Forget Deflation

Consumer and producer inflation indexes are both down. Consumer confidence is down. Employment is up. In a vacuum, this is a recipe for a deflationary cycle. Don’t be fooled. Unless you're a dust mite, you don't live in a vacuum.

We live in a world of interconnected national markets. Even though there is ample granite in the 50 states, we import granite countertops from India. Think of that, a boat full of rocks sailing the Pacific. All that fuel and overhead, yet it is less expensive to import the items than to produce them domestically.

I’m not worried about India. Like China and Brazil, it has a diversified economy. So, as the ass falls out of the commodities markets, India will be able to absorb the downturn over time.

Think, though, of Colombia. By natural assets alone, it should be one of the wealthiest countries in the world. Yet, we know that geopolitics prevent national stability. This instability (or chaos and butchery, if you prefer), prevents the country from reaching the market fantasy of maximizing wealth through comparative advantage (low labor costs + abundant resources = lucre from sales with countries with consumer and producer demand for raw materials).

Even with a free trade agreement, what happens when the prices of their exports drop? Farmers go back to growing cocaine. Shippers go back to shipping cocaine inside vats of coffee beans. Bureaucrats receive a higher concentration of bribes from cocaine producers. Military expenditures by the official government increase. Civilian deaths increase. Crime shoots up (so to speak). Instability foments into carnage. Again. Net effect: prices of raw materials will increase due to increased labor and transaction costs (in the form of physical security) and from scarcity as producers of raw materials flood back to the profits of the illicit drug trade.

Play this out in Kenya, Nigeria, Indonesia, Bolivia, Mexico, Egypt. What about Iran? As the demand for oil drops, the wealth dries up. What will the mullahs do to fasten their grip on a population hungry for economic modernity?

Net effect: we’re still sitting on an inflationary time bomb. Prices are correcting as a result of the bursting of the asset bubbles and as consumers feel the reckoning of their own over-leverage. There’s still too much money out there. It’s just not changing hands – yet.

President-Elect P.T. Barnum?

If true, there really is a sucker born every minute:

http://www.guardian.co.uk/world/2008/nov/17/hillary-clinton-secretary-of-state

At least Barnum could be counted on to give us dancing bears. What will Obama cough up?

The Harvard MBA Feudal System

Forget Adam Smith, the prophet of America’s real religion. Forget that he knew the value of an organization rested in the labor, not the management. Forget all that. Forget dignity and common sense. Forget consequences.

Instead, let us take a moment to regale our munificent lords. Verily, let us raise our hands to toast those who are known not for riding into town in shining armor, but rather for fleeing the scene in golden parachutes. Yea, those Masters of the Universe who have fought their way up through the ranks, with nine iron couched astride their Michigan-born steeds, squires of the Harvard Business School and its pedigreed cousins with names like Wharton, Sloan, and Fuqua.

To them, I say, please shut up. If you win, take your money, sip something expensive for me while you lounge away your retirement in the south of France. If you lose, drop your head and admit you are a loser. Do not expect me to bail you out.

Next Contender: Globalism

The marauding financial crisis slaughtered the GOP and ransacked Reagan’s capitalism. Libertarians have run for the hills, pondering their fate. Will they regroup and form an organized guerrilla resistance, or will they skulk back into town and be assimilated with the rest of us into the next iteration of market theory?

We have learned that our financial systems, in their interdependence, rest on a fragile base, knees knocking with hysteria from the bursting of the mortgage bubble. Indeed, defaults on home loans are at a peak. Yet, at the same time, the actual dollar loss directly attributable to the imprudent loans is not anywhere near the dollar loss to capital markets in the G-20.

As the churn works its way around the world, exposing even greater fragility, the concept of globalism itself will be challenged. At risk is more than wealth, prosperity, and access to mangoes in December. The international cooperation in other matters will feel the strain. For example, the international terrorist black list is maintained and enforced through mutual cooperation. It is expensive to adequately check your customer base for terrorist financiers. As goodwill dissipates in tandem with financial losses, the incentive for countries like Ireland and Singapore to expend resources for the benefit of terrorist target nations will likewise diminish.

As the commodity bubbles burst with global recession and a strangely resurgent dollar, nationalist socialism a la Venezuela and Iran will become more attractive to whichever warlords can benefit from the misery and chaos caused by the meltdown. Warlordism like this will self-perpetuate, and isolationism will become an international norm due to a lack of trust and a breakdown of observing international standards.

