What Columbus Must Have Worried About

When Columbus set sail for what turned out to be our shores in 1492, he was not altogether sure whether or when he was going to see dry land again. It turned out much later that some Chinese explorers had already scoped out a lot of what he found, but neither he nor most sailors at the time had any idea, though he did believe there was something there. Despite Copernicus, there were serious people who really believed the world was flat and that if they went too far, they just might fall off into a void of space.

So what does that have to do with today’s world? A lot, because we too are sailing into unfamiliar, uncharted waters, even though the GPS is omnipresent. Some of the questions that are bruited about at the moment are:

  • Do we have too much debt? Are we going to be pushed into bankruptcy by our foreign creditors?
  • When will we lick the problem of 10% unemployment?
  • How can we avoid the Depression trap of a double dip and accelerating deflation?
  • Without a growth rate like the past 20 years and massive consumption how do we recover?

And, on and on in that vein. There is no iron clad answer about the future, of course, so the flat world people today use the rear view mirror as the best proxy they can find to see ahead. And while it is true that past has in fact been prologue many times in history, this time it is most probably not true —  simply because (to stick with the metaphor) the new continent just over the horizon from us now has never been explored.

The new continent, or the future, is really different. Some of the differences are quite surprising and even profound:

  • The availability of adjustment in the modern world, when the excesses have been wrung out after the credit crisis, is simply amazing. With the internet and all forms of modern communication, including Google, our whole system is adjusting among regions, sectors, and substance daily. That was not true in the past. This kind of continuous, constant adjustment practically assures us that, if anywhere near the right macro policies are managed by our government, it would be impossible for the economy to collapse as it did in the 1930s.
  • Despite the recent credit crisis, corporate America has large amounts of cash stashed away, which it clearly intends to deploy to its advantage, particularly when costs seem relatively reasonable due to deflation. Perhaps to a lesser extent that is also true of American consumers when they see something they want. Witness: I-phones and I-pads, which are not inexpensive, being bought by the millions. Little of that purchasing power was readily available in the 1930s when consumer credit barely existed.
  • Despite the decline in manufacturing in recent decades, in part due to exchange rate adjustments, American competitiveness is increasing. That increasing competitiveness coupled with a relatively well educated work force suggests that we will gradually see new forms of employment incrementally adding to the work force, as part of the continuous adjustment process mentioned above.

The contours of “the new continent” that is just over the horizon may not yet be quite clear, causing many doomsayers to look in the rear view mirror and say  “watch out below.” For two centuries the wisest investors in America have been saying “do not sell America short.” They continue to be correct. Even though we may be looking at a long, slow recovery, which will of course have short term bumps in its path, it almost certainly will continue to favor people who remain believers.

Columbus fought with some of his captains and crew who had grown scared as the days passed without sighting land and were ready to turn back. We do not have a Columbus on our current ship of state who can command us to forge ahead. Too many people are losing faith in Obama because he has not yet “sighted” land.”  We need to find more patience to recognize and appreciate what he has already done to keep us on course. What lies ahead will surely make what lies behind fade into insignificance as the new future unfolds its magic.


Compass Confusion

There are times in life when the way ahead is clear. “Go West young man, go West!” [Attributed to Horace Greeley in 1851] was a rallying cry in the 19th century. Many people followed it and now we have California with its amazing diversity, population, genius and life. And it was easy enough to find one’s way. You just followed the path the sun took across the country.

Metaphorically, where does the compass tell us we are headed today:  North-up; South-down; West-future; East-past?

Since the Vietnam War ended in the mid 1970s the way ahead has at times been hard to find and harder to follow.

  • We had a miserable period of stagflation which ran Jimmy Carter out of a job. Call this one South.
  • Reagan’s sunny optimism unleashed a period of prosperity and consumption grounded on the assumption that less government and less taxes would put two chickens in every pot. It was supposed to feel like North East.
  • Bush One tried to keep the country in balance but lost his in the process. Strictly South.
  • Clinton triangulated everything, including his personal life, and by the end of his second term with the help of a Secretary of the Treasury, of, by and for the bond market, had presided over the greatest spurt of economic growth in memory and briefly eliminated the national deficit. They dreamed of the North West passage.
  • Bush Two, an accidental President, but an intentional cowboy, recreated the deficits, mired the country in two foreign wars and laid foundations of catastrophe. South East again.

During this same period personal consumption as a percentage of GDP rose from 60% to nearly 71% as personal income rose and our trade deficits and foreign debts rose to history making levels for a country of our size. The internet and computers came to life, bubbled over and now are a staple the world over. Information and news on every subject finds its way into every corner of earth in milliseconds. The financial sector grew from the mid 1970s level of about 17% of corporate income to between 30% and 40% from 2003 to 2009 simply by growing into a gambling  casino, though most of the presumed economic benefits accrued only to its participants, not the economy as a whole.

Then came 2008 and the confluence of perhaps the smartest, temperamentally solidest Presidential candidate with the closest thing to a financial economic collapse since the Great Depression. That candidate became President with the largest majority in decades and was greeted by the urgent need to head off disaster. Despite the trillion dollars needed to prevent a national bankruptcy, the new President deftly steered the Congress to create a giant stimulus package. The result, of course, is a vast increase in the national deficits and debt but also some renewed growth in the economy and light at the end of the tunnel.

And, despite an opposition party that knows only one word: NO – the new President managed to get signed into law the most comprehensive health care package since the 1960s, and a solid, if not perfect, financial reform package to rein in the financial sector excesses which led to the meltdown. And at this writing, it looks like there is a chance that the new President just might get the Congress to adopt an overdue immigration reform, an environmental regime and a true energy independence package. This whole process will be looked back at, in due course, with awe. North West indeed.

One can now make the case that North could emerge as the direction to take, having dodged the collapse and with a new commitment to making society work better. Others can make the case that South is inevitable because of excessive debt, which puts us and the whole world in peril of our many creditors. East appeals to those who see retrenchment as the only prudent course and with that come risks of conflicts with those who bear the brunt of less. And, finally, West has appeal because, when on a high wire, stability comes with forward motion.

Perhaps the compass is swinging wildly because we have gotten too close to the sources of “gravity” which pull a large population in various directions, so that any small variation in the vector overcompensates any stable sense of direction. Serious people are spread all over the map in their perceptions of what the direction ahead is and should be. Obviously a widely held thought/wish sees North and believes that we can ultimately grow ourselves out of a mess. The more naturally cautious like the idea of retrenchment, which they mistakenly see as prudence. And serious risk takers seem to say, “Damn the torpedoes! Full speed ahead!” or “Go West Again!”

If there is an answer to the direction to take, it surely lies in the face of the compass. No wise person today should even think for a minute about taking just one direction. That does not mean that people should just circle about. Balance, as seen with the hindsight of history, may not have been the best way to gain in what lies ahead, but it is surely the safest way for people to keep alive and well in whatever direction the compass has in store for us.