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  • As I See It: The Sick Guys in Your Wallet

    November 26, 2007 Victor Rozek

    If you’ve been employed for the past six years, without being officially notified you have been given a 30 percent pay cut. That’s what happens when the dollar drops by nearly one-third of its value. What also happens is that your $300,000 home loses $90,000 of its value; your savings are worth 30 percent less, and your groceries cost 30 percent more. As any driver knows, the price of a barrel of oil is over five times what it was just six years ago. One sure sign that the guys pictured on our currency are in poor health is how little coffee they’re drinking.

    When the price of Starbucks’ stock plunges 40 percent as it recently did, it’s an indication that commuters paying $50 or more for a tank of gas have decided to make one less stop and put their discretionary coffee money directly into their gas tanks.

    Watching your money wither while being coffee deprived is enough to give you a headache and make you long for a vacation. But if you travel abroad, your trip will cost more than it would have just last year because the once almighty dollar is 12.5 percent weaker against the Euro. And why should the Euro be unique: the dollar recently declined against all 16 of the world’s most traded currencies.

    The Federal Reserve has no failsafe remedies. If it cuts interest rates to control inflation, investors in greater numbers will flee the dollar in search of higher returns. And while lower interest rates flood the country with cheap money, they also encourage high-risk speculative investing. If the Fed raises interest rates, it increases the cost of credit contributing to an already inflationary cycle, and discourages borrowing, thus further slowing the economy. The administration’s preferred one-size-fits-all solution is cutting more taxes for the wealthy, many of whom have already demonstrated their patriotic zeal by speculating against the dollar.

    Meanwhile, the nation reached three inglorious milestones: We are now $9 trillion in debt with no end in sight; we have an annual trade deficit of $6 trillion, with no end in sight; and for the first time since the Great Depression, Americans had a negative savings rate in 2005.

    And if that’s not enough to curdle your quarters, the sub-prime foreclosure crisis (high risk loans made possible, in part, by suppressed interest rates) is looming with two–and perhaps as many as three–million people poised to lose their homes. Oh, what a merry Christmas they’ll have. Speaking of Christmas, the traditional make-or-break sales season looks to be cracked if not outright broken because, due to the weak dollar, foreign goods will cost more, which means that consumers (at least the bright ones) will buy less. Certainly families anticipating foreclosure won’t be buying any big ticket items.

    Given the precarious state of affairs, what advice do financial experts offer the middle class? Let them eat economic cake.

    I particularly love the remedies decreed by financial gurus as a hedge against economic decline. Whenever the economy begins to look shaky, a variation of the same book is published under a title resembling How to Make Money in the Coming Recession (or Depression, or Collapse). In these books, the authors offer such sage advice as “buy gold” and “invest in foreign currency,” as if the average middle class American has a gold broker and a currency speculator on speed-dial. And notice the twisted logic. Gold, they say, is good because it has intrinsic worth and is steadily rising in value. Money, they say, is bad because it’s basically just fancy paper whose value is steadily declining. But the further the dollar declines, the more the gold sellers advertise their wares. Apparently, they are quite happy to trade their valuable gold for your worthless dollars. What does that tell you?

    Among other things, it suggests that gold sellers are as dependent on cash as we are. The problem with gold is that it’s not liquid and you can’t really buy anything with it–or with foreign currency for that matter. If you’re sitting on a pile of cash you can afford to speculate, but as far as I know the Piggly Wiggly does not accept bullion, gas stations frown on Canadian currency, and vending machines don’t accept Kopecs.

    I’ve always been suspicious of gold. It’s just a rock, after all, but by some cultural trance we’ve come to believe it’s more valuable than the rocks in our backyards because it’s pretty. But if the depression that some are forecasting actually occurs, creating widespread unemployment, homelessness and hunger, how will having gold help? You can’t eat gold, can’t live in it, can’t rent it, can’t heat your house or cook a meal with it; and it will only be worth something if someone wants to trade for it, which they probably won’t because they can’t eat it either. Besides, most people I know don’t invest in gold because they have all their available cash invested in living.

    But enough about reality. On the bright side, American labor is beginning to look very affordable; that is, of course, if your company pimps you out to foreign corporations. But even if it doesn’t, IT professionals may be uniquely positioned to ride out the economic storm. IT is the nervous system of the modern corporation. It gathers, stores, controls, analyzes, and reports on all activity vital to the survival of the corporate body. It is the command and control center, and as such less likely to experience terminal cutbacks.

    I’ve always believed that when the economy slows it’s the perfect time to speed up IT activity. When business is growing and activity is brisk, IT personnel are typically stretched to the limit. All projects are critical, all implementation schedules are aggressive. But when business finally slows and the critical stuff gets done, it’s a great time to tackle the backlog of tasks and projects that are equally as important but have been pushed aside by binary triage. Things like creating and/or testing a disaster recovery plan; or archiving; or performing system maintenance; or training employees; or developing that second tier of applications that gets overlooked in better times.

    Just because it makes sense, however, doesn’t mean companies will choose to do it. Many will prefer the short-term gain of layoffs to the long-term gain of catching up and investing in their employees. Those are the companies that believe being understaffed is a virtue and are thus in perpetual catch-up mode.

    The challenge, of course, for anyone who finds himself or herself unemployed during difficult economic times is how to survive on less. Between 1929 and 1932 the income of the average American family was reduced by 40 percent. Imagine losing another 40 percent of your already devalued money. What changes in your lifestyle would have to occur? What expenses could be cut? How many months could you survive on your savings?

    It’s something to ponder because there are troubling similarities between then and now. As William Greider observes: “I don’t expect this financial crisis to turn into ‘the big one,’ a total unraveling that makes the history books. But nobody knows, and that’s what makes it scary.”

    One of the causes of the Great Depression was a startlingly uneven distribution of wealth that created an unstable economy. Wages grew more slowly than output per worker, increasing production and corporate profit but decreasing the number of consumer dollars in circulation. After the market crashed, people began to hoard money, which again reduced the amount of money moving through the economy. Additionally, a study done by the Brookings Institute found that in 1929 the top 0.1 percent of Americans had a combined income equal to the bottom 42 percent. That same top 0.1 percent controlled 34 percent of all savings, while 80 percent of Americans had no savings at all.” Substitute “wealth” for “savings” and the disparities are not so different today.

    Milton Friedman observed that “the Great Depression, like most other periods of severe unemployment, was produced by government mismanagement rather than by any inherent instability of the private economy.”

    Maybe so, and heaven knows that management in not this government’s strong suite. But two things we can be sure of are that humans don’t learn much from the past, and that the people managing this economy will not be the ones who become its victims.

    While we’re trying to stretch the dollar a bit further, like stuffing a few extra pounds into a cheap pair of lycra shorts, they’ll be busy hoarding gold and counting their foreign currency.



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    Tags: Tags: mtfh_rc, Volume 16, Number 37 -- November 26, 2007

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TFH Volume: 16 Issue: 37

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    Table of Contents

    • Redefining Security the New Goal of Former i5/OS Security Architect
    • Redefining Security the New Goal of Former i5/OS Security Architect
    • Redefining Security the New Goal of Former i5/OS Security Architect
    • Reader Feedback on Native .NET for System i
    • IBM Slashes Linux SupportLine Prices for System i and p
    • The System i Fourth Quarter Sales Strategy
    • Is There an NSA Back Door in Encryption Algorithms?
    • Power Systems Division Eyes Cognos Deal; Business Systems Shrugs
    • Top Execs at TomorrowNow Depart, SAP Hints at Sale
    • As I See It: The Sick Guys in Your Wallet

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