now, pay later,” has changed the way that Americans run their lives. They have become present-oriented, which is why they are willing to run up credit card debts of $8,000 per family. This is why they are willing to pay 20% per annum on this debt. The problem is, they find it difficult to switch back to future-orientation: “Don’t buy now, don’t pay later.” When the plans of forecasters are based on the continuation of consumer preferences, anything that changes consumer time-preference (future-orientation) will wipe out trillions of dollars of on-paper capital. The economy would have to be re-structured to accommodate the new attitude toward thrift.
I don’t expect a major reversal of two generations of time-preference. Attitudes die hard. We are now seeing old people being sucked into the tar pits of credit card debt. They refuse to cut their spending. They refuse to acknowledge that the golden years of retirement are years in which personal budgets must be radically re-structured. Meanwhile, FED policy has cut retirement income by lowering interest rates.
Either you cut spending or you find ways to increase your income. It’s technically easier to cut spending. “A penny saved is 1.4 pennies earned, depending on your tax bracket.” But habits are hard to break. Going on an income diet is a shock to newly retired people. It’s like an athlete who consumes large quantities of food during his playing career, and then must cut his food intake by 50% or more when he retires and stops training daily.
We all know how hard it is to change our diets and lose weight permanently. We all know that when we grow old, we will have to exercise if we don’t want to turn into broken down heaps. But we are all in Scarlett O’Hara mode:
“I’ll think about it tomorrow.”
I watched an interview with Jack LaLanne two nights ago. At 87 — almost 88 — he lifts huge weights, does exercises that I could not possibly do, and looks 70. He does this for two hours a day. Every few years, the same interviewer comes back to do another interview. LaLanne makes him exercise with him, and of course the poor schnook cannot keep up. Who could? He may be 45. This time, he told Jack, “I want to come back and interview you when you turn a hundred.” Jack replied: “Let’s hope you live that long.”
The next morning, I saw a Jack LaLanne infomercial for the Jack LaLanne juicer. Old Jack is still making a good living by not wearing out. The personal price he pays in relation to the income he receives is low. So, he keeps paying the price. Also, he established good habits early. Yet I read an interview with him years ago in which he said that he hates to exercise. He says that he varies his routine constantly to overcome boredom.
He is exceptional. Also, he has found a way to convert physical pain into a lot of money. Most people cannot do this. Their present pain must be borne in the name of future benefits. There is no guarantee that some disease or other disaster may not offset those expected future benefits. In this sense, exercising is like living within your means. There is no guarantee that a financial disaster may not hit — a lawsuit, a terrible illness, or whatever. You experience reduced pleasure now for the sake of less pain in the future, you hope. But you must act in faith.
This is why people would be wise to learn the self-discipline of thrift early in life. Most people don’t do this. The society screams at them, “buy now, pay later.” What people rarely understand is that getting into debt’s hole early in life keeps them in servitude for years. People develop bad habits early that are difficult to change later on.
All of us should look at old age and say, “either I must find ways to maintain my income or ways to cut my expenses.” If you are not into cost-cutting mode, then you had better be in income-extension mode. If you refuse to face up to the reality of retirement, then you will have a hard time making the transition to drastically reduced income.
I think it’s harder for most people to break a lifetime of spending habits than it is for them to change a career of income-producing habits. That’s why I keep hammering on the wisdom of building up a home-based business or an alternative career to retire into. So few people are willing to budget their present income, let alone make rational projections of their income after age 65, that they are caught flat-footed when they retire. They are not emotionally able to cut their spending permanently by 60% in just one month.
YOUR TREMENDOUS ADVANTAGE
You constantly read serious material about the economy. Most Americans don’t. You are aware of certain economic developments, such as the inevitable bankruptcy of Social Security, that are not on the radar screen of most Americans. You may have come to grips emotionally with the reality of the effects on your future of this looming bankruptcy. Very few people have done so.
You an advantage over your peers, whatever your age group is. You will not be blind-sided by the economy or the political crisis that it will create. You will have taken steps to insulate yourself. Anyway, I hope you will have done so.
The biggest advantage you have is information, but this must be transformed into action. As James wrote almost 2,000 years ago, But be ye doers of the word, and not hearers only, deceiving your own selves. For if any be a hearer of the word, and not a doer, he is like unto a man beholding his natural face in a glass: For he beholdeth himself, and goeth his way, and straightway forgetteth what manner of man he was (James 1:22-24).
Knowing what lies ahead and doing nothing to prepare for it is foolish. It does nobody any good to say to himself, “I told you so!”
Do you know where your money goes? Do you use Quicken? Are you systematically reducing your expenditures and allocating money to investments, especially investments in personal education that will enable you to stay in the work force after age 65?
If you are, then you are taking seriously these newsletters. If you aren’t, then you are like the man whose doctor tells him to change his habits or else risk a heart attack, and yet the patient refuses to change.
CONCLUSION
Changes in strategy are required from time to time. President Bush must now change his military strategy or else suffer the political consequences. He talked himself into a corner last week. Saddam Hussein has now called his bluff.
We cannot forecast everything with precision. We can at best plan for long-term developments that are in the pipeline, such as the demise of Social Security. A bad plan is better than no plan. You can revise a bad plan. It is the self-discipline of following a plan that is crucial in the long run.
Most Americans have no long-term economic plan. They have no awareness of what is coming. Presumably, by now you are not in this condition. You are at least putting together a personal plan.
Budgeting is the key. There are two budgets: time and money. For most people, the time budget is more important. If they would work to convert time into money, or into capital that will eventually produce money, they would come out ahead.
A friend of mine is a retired engineer. He happened to get involved teaching part-time in a local Christian high school. He taught students how to build a robot.
There is an annual national competition for high schools: robot competition. The robots literally compete against each other. His students won first place in Arkansas last year, and won fourth place regionally. A school with 45 high school students defeated public school high schools all over the 14-state region: Texas, Oklahoma, Arkansas, etc. The team also won the Founders Award nationally as the best design for the goal assigned. The school has now hired him full-time. He teaches math, physics, robotics, and worldview. He is paid very little. But he likes what he does. The money isn’t why he does it.
The man who created the school has a similar story. He came to NW Arkansas to retire. Seven years ago, he got bored. So, he began a school. Today, it has 240 students, K-12. The building is home-brew. It looks like an abandoned warehouse from the outside, but inside, it’s clean. It uses donated carpets and used desks. He is building it on the cheap.
Why bother? Not to make money, but to have influence. He has a new career. He is not going hungry. He is having fun. The students are getting a first-rate education.
This is also the reason that Burt Blumert runs the Center for Libertarian Studies, and acts as publisher to this website. It’s also the reason he’s still in the coin business.
Budget your time and money now so that you can have fun doing something useful after you retire from a job that isn’t much fun. If you do this, you won’t go hungry or get bored to death — literally — when you retire. As Jack LaLanne told the interviewer, retirement is a death sentence for a lot of men.
September 28, 2002
Gary North is the author of Mises on Money. Visit http://www.freebooks.com. For a free subscription to Gary North’s twice-weekly economics newsletter, click here.
