Trickle up economy

There are many good arguments for buying from locally owned businesses. The foremost is that your dollar goes much further in strengthening your community's economic base when you skip the Big Box or chain store and buy from a local retailer (see this summary of several recent studies). In the current economic crisis, supporting your community's economy is even more crucial. Vital communities  require a diverse range of businesses to maintain higher wages, yet local businesses are the most vulnerable in this economic climate. 

One reason for buying local has not generally been discussed (here's a list of the more persuasive arguments). Instead of waiting for bankrupt state governments, or the often ineffectual federal government, to fix the global economic tailspin, economically vigorous communities can contribute to a global solution through their philanthropy, sustainable socioeconomic models and their tax contributions (Big Box stores often receive tax breaks that border on the criminal). 

So, when you make the effort to bypass one-stop shopping, or the convenience of the drive-thru chain restaurant, and buy local, you are not only strengthening your community's economy in ways that will ultimately reward you--you are also making a contribution to the institutions of state and federal governance that, like it or not, are key for stabilizing the overall economy.     

Life without financiers?

While it is too early to declare the death of the American Financial Industry, it is not too early to think about life in a post-financier age. In fact many of us are learning to cope without credit, to think of retirement less as an investment strategy and more as a savings plan and to temper our expectations for a gold-plated future. As we stand around the hospital bead of our comatose rich Uncle Wall Street, perhaps we should take some time to think about what life would be like without him...

It is often stated that without fluid credit markets the American dream of owning your own house would be out of reach for most of us, that college education for the masses would be a thing of the past, and that business would close without access to easy credit. Perhaps, but we have to question the extent to which easy credit has simply driven prices up. There is a parallel correlation between the loosening of credit markets in the early 1990s and the dramatic increase in housing prices. If this is the case, is it reasonable to assume that without easy finance, and with a glut of empty houses on the market, that home prices would go down? Perhaps becoming much more affordable through private mortgage arrangements via the homeowner? Considering the damage to the world economy, we have to ask if the 15% increase in home ownership since the beginning of the 20th century (see Smeins 1999) was actually worth the trouble--especially since that very increase (once a point of validation for the finance industry's late 20th century alchemy) is slipping away at an alarming rate.

College education is easier to address as modern finance has little to do with students getting the necessary loans to attend college. I am case in point. I managed to run up fantastic debt in college without appeal to non-government backed loans. Of course there are other issues here. College endowments will shrink and that will affect scholarships and plans for college expansion--hopefully, it will force colleges to decide what their purpose is, are they a business or an educational institution? Often enough the two are at cross purposes. When tax revenue falls off, it will become harder for Uncle Sam to extend education loans in the same quantity, or so one would imagine. But I think that the Obama administration will place college education for the next generation high on its list of funding priorities. 

As for the infamous "bridge loans" businesses apparently require to operate, perhaps businesses should, like households, operate within their means. For example, if a business owner regularly needs a quickie loan to make payroll, then perhaps she should stow that amount into savings and make it a part of her financial plan. If that doesn't work, maybe she needs to narrow the scope of her business. Business around the world are currently making these kinds of adjustments.

My point is that easy credit, as is now glaringly obvious, has been more of a problem than a solution (to paraphrase Uncle Marx, Groucho not Karl, "with a solution like that, who needs problems"). From multinational corporations to my house and your 401K, the current financial crisis is a re-evaluation of everything. Through across the board deflation, prices, salaries and futures will find a new level. My question is, will we be better off without Uncle Wall Street? Should we leave him in his coma, and get on the best we can? I think many of us already are.

Destruction of wealth

Recent numbers:

1) According to a report issued by the Fed: In the third quarter of 2008, U.S. households lost $647 billion in real estate; $922 billion in stocks; $523 billion in mutual funds; $653 billion in life insurance and pension fund reserves; plus $128 billion in private business interests. 

2) The Treasury reports that $330 billion of the TARP have been allocated to banks, yet by far most of this money has gone into the "re-capitalization" of these banks. That is, this lump sum of taxpayer money has not worked as planned to loosen credit markets. 

3) The amount of household wealth destroyed in the third quarter alone amounts to $2.8 trillion--apparently the worst quarterly loss in recorded history (although sources don't claim to adjust for inflation).

