When people have more money than they can spend and invest wisely, they tend to start spending and investing unwisely. They are captives of the old belief that you must always have your money at work. Sometimes, I think, it needs a rest.
A bad investment is a bad investment, regardless of how much money you have. There has been an excess amount of money in the system, thanks to government spending and borrowing, and this has been the cause of a lot of what economists have called "growth."
Economics got off on the wrong foot when some people started believing it’s about numbers and statistics and formulas. Economics is about human psychology and human behavior. It’s not too much of an oversimplification to say that economies fluctuate between greed and fear.
Human greed leads to booms, which in turn lead to busts. Despite all the bullish talk, I think our economy is on the verge of going bust shortly after the leaves change color this year.
Inflation created the false impression in many people’s minds that housing values could only go up. As happened in the past, speculators started buying houses as an investment, figuring they would turn them over in a few months. Lenders started making bad loans to people who normally wouldn’t qualify. Inventory eventually exceeded demand.
Now we are seeing the natural course of human events. Housing prices are dropping, mortgage interest rates are going up, foreclosures are going up, and the housing boom has turned into a housing bust. Since most of these mortgages were packaged and sold and resold to hedge funds, some of these hedge funds now find themselves with an inventory of junk. All of a sudden, lenders are getting cautious. Consumers are getting cautious. Fear is beginning to replace greed.
I’m not predicting a Great Depression, though I suppose one is possible, but there definitely will be a recession. Yes, I know it is a global economy, but when Americans slow down their buying, the global economy will slow down with it. China’s and India’s consumers are not quite ready to buy the same number of Japanese cars that Americans buy.
The Hollywood and Wall Street crowds will still be able to afford their cocaine and booze. Our esteemed public servants in Washington will stay in the top 5 percent of income. The very rich won’t even notice the recession. Recessions affect mainly the middle and lower income groups. They are the people who get laid off, foreclosed on, evicted and have their credit cards shredded.
It will put those folks in a bad mood — hopefully a bad-enough mood that they will vote out of office most of the incumbent politicians. I’m not suggesting that politicians cause recessions or booms. Most of them don’t know enough about economics and finances to run a hot-dog stand. I’m just trying to revive the old custom of turning over the politicians on a fairly regular basis. The Founding Fathers did not contemplate lifelong careers in politics. They certainly did not foresee that the people would allow their politicians to vote themselves into the upper income bracket and to devise the most lucrative set of perks and pensions this side of Mars.
But that’s an aside. Economies run in cycles, and so if we have a recession, it will eventually end as the bad debt is liquidated and the excess inventories are used up. The thing to learn from a recession is to be extraordinarily careful about getting into debt, because nobody today who works for a paycheck can be sure those paychecks will always be there.
Charley Reese [send him mail] has been a journalist for 49 years.