Wednesday, October 13, 2010

Actually, We Aren’t All In This Together

This is the story of an average middle class town. This town could be the snapshot representing the American Dream anytime in history.

Anytime up until 25 years ago. This is when the town and all of its citizens found out that they wanted more than the American Dream could offer.

The story starts in 1985. A newcomer walks into Bernie’s, the local bar. This pilgrim’s name is Sam.

Sam had just inherited what seemed to be a limitless amount of income from a family trust that had been set up in 1776 by his ancestors.

Sam enjoyed the people and the town. So he stayed. He came to Bernie’s every night and bought drinks for the patrons. He made many friends.

Sam liked the attention he received from this generosity and through the years bought more and more drinks for the house. Eventually it became a ritual for him to pay for everyone’s drinks from 7pm until the bar closed at two in the morning.

He continued to draw more and more from the family trust that was set up to last forever.

By all rights, with prudent management the trust could have lasted forever because it was a vast amount of wealth.

Sam loved the attention. And everyone loved Sam. They voted him the figurehead of the bar. This came with a title. Whenever he entered the bar he was always affectionately hailed as Uncle Sam.

One day, Ms. Bair, the conservator accountant of Sam’s trust, started to become worried. Sam was spending a lot of money. If the spending kept increasing, the principle that was lovingly placed in the trust 200 years ago by his ancestors would start to diminish.

Ms. Bair said that she was proud of Sam for helping his friends but it would be best if he didn’t increase the spending any further. This prudence would insure that the trust could provide income forever.

“Besides”, the accountant added, “if you went broke, it would hurt your friends a lot more than one free drink each evening."

This made sense but it was a worry for Sam. So it became a topic of conversation among his friends at the bar.

One of his friends at the bar was a young man named Klugman.

Everyone loved Klugman, almost as much as Sam. He was handsome and articulate and a wonderful story teller.

Sam would buy the drinks and Klugman would speak of the prosperity that lay in the future.

Klugman was a dreamer. This attribute was perfectly suited for his trade as an economist. His job was to consult with business owners and show why they needed to borrow money to grow bigger.

That’s what economists do.

And for a time, the local businesses did grow bigger and bigger, thanks to Sam and Klugman and the bar.

As Sam spent money at the bar, the patrons spent less buying drinks. In this way everyone had more money to spend on other things, except for Sam of course. But he didn’t care.

This additional money flowed though the local economy. Everyone’s businesses grew. Everyone was happy. Everything was perfect.

But the problem with unrelenting perfection is that it eventually becomes average.

Over time the economy stabilized. Businesses stopped growing at a rapid pace but continued to borrow at the behest of Klugman.

At night in the bar Klugman spun even bigger tales of the prosperity in the future.

Because that’s what economists do.

And being an economist Klugman felt that this slowdown in business was becoming serious. His clients that borrowed money to grow their businesses were having trouble paying their loans. He felt the local economy had to be stimulated back to the growth trend that was established when Sam came to town.

He had a talk with Sam and explained that it was imperative that Sam buy more drinks in the bar. “Maybe you could start buying drinks at six o’clock instead of seven.” Klugman urged. "This would save everyone money that they could spend in the local economy."

Klugman promised that this would only be temporary. Local businesses only needed a temporary jumpstart to begin growing again.

The next day Sam explained Klugman’s theory to Ms. Bair. After she stopped laughing the accountant tried to suggest that buying more drinks for bad businessmen that incurred too much debt didn't seem like a viable solution.

"The businesspeople of this town need to live within their means today and not worry so much about tomorrow." Ms. Bair suggested.

This was the nature of an accountant. Today was more important than tomorrow.

Ms. Bair didn’t want to talk about tomorrow as Klugman worried about nothing else.

Sam needed another opinion.

He went to see his friend Mr. Hoenig who was the town banker. Mr. Hoenig seldom came to the bar and always paid for his own drinks. This made Hoenig the only man in the bar that didn’t take advantage of Sam’s kindness.