4) Deflation is here. U.S. consumer prices fell at an annual rate of 12%; producer prices fell at an annual rate of 26.4%; commodity prices are down as much as 70% from their peak.

All of this indicates that we are about to witness depression era levels of unemployment, business closings, bank failures and scarcity in the coming year. 

What does this all mean? Things will likely be changing on an unprecedented scale. Make it a priority to create stability in your home, your community and beyond. Think about self-sufficiency and, beyond that, what you can do to make your community better able to withstand the shock of dwindling government largess. By all means, stock up on canned- and dry-goods, learn to bake and cook from scratch, put in a garden, etc., but also take time out of your week to donate time, money, goods and good will to community projects. Instead of "battening down the hatches" or "hunkering down," we'll get through this mess far better working together.

Social unrest

Regarding yesterday's (12/18/08) post on increased global social unrest:

Wall Street Journal:
Oil's Crash Stirs Unrest in Russia as Slump Hits Home
Russia's oil-fired economic miracle is unraveling as industry shrinks and job losses mount. Now the first stirrings of social unrest have the Kremlin groping for a response.

Reuters
China jobless "much more grave" than official figure
Rising unemployment has fed Beijing's fears of unrest as forecasts for China's growth next year fall below 8 percent, seen as a minimum to maintain social stability.

AFP
Greek activists call for Europe-wide protests on Thursday
Several thousand activists from the Communist PAME trade union marched in Athens in the evening behind a banner reading: "The plutocracy must pay for the crisis!" The civil service trade union ADEDY is also organising a demonstration and a three-hour work stoppage Thursday, three days before lawmakers vote on the budget. Yet another union has called on supporters to gather before the parliament on Friday.

With unemployment skyrocketing in the US, and forecasts point to a very gloomy outlook for 2009, it won't take long before people take to the streets in Detroit, Chicago, New York, Philadelphia...

Global Depression

It has spawned many names: financial crisis, economic meltdown, depression 2.0, depression 2009, financial armageddon, economic catastrophe, TSHTF... you get the idea. I insist on the label "global depression," because one of the distinguishing features of this financial downward spiral is that it is the first of its kind that will touch each of the 7 billion people on our planet.

Globally, markets are linked together in an intricate web of trade and transaction, so much so that an event in one sector quickly spreads throughout the system. Early on, in September and October of this year (funny how that seems so long ago...way back when I had a retirement nest egg), there were some economists speculating that China, that dynamo of economic growth, might pull markets out of their tailspin--today there are few such optimists left. China's growth has come to a screeching halt: AFP reports that China's growth has slowed to a 20-year low and millions of urban workers are returning to the countryside in one of the largest outmigrations in the nation's history. Even for countries peripheral to global high finance the impact of the economic downturn if being felt. According to IMF reports, the financial crisis is severely impacting the countries of Africa.

The global extent of the coming depression is disconcerting in that social and political instability are sure to increase as markets and prices fall (as it turns out deflation can be more destructive than inflation). Today a full 50% of the world's population lives in urban areas. City dwellers are dependent on the currency for their very survival. As unemployment rises and money becomes scarce, what will these billions of marginally employed people do to live? The future could get very bleak very quickly for many. The depression of the 1930s was bad enough, but at that time the vast majority of the world's population lived an agrarian life where sustenance was not an issue. If you grew crops for your livelihood, your harvest might have fallen in value, but at least you had something to eat. If the global financial crisis does not turn around very soon there will be first a major shift in migration patterns for the millions who still have an option to move out of the cities (as noted above we are already seeing this in China), and then an unprecedented degree of social disintegration as our swollen cities convulse with violence and unrest.

As our financial system is not localizable, the political unrest due to poverty will not be contained within national borders. It will have effects here as well. Take a walk around downtown Philadelphia, Baltimore, New York City (just beyond the gentrified sections of the city)...the millions living at the margins are in a precarious position. With no savings, no jobs and dependence on a bankrupt state, their options are few. As Bob Marley so aptly put it: "a hungry man is an angry man."

