Monday, December 22, 2008

We all live in Ponzi land

David Seaton's News Links
I was talking to a very shrewd and well informed friend of mine, a now sedate notary who was once a sort of Spanish Gordon Gekko in the 1980s. He gave me a very intelligent analysis of the crisis.

At the bottom of it, he said, was the enormous increase in productivity brought on by information technologies. We simply produce much more than we can possibly consume: we need lots of consumers and much fewer workers.

How are underemployed people supposed to buy anything? On credit. Something has to give, has given. I think he's right.

A very good example might be how much supermarkets have changed in the last 20 years. Remember (if you can) the days before bar code cash registers existed. Totaling up the merchandise, taking payment and making change was much slower work than today. Check-out girls needed a much bigger skill set in that environment: to add and subtract accurately in their heads to begin with.

Now, passing the product over the laser reader, passing the banker or credit card through the card reader and getting the customer's signature is only the work of seconds and if the customer pays in cash, the cash register tells the check-out girl the exact change to give. A person of average or better than average intelligence, who has successfully completed high school is wasted in such a job.

At the same time that the products are being checked out, the system is seamlessly keeping track of the inventory and calculating the buying needed to keep the shelves full and may even send the orders directly to the head office, several states away, where the orders are also processed electronically and trucks are filled and dispatched with a fraction of the human input needed only a few years ago. Now, project this technological productivity explosion onto almost any human activity. More work done with a shrinking work force.

It is easy to see that with this system it is possible to have much bigger stores with a much wider variety of products, employing many fewer and much less skilled, therefore lower paid, workers than ever before.

With lower costs and more technology, profits rise and much of this gain is reinvested in more productivity-raising technology, which makes more skills and the people who have them redundant.
This means, perversely, that more profits usually lead to less jobs or much poorer jobs. This paradigm, which until recently only held true for the poorly educated, is now reaching the ranks of university graduates. Now, with digital technology, even high intellectual output tasks can be outsourced to where people with postgraduate degrees can be hired for the same cost per hour as high school graduates in a developed country.

Result: As more money is invested in raising productivity, fewer and fewer people can produce more and more for a market glutted with products that fewer and fewer people can afford to buy without going into debt.

Salaries don't rise because most workers are not really needed that badly and are easy to replace if they go on strike, complain or even report in sick.. and thus they have no bargaining power. Any shortages such as one resulting from low birthrate in developed countries can be solved by outsourcing the jobs to poorer countries with high birthrates.

All people are really required to do is to buy many things that they don't really need, which they can do, even with a McJob, by using a credit card... hereby kicking the can into the future: a future with poorer paying jobs, less horizon, more need of credit to participate, with less chance of ever paying back the debts incurred.

To make underpaid workers buy things that objectively they don't need, an entire industry (marketing) exists to make them dissatisfied with what they already have. Perversely, unhappiness becomes a social good in such an economic arrangement. A thrifty person, content with his lot, who for thousands of years was seen, in all traditions, as a wise and sensible man; in this contemporary situation is seen as a public enemy to be "stimulated".

In a sense our entire "civilization" is sort of a universal "Ponzi scheme". If the wheel stops even for a moment it all comes tumbling down.

It's amazing that a structure this artificial, that fills so few truly human needs, has taken so long to nearly collapse.


RC said...

High fiber content in this post, yet it went down smoothly. On the flip side, as a master tradesman, my job can't be exported, and immigrants don't know anything near what I know.
Actually, I am myself somewhat of an emigrant. Plus, I also sell advice that is very location specific.
I left academe in 1971 as I could tell even then that clouds were gathering. I sought a means to be able to go anywhere in the world and not even speak the language.
I succeeded.
Many of the trades have been killed
by the computer {sign painting, type setting, both I no longer do}
but plumbing and electrical design and installation are very secure.
In severe downturns, people can't move and they upgrade their home instead. Plus, until life really devolves, they like the lights and the toilets to function.
Manualities do not get done over the phone. Punto.

bailey alexander said...

I don’t think the ponzi scheme is universal, I get what you’re saying, but it’s too much global generalization. I interact professionally with several different countries on 3 continents. I'm in the IT support business; I own a private company in Seattle, focused on delivering quality and competence. Did well during the Seattle tech boom, then did well when it bust because of aforementioned. I also market for another support biz in NZ, Malta, Paris and have lived on this side for 8 yrs, but traveled to and for a long time. I interact and live amongst colliding cultures. I see globalization, for better or worse. And quite frankly, I find my fellow Americans often behaving the worst, btw. I know nothing of Spain, been there but do no business there although my biological father is Spanish/Basque.

