The market for discretionary goods is very large and volatile. There are certainly many things people can do without, but spending will never go to nothing. The performance of the market is irrelevant to our need for food and shelter. People may frequent restaurants less often and moderate their living conditions, but they will eat something, wear something and live somewhere. Homes will be heated, electricity will flow, cell phones will transmit and some form of transportation will still be required. As unemployment grows people will flock to reasonably priced entertainment. Prices may adjust as usage is moderated but these things will never go away.
How we got here
Prior to the 20th century we used to make decisions to buy based on function, quality and value. A new era of stupidity began when marketers and public relations experts learned to promote products based on personality types using psychological techniques – people no longer bought clothes, vehicles or whatever for certain features or a reputation of quality, they purchased these items to make a statement about how they wished to be perceived by the world. This behavior has always been common at the highest levels of society but now there was a premium on image even for the masses.
This experiment may not end completely, but there appears to be a growing unraveling of such consumerism. The key point, however, is that these ideas are firmly rooted in our heads and nobody will stop wanting – people are being forced by events to cut back – thus many will harbor extreme bitterness at the prospect of a life filled with unrealized dreams. If you never knew a dishwasher you would never miss it. Most people would have never achieved their goals regardless, but the critical distinction here is the lack of hope and loss of confidence in the future. When a critical number of ordinary people fail, the culture changes.
How people will react
The middle class has been irresponsible, but they will not accept any blame because everyone was led down this path by an arrogant elite who are now busy bailing themselves out. People always look first and foremost to blame an outsider for their problems and these bailouts are making it too easy. Ordinary people will complain to their friends and family who will regurgitate the same views and everyone’s beliefs will be re-enforced. Once an idea takes hold, cognitive dissonance ensures many will try to rationalize away their dissenters in the face of any contrary evidence. Meaning, there is a point of no return.
When we pass that point, it will no longer be politically correct to flash piles of cash and diamonds in music videos or at awards ceremonies. Pulling up in a fancy car or flying around in a private jet will become uncouth. Sacrificing for the future will be the new statement – stick it to the man by refusing to play their “consumer” game.
The economic impact
People will make full use of their existing property until the date of expiration. As a result, the replacement cycle will be extended for many products – but not to infinity – eventually everything fails. For example, many people have been purchasing faster and flashier computers at fairly regular intervals for years. Today, there aren’t many consumers interested in computers who are not already equipped with machines sufficiently powerful to meet their demands. Personal computers won’t go away, but production will be scaled down. The same is true for many other industries. Companies will scale back on IT spending leaving hoards of programmers with nothing to do, since an increased number of unemployed people will be using their computers all day there could be interesting opportunities on the internet, but only for self-funded startups with actual revenue models that profit from changing trends. Many service sector jobs will be decimated. People will cut their own hair, maintain their own lawns (or just ignore them) and avoid accountants and lawyers wherever possible. Look for ineffective home remedies to make a comeback. I would expect insurance fraud to become a huge problem.
The end result of these changes is difficult to predict. Many of the benefits of increased production have been absorbed by a tiny minority at the top of society, therefore it’s not unreasonable to believe they will suffer the most from an economic contraction. However, since this small community of CEO’s and financiers are pulling all the strings, it’s also not unlikely they will find a way to socialize their losses to the entire population. We’ve already seen that trend in the financial and auto sectors.
Certainly as local governments refuse to reduce property taxes despite falling real estate valuations, state governments begin raising taxes to avoid huge deficits as they are unable to raise money from the private sector, tax rebellions and civil unrest are not out of the question. It’s difficult to gauge the response from government in that case, I can’t imagine they will have the funds to feed millions of protesters in prison for any duration sufficient to deter future violators. We could very likely see the Federal Reserve buy local government debt to finance daily operations.
But none of that money will circulate and every dollar a person hoards is a dollar not being earned by a producer. Combined with a lack of credit we will see major contractions of supply. As people lose jobs, people spend less. As people spend less, more people lose jobs. Combined with the unprecedented actions of the Federal Reserve we will see a significant increase in the ratio of dollars to goods – the exact definition of inflation. But here is the catch, the dollars will not be spent. If the dollars don’t circulate, price inflation can’t happen. Which means we could have massive monetary inflation and paralyzing deflation at the exact same time, a perfect recipe for hyperinflation.
The interim will feel like deflation, but that will only last until the day it doesn’t. We aren’t likely to see a re-emergence of bubble inflation any time soon but when the mass printing of dollars by the Federal Reserve causes people to doubt the usefulness of paper currency to store their purchasing power, look out. The poor may be hungry, but the rich will find the whole world scrambling to allocate their freshly created paper bills to assets perceived as safe. Right now, that’s treasuries, but eventually that bubble will burst and all that cash will look for another home. With manufacturers bankrupt and commodity producers unable to finance exploration due to falling prices, the supply of goods will be extremely tight at precisely the moment the supply of dollars will be at its height. Picture a giant tower of cash leaning over a few pieces of cheese being fought over by mice. We could go straight from a deflation-like environment to hyper-inflation with very little notice. And if that occurs, don’t pretend for a moment raising interest rates or selling bonds at higher yields will stop it. Hyperinflation is as much psychological as monetary.
Nobody knows how long it will take for people to lose confidence in paper currency, or what event will do the trick, but the unholy alliance of Keynes’ ghost, money-printer Bernanke and big-spender Obama may make it inevitable.
2 Comments »