One way to avoid potential social collapse is to support poverty fighting measures in your own backyard. Speculate on worst case scenarios for the next few years. As jobs become scarce and state largess evaporates, how can your community put those most at risk in a less precarious position? I suggest developing or radically expanding community agriculture projects that would at the very least ensure a local supply of fresh food for the most at risk families. If the downturn turns around, and the darkest of outcomes is avoided, you have contributed to the development of a diversified local economy (mixing agriculture with other industries), added to your region's green cred and created jobs to boot!

Speculation, thy name is Ponzi

A Ponzi scheme, named after 1920s financier Charles Ponzi, is an investment operation that offers high returns to investors based on an increasing influx of money from new investors. It is a classic pyramid scheme based on speculation, greed and naivete. Since the Madoff scandal a few days back, this term has been thrown around a lot (Bernard Madoff apparently lead an investment firm whose Ponzi investment strategy began to fall apart in the face of the financial meltdown--some 50 billion dollars evaporated). But, really, the Ponzi strategy is not all that different from what was happening in the housing market, the financial sector and even in the average American household these last 15 years.

Based on speculation, rather than economic fundamentals, we all have been deluding ourselves that a) the stock market can only go up, b) the value of our homes can only go up, and c) we can live on credit indefinitely. But when the economy goes in the tank, our savings and the equity in our homes vanishes, while the bills keep rolling in. This crippling delusion is connected to all boom/bust cycles and underlies the vast social devastation that occurs when the bubble pops.

There are other kinds of value that do not decline with the markets and we might start investing in those rather than placing our savings with the running dogs of Wall Street. What, other than the almighty dollar, has value? you may ask. Let offer a few examples:

1) personal talent: invest in your inner musician, artist, architect, gardener, inventor, tae kwan do master, sculptor, etc...
2) education: nothing can enrich one's life more than broadening one's mental horizons
3) experience: a rich life means an active engagement with world around you
4) vital communities: support your community institutions, festivals and businesses with your presence as well as your wallet
5) local arts scene: work to support or develop a regional musical/artistic/theatrical identity--know who is who on the scene and attend and/or sponsor events
6) local cuisine: support local restaurants, bakeries and chefs
7) world travel: not everything worthwhile is local, get out of your town or, better, country to know the world in which you live
8) the commons: support efforts to conserve local forests, wetlands, mountains, rivers, etc... quality of life is inseparable from our natural environment (most of us, I think, would rather live on the edge of a forest than on the edge of a strip mall or sub-division)
9) end poverty: actively engage with the causes of poverty in your area and support organizations that address these issues
10) get religion: support, through your attendance and wallet, a religious organization of your choice. Church, temple or mosque, many of these organizations gather local resources and invest heavily in items 1-9 -- even the non-religious can recognize the positive effect of local religious organizations on soup kitchens, food banks, scholarships, global initiatives and environmental stewardship.

But, some may contend, money must be made to support most of the above items. And I heartily agree! Communities cannot be supported on good will alone. The modest suggestion being made here is that instead of throwing good money after bad into speculative industries, allocate some of that (we can now call it for what it is) gambling cash into endeavors that will enhance the quality of our lives and the lives of those around us. So, reject your inner Ponzi and support the vitality that flows from personal accomplishment and active and supportive communities.

Points of connection

This is a reaction to an increasing number of comments I have heard in the past few weeks about the growing importance of television during an economic crisis. It goes something like this: Because family incomes are decreasing and our ability to make discretionary expenditures is shrinking, inexpensive or free entertainment becomes even more important during an economic contraction. It gives a down and out population of millions something to do. There are a few problems with this reasoning. 

The first is the assumption that television is inexpensive or free.  In fact, I can buy a week's worth of groceries with my family's monthly basic cable bill. If I pile on netflicks or blockbuster expenses for the month, I can afford quality of life necessities like good coffee and wine. The alternative to this monthly expense is to lose the cable, the netflicks and the blockbuster and instead visit my local library for free dvds and high-speed internet.

The second is the assumption that television is actually entertaining when, in our heart of hearts, we know that it only provides us with an alternate way of being bored. 

Third, it is my opinion that, presently, discretionary income is better used in buying up a large reserve of dry and canned goods, or stashing into a "rainy day fund" that protects against job loss. After you have a good year's worth of food in your pantry and six months to a year's worth of savings to replace potential income losses, then you have discretionary income once again.

