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A Sweet History on the Current World Economy
A little stop by the "About" section of this site (which I highly recommend reading very first) will tell you that my intent with this blog is to fulfill a noble purpose and mission... even if it does seem like most of the time what I've written looks like it was banged into the computer with my forehead.
Its purpose is make you free from one thing: A particular branch of stupidity which I've coined "financial suckiness"--and to instead, teach you how to thrive in a world of money where the odds are stacked against you, and where nothing is as cool as Ronald Reagan with an uzzi riding a velociraptor.
This suckiness is the stuff I see going on all around me, everywhere I go, all day long. I believe the solution to the suckiness is knowledge... and a little application.
What more noble cause is there than imparting knowledge... or, knowledge in the context of history?
History gives us a perspective into how we got where we are... and where we might end up if we aren't careful. For those of you still not sure how "history" might be helpful... think of it like a GPS, OK?
I'm usually pretty short and to the point in what I write... but this post is an exception, and it's been stewing in my brain for quite a while with no outlet... so, for the length I apologize. You'll live. It's a fairly long-winded piece, but it's a tale that needs to be told... so don't let it drive you off.
But, if you're determined to skip out on this brilliant piece of consolidated history which I've compiled below, feel free to CLICK HERE TO SKIP AHEAD to get on the fast track to finding out what this site is all about, and what I'm trying to achieve by keeping you staring at your electronic device for hours on end...
Putting the World Economy in Perspective
The story I'm about to tell puts our current economic situation in perspective. It tells us where we sit in the history of money/finance... and it will set us up for greater things to come... so pop a squat, and let's get on to storytime...
I'm sitting in my "hut" overlooking the valley where I live, in the sub-village of a bigger "village" in the hot, mountain desert climate of late summer, wondering when the heat will let up. I've had the same thoughts actually also in relation to the sizzling, frothy stock market which sits at all-time highs and continues its never-ending, Fed-induced march to the great blue yonder.
You see, I'm a sucker for financial stuff. Personal finance, the stock market, investments. So, I read a lot. Only a few of the articles I come across every day are worth my time, and have any bearing on the life of an average villager like you and me. One article I read today was interesting... it talked about the "destruction" of the middle class in America (See this enlightening piece recently in Forbes).
Ahh.. the "middle class" of America. Also known as the "working class," it is the largest swath of the country (most academics estimate it comprises 25-66% of households), and sits economically somewhere between poverty and Bill Gates--yeah, quite a spectrum.
Everyone in America likes to consider themselves middle class, regardless of their income or earning ability. That's because it's the social class that garners the most attention from politicians and interest groups... it's also the social class that most often gets the shaft (see this little gem on the definition of "perverse incentives" and I think you'll better understand what I mean).
If you skimmed the Forbes article I cited above, you know the self-proclaimed erudites of finance (i.e., "experts") declare the middle class is "disappearing"--the working stiffs are getting stiffed: their jobs are being automated, their wages are decreasing, and their livelihoods are vanishing. In short, they're getting shafted into poverty by Uncle Scrooge, Uncle Sam, and Uncle Ben--the uber-rich, the uber-powerful, and the uber-Federal Reserve. At least, that's what all the shiny conservative talk show personalities on TV are saying...
...and the middle class believes it. After all, it's true... or is it?
If it's not, then what is true?
Well, I'll tell you... on to story time!
The Jacked Up Economic Crisis
It's 2008. The biggest economic events of this and the previous year culminated in the financial crisis that cratered the world economy through the end of 2008 and bottomed it out in the beginning of 2009. The Federal reserve chairman, Ben Bernanke--leader of our U.S.central bank, which controls the supply of money in our country, and unarguably the most powerful entity in the U.S., more so than the President himself--whipped out his Keynesian liberal economics textbook of fairy tale theories and economic models and thought to himself, "Wow, this economy is pretty much FUBAR," (if you don't know what that means, click here for a colorful definition, but beware). "But this book here says we can do something about it."
He was pondering ways to jump-start the U.S. economy.
Since the crisis and subsequent recession had come on in full force, consumer spending (which modern pseudo-economists of the afforementioned Keynsian school of thought have come to define as apparently the single catalyst of economic growth) had dropped dramatically. And that was a problem. Why?
People were out of jobs, so they weren't spending their money on crap. With no money being spent on useless crap, companies weren't making much money, so they wouldn't raise wages, and they wouldn't hire. Unemployment was high. Since no hiring was going on, and wages were frozen, no one was out blowing their paycheck on a new fancy car or house or big screen TV. They were holding on for their lives.