Sam posed his concerns to his friend. The banker tried to reply in a way his young guest could understand.

“Every businessperson has a place and a time in the economy” he stated. “Bankers live in the past. We are the caretakers of our town’s savings. This is the excess production that becomes a store of wealth. We use a businessperson’s history to determine if they are a suitable guardian of the town’s stored wealth. So we must always live in the past. I can only guess about the future, the same as you”.

Then he interjected “Accountants view the world through their balance sheet which is nothing more that a snapshot of the present. They are not as interested in tomorrow.”

“And, as you have surmised, our friend Klugman lives on the expectation of income. Economists sell business people risk in the future”

“But who can help me?” asked Sam.

“Well it appears you want a forecast” Mr. Hoenig said, “only Economists and Astrologers will give you a prediction of the future. Although some are better than others, I have found that in the aggregate both are correct about 50% of the time. So one could argue that a coin flip has similar predictive value at much less expense”

“But let me suggest that you talk with my friend Mr. Volcker. You will find him at the park everyday feeding the birds.”

“Can I ask one more question Mr. Hoenig? How come you never allow me to buy you a drink?”

Mr. Hoenig knew the answer would be hard for Sam to understand but he made this attempt:

"Sam, although I am happy to drink with you I cannot accept the cool aid that you and Bernie provide. Each free drink from you would distort my view of the market. If the small window for which I view the future becomes cloudy. Then I am lost. As I have said before, I live in the past."

Mr. Hoenig could see that Sam was even more confused so he made another attempt,

“Sam you are not a businessperson or an investor in this town. You are a disinterested third party in our economy. Very much like a government who’s spending is random. You do not add production or efficiency to the market. Production and efficiency is only added by the competition of the market participants. For an economy to work properly neighbors must be competitors. This is the only way in which scarce resources can be allocated correctly. This is only way that productivity can be created and then captured. And hopefully some of this captured productivity or 'savings' is given to me for safekeeping.”

He still didn't quite understand why Mr. Hoenig would not accept his generosity. But they were friends and that was all that concerned Sam.

The fact of the matter was that Mr. Hoenig was Sam's only true friend.

They said goodbye as Sam made his way to the park. Mr. Volcker was there as he was every day, feeding the birds.

Mr. Volcker, like Sam had just appeared in town one day. Mr. Volcker would never talk about his past or anyone’s past for that matter. He would only speak in riddles about the future.

Some speculated that he was a general who was a hero in battle. Others said he was a rich investor that gave up his wealth to live the simple life. There were other stories even more fabulous and truth be told, all these stories had some basis in fact.

Sam said hello and posed his concern to Mr. Volcker.

Mr. Volcker reiterated what Sam had already learned. Bankers must live in the past, accountants must live in the present and economists attempt to sell the future.

“But” Sam said, “Who is the best person to give me advice on the future”.

“Again, I must agree with Mr. Hoenig” said Mr. Volcker, “There is no one that can give you good advice about the future”.

“But do you know what lies in the future?” ask Sam.

“Of course I do son. But I will not tell you. There are others that could tell you too but they will be mute like me”.

“In the long run, a good businessperson is the only one that can accurately predict the future. And they will never tell you what they know for it would distort their market.”

He continued, “I am much like you, a traveler that came to take respite in this town. But I would like to note that I exist in this economy and you don't. Even though my fortune pales in comparison to yours. The fact is, I have earned it myself therefore it holds much, much more value.”

“If you ask me for advice, my suggestion is that you leave this town. You have no wants or needs that allow you to benefit this town or these people.”

“But how can I leave all of my friends?” cried Sam.

“These people are not your friends” retorted Volcker, “You do not exist to them, other than a free drink. You do not have a business, you do not invest for profit and you do not consume. You are only used by people that are incapable of surviving in the market. Therefore you distort the market. No matter how much wealth you bring to our town it will have no effect in the long run. When you are gone your wealth will be just a memory”

Volcker grew tired of the talk and focused on his wards, the swans.

