Boom to Bust
by Charley Reese
by Charley Reese
Whenpeople have more money than they can spend and invest wisely, they tendto start spending and investing unwisely. They are captives of the oldbelief that you must always have your money at work. Sometimes, Ithink, it needs a rest.
Abad investment is a bad investment, regardless of how much money youhave. There has been an excess amount of money in the system, thanks togovernment spending and borrowing, and this has been the cause of a lotof what economists have called "growth."
Economicsgot off on the wrong foot when some people started believing it's aboutnumbers and statistics and formulas. Economics is about humanpsychology and human behavior. It's not too much of anoversimplification to say that economies fluctuate between greed andfear.
Humangreed leads to booms, which in turn lead to busts. Despite all thebullish talk, I think our economy is on the verge of going bust shortlyafter the leaves change color this year.
Inflationcreated the false impression in many people's minds that housing valuescould only go up. As happened in the past, speculators started buyinghouses as an investment, figuring they would turn them over in a fewmonths. Lenders started making bad loans to people who normallywouldn't qualify. Inventory eventually exceeded demand.
Nowwe are seeing the natural course of human events. Housing prices aredropping, mortgage interest rates are going up, foreclosures are goingup, and the housing boom has turned into a housing bust. Since most ofthese mortgages were packaged and sold and resold to hedge funds, someof these hedge funds now find themselves with an inventory of junk. Allof a sudden, lenders are getting cautious. Consumers are gettingcautious. Fear is beginning to replace greed.
I'mnot predicting a Great Depression, though I suppose one is possible,but there definitely will be a recession. Yes, I know it is a globaleconomy, but when Americans slow down their buying, the global economywill slow down with it. China's and India's consumers are not quiteready to buy the same number of Japanese cars that Americans buy.
TheHollywood and Wall Street crowds will still be able to afford theircocaine and booze. Our esteemed public servants in Washington will stayin the top 5 percent of income. The very rich won't even notice therecession. Recessions affect mainly the middle and lower income groups.They are the people who get laid off, foreclosed on, evicted and havetheir credit cards shredded.
Itwill put those folks in a bad mood – hopefully a bad-enough mood thatthey will vote out of office most of the incumbent politicians. I'm notsuggesting that politicians cause recessions or booms. Most of themdon't know enough about economics and finances to run a hot-dog stand.I'm just trying to revive the old custom of turning over thepoliticians on a fairly regular basis. The Founding Fathers did notcontemplate lifelong careers in politics. They certainly did notforesee that the people would allow their politicians to votethemselves into the upper income bracket and to devise the mostlucrative set of perks and pensions this side of Mars.
Butthat's an aside. Economies run in cycles, and so if we have arecession, it will eventually end as the bad debt is liquidated and theexcess inventories are used up. The thing to learn from a recession isto be extraordinarily careful about getting into debt, because nobodytoday who works for a paycheck can be sure those paychecks will alwaysbe there.
August 2, 2007