Also, the housing market was in the virtual crapper after average home prices in many areas fell by nearly 25%! Foreclosures soared, and home ownership dropped in favor of home rentor-ship. This was a problem, because the housing market and the construction industry are typically considered to be "leading indicators" for economic activity in the U.S. As housing and construction goes, so goes the economy.
Ironically, it was during this troubling time that we learned home values move in more directions than just one. Weird:
Economists believed that "fixing" these two problem areas of our shut-down economy would help end the recession. And the alchemists at the Federal Reserve believed we could get our clunker world economy rolling down the street again with a little hat trick called "quantitative easing." Also known as "printing money."
With this Trump Card from up its sleeve, out of thin air the Fed could "print" new treasury bonds and sell them to the public, inflating its own bank account balance, and lend out this magical new money to banks and individuals across the country. The idea was to lend free money to anyone that could be persuaded to go out and buy crap to get the economic cycle of lending-borrowing-earning-consuming-wasting jump-started.
Just so we're clear, there are two groups that generally borrow money from banks.
Exhibit A. Those who know what to do with it--real investors, savvy speculators, and businessmen, etc.
Exhibit B. Those who know how to waste it quickly--average consumers (call them "middle-to-lower class"). This is us--yippee!
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| Speculators and rabid consumers control the economy |
Anyway, the Fed made all this money available, and lowered interest rates to encourage as much lending as possible to as many groups as possible. Banks of all sorts could borrow money from the Fed at a rate of nearly zero percent, and turn around to lend it out to the public at a higher rate, thus making money (this is called a "spread").
Like moronic frat boys at a party with free beer, the banks got drunk on the free money by lending to people, businesses, and companies as fast as they could.
The weird thing is, it actually seemed like a good idea at the time to nearly everyone--politicians, economists, middle-class peasants, debt-serfs, etc--you get the picture. Economic "stimulation" jokes became the norm even to people who had no idea what that even means. (Yeah, you remember--either you or your significant other at one point said to the other "Can I buy this? It'll stimulate the economy..." That was so corny).
This cash windfall was a hayday for investors, speculators, big banks, and institutions (Group A above)--companies like hedge funds (money managers) and private equity firms, who had billions of dollars already at their command, could borrow money basically for free to invest in things that were cheaper than they had been in decades. Things that actually have an intrinsic value, and have the capability to increase in value, as opposed to depreciating value.
These people who knew what they were doing went out and started buying up these cheap, productive assets like hell-fire--stocks, commodities, homes, you name it--anything they thought could recover in price from the lows of the crisis. They BOUGHT BOUGHT BOUGHT of course, and prices eventually began to rise.
The little guys like you and me (Group 2) were also offered money to borrow at record-low borrowing rates. We could get an effing 30-year mortgage for 2.5% if we put 20% down, or 3.25% even if we didn't--un-freaking-believable! We had not seen rates like this in over eighty years.
The problem was, the little guy was still tight on money, and his income wasn't increasing very quickly. Since the crisis, wages were still stagnant, jobs were somewhat hard to come by, and firms were hesitant to hire. So, the little guy wasn't really getting much "action" from the Fed's admittedly promiscuous monetary behavior. He just wasn't feeling the "love."
But the big guys sure were.
Those little guys that did get some action were buying absolute CRAP--cars and other crappy depreciating assets--on credit, because it was what everyone else was doing, and because our beloved president actually said it was the PATRIOTIC thing do.
The boom started in 2009. Fast forward to 2014. The equity (stock market) buying spree has been virtually unabated. Check out this little beauty of a graphic:
WRONG. Here's why.
But here's the question: Is this economic "growth" all real?
Perhaps a look at the quality of the "fuel" behind the burst in growth will give us an answer... and determine whether the quantity left over to keep this fire roaring will be enough to keep things rolling.
In a healthy economy, the fuel of economic growth is a slow ebb and flow of buying, selling, and growth. The fuel consists of everyday people going out and buying what they need, saving money, and buying assets like homes and stocks. Companies contribute to growth by inventing new stuff with legitimate money investors have given them, and putting out new products that make life better. We in turn buy these things, and the cycle is actually healthy if it happens this way.
What isn't healthy is artificial injection of capital ("money") into the womb of the economy at a break-neck pace.
