It is Labor Day in the United States of America. The country is taking the day off, in honor of the toiling masses. Since almost everyone toils in some way or another, and always has, a day off – celebrating labor – seems both oxymoronic and purely moronic. Why not to take a day off to celebrate breathing? But nothing is so absurd, so pointless, or so appalling that it can’t be made the law of the land.
Our own contribution to the Labor Day festivities began at 6:15 AM when we boarded the train to Paris.
“Well, I guess this is the end of the summer,” said Elizabeth, as she said goodbye. “But it has been a very nice summer for everyone. We can’t complain.”
The station is so small; we were alone on the platform. Your editor was the only passenger to board the train. A couple other drowsy travelers were already in the car when we took our seat. Neither raised his head or opened his eyes. Soon, you editor, too, was enjoying a little railroad sleep.
Sleeping on a train is different from sleeping in a bed. You are never fully unconscious. Instead, your mind replays the dramas and delights of the recent past…drifting between the facts and fantasy.
We began to think about the parties we’d attended over the summer…about the children and their whereabouts. We imagined we were painting the shutters (we finished them all – about 100 of them!) and we thought of the credit crunch.
We recalled our own words, (to a friend):
“Calling it a ‘credit crunch’ is probably misleading. It’s not something that just happens – and then it’s over. More likely, it is the beginning of a trend. Interest rates (real and/or nominal) tend to go up and down in long cycles that last about a generation – 25-30 years. When they go down, people borrow more freely and the value of the collateral – houses, businesses, whatever – goes up, making it possible for them to borrow even more. That’s the boom phase of an economy. But when rates go up, asset prices tend to go down. So, the lenders lose money, because their collateral is worth less than it was before…and because borrowers are either unable or unwilling to pay off loans. Naturally, the financiers stop lending so freely…and you get what people call a ‘credit crunch.’ It’s just the beginning of a bust.
“The actual ‘crunch’ part disappears from the headlines in a few months, but the trend towards lower rates continues…for a long time.
“Of course, it’s hard to see what it going on, because there are nominal rates…and there are real rates. And it really is like a battlefield; with so much going on in so many different places it is hard to know who’s winning. A period of rising real interest rates is inherently deflationary, meaning…at least as we use the term…that asset values deflate and people aren’t as rich as they used to be. And since asset values go down, businesses stop expanding, jobs are cut, and you typically have a recession or a slump. But you can have inflation – consumer price inflation – at the same. That’s what happened in the ’70s. Falling asset prices make the rich poorer. Rising consumer prices make poor poorer. Of course, they can get poorer simply by spending more money too. There are a lot of ways to ruin yourself.”
Americans ruined themselves in the boom years by spending more than they made. Now, one way or another, they have to correct the mistake. Spend less. Save more. Work longer.
Two headlines over the weekend illustrated our point:
“Laboring longer is growing trend for Americans,” said an AP article. The average retirement age is currently 63; it’s likely to go up.
“Saving up for a down payment is the new reality,” came a headline from a forgotten source. Lenders, concerned about falling collateral values, will no longer put up 100% of the money needed to buy a house. Anyone who wants to buy a house will need to put up some money of his own.
“But economic cycles are very confusing,” we went on. “That’s why so many economists are certifiably insane. It drives them crazy.
“But we try to look for the major trend…and try to understand what is really going on. There’s no point in trying to be precise about it. The best you can do is to understand, vaguely and imperfectly, the fundamental direction of the economy is. What we mean is that every day is a new day…with new and unanticipated price movement. But there are broad patters too. And the best you can do – or, perhaps it is the best that WE can do – is to try to see where we are in terms of those broad patterns of human behavior that seem to recur throughout history. And, looking at it that way, it appears to us as though we have just been through a once-in-a-generation credit expansion…which is now being followed by a once-in-a-generation credit contraction. And that means, generally, lower real asset prices and higher real rates of interest. It also means lower standards of living.”
After boring our dinner companion with this economic mumbo-jumbo, the conversation shifted.
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