Prior to World War I, many believed that the era of European wars was over because of the interconnectedness of markets and the free flow of people and ideas across borders that characterized the 30 years prior to the assassination of Franz Ferdinand. Yet, devastating war did break out, mostly as a result of the vestigial inferior political systems of Germany, Austria-Hungary, and Russia. If the march of democracy is reversed and the world is gripped by a new era of warlordism, not even the allure of global interchange of commercial goods and cultural artifacts will prevent a repeat of the horrors of multinational, intercontinental war.

November 5, 2008

Numerous thoughts on the day after the historic election of Barack Obama:

• There used to be slaves in the White House.
  
• Obama has not shared his vision with us to the fullest extent. Political viability prohibits it. People are going to be shocked and dismayed about certain things. For example, watch affirmative action die away. Conservatives will ask why there should be affirmative action when a black man has been elected president, which should effectively wipe away all remaining badges and incidents of slavery. That argument will catch hold. I predict that Obama will only give lukewarm support to affirmative action while strongly emphasizing the need for individual accountability.
  
• We will see America and Europe work together on pollution and climate change. In reality, the two spheres are not far apart. What has been needed is an executive willing to frame the issue as one of diplomacy rather than one of domestic economics. I think Obama will see it through the lens of diplomacy.
  
• Obama’s economic legacy will be more Square Deal than New Deal. Personally, I think that is the appropriate measure. What we need is not massive government hiring, but rather a system and culture that demands that workers get treated like humans, a system that values the psychological and moral reward of gainful employment rather than treats labor as a collection of fungible assets. We live in a society, not a marketplace. I go to Wal-Mart; I don’t live in Wal-Mart.
  
• We will see two months of America’s rivals jockeying to simultaneously provoke Bush and predetermine Obama’s initial foreign policy. Russia today moved missiles and electronic jammers into Kaliningrad. Israel and Palestine have commenced killing each other again. North Korea has already ratcheted up the bellicosity. What will Iran do? What will Syria do?
  
• I think Obama will continue the anti-secular trend, to my dismay.
  
• Not even Obama can fix what’s wrong with education. Only personal accountability and a judicial/legislative limitation on what parents can sue for will fix education. I see the decline of educational performance as a problem with personal standards and discipline, rather than a failure of providing incentives or a proper curriculum.
  
• Obama will have his first falling out with the Democratic Congress over the issue of financial stimulus. I think Obama will not support another check distribution, but will rather look for a more comprehensive and meaningful demand-side bailout to buttress whatever will be done with TARP.
  
• His personality and ethical determination to listen to his opponents will win him some unexpected allies (Lieberman, Hagel), and earn him some dogged enemies from within his own party. Watch this create a schism in the Democratic party’s second tier of leaders, with people like Pelosi and Reid leading the partisan brigades against bipartisan pragmatists like Steny Hoyer. As Clinton tries to retain relevance, it will be interesting to see how she plays this.
  
• Health care reform will not even get touched during year one. There are too many immediate problems to fix as soon as he gets into office.
  
• USA is officially transitioning to the post-Boomer era. Technology, practical ecology, work-life balance, entrepreneurship will be key components.
  
• Evangelicals are too numerous to be stereotyped. Watch this unfold: increasing numbers of non-insane, non-insecure evangelical Christians will want to contribute to and be a part of the cultural changes Obama’s election will create. Environmentalism, charity, education, and foreign aid are important to this type of evangelical.
  
• The "true conservative" movement will gain more traction. The large numbers of people who voted Republican in the past do not hold much sympathy for the blue blooded Wall Street sycophants who have dominated their party. I think of the points of view of many of my family members. They don't want big government. They don't want restrictions on their personal freedoms. They don't want to reward those who put forth less effort than themselves. They don't want wars for oil. They don't want valor exercised for greed, or personal sacrifice made for the gain of a few. This is a principled position. Obama exemplified the candidate that post-Boomer liberals want. Who will come from the right to give action and words to conservative populism? Ron Paul is ancient. Sarah Palin is a fraud. Bob Barr looks like a pervo. What about Jesse Ventura? He was a fine governor (and I mean that in all seriousness).
  
  
  

11/04/20008

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