The Daily Reckoning PRESENTS: In this Daily Reckoning classique, first published on Feb. 28, 2003, Bill Bonner examines the differences in the America's economic structure since the last decade of the 20th century. He points out that the world very rarely does what we want it to do, and more often it does exactly the opposite. Read on...LITERARY ECONOMICSby Bill Bonner
It all seemed so logical, so obvious, and so agreeable back in the last half of the last decade of the 20th century. Stocks went up year after year. The Cold War had been won. There was a new "information age" that was making everything and everybody so much smarter...and richer too.
The world was a happy place, and Americans were the happiest people. American consumer capitalism was the envy of the entire species, whose peace and freedom were guaranteed - if not by Americans' goodness, intelligence and foresight, at least by their military arsenal...which could blow any adversary to kingdom come. Francis Fukuyama, a bit ahead of his time and perhaps overly impressed, announced that the "End of History" had arrived; for it scarcely seemed that any major improvement was possible. Fukuyama was, of course, not the first to believe that perfection had been achieved. Hegel had proclaimed the End of History nearly 200 years before, after Napoleon Bonaparte imposed the benefits of French republicanism on a reluctant Europe.
But "it's a funny old world", as Maggie Thatcher once remarked. Ms. Thatcher might have meant "funny" in the sense that it is amusing; she probably meant that it is peculiar. In both senses, she was right. What makes the world funny is that it doesn't cooperate; it doesn't do what people want it to do, or what they expect it to. In fact, it often does the exact opposite.
Nor do people do what they "should." Other people don't seem to act "rationally," especially those who don't agree with us. And even we do not always follow a logical and reasonable course of action. Instead, we are all swayed by tides of emotion...and occasionally swamped by them.
The world is funnier than you think. And the more you think about it, the funnier it gets. Close inspection reveals the ironies, contradictions, and confusions that make life interesting - but also make it frustrating. Men of action despise thinking - and rightly so, because the more they think, the more their actions are beset by doubts and arrière pensées. The more a man thinks, the more modest he becomes, because he sees more clearly the limitations of his own plans. Exploring the possibilities, he sees more and more potential outcomes and problems...and he recognizes more and more how little he actually knows. If he keeps thinking long enough and hard enough, he becomes practically paralyzed...a man of action no more.
Will the stock market rise?
"I don't know," replies the thinking fund manager.
Can we win the war?
"It depends on what you mean by 'win'," answers the thoughtful general.
Here at The Daily Reckoning we write in the spirit of runaway modesty. The more we think, the less we think we know for certain. If we keep at it, we will soon know nothing at all. (There are those, of course, who think we know less than nothing already.)
We are, frankly, far too much in awe of the world...and too deeply entertained by it...to think we can really understand it today or foretell tomorrow. Like its most attractive components, love and money, life is far too complex for reliable soothsaying. Still, we cannot resist a guess.
Our approach at The Daily Reckoning is, in case you hadn't noticed, is a little different from the typical investment advisory. Instead of econometrics or stock analysis, it is an exercise in what is known, derisively, as "literary economics." While you will find statistics and facts, it is the metaphors that are important. Facts have a way of yielding to nuance like a Texas jury to a trial lawyer. Under the right influence, they will go along with anything. But the metaphors remain, however imperfect, ready to turn almost any set of "facts" into the shape they want. People understand the world and its workings by metaphor, not by facts. As Norman Mailer put it in the New York Times, "there's much more truth in a metaphor than in a fact."
We cannot know how the world works, but we are immodest enough to think we can know how it doesn't work. It is not, for example, a simple machine, like an ATM into which you can merely tap in the right numbers and get cash out when you need it.
Nor does the world ever work the way people think it does. This is not to say that every particular idea - or metaphor - about how the world works is wrong, but that any particular idea will prove to be wrong if it is commonly held. The trouble with metaphors is that no matter how true they may be when they are fresh and clever, when they get picked up by the multitudes, they almost immediately become worn out and false. The whole truth is always complex to the point of being unknowable, even to the world's greatest geniuses. Only simple ideas can be held by large groups of people - so the commonly held ideas are almost always dumbed down to the point where they are practically lies...and often dangerous ones. And once vast numbers of people come to believe the lie, they adjust their own behavior to put themselves in sync with it - and thereby change the world itself. Soon, it is no longer the same world that gave rise to the original insight in the first place, and a cri! sis develops. People who have been guided by a lie suffer the consequences. They get, not what they expect, as we say, but what they've got coming. Then, they look for a new metaphor.
Thus, we cannot help but notice a pernicious and entertaining dynamic...a dialectic of the human heart, where greed and fear, confidence and desperation constantly confront each other like women mud-wrestlers: an insight about how the world works gets taken up by the masses and simplified...leading them to misdirect their efforts and ultimately getting them into trouble. A crisis then develops, which brings them to a new and different insight...one which is, ultimately, just as disappointing. In the financial markets, this pattern is well known and often described.
After reaching absurd levels in the late '90s, investors came to believe that stocks always go up. Many were the reasons given why they should, but the main reason was simple: that was just the way the world worked. But after they had moved their money into stocks - to take advantage of the insight - there were few buyers left...and prices had risen so high that there were no longer enough profits or growth to support them.
Investors were deeply disappointed in the early '00s when stocks fell three years in a row. How could this be, they asked themselves? What is going on, they wanted to know?
Mainstream economists have no answer. Paul Samuelson, popularizer of the economic profession for NEWSWEEK magazine, admitted that he and his colleagues didn't even have words to describe this "baffling economy".
Nor has Alan Greenspan been much help. In the late summer of 2002, the most celebrated economist in the world addressed an audience in Jackson Hole, Wyoming. He explained that he didn't know what had gone wrong. He wouldn't know a bubble if it blew up right in front of him. He'd have to wait, he told his fellow economists, and check the mirror for bruises - for only after the fact could a bubble be detected.
And what difference would it make, anyway? America's favorite bureaucrat explained that it made none; even if he had known, he said, he couldn't have done anything about it.
After enjoying the unqualified reverence of nearly the entire literate world, Mr. Greenspan suddenly found himself a laughingstock. He had stood by Hilary Clinton at her husband's State of the Union address...and helped his re-election with an easy-money policy. He was the key man, along with Robert Rubin and Larry Summers, of TIME magazine's "Committee to Save the World." He was even awarded France's highest honor - the "Cravat" of the Legion of Honor...and later be-knighted by the Queen of England.
And now, the poor schmuck is treated in the press like a fool. He should have known, they say. He should have done something. At the very least, he should not have praised the boom and pretended that it was permanent.
But we do not write to carp or complain. Instead, we offer it in the spirit of constructive criticism...or at least in the spirit of benign mischief. We do not know any better than Alan Greenspan what the future holds. We only guess that we are at one of history's crisis points - where the metaphors of yesterday no longer seem to describe the way the world works today. The financial markets are not the congenial ATM machines of investors' fantasies, after all. Nor is the political world as safe and as comfortable as people have come to believe.
Life is always complicated, often perverse, and occasionally absurd. But that doesn't mean that events are completely random; though unexpected, life's surprises may not always be undeserved.
Regards,
Bill Bonner
The Daily Reckoning