Wednesday, January 07, 2009

More Mish

Mish has another post up that has me nodding in agreement. In it, he links to a Wall Street Journal article discussing how frugality and an increase in savings is deepening the economic crisis.

While I don't take quite as hard a line against Keynesian economic theory as him (I think it has merits, but then again, so does Communism, but that doesn't mean it works in practice), I do agree that the current thinking that still dominates policy is wrong-headed and close-minded.

How can anyone say with a straight face that people acting frugally is bad for the economy? It's easy if you don't look any further ahead than the next paycheque. Sadly, this is the state the US has been in for decades.

I never really accepted it until this crisis though, be cause Canada is traditionally a nation of savers (although this had started to change over the last 5-10 years, but we're snapping back to historical norms with the current downswing). I grew up in a world where you paid off you entire credit card balance at the end of the month, you kept your mortgage small, you maxed out your RRSP if possible, you could feed a family of 5 for $20 a day, you bought on sale, and you put every spare dollar in the bank.

So seeing that people who had been worth millions of dollars now flat broke amazes me. Hearing of billionaires committing suicide because their fortunes were wiped out is dumbfounding. We've lived in a world of super-rich who weren't. Things bought with borrowed money, a life paid for with debt. This was systemic throughout the whole of the US. Companies didn't actually have any real value. Instruments that had been "making" them loads of "money" turned out to be steaming piles of crap... or nothing at all. The government is $10 TRILLION in debt, with trillions more on the way to try and spend their way out of this mess (it won't work).

So now people are saving in the US. For the FIRST TIME IN HISTORY (well, 1952, when they started tracking), US household debt has gone DOWN. how sad is that? For at least 56 years, US families have been living beyond their means and constantly increasing that gap. And what does the WSJ do? It blames them for making the problem worse.

No, people are finally waking up to the fact that you can't keep spending what you don't have. Saving money, cutting spending, making your own meals, and keeping an eye out for real sales means that mom, dad, and their 2.5 kids will have more money in the bank and actually be able to pay for things with REAL cash, not some mythical amount they'll have in the future. Does this mean an economic contraction? Damn straight. And it's a good thing. Stores won't be able to sell as many high-priced goods, profit margins won't be ridiculous, the auto industry will actually have to MEET demand instead of creating more to match their overproduction, houses might actually be worth a value that makes sense, and companies will make profits that people can fathom instead of artificial billions. In the end, painful as it will be, the economy, the country, and the people on the whole, will be more efficient and stronger. This obsession with constant growth at the expense of a stable foundation is insane.

Plus, this idea that saving hurts everyone is bullshit. It hurts companies and corporations that don't adjust to a new attitude of frugality. Call me an idealist, but I believe that deflation and saving is good for the INDIVIDUAL and that's where the focus needs to be. If GM can't find a way to make money in that environment, then they can go the way of the dodo. Another, mor nimble, car company will take their place. *I* want to pay less, *I* want to feel secure that *I* have the savings to get by if need be. But those who set policy and are trying to "fix" things don't. They care about socializing debt and failure for companies that should be allowed to collapse under their own excess.

I keep thinking of the Simpsons episode where at the end, Homer, Chief Wiggum, and others are at the bottom of a hole they had dug while searching during a scavenger hunt. The question is asked - "How do we get out of here?"

Homer: "We'll dig our way out!"
[dig dig dig]
Wiggum: "No, dig UP stupid."

Welcome to every government in the world's (except Germany for the time being, and I hold out some small, tiny, miniscule hope for Canada) plan to get out of this mess.

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