"With all the talk about how to stimulate it, you'd think the economy was a giant clitoris," writes Barbara Ehrehreich of the recession everyone's talking about today. Stock markets are plummeting across the universe, the Federal Reserve Chairman Ben Bernanke cut interest rates, CNBC is blaring at me to buy technology stocks, and the President is wrangling with all the Presidents-in-waiting over what vibrator attachment package of tax cuts and subsidies will "prime" the consumption pump and get consumers like us in line orgasming over the next skinny jean/iPhone/tiny moving vacuum cleaner trend again. But as Barbara points out, the economy isn't exactly one giant clitoris, but 300 million of them, some of which belong to obsessive masturbators and some of which haven't gotten close to a small motorized device in LIKE OMG DECADES. Or something like that. After the jump, we enlist the help of the New York Times Magazine, the Atlantic Monthly and Wall Street blog Dealbreaker's Bess Levin to give you a practical guide to the recession, and how to cope if you still have savings to invest.
What happens when the Fed lowers interest rates like they did today?
Okay, so according to the latest New York Times Magazine, here is I think what happens: the Fed tells its thirteen or eleven or whatever regional feds to start sending XXTRA CHEAP 0.000009% OVERNIGHT LOAN offers to dealers of T-bonds. It takes the bonds as collateral. The dealers of bonds take the loans, knowing they can turn an easy buck lending the money out at slightly higher rates to other banks, who in turn lend it out at a slightly higher rate to a big investment bank, which in turn maybe uses it to see if it can turn a quick profit lending it out to a good the dip on Cisco stock or god knows what else... shit, don't ask me.
Whatever happens, money floods the system, or anyway, it is supposed to. The Fed doesn't have to worry about going under because it reserves the right to print money. So, trickle trickle trickle, out flows the money. To the guy who already spent the bonus he made last year convincing BNP Paribas to buy into another basket of re-purposed subprime mortgages that would have been so profitable if only the housing market had kept rising while interest rates kept falling like everyone assumed would keep happening...all the way down to the lady who fucked her credit rating cosigning on her deadbeat ex-boyfriend's Lexus. Soon everyone's spending recklessly again!
Does it always work?
No. Sometimes you can "print" a bunch of money and no one cares. Like, right now you could look at the economy, think, "Well, oil is ten times as expensive as it was before we wasted a trillion dollars on a pointless war, and that's sort of a metaphor for what my own personal balance sheet looks like after paying for a graduate degree in public policy, so yeah, actually I'm going to stop spending for a little while."
For instance, following a similar real estate meltdown in Japan in the early nineties, the Central Bank tried and triiiied to get people to spend more money so that companies would create new jobs and invest and crap. They even printed their own Sunday coupons. And people were like, "Yeah, no thanks." As a source of Bess Levin's just explained:
Maintaining a healthy economy is like trying to sell someone a car...you agree on a certain price and are ready to buy....however, if you then hear the engine make sketchy sounds, you back off a bit...the salesman knows he has to lower the price to get you to buy...How much would he have to lower it?...in markets, people are pricing in a recession... how low does the Fed have to cut in order to make people say, "yeah, the economy might not do so well in 2008, but money is X cheap so it's still worth the risk."
The fed has to offset uncertainty with cheap money... if consumers are getting fired and are uncertain about their future incomes, they will cut back on spending and borrowing no matter how low the rates go... what needs to happen to reverse the recessionary trend is a broad-based acceptance of risk and uncertainty
And that's basically the truth, with a few add-ons: you really don't need a car in Japan. Maybe that's why their big main automaker made it an abiding motto to "eliminate all waste" — unlike US American cars no one wanted to be saddled with a whole bunch of excess cars they couldn't use.. there wasn't enough room for the people. So when real estate prices tanked and people no longer had to spend a billion yen on a studio apartment, they were dumbfounded: what to spend money on?
And that's why Japan's cell phones have always been cooler and more futuristic than ours.
To another end, "broad-based acceptance of risk and uncertainty" is like, not everybody's bag, especially if they're getting by okay and everything's all clean and orderly like it is in Japan. It really depends what you've lived through, and well, you read in middle school about what the Japanese lived through, I'm sure.
So what's so bad about a recession anyway?
