Here we go again? The weird thing about blogging about personal finance and frugality for so many years is that an entire economic cycle may be repeating, or not. (My first post was from November 2008, just as The Great Recession was gaining speed.) Inquiring minds want to know, are asking me questions; and I’m one of them. Recent events have me wondering whether we’re about to see the world’s financial pendulum swing again. I wonder. Let’s see if I can show you why.
Monday, August 24th, the Dow dropped over 1,000 points within minutes. It recovered, but it recovered to a level that would’ve been considered a major drop.
The Dow drop was supposedly because China’s stock market dropped, had been dropping, and efforts to curtail the losses weren’t successful – and that’s in a country that has an amazing level of control over its systems and citizens. The fact that the manufacturing index was down, and that investors had doubts about the extraordinarily high GDP growth encouraged many to switch their view of China from exemplary role model to possibly just another bubble economy.
For the last few months, the price of oil has been dropping because the Saudis were maintaining high production. Normally, OPEC and the Saudis would back off to keep prices high, but an internal price war broke out as the cheaper producers (OPEC and the Saudis) tried to squeeze out the expensive producers (North Dakota’s boom, Russia, Venezuela, etc.). It has been succeeding, but it also means there are several countries and regions that are going into recession because their revenues are down more than their expenses can be cut. Some blame the economic pressures on some countries’ military posturing, which may act as a distraction to their populations. More countries are then at risk, and the markets don’t like risk.
The price drops have happened just as solar and wind power prices are falling to the point that it is becoming cheaper to live off the grid than on it, at least for some. Some countries, like Costa Rica, Denmark, and Germany, are experiencing days or weeks of fossil fuel free electricity production. Costa Rica just set a record of over 90 days, and that was only interrupted by a one hour spike. Lower energy prices are good news, but the reduced demand for fossil fuels happening as there is increased supply of fossil fuels means the prices of fossil fuels will remain low, possibly undermining traditional power structures.
Some countries are just having bad financial times because of debt. Greece is frequently in the news, but Argentina also has problems. Puerto Rico isn’t a country, but it is in a similar situation. Bond holders are asking for their payments and are demanding austerity, which means less money for government services and less growth within the country – particularly as their citizens emigrate to better places.
With problems in Greece and a few other places, the European Union and particularly the Euro, seem less stable; which means yet another large economic zone isn’t as stable as markets would prefer.
From the inside, the US is always full of internal debate and concern about the nation’s money policy. It seems to be one of our defining characteristics. For decades we’ve had too much debt, according to some. The response to The Great Recession was to drop interest rates and increase ‘Quantitative Easing’. which funneled money into the economy, and which may have fueled the stock market rise. The Fed agrees with most people that the QE had to be temporary, and its curtailment was a reason to expect stock performance to diminish. At the same time, interest rates have been kept low to encourage borrowing and fuel growth; but the rates are so low that the Fed has eliminated the possibility of dropping interest rates if necessary.
One of the concerns is inflation. With so much more money in the system, inflation seems inevitable, yet it hasn’t been in evidence. Money is flowing in, but it isn’t appearing in paychecks. Without more money to spend, the economy isn’t growing as much. If the economy isn’t growing enough, and if inflation is so low that it switches to deflation, then the US economy is in a difficult position because interest rates are already too low. Aside from interest rates, there aren’t as many tools to fight deflation as there are to fight inflation. Inflation is measured across an arbitrary collection of expenses, and it is possible that parts of that collection are inflationary (food and health care) while others are deflationary (fuel and technology). As a result, it is possible that some Americans are already in a deflationary cycle.
Deflation has usually been academic, but it is already more prominent in Europe where interest rates are so low and inflation is hard to find to the extent that some savings rates are negative.
The economy is a system, and probably a chaotic one; which means it is inherently unpredictable. Systems theory, however, can look at such systems and draw some conclusions. There are a couple of TED talks that I’ve referenced in my posts. One proves that the world economy is not being run by a cabal, no conspiracy theory necessary; but the world economy is largely controlled by about 200-300 people who wield more than enough power to drive the system – and that they are probably unaware of their larger role. The analysis also shows that the system is unstable. The other analysis used a different approach to come to the same conclusion that the system is unstable. It just happens to be a system that drives the global economy, is unstable, and the instabilities are growing.
Wealth and income distributions reflect all of these effects because wealth and income are the money collections and movements that make up the economy. The last time income inequality was this bad was 2008 and 2000, just before The Great Recession and the Internet Bubble bursting. Wealth is concentrating into fewer hands such that 80 people have the same wealth as 3,500,000,000. Every year fewer people own half the wealth. A few years ago it was over 300 people. An increasing concentration is unsustainable because at its extreme one person owns everything (impossible), and as wealth accumulates, some fraction of it is taken out of the economy, limiting the economy’s growth because the rest of the people have less to spend.
That’s some of the bad news. If that was all there was, it would be time to climb into the bunker and close the door.
The good news is harder to find, isn’t any clearer that the bad news, and isn’t talked about as much because we humans more readily dwell on the worrisome.
Economies haven’t gone to zero. There is a lot going on. Billions of people are working. Technology innovations are improving lives and economies, and may not be properly represented in the numbers. And, humans are amazingly adaptable.
The Great Recession hurt. So did the Internet Bubble, the crash of 1987, the stagflation of 1980, the fill-in-the-blank of every economic crisis back to Egypt and Mesopotamia. We get through because we do what we must, frequently complaining about the old world fading while quietly incorporating new ideas like the wheel.
I haven’t watched the markets any more or less this week. I’ve seen enough cycles that many of the phases are familiar. Right now we’re in the phase where it is easy to create an appalling list of worries without knowing if this is a blip or the start of a major slip. I live a frugal life. I think I work hard enough, maybe too hard. I’m invested in several places, though not as much since my Triple Whammy. I’ll think about what’s going on, but I’ll spend just as much time thinking about working with my clients, teaching my classes, fixing my backyard fence, spending time with friends – and making sure I dance. Gotta dream. Gotta invest. Definitely gotta live.
(Most of the news items behind my understanding of the situation are posted on my other blog; PretendingNotToPanic.com, my daily newsfeed of “news for people who are eager and anxious about the future” .)