The Sky Is Falling, Chicken Little

In some ways I am a Doom and Gloomer and yet in many more ways I am not.  Now this might seem to be a contradiction in terms and I tend to agree if I believe solely in seeing to world as black and white.  But the truth to the world is that there is so much more to it than we dream.  When one views the world as simply a black and white entity then the choices are very clear, either a thing is black or it is white and no need to call on any judgment if one accepts shades of grey.  In a sense, it is the moralist argument of sin and wrong doing.  Either an act or feeling is sinful or wrong or it is the embodiment of god.  Morality is based on basic symbolic logic: either P or ~P (that is, not P) and this is what runs computer logic, a simple on or off with nothing in between.  But the world does not work that way and never did regardless of moralistic religious teachings.  I doubt that even god has restricted himself to such a narrow logic.

Yes, there are a great many things in the world that operate within a very narrow range of action.  Either a body is at rest or it is in motion, drifting along is not an intermediate state.  And either gravity works for all or it works for none.  But as we move up the ladder of actions from the strictly mechanical (well, not that motion and gravity are strictly mechanical but that is their general appearance to the human eye and brain) to the more human free form actions with uncertainty principles and unbounded conditions (sounds like math and physics, doesn’t it) we become less sure of where a particular shade of grey lies on the black to white continuum.  Well, add in a little color theory and now the world is festooned with choices well beyond our abilities to understand.  This is the universe we vainly strive to know with the limitations we have at hand.  So what does this have to do with Doom and Gloom?

On the one hand we may hear talk about the amount of debt in the world and how it is beyond our abilities to repay and all the wrath that will occur when it all comes crashing down on our heads.  This is a natural assumption because we tend to think of money and wealth as something tangible one carries in a wallet or keeps in a bank vault.  So many of us have the idea that the billions that Bill Gates owns are all the sacks of gold and piles of hundred dollar bills kept somewhere as we have seen in the cartoons of Scrooge McDuck.  Yet nothing could be further than the truth.  True, Bill Gates is rich in terms of net worth but most of that Worth is nothing more than electronic ones and zeros in various computers.  True, there are piles of paper that have stock certificate printed on them but they are represented by electronic ones and zeros.  Almost most of his money is invested in one way or another in some economic enterprise.  True, his personal bank account may have several tens of thousands of dollars in it at any one time, but all those billions are nothing more than ownership in stock certificates of Micro Soft and other corporations.  Perhaps he owns some corporate and government bonds and other financial instruments, but sacks of gold in a vault, no so much.  Well, why approach the Doom and Gloom from this point?

So much of our financial world is based on promises.  True, some of those promises are backed by hard assets.  Your house, for instance, is a hard asset.  But is it really worth what the appraiser says it’s worth?  And appraised value is based on what an asset would sell for if it were for sale and if there were any buyers willing to purchase that asset.  But what if those buyers were not willing to pay the appraiser’s price or what if there were no buyers at any price?  That new automobile drops in worth the minute you drive it off the showroom floor.  Actually, the minute the car is sold and the contract signed, that car is now a used car and reduced in worth accordingly.  But that is the black and white notation of a vehicle, either it is new or it is used.  Like new is not a legal standing, only an appraised condition.  Money is an appraised worth or value.  Most of the world’s currencies do not have the backing of gold or silver, they have only the particular government’s opinion of how much a five dollar bill is worth and it is five dollars.  Ah, but you say, what will five dollars buy in today’s market?  Well, that is a different story since we are no longer talking about worth, a value of grey and thus debatable.  No, we are back to black and white, such as how many apples and oranges can I buy with my five dollar bill?  I am not promising to pay five dollars, I am paying five dollars,  I do not warrant that my five dollar bill is worth five dollars, it is currency and its worth is determined by our government and we accept their appraised value, so we trade the five dollar bill for so many pounds of apples and oranges.