Economic contraction does not need to mean social contraction and isolation. Get out and connect with people--this can be so much more fulfilling than sitting at home watching the tube. And points of connection can be very inexpensive. Here's my short list:

1) meet over a cup of coffee

2) hiking a local nature trail

3) book club meeting

4) volunteer...anywhere

5) religious gatherings

6) a potluck celebration (winter solstice is right around the corner)

7) see a local band

8) organize a byob wine tasting

9) join a writers/musician/dance/theater troupe

10) start or join a political action group to influence local government

11) gather some friends and attend a local sporting event (high school or local college events tend to be quite cheap)

12) host a game night at your house (cards, scrabble, risk, sudden death checkers...)

13) organize an environmental clean up party

14) start a monthly dance party--reserve a free space (at city hall, a park, a library conference room "after hours," or at someones home) every couple pitches in $10-$20 or so to provide refreshments and pay the band.

15) organize a star-gazing party (a telescope, a clear sky, a blanket to lay on and refreshments) 

The possibilities are really endless -- the point is to fight the urge to isolate yourself as the economy shrinks. Most of us organized our weekly outings around consumption--it became a habit that when we "went out" we were going out to spend money. But when money gets tight, we are at a loss as to what to do with ourselves. TV is not the answer. Getting out and expanding our social network of friends, family and acquaintances is not only more rewarding than an evening spent watching TV, it may become vital to the short-term survival and, when the time comes, renewal of our communities.  

Recession, depression...it's not as bad as you think

This is a rejoinder to my earlier post "unemployment, it's worse than you think." I try to steer clear of downer posts--there is enough negativity out there as it is. So, here is more optimistic look at economic disaster...

As everyone knows, a recession is a period of economic contraction--the opposite of what we have been experiencing since the mid-1990s. Economic indicators like the GDP, consumer spending and interest rates head south, while prices and unemployment rise. As bad as this is, economic contraction does have its up side, let me enumerate:

1) Recessions and depressions are a reality check. When speculation, "irrational exuberance", hype and insanity create a bubble, economic downturns remind us that market value, while not divorced from our mental states, cannot be separated for long from some kind of base reality. For example, that house you bought for $120,000 ten years ago probably is not really worth the half-million zillow.com would have you believe. The stock market does not only go up and probably does not make for the best retirement strategy. And China will not always and forever manufacture cheap goods for our stores.

2) Economic contraction is an opportunity to rationalize our household spending habits and adopt a boy-scout attitude toward future instability. Just because credit is easy to come by doesn't mean that we should continue to apply for all those pre-approved credit card applications. Eating out five times a week may save us time, but it costs... a lot (especially when the bill goes on the Visa). And the shop-a-holic lifestyle can be seen for what it truly is, a symptom of much deeper personal and social pathos.   

3) An economic depression offers the opportunity to consume less. Consumerism is not only the motor for the global economy, it also has been the driving force behind environmental destruction. Globally speaking, the air, water, topsoil, oceans, forests, etc... are all in a state of degradation unparalleled in modern history. An example from my neck of the woods: due to the housing bubble there has been a constant drive to build more subdivisions--plowing under much of the local forestlands that made this portion of Southeast Virginia so appealing. But rustic aesthetics aside, this is a major migration route for all kinds of birds. The lack of trees here impacts food and shelter requirements for these flocks and results in fewer birds making their destinations. Perhaps with the economic meltdown we can convince our city planners that unchecked development has a downside: environmental degradation, a decrease in local appeal (which drives property values down even further when there are so many empty houses--when one has so many choices as to where to buy a new home, why chose to live in a city that has all the attraction of a strip mall?) and not to mention a huge surplus of empty houses on the market.

4) Finally, an economic downturn gives everyone an opportunity to be more socially expansive--to rediscover the value in human relationships in our families and our communities. If your hours get cut, you have more time to take the kids out to a high school football game, your spouse to a dance or invite friends over for an evening of cheap wine and good conversation. If you lose your job altogether, you'll need a strong social network to get you through the financial and emotional stress. SO, get expansive during the contraction and reconnect with the social events and relationships that hold real value, a value  that does not diminish with a fall in the DOW.

