Oh you lucky, lucky Boing Boing readers... I have a gift and I think it's pretty special: For those of you unaware of the work of Charles Hugh Smith you are about to meet one of the finest thinkers and writers in America today.
It often seems like there are certain people who come along, at precisely the right time, to fulfill necessary and needed roles in society. I'm not sure why, but I'm glad it happens. Maybe it's a function of DNA, who knows? Right now, with the problems the world and this nation face, there need to be more voices that we can TRUST in the media sphere. Especially when it comes to understanding the economy, because that's where what matters most in our society occurs. It's THE big story of our time. Perhaps part of the problem is that reporters and journalists writing on the economy aren't economists. Fine, fair enough, but what do you actually receive when the issues being discussed on the evening news and in the newspapers are so complex as not to be understood adequately either by the journalists themselves or by the man in the street? Not a lot of value there I'm afraid.
And here's the genius of Charles Hugh Smith: He takes some of the most difficult to understand problems vexing the world today and make sense of these issues -- heavy things like what are we going to do about universal health care, why Social Security will probably never get fixed (or be around much longer), ending oil dependency, what sorts of jobs will matter most during a depression and so forth. He writes with a calm and steady voice that takes readers by the hand and carefully explains the most pressing issues of our time. We, all of us, need to comprehend our problems, that's the first step, before we can change anything and master our fates.
Each morning I check email, glance at Drudge, the NY Times -- Boing Boing, of course! -- and then when the coffee is brewed, I sit down with that morning's essay from Charles' weblog, Of Two Minds. His writing is my daily oasis of sanity in an otherwise insane world. It never fails to impress me - -each morning I think this same thought -- that every day he's able to come up with something so utterly brilliant, deep and wise, no matter what the topic, although the main subject Smith tends to write about is examining how we got to where we are today and how we will live tomorrow in a tragically diminished America.
Recently, one of Charles' readers wrote in to say that he considered Smith the "new" Henry David Thoreau. What a nice compliment, I thought, and then it struck me how true that comparison is. Charles Hugh Smith is indeed the Henry David Thoreau of our era. Thank the gods he showed up, and right on time!
And like I said, I have a gift for you people... Read on for an interview with philosopher Charles Hugh Smith after the jump.Richard Metzger: When it was announced that there would be a meeting over the past weekend of the West's big financial players and then with the Italian Prime Minister Silvio Berlusconi's irresponsible lip flap about the possibility of shutting the markets down until they figured what they were going to do -- this is almost an outright admission that nothing they've done so far is working, isn't it? I expected that the financial markets would just utterly tank on Monday, but for some reason they didn't. Is it possible that Wall Street knows something that the man on the street doesn't or is this just another irrational rally based on fumes and Pollyanna-ish "hope" -- and little else -- like all the other recent rallies have been?
Charles Hugh Smith: We’re always told that the stock market reflects the “real economy” but the connection is mostly illusory. The markets reflect human emotion and our tendency to “herd” with the consensus, a consensus that has been based on “good news” data that is highly suspect. In Exploiting the Market and The Real Revolution I posted two charts of the last great Bear markets: 1929 – 1946 and 1966 – 1981. You can see that as the real economy foundered in both decades, the stock market rallied again and again, reaping huge gains for those who ignored the real economy and focused only on charts, which reflect the human emotions behind the trading. Note how a "buy and hold" strategy resulted in big losses–so the standard “buy and hold” advice is an OK strategy in a 15-year Bull market but a horrible strategy in a 15-year Bear market like the one we’re in.
So while this rally is irrational in terms of the real economy, which is deteriorating rapidly, it makes perfect sense to traders because they reckoned that such apocalyptic expectations were overdone. The sharp declines look a lot like panic selling in 2002 and after 9/11, and so history suggests a strong rebound would occur,
The other thing Wall Street knows that the man on the street might not is that all this government intervention would eventually have an effect. I like to think of it as feedback. When the financial sector was collapsing, it seemed like bad news fed on itself. But the massive intervention created positive feedback loops that acted to counter the prevailing panic.
In other words, The Powers That Be were actively throwing everything including the kitchen sink at the panic. Experienced traders, both small-fry and big-money managers, didn’t need any inside information to expect the feedback to start mitigating the crisis.
Did the intervention fix what’s ailing the real economy? No; but it did change the psychology of the herd and hence of the market. Bear markets are characterized by these wild, even irrational swings of consensus from hope/renewed greed to gloom/panic. We should expect these to continue for at least 4-5 years and perhaps even longer.
Richard Metzger: Isn't the moment that the government tells you that "everything is under control" the moment to hit the panic button and BAIL OUT of the markets?
Charles Hugh Smith: I would say the time to bail out of the markets or go short is when the consensus as reflected in the mainstream media and the markets is that everything will be fine. The intervention repaired some immediate financial-sector problems but didn’t fix the economy.
Richard Metzger: What about the price of gold? The age-old truism about gold is that it is supposed to move in the opposite direction from the market and that it provides a "safe haven" hedge against both inflation and deflation. The Market goes south, gold increases in value. At least that's the way it's supposed to happen, but this year gold is making some unexpected moves... why?
Charles Hugh Smith: There are lots of theories and I really don’t know which ones have traction. My best guess is that as the global credit bubble popped and all the extreme leverage began shrinking, all assets which had large amounts of speculative money in them fell as players sold whatever still had value to raise cash and pay down debt. Even real stores of value like gold and oil got sold off hard.
