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Monday, September 15, 2008

Decoupling is Dead; Invest in Your Head

posted by on September 15 at 14:32 PM

From the exemplary Daniel Gross at Slate:

“Decoupling” is the notion that the rest of the global economy could power ahead even as its biggest single motor, the United States, stalled. Decoupling was trumpeted by many of the international grandees at the World Economic Forum in Davos, Switzerland, last January and gained currency in certain circles (including the one surrounding my desk). But now it, too, seems to have been cancelled.

Ok, the US economy and Wall Street are in crisis. If we go down, the common thinking has been for a bit, the other economies in the World will be just fine. The Euro-zone will putter around, perhaps becoming the leading home of global finance. The BRIC (Brazil, Russia, India and China) economies will pick of the rest of the slack.

Well let’s take a tour, today, of these saviors (after the jump, plus a suggestion of where you can safely invest):


China cut interest rates for the first time in six years and allowed most banks to set aside smaller reserves as worsening credit-market turmoil and weakening export demand dimmed the outlook for economic growth…

Zhu Baoliang, the chief economist at the State Information Center, a government research agency, said August’s weaker economic data probably prompted today’s moves, rather than events in the U.S.

Capital Economics’ Williams said it was “suspicious” that the central bank acted when the Shanghai Composite Index seemed set to drop below 2,000. It closed on Sept. 12 at 2,079.67 after slumping 60 percent this year on concern that measures to tame inflation will erode company profits.

The property market could be headed for a “meltdown” as home prices and sales decline, Morgan Stanley said Sept. 12.

Tightening access to international credit and mounting stock losses are hurting Russian billionaires as well as state- owned corporations, prompting calls by businessmen to heed Western complaints over Kremlin policy in Georgia…

The stock market is plunging, capital is fleeing, there is a severe shortage of liquidity in the banking system, prices for many core exports are falling and inflationary pressures are strengthening,” the business group’s Alexander Shokhin said today in a live televised Kremlin meeting. Current policies “may turn out to be inadequate,” he said.

The Euro-Zone:
The transatlantic divide in monetary and fiscal policies may mean the economy of the 15-nation euro region takes longer to rebound after contracting 0.2 percent in the second quarter. The European Commission projects the weakest growth since 2003 this year as Germany and Spain slip into a recession and Italy and France stagnate.

“Europe faces a long-lasting slowdown and only gradual recovery,” said Dario Perkins, an economist at ABN Amro Holding NV in London.

So, dispel the notion that the global economy will be just fine without the US. And, don’t kid yourself: The United States’ financial markets are in a tailspin. Why?

Again, the Daniel Gross has the best explanation:

Glass-Steagall was one of the many necessary measures taken by Franklin Delano Roosevelt and the Democratic Congress to deal with the Great Depression. Crudely speaking, in the 1920s commercial banks (the types that took deposits, made construction loans, etc.) recklessly plunged into the bull market, making margin loans, underwriting new issues and investment pools, and trading stocks. When the bubble popped in 1929, exposure to Wall Street helped drag down the commercial banks. In the absence of deposit insurance and other backstops, the results were devastating. Wall Street’s failure helped destroy Main Street.

The policy response was to erect a wall between investment banking and commercial banking. It outlasted the Berlin Wall by a few decades. In the 1990s, as another bull market took hold, momentum built to overturn Glass-Steagall. Commercial banks were eager to get into high-margin businesses like underwriting hot tech stocks. Brokerage firms saw commercial banks, with their massive customer bases, as great distribution channels for stocks, mutual funds, and other financial products that they created. Generally speaking, the investment banks were the aggressors. In April 1998, Sandy Weill’s Travelers, which owned Salomon Smith Barney, merged with Citicorp. The following year, Congress passed and President Clinton signed the Financial Services Modernization Act of 1999, known as the Gramm-Leach-Bliley Act. This law effectively deleted the prohibition on commercial banks owning investment banks and vice versa.