When to "cut bait"

I always liked the expression "cut bait"--it suggests both determination and realism. After a long day of fishing, someone has to make the decision that the fish aren't biting and that it's time to call it quits and return home. In my last post, which has become more pertinent judging by the new crop of upcoming layoffs reported this morning, I suggested that people need to identify a top three or four major expenditures that they could cut if a job loss is in the offing. 

For example, first I would, depending on public transportation in your area, loose all extraneous vehicles (motorcycles, 2nd and 3rd cars, boats, etc.) that cost you in upkeep, insurance and/or monthly payments. Second, lose the expensive cable setup--go basic cable and dial up internet if you can't live without these things--you'll save a bundle annually. Third, any major purchases you are paying off, either through store credit or on credit cards--big screen TVs, unnecessary furniture, that $1000 espresso machine...you get the idea, take it back. Fourth, push back any leisure travel, family vacations or other boondoggles you have planned to 2011 or 2012.

We are creatures of habit, and when faced with the craziness that would accompany a job loss, we may be hard pressed to make the necessary adjustments. The compulsion to cling to the things that give us comfort in hard times have the potential to drag us down if they continue to drain our resources. All the more important to have a plan in place should you ever need to make the call and "cut bait."   

Unemployment -- it's worse than you think

The financial meltdown became widely recognized just a few short months ago. The debate over whether or not the US was in recession quickly changed to whether or not we are heading toward a depression. The cheerleaders of the US economy, those who spent last summer blustering on about the economic strength and fundamental soundness of our economy, are much more somber, if not altogether silent, these days (there are a few exceptions, but they are beginning to look a bit ridiculous). Now the debate, subdued as it is, concerns the possibility of a depression in US. In fact, in the comparative assessments of many of the pundits, we have slid from undergoing a recession similar to the post 9-11 era, to the early 1990s and now it is suggested that we will be experiencing a recession that would compare to the length and severity of the early 1980s. The next stop is the 1930s, at which point the debate over whether or not the US is sliding into a depression will have been resolved. 

One point that is being used to mollify us is a comparison between today's unemployment figures with those from the 1930s. The high for that decade was around 25% in 1933. Currently the Bureau of Labor Statistics reports that, as of October 2008, we have an unemployment rate of 6.5% -- a far cry from the 1930s. This fact has been repeatedly brought up to dispel the specter of a new Great Depression. However, if you look at how the Bureau of Labor Statistics reports its figures, 6.5% measures only those who have actively sought a job in the last four weeks (category U-3). A better estimate is the U-6 category which measures 

1) people that are unemployed and includes those who are unemployed and have looked for work in the past year, but not within the last 4-weeks, and

2) the marginally employed--i.e. those who want full time employment but are unable to find it. 

This more inclusive number put the US unemployment rate at 11.8% in October (see http://www.bls.gov/news.release/empsit.t12.htm). 

However, the SGS Alternative Unemployment Rate, which includes people who desire employment but have not looked for work during the past year, is much higher. This figure was used until the Clinton administration, but is no longer included in Bureau of Labor Statistics reports as it tends to be politically inconvenient. The SGS Alternative Unemployment Rate is currently at 15%. 

Considering that recent mass layoffs in the financial sector and currently projected layoffs in retail and manufacturing, the unemployment rate could double during 2009.  Even Goldman Sachs projects official unemployment (U-3) rising to 9% in 2009. If the SGS rate correlates with this projected rise in the U-3 rate, then a conservative estimate of the SGS Alternative Rate will shoot to around 23%. At this point we are talking depression era unemployment levels by the end of 2009--and who knows what 2010 will bring. 

If you still have your job, I would begin the uncomfortable process of considering what you would do if you had no income for 6-12 months. Do you have enough savings to see you through? Most Americans don't.  But don't get bogged down with worry and stress-- now is the time to formulate your plans B, C and D. Could you live on unemployment? Would you be able to pick up a comparable job within a few months? Do you have family or friends that could put you up for a while? What possessions would you get rid of first? It is a good idea to immediately identify the top three or four items that you would not be able to afford if you were in reduced circumstances. Too often folks loose their job yet still try to get along as they have in the past, but this denial simply drags them down faster.