The rich are finally afraid. You can see it in their eyes. They're laying off their nannies. The smart ones are fleeing into Treasury notes, even though the yield is zero. According to the New York Times,
government, economists worry that a widespread hunkering-down could
have broader implications that could slow an economic recovery. If
investors remain reluctant to put money into stocks and corporate
bonds, that could choke off funds that businesses need to keep
financing their day-to-day operations.
Perhaps. But it might, just might, jolt Americans back to reality. That means an economy based on producing things of real value. And a re-valuation of business, which in this country means a re-evaluation of our very lives. It won't be easy, perhaps not even likely, because the dead hand of the past rests oh-so-heavy on everything we do. If it happened, however, it might just save us.
The wealthy investors willing to accept no growth from Treasuries are no fools. They want to preserve what they have. For the moment, at least, they realize that the stock market is a dangerous house of mirrors. Stock brokers are taught to reassure clients that in the long run, equities always keep rising and will provide a superior return. The problem with this goes beyond Lord Keynes' pithy, "in the long run we're all dead." First, that long trend line of the Dow has had plenty of downs — it wasn't until the mid 1950s that stocks recovered from the crash of '29. Investors were so burned by the 1973 recession that they shunned stocks until 1982. If you were caught in those troughs, you were scrod, as they say in Boston.
But the more fundamental problem with this sales pitch is that the reassuring long trend lines don't take account of the revolutionary changes in the market and the economy since the 1970s. Among these are globalization, instant movement of capital, hyper-concentration of the financial industry, the rise of shadow capital markets such as hedge funds and dangerous securities such as derivatives, deregulation, and the replacement of the stodgy old white-shoe brokerages by gigantic sales shams exemplified by Citigroup.
The result has been to take the worst aspects of speculation, a necessary evil on the fringe of a healthy market, and make it the dominant paradigm. You know the drill: unrealistic growth demands, monomaniacal focus on the next quarter's results, job-killing mergers to generate fees for Wall Street and the bundled securities of dangerous nothing. Then a series of bubbles to keep the Ponzi scheme going, capped by the Mother of All Bubbles in housing. The most respectable names on Wall Street were caught up and ruined. As always, the numbers "made sense" at the time, backed by the most sophisticated computer modeling and the reassurances of the best and brightest. It was a vortex that caught up average Americans, who had given up their pensions and unions in exchange, or so they thought, for a piece of the action on The Street.
What was really going on was not generating capital to create new businesses and jobs, but a giant yard sale of the wealth it had taken America 100 years to create. Being a shareholder didn't mean being an owner — you were just waiting
for a huge payout from a merger. Or a continued run-up in the stock price, helped by outsourcing, offshoring, union busting and stagnation of average employees' pay, so
you could sell at the right time. None of this was sustainable,
although it was highly profitable for the Wall Street elite. Now they're on Capri as you fear opening your latest mutual-fund report, lose your job and get tossed from your house. And here we are.
Much recovery work needs to be done, and believe me, we will have the leisure to regret and contemplate. Markets must be re-regulated. If the Obama administration is smart, it will break up the big industry concentrations. These steps would do more to restore business health than any bailout of Citi. But can we return to something more fundamental, a different mindset.
It will run against all the conventional wisdom, taught in the finest business schools and purveyed by many leading economists. But they're all afraid now, too. Their ideas have failed in cataclysm. So let them slink aside as we consider…
The mindset of the real: Investing in real companies as shareholders, not speculators. So you're in for the long-haul and hope to make a modest amount from dividends and a modest improvement in the share price, based on making real things, employing your fellow citizens and competing in the real world. It also means savings and sacrifice and hard work. It means a rejection of the casino mentality because there is no free lunch.
Many companies shouldn't go public at all. Running an outfit for love of doing it and making a decent living were once the norm. The great god "Growth" should be viewed with suspicion. James Cash Penney, who weathered the Great Depression, hewed to the golden rule and set a standard of doing well and doing good.
The mindset of the real means valuing work and workers, over merely those who live off "investments." Said Lincoln: "Capital is only the fruit of labor, and could never have existed if labor had not first existed. Labor is superior to capital, and deserves
much the higher consideration."
The animal spirits will wax and wane and the speculators will do their thing. But for most of us, the lesson of the times is a call back to basics. It happened after the Great Depression and helped build the powerful America on whose fumes we're still running. Maybe our ensuing decadence makes such a return impossible. I hope not.
Jon,
Great piece. A couple of days ago I paid my monthly Visa bill that included: AMTRAK to San Jose, CA; seven days in a motel; and three airline tickets for my niece and I to visit my sister over Christmas. When I return in late December, the trip will have been paid for.
Stu
The real middle class – people who may be paid well, but have to work and pay as they go: grocheries, mortgage, and foreign made t-shirts and jeans – is in for a rude awakening. Many thought they were rich – “my house has doubled in value!” “My 401K has me set for retirement!” – but now the reality.
As soon as one loses their job, and many in the real middle class will during this economic tailspin, all the things that made up their standard of living are unsustainable.
There is no “fleeing to Treasury notes” for there are no real assets to transfer. Many middle class are a layoff away from an undesired downward mobility.
The bad news: The margin for middle class has been erased. If you’re a one-income family, such as mine, you don’t have much hope without winning the lottery or a rich relative dying off.
The good news: Home prices have fallen so sharply, police officers and teachers can finally afford to live in the neighborhoods in which they work. That’s, like, old school.
Reinventing the American economy will not be easy and may frustrate any one president’s best intentions. There is understandable sadness about all the foreclosed houses and American dreams. On the other hand, maybe we’ll have serious conversations again about the future instead of millenialist twaddle from pundits like Larry Kudlow, Stephen Moore, and David Brooks. I just wish Louis Rukeyser had lived long enough to survey the wreckage from his Manhattan aerie.
This day was long in coming and will be just as long in passing. I’m not sure if representative government will survive the anger of those whose idea of the political contract involved endless shopping. We went into this wildly and will leave either deeply chastened or counting the dead.
Superb piece, Mr. Talton. Wow! I’m just not reading this kind of insightful commentary anywhere else.
This is a fantastic piece and is the absolute truth. In order to be a sustainable nation, we must have an economy based on producing things of real value. Tragically, the current Republican administration has tried to completely obliterate that concept by outsourcing and vigorously pushing any policy that destroys jobs and slashes wages and benefits. Jobs that result in production have been targeted for destruction the most.
We must take nearly every economic policy of the past 8 years, turn them inside out and upside down, reverse them, and start over. We have to produce, build, and craft tangible things that we can use or sell. Additionally, we have to pay Americans to do the work. It is stupid to lay off Americans, move the jobs to China, import Indians to steal our white-collar jobs, and import illegal immigrants to steal our blue-collar jobs, and then snicker at the Americans who are losing everything as a result.
I nominate Jon Talton for Secretary of Labor.