Don’t count on a vigorous stabilizing reregulation of the US financial markets anytime soon. The Gramm in the Gramm-Leach-Bliley Act is Phil Gramm—John McCain’s chief economic adviser, and the man who called all of us “whiners” for being concerned about the economy. With John “Keating Five” McCain and Sarah “I can see Russia!” Palin as our increasingly likely next two presidents, why wouldn’t global investors be worried?

Well, what does count as a safe investment, today? Let me consult the ancient Jewish secret for surviving and thriving in ineptly managed economies: Invest in your head, your health, your family and your community.

1. Invest in your Head or “What can I do that will cause someone to feed me?”
Learn a trade. Learn a language. Learn accounting. Learn the law. Learn how to cook and bake. Learn how to fix a leaking pipe. Learn how to entertain a crowd.

Take a class. Go to community college. Read a book. Use your savings and resources to fill your head will skills and knowledge. Until the moment of your death, nobody can take these from you. No inept or corrupt banker, no thieving politician, no political unrest. These become a part of you, and follow you wherever you go.

2. Invest in your health.

Now is a good time to go to the doctor. Get that lump checked out. Get that dental work done. Get your blood pressure down.

These investments, also, retain their value no matter what the economy is doing.

3. Invest in your family.

To the extent you have a surplus, put it into your family members—helping them invest in their heads and their health. Having a strong team behind you vastly increases your chance of success.

4. Invest in your community.

The stronger, the more knowledgeable and the more healthy those around you are, the better your chance of weathering a crisis.

This might seem dire. Even if the predictions of economic doom are overblown, these sorts of investments help even when things are going great. During a real economic crisis—the sort of which not seen since our grandparents and great-grandparents struggled—these investments are essential. Even in the worst case, we have a few months and years to prepare. Start.

RSS icon Comments


The BRIC? To me, China, Russia, India and Brazil will always be The CRIB, know what I'm saying?

Posted by elenchos | September 15, 2008 2:48 PM

Wow, this is the market into which we were supposed to privatize social Security? I was supposed to retire in 8 years. I am glad that my job class is more stable than the markets because right now things aren't looking too rosy and I may need to keep working.

Posted by inkweary | September 15, 2008 2:58 PM

Wall Street is drying up but Main Street is flourishing.

A re-agrarianized super exurbian lifestyle is flourishing and leaving haphazard Lib planners building boondoggle Lite Rail systems with egg on their faces.

America is ahead in all the industries that count while Asia, Europe and South America continue to party like it's the 20th century.

Posted by John Bailo | September 15, 2008 3:01 PM

I wish John Bailo was Mr. Poe, but then again...if that were the case he would actually be funny.

le sigh.

Posted by Original Monique | September 15, 2008 3:12 PM

There is a fantasy among many left intellectuals, propagated by folks like Wallerstein and Arrighi, that America's "unravelling hegemony" will allow us to transition to a "multipolar" world.

The appeal of such a view is that the people don't have to rise up to overturn US militarism for new regional power blocs to be freed from the yoke of US imperialism (ie that pesky tendency for the US government to define the entire globe's affairs as within its own "national security").

The problem with the view is that it is wishful thinking on an economic level (see above). Though it is also naive to say "No inept or corrupt banker, no thieving politician, no political unrest."

The other problem with these views is that it is liberal-- that is to say it separates economic from military power. It is wishful thinking to assume that the nation with world's most powerful military will peacefully accept an IMF audit and its own structural adjustment. Economic catastrophe for a military superpower is a recipe for fascism. See Germany in the 1930s, or Russia in the 1990s.

Posted by Trevor | September 15, 2008 3:15 PM

exactly how will china decouple itself from the american economy? we are their largest market, and they basically own our debt. we go down, the whole planet comes with us.

i'm looking at YOU TOO, latin america.

Posted by max solomon | September 15, 2008 3:20 PM

Well done!

Posted by tomasyalba | September 15, 2008 3:21 PM

And erm... a second ago S&P lowered WAMU's credit rating to junk. Stock hitting $1.80 after hours. Bye bye market capitalization. Per your earlier fine posts...

Posted by tomasyalba | September 15, 2008 3:44 PM

Great Post! As Jeffery Brown on often says: Get thee to the non-discretionary side of the economy!