But banks and firms out there with access to tons of money were out there with their money getting assets "knocked up" with wanton recklessness. It wasn't Joe Shmoe doing the majority of the schmoozing in the economy. There was no healthy balance as there should be in the ideal scenario.
Remember... the big banks and funds out there were the ones who first piled into all these cheap assets with billions of dollar of free money... it wasn't until later that Joe Shmoe caught on too and started buying. Now that he supposedly is, will the amount of fuel he has he keep the boat ("economy") afloat where it is?
The fuel behind this capital injection into the economy is essentially.... low interest rates. Cheap money that firms could borrowed at almost 0%, and flip into productive assets and earn 10%, is what has caused the parabolic rise in the stock market, as well as the rise in home prices. Low interest rates are the rocket fuel.
Do you think it's good timing for Joe Shmoe to get in?
When Joe Shmoe goes into the store to buy something, and it's on sale, he's super excited. Sometimes he even buys a lot to stock up. But he wouldn't do that if he saw the price of his item was DOUBLE what it should be... would he?
But what if everyone else was piling in the store to buy it for some reason? Isn't it possible he would think to himself that he was having a momentary lapse of judgement--and that the mob around him buying this item must be right... after all, how could so many people all be wrong at once?
This is a little thing called "cognitive dissonance." It occurs when your circumstances cause you to justify two contradictory statements or positions as both being true even though you know in your mind they are completely irreconcilable.
One thing is clear about this "fuel"... the housing market has not recovered due to Joe Shmoe buying his first home, or even an additional rental house. It's due to the big institutions piling in bigtime. And they are only buying houses because credit is cheap and interest rates are low--rocket fuel is plentiful and cheap. It's "easy money." Take as evidence the below articles to illustrate this point.
Bringing this point back in... at this point, basically everyone's in the stock-buying and real estate game. Incomes have started to rise again. That's good, I think. Even I, the pee-on at the investment bank where I work, got a raise this year.
We're now sitting at a market more than triple the height of the 2008-2009 crash. As we speak, many commodities are overbought. Home prices have recovered for the most part. Us middle-classers must be doing pretty good, right?
itself. Look around you. Do you feel any better off than you did a few years ago? I know I sure don't. I'm having trouble just staying within my monthly food budget, and I don't even eat out. Don't take my word for it. Look at this little gem of a chart and article.
The price of basic goods and expenses-food, energy, transportation, etc--has increased, and become a larger percentage of our take-home incomes.
And prices continue to rise on basic goods, while working class peasants continue to earn wages that have remained mostly stagnant. Inflation of course still exists, so let's also factor that into the equation along with companies' failures to address workers' cost of living. Put it all together and you get one giant personal finance snafu for Average Joe.
If you go to the grocery store and compare prices from just a few years ago, you'll find many basic staples are 15-25% higher. It's costing a greater percent of your stagnant wages to buy just bread, cheese, milk, and beef, for example.
So what's the verdict? Is the middle class screwed?
Are the self-proclaimed experts right about the plight of the middle class? For once, it looks like they are. But, they aren't making too big a deal of it right now.
Who is to blame? Obama? The Fed?
Who else can we blame for our plight? The Democrats? The Republicans? Mitt Romney? Steve Jobs (RIP)? The Chinese? The Russians (why not?). Yes, they all make great scapegoats. But playing the blame game doesn't really do a lot.
For the past five years, the Fed has been meddling in money and pumped trillions of dollars into the system, supposedly with the intention of stimulating the economy, increasing consumer spending, and keeping the middle-class peasants like us from teetering off the "fiscal cliff" into an even deeper Recession than we saw after the financial crisis.
But it isn't working.
All this money printing did was serve to drive up prices of real goods and hard assets, making life more expensive, our investments more artificially bloated, and put our livelihoods in greater jeopardy.
"Surprise!"
To be clear... I actually don't think our problem--and the overarching problem which threatens the middle class of America--is that none of the money flowed down to us during this whole process... i don't know any rational person who expects money to fall into their lap.
No, no, no... let me give you my verdict... and reiterate my entire reason for writing this blog. It's based on a personal philosophy of mine which is a recurring theme here.
I submit that the problem with the financial stability of the middle class is our own stupidity. The biggest problem is "YOU," or in other words, the average member of the middle class.
The problem is that most of us aren't saving money, aren't investing, and aren't thinking the least about our financial futures.
