The Economic Addiction

I watched the movie Flight (with Denzel Washington) last night. It’s a dramatic story about addiction… and lying about addiction… aka denial!

You see, the thing about addiction is this. First, you have to admit you have a problem… that you’re addicted to something. Of course, there are many things to be addicted to.

It could be something as simple as sugar or chocolate, cigarettes or alcohol… or even much harder drugs, from sleeping pills to pain pills to heroin. You could even be addicted to talking too much, being right, dominant or even of being a workaholic.

You could even be addicted to quantitative easing, stimulus or easy credit (a little something, I like to call financial crack)…

But back to the movie…

Whip (Denzel) is an alcoholic pilot so adept that he landed a failing plane while high on alcohol and cocaine. He continued to lie about his addiction until the final testimony, when he just couldn’t lie “one more time” and finally admitted he was an alcoholic. He went to prison where he sobered up…

But what has this got to do with financial crises?

Monkey On Our Back

Quite simply, we’re addicts. We’ve been addicted to debt and Keynesian economic policies since the 1970s. Debt has grown much faster than the economy for over four decades. Now we are facing the greatest debt crisis since the 1930s…

Surprise, surprise, surprise!

ALL addictions are characterized by denial.

And ALL debt bubbles in history end up in periods of austerity… when we’re finally forced to admit our problems and rebalance or “detox” and get the addiction out of our system. We have to get straight and grow again. That is the picture of our economy over the next several years.

It’s human nature to strive to be better and have a better life. We mostly do that through working harder, innovating better technologies, better governrnment and private systems for prosperity.

But we also have a natural inclination to go beyond that and try to cheat to accelerate such trends. We use strategies like borrowing more than we can afford to get ahead. Then when such debt bubbles go beyond natural means and sustainability, we learnrn to lie about it to defend such strategies.

We deny, deny, deny.

We end up like frogs in water that is slowly starting to boil. We don’t realize we’re in trouble until it’s too late to jump out.

It’s natural and fiscally responsible to finance your house over the next 30 years in which you’ll raise your family. It is NOT natural to borrow against rising home values to buy a house that is more than you can afford, speculate in real estate or to fund your child’s education in private schools… or to speculate in technology stocks that are totally unproven.

It’s natural for businesses to finance a plant that will generate profits over 20 years, but NOT to speculate in new businesses or markets that are unproven, or to buy back their own stock with cheap debt.

Our economy and the great boom we enjoyed from 1983 to 2007 was driven by the baby boomers as they ascended in their predictable productivity, income and spending cycle. And it was characterized by growing speculation ever since the mid-1990s, rather than by productive investment in the future.

Everyone wanted to make money from stock or real estate speculation and retire early or even — stop working forever. We became addicted to the idea and took a shortcut in order to achieve it.

Now We Pay the Price

Retiring early and on speculation is not the “American Dream” and is simply not workable.

We’re simply out of touch with reality after nearly three decades of the highest growth, productivity and investment gains in history. But such booms and debt bubbles are always, and I mean always, followed by periods of austerity to rebalance and deleverage.

The truth is that we should be retiring at age 75, not 65, especially given our much higher life expectancies today. And governrnments should be actively working to restructure our massive debts in the most civilized manner, like a Chapter 11 debt restructuring, rather than flooding the economy with artificial money to cover over the crisis and push it down the road.

It’ll require a major financial crisis to get us back into reality… not more of the crack we’re addicted to.

So, plan on that!

Work now to protect yourself from the next great financial crisis to hit, likely between early 2015 and 2020 to 2022.