Living in Rome showed me an entirely different mode. The family lives there, my husband has an italian passport, I get Italy; full of self-employed people, banks don't lend much; they do relatively well. Look at Alitalia, bankrupt forever, still moving's an arbitrary environment, certo, but still, part of the EU, behaving well, at least, much of the time. Money is found in the mattress, still, probably always will, so that the mother can buy the children their flats. This may change, somewhat, in 30-40 years, maybe.
I've spent the last month in Malta. Again, the economy is fine, banks lend little, economic issues are minimal, housing prices have stayed stagnate. On line gaming industry does well.
In contrast, of course, to the UK, where I've lived and spent a great deal of time. They live closer to the American model on many layers and after their distinctly vulgar 'pay to play boom time', they are screwed. But they are unique in that they haven't produced or manufactured anything for a very long time, other than, say, the financial industry and look where that's at. My sister in law works for a top investment firm there, she's extraordinarily competent and doing well, apparently.
Yes, life as we know it, will change, but I'm a change agent and have accepted this fact, for almost forever. I’m amazed at how resistant people are to change the more I accept it. I talk to Seattle daily , and I can see the shock begin to settle on a city that's been isolated for so long, one that has produced some 30% of America's exports....again, change is imminent, one can hunker down, form their own business, learn to read the fine print and hold themselves accountable. It’s an idea. I recall the 70's in Seattle when they said, 'turn out the lights when you leave' and I've experienced the Emerald City as one of the most spoilt cities in the world, but it's productive and will stay that way. The grey skies dictate you live in the garage for 9 months a year.
At the end of the day, it shall all end in tears anyway, so best to apply a bit of hedonism while you're still alive, or at the very least, grow your own garden, if possible.
I've rec'd emails from friends in the states that are doing just that, that’s good change.

David Seaton's Newslinks said...

If you are in information technology and own a company then you are part of the productivity revolution and not yet a victim of it.

What the credit bubble has done is to mask a process that Marxists used to call "the reserve army of labor" whereby raising productivity inevitably made redundant and pauperized workers (workers being defined as those who have only their labor to sell)... The credit bubble was allowing marginal people to "buy" homes and go to college etc. and now that is finished. Without this anesthetic we are again looking at classic Marxist scenarios, which you are probably too young to be familiar with. Certainly none of this is taught in any MBA program I've ever heard of. When I was a kid none of it made much sense, now I'm having to catch up on my reading, because now it's the only thing that makes any sense... The world turns.

Steve Crawley said...

Agree completely with your excellent analysis of our times. Just returned to the States from living in China for a few months. The direction of their social polices and the automation that is occurring in their businesses (and yes in the supermarkets – they now have huge supermarkets) screams productivity. They are on the cusp of developing their financial markets to be competitive worldwide. Credit availability for housing and other consumables, allowing leveraging in their stock markets for the first time, and a quantitative improvement in marketing, is advancing at an accelerated pace. But alas, I believe these are going to do the same thing to their large labor pool as it has done to ours. So in China’s case and the case of a lot of other countries that I have visited, your generalizations are not too global. The results for those developing countries following the US model will ultimately be the same – it is just a matter of staggering the timing.

I would like to hear the rest of the story from you about the post-collapse era. Here are a few prompting questions to hopefully get you started. Assuming technology and advanced communications continue be with us, will they contribute to improving our national economic or is something else needed? Do you agree social instability has not yet arrived, but is just around the corner? Or is there another path that is necessary for some sort of economic and possibly social stability to return?

bailey alexander said...

My point, though verbose, was to highlight how people adapt to whichever political ideology is at hand. Italy's worth noting because the people's will bends so little to their political reality. Everyone laughs at them, but somehow their culture functions better than the 5 I've lived within. The gov't doesn't really work, so they don't pay. They don't take is so seriously. Bologna functions quite well in an older 'form' of communism, in modern day, per sempio.
Self employment is key.

Laissez Faire capitalism is not working well these days, I think we all get that.

My husband had a public company that unfortunately, domiciled in the States. I saw firsthand how the SEC worked, they simply checked off little boxes and looked the other way while we paid attorneys and accountants all the money that should have gone into the service. At least other countries really try and keep their businesses honest. Now he's gone private, bettah.

Of course, because of all the bureaucracy in business in the States, everyone went to London to IPO, then yet another bubble burst, as they are wont to do.
Self-employment is good, whether or not you can support IT, one's need to eat, drink, etc.

Business is business, but after 25 yrs in the game, at 45, whether or not I was in the art world or the corporate world, and I've been in both, self-employment is best.

I married into a family, German and Italian that do nothing but talk about history and 5 generations back, because as you know, that's what they do, on this side of the pond.

I read this musing on Kundera's The Joke and thought of you:

You may know the basic story. Ludvik, a young Communist of the late 1940s, becomes besotted with a woman. Where he is laconic and diffident, she is ardent and pure. Rather than spend a summer yielding to his romantic advances, she chooses to go off to some Communist youth camp. She writes him letters, but they fail to express sufficient remorse at being away from his side and instead emphasize the camp's "healthy atmosphere" and her optimism about the future of humankind. So one day, in a fit of pique and hoping to get her goat, Ludvik sends her a postcard, dashing off three thoughtless and imperishably memorable lines: "Optimism is the opium of the people! A healthy atmosphere stinks of stupidity! Long live Trotsky!" The passage remains, to me, one of the funniest things I've ever read.

Naturally, the authorities intercept the card. Ludvik is questioned, expelled, and sent to work in a rural mine. Later in life, he meets a woman who is married to the man who, all those years before, led the effort to purge him from the party. He seduces her, but his act of revenge ends up helping his old accuser instead of hurting him. Ludvik is left to ponder the what ifs, concluding, as it is put on one Web site devoted to exegeses of the author's work, that "since so many people were involved in the injustice of the 1950s (either doling it out or suffering the consequences) ... one must blame history, not humans, for the crimes."

David Seaton's Newslinks said...

Very interesting and informative comment, I'll try to work on your questions in the next few days.