Economy & Business

Off the Shelf: Doom and the Dismal Science

A trader in front of display on the floor of the New York Stock Exchange in 2015 (Lucas Jackson/Reuters)
I suspect we’re in for a massive economic disruption soon, probably moving very quickly from a downturn in real estate to the financial sector.

It’s sometimes destabilizing to consider that it is your personality that determines your thoughts. I suspect that one reason I’m a conservative is that I’m just a melancholy person. When the world is thick with grey clouds and the storm is oncoming, I feel like the universe itself is showing me sympathy. My intuitions are about dangers more than opportunities, I attend to things that I suspect we’re about to lose and have difficulty noticing the things we’re about to gain.

This leaves me as a natural doomsayer, rather than say, an entrepreneur. And I’m instinctively drawn to subjects that are about to experience bad news.

Lately, I noticed that I’ve been lingering over the economic data, my chin jutting out solemnly. I notice that home listings in my own suburb linger seemingly forever, as if aging Boomers have a price that they absolutely must get in the market before they retire to a sunbelt state. I’ve been picking up on little details in friends’ stories that have to do with prices. After decades of vaguely hearing about London real-estate prices always going up, suddenly it sticks out when a friend says that his own home’s value is starting to sink. I linger over the Irish Times and see that Dublin is having another round of insanity in its property prices, equaling and surpassing the madness of a decade ago. The newspaper’s sharp economic writer, David McWilliams, says the rise is not driven by competition from below-poor-credit buyers, using easy money. Instead, it is being driven by international finance, dragging prices up from above. The old Irish property developers are back in business, not as owners, but as wage-slaves. He writes:

If you are the Irish person looking for a place to live none of this really matters, because it feels as if you are being priced out of your own city by a combination of foreign tenants who are elbowing you out and foreign funds that you are paying the high rent to if you do get a place. Rarely has such a transfer of wealth to so few been underwritten by so many.

However, an overheating market followed by a crash (still unlikely) would actually benefit Irish people and the Irish balance sheet, because these days we are only tenants in our own country.

The problem is that I think those international funds might also be funded by too-easy money.

My intuition somehow interacts with the algorithms in YouTube to present to me videos of Americans in China. They are almost re-creating the hilarious scenes in Adam McKay’s The Big Short, where finance guys look for evidence of a bubble by actually walking around new property developments and seeing them made of rotting material, and empty.

Just as in Ireland, in China the construction is driven more by demand from investors than tenants.

One of our National Review Institute fellows, Teddy Kupfer, is a stock-market watcher, and he shared with me the new bearish note from Bridgewater Capital. The firm’s head, Ray Dalio, had written very bullish notes upon Trump’s election, talking about the release of animal spirits and invoking the good-old 1980s. But something else has happened now: “We are bearish on financial assets as the US economy progresses toward the late cycle, liquidity has been removed, and the markets are pricing in a continuation of recent conditions despite the changing backdrop.”

I’ve started to wonder if the kind of economic pain, and the endless false dawns, that landed on Japan over the last three decades aren’t a preview for the rest of the world.

No one does better during an economic downturn than an Austrian economist. I remember well when the 2008 crash was happening that above a painting of Lehmann Brothers’ Richard Fuld, somebody wrote, “Austrian Economics Was Right.” And it was right then. Austrian economists have successfully predicted every single financial implosion in the last 140 years. They’ve also predicted thousands of others that haven’t happened.

But I’m in the mood for the Austrian doomsayers right now, so I read Tim Price’s 2012 book, Investing Through the Looking Glass.

Price quotes Jim Biano of Biano Research, who estimated that the combined inflation-adjusted cost of the Marshall Plan, the Louisiana Purchase, the Korean War, the New Deal, the invasion of Iraq, the Vietnam War, and the entire NASA space program, including the moon race, is still $686 billion less than the $3.9 trillion of bank bailouts doled out since the financial crisis of the last decade.

Financial-information provider Bloomberg reported that the U.S. taxpayer, post crisis, was on the hook for a total of $7.76 trillion of liabilities, which equates to $24,000 for every man, woman, and child in the country.

And Price seems unanswerable when he argues that the bailouts in the financial crisis did not really fix the problem of bad banks — but delayed the economic reckoning to come.

Goldman Sachs was almost certainly as insolvent as Lehman Brothers in those dark autumn days of 2008. The difference is that Lehman Brothers wasn’t allowed to convert itself into a bank holding company and borrow emergency funds directly from the Federal Reserve. Goldman was, despite not being a bank in any conventional sense of the word.

The financial costs haven’t quite been paid, because they were converted into political mistrust and populism. The Tea Party, Occupy Wall Street, the Bernie Sanders insurgency, Brexit, and Donald Trump’s election victory all are in some way tied together in that they are rooted in a fundamental and justified anger that connected politicians saved connected bankers at the cost of homeowners, taxpayers, and those yet unborn, who will inherit the mess.

Price works through his case for value investing — “good stocks at fair prices” — even in a world where prices are inflated by quantitative easing and low interest rates.

He argues, as Austrians do, that quantitative easing is a protective measure for the indebted — not just consumers, but primarily banks and governments:

Deflation is a mortal enemy to the heavily indebted state and its embedded parasites, but it is a friend to the saver and to those with serviceable debts. Precisely because deflation is so dangerous to the irresponsible debtor, unelected central bankers clearly feel they have no option but to incinerate prospects for savers through the malign workings of quantitative easing and negative interest rates.

Price ends the book with a resounding call to buy some gold. Not just a few shares of mining companies. Not just shares in a precious-metals investment vehicle. Physical gold. He calls his opponents “paperbugs” and reminds them that no other currency has lasted forever. He is waiting for a massive collapse of the currency system.

Faith in paper currencies, and in the governments that issue and consistently degrade them, doesn’t follow a linear progression. Avalanches don’t happen in tidy stages. Snow continues to pile up until the system tips from being stable to unstable, whereupon one random snowflake will cause the entire snow mass to collapse. We just don’t know which snowflake it will be. Similarly, we don’t know which act of monetary insanity will cause the financial system to implode.

In summary, why gold? Because it’s been a store of value for thousands of years. And it represents a form of money with no credit or counterparty risk. Why gold now? Because the risk of a global monetary fiasco rises by the day.

I don’t think this is advice I can take right now. I don’t have lots of excess capital sloshing around. I’m in middle age, and my home and children tend to monopolize most of the income. I can’t shift the cost of children into a different part of the business cycle.

But I suspect we’re in for a massive disruption soon, probably moving very quickly from a downturn in real estate to the financial sector, particularly the bond market. If you think politics is hot now, just wait.

In other news, I went to an English pub near National Review’s offices, and when I heard the Irish accents behind the bar, I tried out my knowledge. Dia dhuit! Tá cúpla focal agam. “Hello to you! I’ve a couple words.” One of them was embarrassed and admitted she knew nothing. The other was rather thrilled to practice. Although, she admitted she was prejudiced against my “clear Donegal” dialect. She was more of a Connemara speaker. I have to finish my manuscript, which like almost all manuscripts is coming in later than promised.

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