Observations

Two articles I saw in as many days made me think about the situation of the global economy.  One was on the Wall Street Journal, titled “U.S. Farmers Reclaim Land From Developers”, was talking about farmers reclaiming land from developers for the purpose of agriculture (Wall Street Journal, November 14, 2011, link – http://online.wsj.com/article/SB10001424052970204621904577018201607304964.html).   The other was on USA Today, titled “As economy tanked, fewer moved” was talking about how the usual movers, namely retired folks moving to sunshine areas like Florida and Arizona, and college graduates – two populations usually relocating easily – are basically stuck.  The older guys because they can’t sell their houses or they simply can’t retire (if their lucky enough to have a job at all), the younger ones because they have nowhere to go.  This is the astonishing datum: “only 11.6% – 35 million (Americans, AH) – changed t residence from 2010 to 2011, the lowest rate since the Census Bureau began collecting the statistics in 1948”.  If as a parent you started thinking recently that the world we’re leaving for our children is in much worse shape than we have received it, this is a good indication.  People are stuck.

What’s the apparent connection between the two?  Housing and jobs.

Here’s how.  In the past, agricultural land would be sold to developers so they can build a shopping mall, or a housing complex, a condo community.  Housing, perceived as a good investment, was a much better use for land than growing corn.  Most of the corn and other cereals, by the way, goes to feed the steaks we so much like to eat.  “70 percent of the grain and cereals that we grow in this country are fed to farmed animals” (http://www.peta.org/issues/animals-used-for-food/meat-wastes-natural-resources.aspx).  By the way, it takes sixteen pounds of grain to produce one pound of meat.  Anyway, farmers sold land to developers, and the developers are now willing to sell the land back to the farmers at a fraction of what they have paid only a few years ago.  Housing is not a very good business anymore.  Many people who thought that when they retire they will sell their (expensive) house, and buy a (cheaper) house in the sunshine belt, realized lately that they can’t.  If they have a job, they can’t leave it, and if they don’t, they can’t afford to move.  They are stuck.

In turn, the inability to retire does not create the jobs so desired by the younger folks.  They are stuck as well.

I can already see a problem.  More farm land to produce more grain to feed more cattle to produce more meat, which will be more difficult to consume as it is considered expensive food.  So mark my words: meat prices will go down.  Otherwise, there will be more meat with less people to afford it.  Simple supply and demand equation implies that meat prices are going down.

But beyond the speculation about meat prices.  Where are we going?

I am not an economist.  Not even close.  But over the years I have been exposed to the term “Trickle Down Economics”  (http://en.wikipedia.org/wiki/Trickle-down_economics), “Consumption Based Economics” (http://en.wikipedia.org/wiki/Consumption_%28economics%29), and many other terms that try to persuade us that if tax breaks are given to the rich, the poor benefit, and that the more we buy, the better the economy is doing.  I admit that it does make certain sense.  If tax breaks are given, businesses can expand, and can hire more employees, who in turn spend more money and create more jobs.  The same goes for consumption.  If you buy more, the store has to employ more people to serve the increased demand.  But does it actually work?  I’m not so sure.  Consuming beyond means, and we’re seeing it now at the level of the individuals as well as at the level of states (see USA, Italy, Greece, Island, Ireland, more to come).  I believe that everyone knows that spending beyond means gives you a second of pleasure followed by months or years of misery.  Take for example a certain population in Israel who thought it would be a good idea to invest in real estate.  Middle class folks, who invested their life savings and took a huge mortgage to buy a house they simply and clearly cannot afford.  Now, as is common in many other countries, as the prices of real estate are coming down, (yes they are and will come down), they will experience what many Americans experienced in 2008: if they sold the house, the money will barely cover their mortgage (banks in Israel are conservative, they typically loan up to 70% of the value of the asset at the time of the transaction), their life savings will be gone.  Easy decision to make, right?  Don’t sell.  But then comes the variable rate mortgage, which was nice and easy when they bought the house, and is nasty and brutal today.  Bottom line: they are shackled to a bad real estate decision for the rest of their lives.

Now it’s true, I was raised to be financially careful.  I can only assume that it stems from the fact that my mother’s family spent years in concentration camps and my father was raised under the British mandate in Jerusalem and the first years of the State of Israel which was experiencing significant financial problems at the time.  I was probably raised to think about tomorrow, and the day after that.  My mother’s motto was “save a shiny penny for a rainy day” (originally it was save white money for a black day…).  But even given where I was born and raised, I couldn’t help watching in awe people who were living beyond their means.  Buying stuff they don’t need with money they don’t have.  Taking loans, running negative balances in the bank, but living in a fancy home and driving fancy cars, wearing brand names only.

