Friday, January 30, 2009

Will the Year of the Bull inspire a Bull Market?

This past week Chinese families have gathered to celebrate the beginning of spring, often referred to as the Chinese New Year. Everywhere, upside down “fu” (luck/prosperity/fortune/ happiness) signs hung on doors and walls to ring in the Year of the Bull. The character “fu” hangs upside down every year (the Chinese word for upside down sounds like the word for “to come” or “to arrive”); but this year, the signs seem to be asking for something more. In the economic downturn, everyone is hoping that the year of the bull will usher in a bull market.
The question is how? How do we inspire investor confidence, especially when cash and credit are both dwindling? The media continually points out that nobody seems to know anything about anything in the financial market or where the problems come from. And yet economists are having a field day with their theories on how to fix the problem. Interestingly enough, many of there theories go back to economics 101: is it better to spend or to save our way back into economic prosperity?
China and Japan have been well known for following the “saver” mentality, while the United States and many other western economies have preferred to spend there way into a good economy. Even after the September 11 attacks on the World Trade Center, former-President Bush told the American people to go out and consume. It was probably not the most practical response, but it was consistent with seventy years of American economic policy. What is wonderful is that we got away with it for a quite some time: America has managed to spend its way into more than $10 trillion dollars worth of debt. There are many factors that contributed to the current crisis; one of the biggest is also based on one of our most closely held beliefs: consumerism. Our consumer mentality resulted in a reliance on credit and the overextension of our liabilities on a micro and macro level.
When I finally took a step back to examine my very “American,” capitalistic belief in spending, I realized that it violates common sense. There are many complex economic theories and charts demonstrating why spending is great and will save the economy, and yet, at the end of the day, the bill still comes and someone has to pay for it. So how are we going to pay yesterday’s bill?
Even though alarm bells may be ringing in your head along with words “unpatriotic” or “communist,” perhaps it is time for Americans to start learning from the Chinese and the Japanese. It might be time to start thinking about saving instead of spending.
Let me be clear in what I am proposing. I do not believe that spending and saving are mutually exclusive. What I advocate is for Americans to spend within their means and put some money away for tomorrow as opposed to spending tomorrow’s money today.
Although I do not have the intellectual prowess or credentials of John Maynard Keyes or Befekadu Degefe, I do have a credit card and I know how to shop. Shopping has taught me that if I buy a widget, I will have to pay for it. For a while, I could put off payment of the widget by putting it on my credit card, but I’ll probably accrue interest payments on top of the cost of the widget if I do not pay off the credit card immediately. However, if I wait a while to buy the widget while earning some money, I can pay for the widget in full and not accrue any interest payment, keeping more money in my pocket that I can spend elsewhere, invest, or save for a rainy day. That money will eventually funnel into the economy.
Some economists warn that saving will lead to absolute job loss and further the economic doom. To suggest such a result relies on a proven assumption: we have put ourselves in a vicious cycle. Our entire economy is inflated because we have been spending tomorrow’s money. If we stopped spending tomorrow’s money today, there will be no money today because we already spent it all yesterday. What these economists propose is that we continue to be the rat in the wheel. The credit bubble has already burst and we are seeing the result. It would seem counterintuitive to follow the same path and create another credit bubble, run in another wheel, which will eventually burst and lead to a similar result.
It’s time to try something different. I understand that there would be a difficult period during the transition from a spender economy to a saver economy. In the long term, it seems like a better policy to spend what you have instead of risking spending what you hope to make. Will saving start a bull run tomorrow? No; but it may inspire market confidence in the future, maybe even enough for a bull run. And, then, there might just be real money to back it up.

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