Since I have basically come to the belief that our economy (especially the mortgage/housing market) is little more than a giant Ponzi scheme, I am perpetually bearish on everything related to the economy. There’s a semi-bullish (if self-serving, given the people I tend to hear it from, i.e. credit traders) story going around that credit will have to rally hugely because, well, in a such low-interest-rate environment, money managers and the like will have to put their money into something to get reasonable returns and justify their fees.
This may be true but it’s only an argument for a bubble. If all the real-money suddenly goes big into tulips, yes tulips will rally. But this will not help the economy (outside of the tulip sector), because ultimately it will be a misallocation of resources, not actual productive economic activity. Ten years down the road we will find the country flooded with useless tulip factories. (Yes, I know that tulips, probably, aren’t made in factories.)
It’s really hard to follow this ‘rally is coming’ mantra to its logical conclusion and come up with what sort of productive economic activity modern-day America is meant to be engaged in – where all this cash ‘on the sidelines’ is supposed to be put to work. You can posit a new bubble to come along and replace the housing bubble, but it’s hard to imagine a bubble that wouldn’t be just another misallocation – i.e., it’s hard to imagine how it would actually increase our wealth.
Keynesians talk of idle resources. But why shouldn’t they be idle? What do we really need from these resources? What do we really need from all the unemployed people? You look around and a lot of people who do have jobs go to their works and check their emails (myself included) but what are they doing. What are they providing that people want. Are they using X man-hours of their time to create X+Y man-hour-equivalents’ worth of usable/desired stuff for others? I mean let’s say we put all those unemployed people to work tomorrow. What would they even do that would be helpful to anything or anyone? Send more emails? Is the answer ‘education’, i.e. making sure that an even greater percentage of people end up with useless college degrees? For what? So they can send more emails?
Economic activity, to grow, has to deliver more things people want in an ever-efficient manner. So to really talk yourself into believing in a recovery, you have to believe we’ll get better at delivering (at least some) things people want. It could be something new or it could be just delivering something old in a better way. But that’s what a recovery has to involve.
These are some things people want, and I’m trying to boil it down to the essentials here:
A lot of ancillary demands are really just traceable to these three. For example, the housing bubble was predicated on a lot of demand for nice houses, on the face of it. But that is just a demand for two parts comfort (living in a nice house is comfortable; and even to the extent that this was just speculation, if the house appreciates and makes you wealthy, that helps further the cause of comfort) and one part respect/honor (make all your friends ooh and aah at the nice house you live in and how much it has appreciated on Zillow).
Similarly, one of the few things the U.S. has been doing well – tech toys like the iPod and stupid timewasting web doohickeys like Twitter and Facebook (and WordPress…) – delivers people comfort (do many more things, such as buy airline tickets, keep in touch with people, or get directions, easily) and sex.
It may even be possible to reduce my list further. After all, honor/respect (being wealthy, having nice stuff, etc.) could be seen as simply a means to get more sex. And sex is a form of comfort. Maybe the overwhelming drive is comfort.
So the next big thing, the next bubble, the next recovery driver – to be believable and real – has to involve delivering people more sex, respect, and comfort – primarily comfort. And it has to do it in a more efficient way than we already do (if it’s not more efficient, it doesn’t boost the economy).
But what’s that going to be? Unless you believe that there’s something out there which it could be, it’s nonsense to think that the economy will ‘have to’ recover just because money ‘has to’ be put to work to generate higher returns. You can generate high returns on air for a while, and demand can create higher returns in a self-fulfilling way for a while, but ultimately – as we have seen with overextending mortgages to those who can’t pay – something tangible has to back those higher returns. The money being put to work has to result in something tangible.
A common candidate for the next big bubble is to say it will be health care. And this is somewhat plausible given the demographic realities of retiring, aging, sickening Baby Boomers who are going to get their high blood pressure and cancer and kidney problems and bad hips so on and will thus need to consume an unprecedented amount of health care services, scans, monitoring, drugs, and nursing. This is inevitable. And it goes along with the drive for comfort.