Sam said goodbye and headed back to Bernie’s

Klugman was already at the bar holding court. Slapping backs and spinning tales.

Sam explained to his friend about his day and expressed his worry.

“Well Sam, I know that life is not worth living without friends. And we are your friends. And I also know that life involves risk. Speaking of which why is your capital placed in such ridiculously safe investments?” Klugman harangued.

As an accountant, Ms. Bair had always demanded that Sam’s money be 100% safe in the present. Ms. Bair told Sam that the local economy was very dependent on his spending so his money must not be tied to his neighbors. It must be placed in very safe bonds with a touch of equity in foreign lands.

In this way Sam’s money would always be there for him no matter what happened to the local economy. She had tried to explain that Sam was not a businessman or an investor and therefore not in a position to take risks.

“This is the crux of the argument” stated Klugman. Why can’t you take the same risk as your neighbors? Aren’t we are all in this together?"

But the fact was that Sam was not a businessman and he was not an investor or even a consumer. He was a disinterested third party that didn’t care what he earned or what he spent.

As an economist Klugman’s job was to sell his picture of the future to businessmen. So it was easy to convince a disinterested third party to do just about anything. Especially since this person considered him a friend.

The next day Sam told Ms. Bair what he wanted. She was to follow Klugman’s advice and invest his trust in the local community.

He loved this area and its people so it made sense to invest his money in the town.

And with this investment the local businesses and the economy boomed.

Sam began to make so much profit that Klugman suggested that Sam start buying drinks at 6 o’clock, then 4 o’clock then 2 o’clock. How could Sam argue, Klugman had been right before.

The wealth of the town grew at a phenomenal pace. Sam’s income increased so quickly that the bar was always open and drinks were always free.

The local economy boomed like never before. Businesses grew and took on new debt and then grew some more.

It was undeniable that Klugman was correct and Ms. Bair, Mr Hoenig and Mr. Volcker were wrong.

Klugman became a hero in the town.

(If you think like an economist, this is where the story ends. The short term is all that matters. As Lord Keynes said, “in the long run we are all dead”.)

(the story will continue for everyone else)



  1. I love the story, and agree..within the scope of the story.
    Where the rubber meets the road is a little farther back yet. It lies in the trees and the oil in the ground and the soil organisms...where the roots grow. When you have time, take your story and apply it to "cheap food policies"...the USDA created an addiction to cheap food, and the money people should have spent on food went to buy things from outside the country instead of for hand tools and hardware stores within your little town. The cheap food (and cheap mortgages for misplaced houses outside of towns) came from the availability of cheap oil. The other cheap products also were produced with cheap oil. The predicted growth figures, based on historical records of growth, were based on perpetual growth of the availability of oil. Every iota of effort by the System of systems is applied to more growth in a finite system (the earth). Wendell Berry once wrote (about family farmers)"Economists tell us that this is business. They say we have too many farmers producing too much food, so some will have to lose their lives in order for things to balance out. But the economists never tell us that there are too many economists."
    In that vein, the economists and the bankers will never tell us that the problem with a depressed economy lies with spending too much money BEFORE the depression occurs.
    When the last one happened, we had plenty of oil to rebuild with. What physical resources are available now, except hand labor that is unskilled and unwilling to go 'backward'?

  2. I hate to say it but if I were put in charge, I would tax the heck out of oil, processed food sugar products and high fructose corn syrup amoung other things. I feel that people make very bad choices because of the low prices of all of these consummer goods.

    Also, I would tax the heck out of children. This might offend a lot of people but it does not make sense that over 50% of the children in our country are unwanted.

    If I was in charge that 50% number would change to zero. There should be no unwanted children. It is an injustice to our most precious commodity(children) and to our creator.

    Thanks for the post Auntiegrav.