We suck at math... and we don't realize that money is meant to be used for productive things (i.e. making money for us) instead of just being spent.
Another thing is clear: We're quick to make ourselves out to be a victim in our collapsing financial house, rather than the solution.
Consider this case in point--the discussion on Wal-mart paying its employees a living wage, as opposed to minimum age. These compete patsies working minimum wage actually think that their employer is the one keeping them poor. They think minimum wage jobs are meant to make them rich. They eat up everything they hear from Jon Stewart on their 60-inch TVs that make them feel rich for a while, while blowing their food stamp money on beer, cigarettes, lottery tickets, and rent-a-center furniture. And they genuinely wonder why they can't get ahead in life.
All this crap spewing forth from conservative news outlets (whom I do happen to share political views with, sometimes) about the Fed and Barack Obama ruining your livelihood... it's all "smoke and mirrors." No, seriously.
Politics are probably the least of our worries when it comes to the economy. The real cause of our problems is much closer to home. In fact, it's IN your home... it's probably sitting right now on your couch.
Polls suggest that the middle class in this country is extremely ignorant about money and how to use it. The middle class is made up of crappy savers, crappy investors, and out-of-control spenders.
The truth is, if the middle class in general were smarter about money, all of this wouldn't be affecting their way of life. If we all made smarter choices about money in general, we wouldn't worry if we woke up tomorrow and gas prices had doubled. We'd be taken care of.
If things are going badly for you financially, it's because A) You're very unlucky (luck doesn't exist), B) You aren't trying very hard, C) You're trying, but you don't know what you're doing, or D) You're willfully ignorant.
Most of us probably fall under several of these categories. If you're reading this, you can no longer claim D. You've been warned.
With the tremendous, powerful forces of capitalism in play in this country, no one in their right mind with a good degree of discipline, some ingenuity, and with a freaking ounce of sense in their brain should be getting poorer. There's so much money floating around in this country compared to other places of the world, it's ridiculous that we even have one person living in poverty.
Yes, the income disparity in this country is outrageous. But the disparity itself is not the root of the problem.
It's the instant gratification mentality, and the obsession with having what "everyone else" has. Poor people see what the rich have, they want it, and society preys on this stupidity. Anyone can easily and quickly get what they want with "low down payments."
Rent-to-own schemes, payday loans, title loans, student loans, mortgage insurance, zero-down home "purchases," auto loans, credit cards...
The poor and middle class get suckered in by this crap ALL THE TIME. It's endless.
Now that the bomb's been dropped, I know you probably won't finish reading this. No one wants to hear that they are the source of their own problems.
That's the thing about denial. Like quicksand, the longer you're in it, and the more you flounder, the more stuck you are, the less likely you are to get out, and the more comfortable you get with your fate.
But making you comfortable isn't what I'm here for. I'm here to MAKE YOU ANXIOUS. To get you motivated. So say it with me. After you have, things will suddenly get better.
"I SUCK AT MONEY."
Don't worry, you're not alone. Look at your neighbors. Your co-workers. Your parents, maybe. If they're 45, have had an average living for most of their life, and still have to work for a loving, barring some catastrophic financial event, the sad truth is, they suck at money, too. I've proven it to you with some simple math. People that don't suck at money shouldn't be forced to work past their fortieth birthday.
Get outside your hut right now and shout it from the rooftop to our fellow savages. Make sure you believe it, because if you're going to make use of the rest of what I have to say and offer, I need you to be motivated. I'll demonstrate why this is the complete and honest truth.
If you think I'm opinionated when it comes to money and finance, it's true. I consider myself the effing self-proclaimed black belt Jedi Master of the money and investing universe. But that's why it's fun to read my musings... that's why you're still here, and it's the reason why you'll keep coming back.
The bottom line is, I started this blog because I enjoy thinking and writing about this kind of stuff. I probably won't lecture you about many of the intricacies of finance, just about what I find interesting and useful. But I truly enjoy the satisfaction of helping people in bad financial situations realize the crap storm they've gotten themselves into, and helping them get back on the right track.
But being on the right track isn't enough... my hope is that the Village will completely work you over until you've reached the point where you no longer have to worry about money, no matter your income... but yes, the income will eventually be substantial, once you are converted to the plan and continue to make progress.
The Village Id-Vestor exists to take people, even complete idiots, and make them into Financial Freaking Jedi Masters. That's our quest.
It all begins with my epic first blog post below.
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