The problem is that we don’t get more efficient in health care, we get less efficient. We spend more money doing the same things. We may come up with X% better procedures/machines but they cost 10X times as much. Health care has an ever-increasing bureaucratic and legal burden and Obamacare is sure to make this only more so. As we diagnose and discover more diseases earlier, we’ll need more drugs and procedures and doctor visits to combat them.
The only somewhat mitigating factor in the increasing inefficiency involved in health care delivery is the tried-and-true method of importing immigrants to do all the nasty, demeaning tasks for less pay than natives would accept. Where I grew up, it’s widely known that senior citizens in rest homes are pretty much all taken care of by Filipinos. It may be different ethnic groups in other places but the pattern is the same. This will bleed upward not only into the assistant/service roles but up through to nurses and doctors. In England it’s already a cliche that the nationalized health care system relies on low-paid Pakistani doctors. We will have to continue to replicate this pattern to an ever larger degrees just to break even when it comes to health care. We may even start to see hospitals/hospices/retirement communities/care facilities spring up across the border in Mexico, or in South America, or elsewhere, as it becomes more and more uneconomic for people to afford them here.
So maybe I’m wrong but I just don’t see the seeds of a bubble in that market. I see a giant, growing drag on our economy. The only way out is if there were some huge, game-changing innovation in the field of health care. Something which made some aspect of it a hundred times cheaper, faster, or better. A cure for cancer, or similar miracle, would be one such game changer in health care for example. Because then suddenly millions of people who would have had to get all sorts of chemo and radiation procedures won’t have to do that. And so resources won’t have to be spent doing that. Could be spent doing other stuff, therefore. In other words, it would make us all wealthier.
But most of what health care is about – you go and meet with your doctor for a while, he does some stuff, you talk a bit, he says what he thinks might be wrong, and signs some paperwork, if it’s really bad you stay in a hospital room – just isn’t amenable to this sort of game-changing improvement. Computers can’t diagnose people over the web and it’s not likely it would be desirable if they could. But you simply can’t make a doctor visit a hundred times quicker. You can’t squeeze a hundred times more hospital beds onto the same piece of hospital property. You can’t change peoples’ bedpans and wipe their derrieres a hundred times faster. There are always new gadgets and equipment coming out. But these improvements have generally become marginal.
Health care is fundamentally a service that has to be delivered by some other people in realtime, using human judgment, like getting a haircut; either takes a certain irreducible amount of time/resources/people to deliver, and there really is very little low-hanging fruit to be had in improving it per se. Yes we’ll be spending a ton of money on health care (and some government-connected people will get rich, no doubt) but overall this will be deadweight loss, not something that helps the economy. It’s not even likely to be a good place to put your money in the medium term in the hopes of riding a bubble anyway, because the whole sector will be so politicized and government-controlled once Obamacare is in place that all health care and health care companies will be commandeered as explicit or quasi-government agencies, and prevented from producing meaningful profits.
Ultimately, fundamentally, economic recovery still has to involve more people doing/making more useful things for other people, things that they need and want, at a faster and more efficient rate. The problem (and this is a nice problem to have, I suppose) is that to a large extent, Americans don’t really need much of anything, and they already get everything they want.
I will say this: There’s one thing people can never get enough of: Educating/helping/spoiling their kids. People will spend ANYTHING on their kids, to give them ANYTHING, if they think it’s ‘important’ or ‘good for them’ or gives them some sort of advantage or skill or something that would look good on a college application or just won’t harm their self-esteem. This fact seems to be the underlying premise of standup comedian Brian Regan’s joke about how he’d like to be in the children’s-book-writing business, charging 12 bucks for a giant ‘board book’ whose story goes like:
The big clock
The reason parents all buy these books is they want to feel like good parents, who read to their children, because that’s good for them, they’ve all heard. And not only does thinking they’re good parents give people comfort, but there’s no minimum price tag your typical parent will put on that sort of thing.
So maybe that’s where the next bubble is. Something involving further pampering, educating, and general spoilage (depending on the product) of children. Some new service or product or innovation involving kids, which makes every parent know they’re Doing The Best For Their Kid. And it’s not even obvious this would be a bad bubble to have, because maybe there are useful/beneficial things that could be done for kids.
So there you have it. That’s my pick for the next bubble, and that’s where I think the sidelines money should go. It should, and will, go to kid stuff. The smart money has spoken.
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