It was Saturday the 14th — the day after we usually expect the Universe to throw us a curve. My brother-in-law and I were day-hiking Mt. Whitney. It’s a 22-mile scramble from 8,360 up to 14,496 feet and back, not the most relaxing way to spent a day.
Before long, we came across two brothers and their best friend. We took turns passing each other, sharing words of encouragement and speculating as to how hot the waitresses serving margaritas at the summit would be. At about 14,000 feet, my brother-in-law’s hypoxia forced us to rest and the others pushed ahead. Unfortunately, none of us could see the huge thunderstorm racing in from the blind side of the mountain.
And that which has been done is that which will be done.
So there is nothing new under the sun.
He had intimate knowledge of the dangers of lightning. He knew not to be out in the open and exposed when a thunderstorm came along. He was even in the company of several people trained in CPR and survival skills who would stop at nothing to save one another. None of this changed the fact that they were nearly three miles high in the middle of a thunderstorm.
An average lightning bolt carries 30,000 amps and a trillion watts. The air in the immediate vicinity literally explodes when it’s heated to 36,000 degrees — three times that of the surface of the sun. During this particular storm, there were hundreds of lightning bolts registered in a couple of hours. There was nowhere to run, nowhere to hide.
Moments later, the hut was struck by a bolt so massive that a ball of lightning appeared inside, floating around the ceiling for thirty seconds until it exploded, shocking everyone in the hut. The brother who’d been joking went into cardiac arrest and, despite five hours of CPR by his brother and his best friend, died that day.
The Federal Reserve is not currently forecasting a recession.
Ben Bernanke, Jan 2008
Despite his experience and expertise, not to mention a well-worn idiom, he was unable to avoid the inevitable. I think about him from time to time, especially when contemplating our economic future. Our Fed Reserve chairman, a renowned expert on the Great Depression, has assured us that depressionary lightning won’t strike twice. But, it shook our confidence when, in the year following the above quote, we saw stocks lose over half their value.
In 1933, when Roosevelt took the US off the gold standard, loosened monetary policy and greatly expanded federal spending, markets soared. Federal expenditures tripled, but GDP kept pace. Federal debt to GDP maxed out around 40%. Employment dropped below 20% and deflation abated. The country had turned the corner and sentiment improved, much as it appears today.
In 1937, however, the wheels came off the recovery express. Unemployment jumped from 14.3% to 19%; industrial production and the stock market both plunged over 30%. The causes are subject to great debate. Depending on whom you believe, monetary policy was either too accommodative or restrictive; taxes were excessive or regulation was too lax; spending was too high or not high enough.
And then we get spring and summer again.
Like storms, economic cycles are a fact of life. We try to prevent them with stimulative monetary policy, deregulation and lower tax policies. But, we invariably overcorrect or undercorrect; we take wrong turns and run down blind alleys. It’s human nature at it’s finest. As anyone who’s ever ducked into a tin-roofed hut to escape lightning would tell you, unintended consequences can be a bitch.
Witness the continuing fallout from overly lax real estate lending. Despite Bernanke’s March 2007 analysis that “problems in the subprime market seem likely to be contained,” real estate remains locked in a deflationary spiral. Nearly five years later, amid a meltdown that saw his own boyhood home sold at foreclosure, prices are back to 2003 levels.
Personally, I don’t think we’re anywhere near out of the woods. I think we’ve come to a cyclical clearing that precedes a denser, darker, scarier forest than anyone alive today can remember. I don’t believe issuing more debt can cure a debt problem any more than buying a guy a scotch can cure his alcoholism. So, forgive me when I question Bernanke’s repeated assurances.
Whether you believe him or not, know that everything you hear from the Fed, the White House, Congress, the ECB, the IMF, the WSJ or CNBC serves one purpose and one purpose only: to produce optimism. If we forget about the inevitable cycles, the ludicrousness of the cures being proffered, the quicksand into which the political process has sunk — maybe we’ll start buying Chevy Volts, iPhones and big-screen TV’s in numbers sufficient to part the storm clouds.
As a wise man once said, question everything.