But now, I am seeing this irresponsible behavior in countries.  Not just countries, Western countries, some with very significant GDP.  Italy, Greece, Ireland are ones we know about.  What about the ones we don’t know about yet?  When it comes to Greece, it’s not only that the country spent way more than it was supposed to under the European Union’s conditions for acceptance.  They did not communicate the real data for years.  America has been running a mortgage scam that nearly brought down the economy.  Italy was busy documenting its Prime Minister’s indiscretions, while its economy was going down the drain.

To this scary equation one must add the fact that Iran wants to get nuclear.  If only we could trust and believe that Iran wants to use nuclear energy for electricity it wouldn’t be so bad.  But given the rhetoric coming out of Tehran, the question must be asked: are they looking to get an A-Bomb?  Well, if they do, the assumption that must be made is that neighboring countries will not be able to afford not go nuclear.  Saudi Arabia, Turkey, to name a couple.  Both are rich and smart enough to go get it.  What does this have to do with the economy?  A lot.  The economy going down in the US and Europe gives all a very poor incentive to go to war with Iran.  In addition, Russia and China really don’t want to see the oil prices going up.  The direct result is no sanctions, no military option, and the outcome is: expect Iran to have a rudimentary nuclear weapon in 2012.  Because they can, and because nobody can afford to stop them from doing it.

The combination of the upcoming bad economy and the Islamic fundamentalism is possibly the worst combination we’re facing in the coming years.

Given all this (and of course much more that I have no exposure to), I am worried.

What really got me going are thoughts of how to fix it.  Now obviously I am not in any position to influence anything.  The only thing I can do is share my opinion.  And my conclusion lately is very basic.  Economies cannot be based on consumption anymore.  Let me rephrase.  Consumption must be based on available funds only.  The current paradigm of economy is as follows: you seem like a nice guy, you seem to have the capability of paying your bills, let’s give you money to spend today, and you will return it to us tomorrow.  With interest.  The deal is simple: you get something you can’t afford today, and we charge you a commission for giving you the ability to satisfy your urge to have it today and not wait until you have enough money to pay for it in the future.  It does sound simplistic indeed.  The problem starts when you scale up.  You want to buy a house, but you can’t afford it so you take out a mortgage, you want to go to school but can’t afford the tuition, you want to buy a company, but don’t have the funds.

What if one day we were told that credit cards are illegal, and no more mortgage loans?  Don’t panic.  Your earned money is still safe, but you will have to save in order to buy stuff.  What will happen as a result?  Prices will go down, people will consume less, the planet will look better, seriously.  The alternative is unthinkable.  Keep spending money you don’t have on things you don’t need and can’t afford, all you do is drive prices up and put you more in debt.  This, by the way, is correct for individuals as well as countries.

In addition, living within one’s means essentially forces people to make choices: I want this but I can’t afford it.  I must have that other thing though, because I can’t live without it.  Then I’ll buy the other thing and not the first.  Today, we are not making a lot of choices.  We buy what we WANT, not what we NEED.  We are actually driving the prices up.  Imagine that: no mortgages, no funds, no house sales.  Builders lower the prices, people start to buy as they can afford the lower prices.  This is true for everything.  Surprisingly, this decision can be done at the individual level.  Decide to think twice before you buy something.  Think whether you need it and whether you can afford it.  Think whether there are other things you need more.  Think what would happen if fifty million people around the world will be looking at the same product you were considering, and actively deciding: I am not going to buy this thing today.  I have more important things to do with my money.  Only good things will come out of this practice.

Don’t get me wrong.  I am as guilty as us all.  Particularly when it comes to kids.  When they want something I don’t stop to consider whether they really need it or not, whether or not they will even use it next week.  But I did notice that when I say no to some impulsive “I want it” request, it’s simply forgotten and life goes on.  Last but not least: consider alternatives.  I have a confession to make.  I love Old Navy products.  They are a lot cheaper than Banana Republic or Billabong for example.  Yet, I promise you, I still have a half dozen Old Navy T Shirts I bought in Tucson a decade ago.  The expensive Banana Republic and Billabong shirts are long gone.  Be a smart consumer, don’t let the advertising lead you to bankruptcy, think about tomorrow.  Believe it or not, the future may actually come, and you don’t want to be taken by surprise…