Richard Metzger: Do you see Inflation or Deflation? Deflation is supposed to be the thing that "can't happen here" or so conventional wisdom says... but some iconoclast financial analysts (like Mike Shedlock and others) think Deflation is exactly what we’re dealing with. What do you think?
Charles Hugh Smith: Back in June 2006 I asked Could We Have Deflation and Inflation At the Same Time? and my answer was yes. The reason is the global credit bubble created huge asset bubbles in real estate and construction-related commodities like copper and steel. But it also created new wealth in the BRIC nations (Brazil, Russia, India and China) and that wealth enabled hundreds of millions of consumers to buy more and better food and to begin consuming petroleum in vast quantities. I call this the 500 million motorscooter economy. If Mr. American cuts his gasoline consumption a bit -- currently U.S. oil consumption is down about 500,000 barrels a day, or about 2.5% of our total daily consumption -- then the slack is more than picked up by 500 million motorscooters, not to mention millions of new autos and trucks. So as global demand outstrips supply of limited resources –- what I call the FEW resources in my new book Weblogs & New Media: Marketing in Crisis (food, energy and water) -- then prices for these essentials rise even as deflation ravages assets like real estate, stocks and eventually even bonds.
It turns out this is exactly what has happened in past economic cycles, as historian David Hackett Fischer described in his book The Great Wave: Price Revolutions and the Rhythm of History which I often recommended. I have also covered other aspects of this cycle, for example:
Are We Entering the Next Age of Turmoil? (June 2005)
A Rickety Global House of Cards (Oct. 2005)
As the Real Estate Bubble Pops, so Does the Economy (March 2006)
Housing Bubble Bust Will Take Down the Global Economy (May 2006)
Richard Metzger: What do you think things are going to look like in a year's time? In five years?
Charles Hugh Smith: These long historical cycles take a long time to play out. I expect assets to continue to deflate in terms of purchasing power while the FEW resources (food, energy, water) will continue rising in price. Gold and oil will continue rising as stores of real value. Political “solutions” will basically be half-baked attempts to muddle through without addressing the core problem that ultimately the entitlements we have promised our citizens will bankrupt the nation. Eventually the U.S. will be unable to pay its bills as the interest on our rapidly rising debt squeezes out all other spending. This will probably take 8 or 9 years to play out, maybe even longer.
Richard Metzger: History probably will not repeat itself in the sense that there is a much different world today with different possibilities and choices, than there was during The Great Depression. Not only are we more interconnected now (trade, air travel, Internet, various forms of cultural exchange, etc) but there are many categories of job descriptions, businesses and marketplaces that didn't exist then. Having said that, it's pretty easy to envision the more frivolous professions and businesses being vaporized first. I wouldn't want to be an investor in, nor employee of, something like (not to pick on them, but here goes) "Second Life"! What are the core safe/essential jobs you see for Americans in the next decade?
Charles Hugh Smith: Certainly everything connected to the FEW resources (food, energy, water) and anything which enables “faster, better, cheaper” goods and services and living healthier without costly interventions. In my book Weblogs & New Media: Marketing in Crisis I propose that the Web and New Media are key enabling technologies for just these kinds of improvements in efficiencies, for virtually all enterprises from one-person businesses to global companies. I have long suggested ( Will the Housing Bust Take Down China? June 2006) that China may be more vulnerable to the global depression than is commonly recognized. Couple this with rising sea transport costs and it is easy to see a resurgence of distributed manufacturing in the U.S.
Richard Metzger: When I was reading The Fourth Turning -- a book I know that you are a fan of, too -- I felt like the authors were building up to a moment in history that is pretty much nigh upon us, a period of intense change and perhaps chaotic transformation, but one they seemed determined not to describe or speculate about in their book with any detail. When the tectonic plates move between generations, much changes. Putting on your long-range prophecy goggles, and assuming that we're coming out the other side of this mess ten years from now, what kind of a world will we have in 2018? (I cling to the hope that things will be as different in 2018 from today as the change was from 1960 to 1970).
Charles Hugh Smith: While many predict doomsday scenarios, and those are certainly possible if we go into complete denial for another decade, I suspect painful adaptations will have been made by 2018. We will have learned to get by with much less energy consumption per person and how to create distributed networks of alternative energies. The Federal government and all state governments will be essentially bankrupt and the entire culture of entitlement will have been upended by this inability to pay everyone’s medical care and pension. Self-reliance and community will replace dependence on central government. The dollar may well be replaced with a “new dollar” or superceded by a global currency based on gold or a basket of commodities of enduring value. Hopefully we will have avoided “resource wars” but if we haven’t weaned ourselves from petroleum then we may well still be engaged in a “long war” over oil resources, perhaps even involving China or Russia. If we refuse to become energy-self-sufficient then a major global conflict is not impossible in the 2017-2021 timeframe.
Richard Metzger: How will you personally live and protect yourself during the hard times?
Charles Hugh Smith: In June 2008 I wrote an essay called Art of Survival, Taoism and the Warring States which a lot of people seemed to like. Basically I plan to rely on living simply and reciprocity/generosity with my circle of friends, family and neighbors. My beliefs are counter to killing and I will depend on community for defense rather than stockpile weaponry and ammo. Many survivalists wrote me positive comments about this essay so that gives me hope that we will collectively recognize that pulling together is the best way to “take care of Number One.”
(Richard Metzger is guest blogger.)