My wife considers me the family prairie dog, spending his time out of the hole and persistently sniffing the air and surveying the horizon. I spend time surveying the on-going slo-mo changes in our economy and try to adjust accordingly depending on what I suspect might happen, and so far, I’ve been right more often than not. That said, I took my drubbing on a Double-Short Treasury ETF (TBT) manfully and resolved to never again walk in that segment of town. Otherwise, I keep my eye on what’s happening and despite that, there are still moments when I really don’t know what to answer when my wife looks at me and asks so what does all of this mean for our family?
That’s a damned fine question and I honestly wish that I had a clear answer. But I will – finally – lay out when I anticipate might happen and what I’m doing otherwise but don’t worry, I’m not going to shill for weapons/ammo/clean water filters and GoldLine. I work hard to not wear a tin-foil hat and refuse to put one on now. Let me start by saying that I try to look at events beyond the 24 hour CNN newscycle and in the context of a longer timeframe. Americans have notoriously short attention spans, made shorter by the CNN newscycle. Unlike here, there are countries well versed in their past and so much so that they still hold grudges, such as the Serbians who took apart Sarajevo in the early 1990s. If you have to remember who the Serbians are and what happened in Sarajevo during the early 1990s, then you need to start thinking beyond the newscycle span. My second reference frame is the idea that life and systems are entropic. My kids aren’t completely the same as they were six years ago nor am I completely the same man that I was 30 years ago. This holds true as well for systems of governance and currency as new pressures and dynamics alter or overwhelm the existing structure.
I couple these two points because there’s no reason in the world that we are so special as to not be alive during a time of major societal or economic change. When the Soviet Union fell in 1990, some yahoo wrote a book entitled The End of History. Even then, I found it offensive as it presupposed that now that capitalism had vanquished communism, there were no other conflicts in the offing and we could trot merrily on our way into an Ayn Rand Utopia. So long as there are teenage boys and a video recorder, there is potential for something spectacular to occur. If it involves a skateboard, a roof and a firepot, it could even be historic.
So what am I looking at?
1. The end of the dollar as the reserve currency. On the one hand, there are as many currencies out there as countries and none of them are the reserve currency, so how bad can that be, right? Technically, that’s correct and there’s some long-term good that could come out of it but the problem will be the short and intermediate before the long-term. Resets can be a bitch.
Listen to an auctioneer at the outset of the bidding for any piece just being offered and you’ll hear him asking to start the bidding at a specific point. If there are no bids at that suggested price, then he’ll continually drop the opening bid to a point at which someone finally thinks there’s value. Substitute the dollar for the item being auctioned and it’s the same. Our fiat currency is accepted primarily because the world believes that the full faith and credit of the US Government stands behind the buck. But with our 2010 end of year debt at about $14 trillion, and more on the way, the world seriously doubts that the debts can be repaid. Likewise, the Federal Reserve system is happy to trade cash for various forms of US treasury notes, effectively monetizing the debt – which is econobabble for printing money.
At some point in the future, the rest of the world will move from the dollar to something else and the rest of the world includes the oil producers who sell us more than half of our oil supply. The rest of the world will shift out of dollars into something else, so the dollar is less valuable and worth less, and they’ll want paid in something else besides dollars. If the dollar is then worth less compared to everything else, then it will take more dollars to buy oil and that will ripple through the system creating inflation as it goes.
2. A nation with both political and economic power concentrated amongst a small minority, aka an oligarchy. When even USA Today writes openly about the size of the income gap between poor and wealthy Americans, then it’s now both mainstream and noticeable. There’s always been a gap in the US, but it’s reaching a point that’s honestly frightening as the nation sets records for food stamp participation – 43 million and rising. Couple this with the frustrated efforts to control the money flowing into the coffers of our elected politicians and the cards are increasingly stacked against the growing majority of our children.
3. A system of higher education that is increasingly affordable only if the student and family incur significant debt, some of which simply can’t be repaid in today’s economic environment. When a young person comes out of college with tens of thousands of dollars in debt, that’s money that they can’t spend on setting up their own lives and families. They defer decisions that are ultimately important to our greater society, such as becoming full-fledged adults capable of supporting themselves and starting their own families. Unless and until this country gets back to producing what the rest of the world wants and needs, then the employment will continue to be largely service/government oriented which is akin simply to rearranging the deckchairs on the Titanic.
So what does that mean for me and my family?
- We’ve planned and saved for a large trip in 2011 and we’ll continue to do so. That said, the other spending will be ratcheted downwards and multiple requests for different things have been shot down peremptorily with the word Europe.
- Starting on January 1, restaurant meals will be finished.
- We’ll continue to speak purposefully about spending as well as the appropriate use of credit.
- Grades will continue to be pushed and as the kids age, we’ll overtly talk about scholarships and other forms of low-cost higher ed alternatives.
- As Eldest toys with a hard science versus a soft science college, we’ll make sure that she’s aware of the advantages of a hard science (think biology) over a soft science (think psychology) in the workplace.
- Political conversations have already taken on a harder tone with a harder edge. There is clearly a system in place that immediately places young people at a disadvantage at a time when they are financially disadvantaged enough already and to ignore it’s existence is simply foolish. For example, when Senator Bernie Sanders (I – VT) gave his eight hour filibuster last week, I made certain that the two kids at home heard at least a few minutes of it and what it meant. Simply put, we’re passing the point at which it’s best to appear balanced and are better suited now to clear political advocacy.
- I’ll contine to spend time explaining the "real world" examples in finance and economics. It’s been surprising to understand that despite the rolled eyes, they really are listening to what’s being said.
What’s happening and what’s coming are not single events but rather whole changes in the way that we handle our economic lives. It’s necessary for me to set aside the desire to protect them and educate them instead.