We are trying to think different thoughts…and give ourselves severe handicaps.
It is another beautiful day here in the South of France. The sky is clear. The air is cool and dry. It is perfect weather for this fin de bubble summer.
But as we try to think new thoughts, old ones come back to us.
"Consumers and economists alike are looking over their shoulders at a growing American mountain of debt," says U.S. News.com. "Just how worried should most families be about what they owe? At the very least, economists fear that the indebtedness of the all-important consumer threatens U.S. economic growth, already slowed by record-high oil prices."
Yesterday, oil hit a new record — almost $62 a barrel. Reports from the homeland tell us that Americans still drive to malls…still spend…still shop and still borrow.
Spending rose in June by 0.8%. Incomes rose 0.5%. Americans are still spending more than they make.
"Household finances, like the economy, tend to run in cycles," U.S. News continues.
Usually, when times are good, families assume things will be good forever, so they spend more and save less. When times get tough — as they did in the mid-’70s, early ’80s, and early ’90s — consumers tighten their belts, saving more and borrowing less. But in the most recent downturn, starting with the bear market of 2000 and the recession of 2001, belts didn’t get tightened. In fact, they were loosened.
"Household debt rose from 96 percent of personal disposable income (consumers’ take-home, spendable cash) in 2000 to 111 percent in 2003 to 113 percent at the end of 2004. Just the fact that it’s growing isn’t necessarily a problem," says Scott Fullwiler, an economics professor at Wartburg College in Waverly, Iowa. "My concern is that as a percentage of disposable income, it’s at an all-time high."
"At the same time, the savings rate — that’s savings (not including home equity or investment gains) as a percentage of disposable income — has plummeted. It fell to 0.6 percent in May, down from as high as 3.4 percent in 2001 and 7.9 percent in the early 1990s."
These are old thoughts to us. They keep coming back to us…they are like a dead animal under the floorboards; it stinks until it is properly disposed of. We won’t be rid of these thoughts until consumer spending falls and savings rise. And those things won’t happen without a real recession. We’ll be glad when it comes — we’re getting tired of the stench.
We don’t know what to make of our new thoughts. We are trying them on like new shoes -looking for a pair that doesn’t pinch. Whether they are useful, or merely elegant, we don’t know yet.
At the heel of our new thoughts is the idea that thinking itself is little better than a conceit. We believe what we need to believe when we need to believe it. When circumstances change, we believe something completely different — even though we considered both thoughts eternal.
A man marries one woman. "She is the girl of my dreams," he thinks to himself. "I am hers forever." Years later, he finds a new girl of his dreams. People with no money of their own believe in the graduated income tax. "From each according to his means," they say. People with more money believe in "flat rate." It is fairer, they say. People with a great deal of money barely care what the tax rate is; money has reached a point of such low marginal utility they become indifferent. Besides, money really is a burden; the rich man has to take up expensive hobbies from which a poor man is spared. These handicaps help him get rid of his old money, as well as reducing his ability to compete for new money.
Warren Buffett, for example, encourages the government to take away his money when he dies. He favors the inheritance tax because money, to him, is a game. When people start with vastly different grubstakes, he says, it takes the fun out of it. Had he not been the best player in all history, he might not find the game so enjoyable. Had he not so much money, he might be more careful about where it goes. Had he not been who he is, where he is, and lucky as he has been, he might believe entirely different things. As it is, he enjoys the sport of making money…and looks for the government to impose a handicap…taking it away from him when he dies.
The idea of "handicap" comes from sports — where the stronger player spots the weaker competitor a few points in order to make the outcome less certain. But you see the phenomenon in nature too — where male animals give themselves handicaps in order to prove that they are stronger than their comrades (and therefore better candidates for mating). That is why male birds have such bright and elaborate tail feathers…and why stags have such huge antlers.
Humans give themselves similar handicaps. When a successful lawyer buys a beach pad…and a sports car…he is signaling that he is strong enough to carry the load without going bankrupt. And when a member of the British upper classes stutters, he is spotting his interlocutor a few points. "Look," the stammering tells us, "I know you are inferior, so I will act as though I can’t speak right just to try to level the playing field."
The handicaps are taken on for reasons of vanity. But they have the effect of bringing things into balance…that is: of helping them regress to the mean. If the stag really is strong, the rack of horns on his head will slow him down. After paying for his beach pad and sports car, the lawyer has barely any more free cash than his less-successful brethren. And after a few passes through the inheritance tax system great fortunes are reduced to modest ones.
We all believe what we need to believe…to get back to the mean.
• House price increases have been running at three to six times the rate of GDP increases. It can’t continue — for obvious reasons; houses would soon become unaffordable (in many areas, they already are). The big question is how the bubble ends…with a bang, or a whimper?
• "In the struggle between man and beast," said your editor, limping towards the dinner table last night, "the beast has won a round."
Your editor has been giving himself a severe handicap. No man over the age of 50 should be allowed to take up horse riding. But at the urging of his wife — who bought him a very big horse — he decided to mount up. The first few sessions passed reasonably well. He began to imagine himself as the Lone Ranger atop Silver or perhaps Tom Mix with his horse Tony. But then, two days ago, he wrenched his back in the saddle, which must have come as a blessing to his readers, since it made it difficult for him to sit up to write. And yesterday, the bloody horse tried to unseat him as he mounted — walking under a low-hanging limb as he was trying to get his stirrups on. Nor was that the end of it. After refusing several invitations to trot down the garden road, we road over to a riding ring for further instruction. This, too, began deceptively well. We practiced starting and stopping. Trotting and cantering. But as we approached the end of the session, the horse — Ipso — began running around the rink at a faster-than-usual pace.
Caught off balance, the cavalryman lost his right stirrup. No problem; he will slow the horse and put it back on. Then, he lost his left stirrup. It had now become essential to slow Ipso down. Instead, he speeded up.
The ring is bounded on three sides by a wooden fence. On the other side is a stone wall. As the speed increased, so did the horse’s proximity to these obstacles and the rider’s visions of eternity. He pulled on the reins, but without stirrups — and only five days of practice — he found himself completely unable to control the animal. Faster and faster it went. Around and around. We saw ourselves thrown into the stone wall…collapsing into a limp heap to be discovered later in the day with our head at a strange angle and a glassy look in our eye. The thought of Christopher Reeves, for whom we were often mistaken…and of Rhett Butler’s daughter, who was a much better rider…crossed our mind. We wondered who would close the shutters at night…who would write this…and who would give us a proper eulogy. We wondered what kind of a fool would take on a handicap so severe it proved fatal. We wondered how to get off the horse…
It is a disgrace, in the riding world, to be unhorsed. But there is nothing especially dignified about getting your neck broken either. We decided to try a maneuver we had seen in the movies — the dismount au gallop. We swung our right leg over the saddle and fell off to the left, while the horse was careening around a left-hand turn. The ground was soft sand. We expected to be trampled. We felt for broken bones. Everything seemed okay.
Ipso had come to a halt as soon as we had fallen. He stood there with a curious look on his face — something between satisfaction and contrition. You are supposed to get back on the horse when this happens. But we felt lucky to be able to stand up, let alone mount up.
We hobbled back to the stable. Two days ago, we could barely sit. Now we can barely walk.
Bill Bonner [send him mail] is the author, with Addison Wiggin, of Financial Reckoning Day: Surviving the Soft Depression of The 21st Century.