Well, a stagnant or slowly contracting economy isn't all the awesomeness I might make it out to be. Even in Japan, which has done an admirable job of maintaining an endless recession while keeping living standards some of the highest in the world, elderly folks literally starved to death last year on account of how difficult it's become to get social security benefits. But that's more the exception whose horror proves the rule: You've got to consider the inevitability factor, too: our standard of living is 32 times that of the average Kenyan. Now, with the war on and everything, no one expects Kenya's economy to get its shit together to threaten ours anytime soon. But the economies of India and China are totally on their way. So... just say they caught up with us. According to a new analysis by Jared Diamond, that would be like the global equivalent of trying to house 72 billion people. Suddenly NASA seems relevant, yeah? So anyway, we're headed for disaster. Or we're headed for some sort of endgame wherein all the countries finally come into some sort of alignment with a level of consumption considerably lower than that of the United States. "Americans might object," Jared Diamond admits. But! "Real sacrifice wouldn't be required, because living standards are not tightly coupled to consumption rates. Much American consumption is wasteful and contributes little or nothing to quality of life." I know, I know, you're thinking, Who in god's name is this pinko heretic? Just some guy.
Is it true that the Chinese have been artificially propping up our standards of living? Don't they hate us?
Yes, and: not as much as they hate their own people.
Seriously though, from what I can glean from this Atlantic story, China is a nation of a billion and a half mostly shit-poor people governed by an oppressive dictatorship that desperately wants to hold onto power. Most of the people, not knowing what the hell else they're supposed to do, are okay with that because their standards of living increase steadily every year. Sometime around the eighties, China started allowing foreign companies to run factories in there. The wages were so cheap it got to the point that pretty much everything you touch on a day to day basis is probably made in China. The economy started to get strong. But China didn't want it to get too strong too fast, because that just creates a bunch more problems. Like if suddenly, 30% more people can afford to buy lead-free toothpaste, the price of lead-free toothpaste is going to go wayyy up and eventually that sort of thing creates inflation, which can totally fuck up an economy. So China keeps its currency artificially weak, to keep everyone struggling in lieu of shopping — and to keep factories adding jobs because exports are so goddamn cheap the Wal-Mart shoppers won't be able to resist.
If China decided to mandate strict minimum wages to keep pace with its economic development, it wouldn't really risk losing jobs back to America, but it might ease the flow of investment and definitely put a few people out of work for a season or two here and there. And the flow - and the constant motion of the economy — is what matters. The constant job-hopping, the corner-cutting, the endless Tetris game of mere survival — it keeps the minds of the masses off the widening income gap. Because there's always a job to be had somewhere, it's just usually a crap one. Just keep the people active, moving, working, eating. They'll never find the time to start a "revolution."
It's sort of the same strategy we take in the United States.
Which is, incidentally, where the Chinese government ends up sending all its dollars — into our Treasury Bonds and our real estate IPOs and our big financial institute bailouts, because everyone wants to keep the status quo, man!!!! What are they gonna do, use it to clean up the air? Heat elementary schools? Yeah, whatev.
If I have money, what should I do with it?
For this question, since I have virtually no personal experience with this predicament, I contacted the inimitable Bess Levin of the financial blog Dealbreaker, and on the basis of recommendations from two anonymous hedge fund managers, aged 36 and 23, she devised two strategies.
US Stock Exposure: Vanguard 500: 20%
International Stock: Vanguard International Value (VTRIX) 20%
Emerging Markets Stock: Matthews Asian funds, or Vanguard Emerging Markts: 20%
Buy stock in Lehman Brothers, Merrill Lynch, Citigroup, Blackstone Realty, and some sort of pharmaceutical stock fund. Meanwhile, short** stock in Barnes & Noble, Levis, the Gap and July oil contracts.
*Jewelry doesn't really count. But it's a better investment than premium denim.
*To short a stock, you need to have a margin account with your brokerage. If you are reading this blog, I'm betting you don't qualify for one. But I could be wrong.
Other strategies recommended by sources of Bess: "Don't rack up $42K in credit card debt and hope your bonus will pay for it"; and reduce the frequency of spa treatments and tennis lessons. Because if you don't have money, you are going to need it.
So yeah: sell your eggs while there's still time!