So what happens when our economic systems collapse under the enormous weight of the promises of debt?  Five dollars will still be worth five dollars as long as we accept the government’s appraised value.  Now if someone else in a foreign country does not believe that our five dollar bill will buy X-quantity of apples and oranges but some lesser amount called Y-quantity, then that will be the new exchange rate.  And if foreign governments default on their government bonds and all those bets called derivatives can’t pay off because there is not money behind those transactions, well, too bad.  But people will still have currency and use it as a medium of exchange as long as others are willing to accept it.  Now we may have the problem that our government goes bankrupt in the manner of speaking that it cannot honor its debts.  The Modern Monetary Theory people say that a government can’t go bankrupt, it just prints the money it needs to satisfy all debt.  Except it can’t.  Government spending competes with private spending.  A government buys warships and fighter aircraft, the private individual does not.  The private individual buys apples and oranges, not the government.  But printing more money to buy more goods and services for the government means that there is competition for goods and services, it means that there must be a reallocation of resources such as goods and services.  The government is not buying waffle irons and home decor items.  It is not buying baby clothes or fashion apparel.  It does not buy consumer goods unless it intends to distribute such goods to various individuals.  Lipstick and hair conditioner become scarce and expensive.  Razor blades and shoe strings become scarce and expensive.  But if a government does buy consumer goods then the variations become limited, women all wear cotton panties and bras.  Men all shave with straight razors and shaving soap.  Why would that be so?  Because mass consumption depends un uniformity.  What do you think has happened in Venezuela?  They are out of basic toilet paper and have not seen Charmin in decades.  The greatest MMT experiment of all times, the USSR went bankrupt.  MMT has its head up its rear end.

No, life goes on and there will be some winners and a good number of losers.  People who depend upon the governments for their pensions and wages may be surprised to find their standards of living greatly reduced.  But in a deflation, that always happens.  In deflation, well, let’s call it a depression because that is what it is unless the government interferes with the process for some, prices and wages go down, they retreat from the higher inflationary levels.  Now back in the days of the New Deal, labor wages went up because the government policy was to support unions and their organizing and that kept wages higher than they should have been.  It also kept businesses from hiring and thus we had an unemployment rate that reached 25% of the working population.  That interference also kept the depression continuing far longer than it otherwise would have.  All of that is historical record.  The one thing that deflation does is that debt becomes magnified.  That is, if your cost of living goes down and your wages go down, your cost of dept service (mortgage or car loan payments) remain the same.  The problem is that where your debt service may have been only 25% of your income, you may find that that same debt service is 50% of your income.  what does that mean in practical terms?  You have less margin for error or income loss.  And if your mortgage payment is now 50% of your two income family and one of you loses your job while the other suffers a 25% loss of income due to depressed wages, You can no longer afford your house and because it has lost much of its formerly appraised worth, you may not be able to even sell it for the mortgage balance.

Do you start to understand why the sky will fall for some but not others?  And a good many of the one percent of the wealthy will lose their place, their membership in the one percent.  And those who remain in the one percent may well have to make do with only being multimillionaires.  Wealth is a relative value and depends upon inflation and deflation.  What good is being a billionaire if the cost of buying stuff has risen by a factor of one hundred?  Once economic uncertain hits and chaos reins, there will be a period of dislocation that will affect many people and it may last five to ten years.  Then the world goes back to what it knows best, greed.  The old rich will be pulled down and the new rich will be installed in their places.  Many will die but most will continue on.  The only true unknown will be war and its outcome.  As it stands, we have about four or five billion too many people on this planet.  But consider that if war comes then we may see losses in human life that top a billion or so individuals.  There is a chance that in the next ten years we may see wars fought over resources and that means the death of a great many people.  There will be no salvation by technology, it will offer no miracles of abundance and the good life.  Take a look at our inner cities and tell me that technology has provided those inhabitants with the good life.  Is poverty any easier to bear than it was in the 1920’s?  You don’t need to fear the future but you should be aware of the possibilities.


One thought on “The Sky Is Falling, Chicken Little

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