Posted by Pondscum | September 15, 2008 4:19 PM

Damn it. I don't have any skills.

Posted by Abby | September 15, 2008 4:26 PM

[i]"A re-agrarianized super exurbian lifestyle is flourishing and leaving haphazard Lib planners building boondoggle Lite Rail systems with egg on their faces."[/i]

Okay, but how's life in swinging Kent these days?

Posted by Tiktok | September 15, 2008 4:31 PM

What do you think about have a backup supply of gold or other precious metals in a safe deposit box or mattress?

Posted by Cornelius J. Hertzenbuilt | September 15, 2008 5:06 PM


i) Someone can steal gold or precious metals. If they steal your head, well, you don't have much else to worry about anymore.

ii) Gold is worth less than a valuable skill or piece of knowledge, in a practical sense.

"I can treat your festering wound"


"I have something shiny, yellow, ductile and malleable."

Posted by Jonathan Golob | September 15, 2008 5:19 PM
"I have something shiny, yellow, ductile and malleable."

you should have that checked out

Posted by not a doctor, but... | September 15, 2008 6:22 PM

Yeah, I'd rather have gold. With that you can hire any kind of specialist you need, but an education only works out if your skills are in demand. Lots of smart people pick a field that turns out to not be needed any more, and nobody cares about them when they get laid off. And even if your skills are in demand this second, you're only a hireling of somebody who has money. They call the shots.

But wealth. Wealth is fungible. You can buy ammunition, tanning beds, private armies to expand your fiefdom, you name it. It's always better to be rich than to be poor. Capital is power that lasts.

Posted by elenchos | September 15, 2008 6:49 PM

Hey Jonathan Golob

From Wikipedia:
On July 18, 2008 Gramm stepped down from his position with the McCain campaign. However, he often accompanies McCain during the campaign, and continues to be an unofficial adviser on economic and financial matters.

Posted by Simon | September 15, 2008 7:43 PM

elenchos, It IS better to be rich than poor. But what is it about gold that makes it of some sort of intrinsic value? Hooray, I can decorate my festering wound!

Plus if you're useless but have gold, I have a feeling you may not get good value... if any. Ie theft, graft, your hired guns deciding they have the guns, they should do the hiring...

Posted by Fe Man | September 15, 2008 8:40 PM

Marx didn't tell the workers to waste their time getting an education. Republicans always tell the poor to stay in school and eat cake. Those that know the score tell them to seize control of the engine that makes it all go. The machinery of production itself. Once you have that, you can afford nice things like teachers or DVDs or health care.

It's interesting that you often see self-indulgent fiction like Lost or Gilligan's Island where a doctor becomes the leader. Where in the real world power winds up in the hands of a soldier or a plutocrat. Philosopher kings are wishful thinking without a massive edifice of cosmopolitan culture to prop them up. Take that away and things get ugly.

Posted by elenchos | September 15, 2008 9:11 PM

It might also be good to stock up on booze, condoms & other barriers (you can get free condoms at planned parenthood) and/or anything else you could trade for food. Even if this isn't the next depression you could have an awesome party.

Get some good shoes too.

Posted by asteria | September 15, 2008 10:02 PM

@18: Republicans always tell the poor to stay in school and don't do drugs. Isn't that the opposite of eating cake? By all means, seize control, but please don't become Josef Stalin.

Golob's right. Sorry to be serious, but I'm proof. Skills are worth more than gold, and easier to carry. Thanks for the short list.

Posted by Amelia | September 15, 2008 11:14 PM

@15: "The only sin is undercapitalization."

Posted by Amelia | September 15, 2008 11:16 PM

I'm an expat living in Holland. And I think it depends on where in the Euro zone you're in. For instance, Spain is gonna totally crash. Too much building, over priced, and no credit for potential buyers. While not on the Euro, England and Ireland have the same type of housing crisis as in the States.

But I can tell you in Holland, People don't consume nearly so much and credit was never extended willynilly to anything that could fog a mirror. So I think Holland is gonna fare just fine.

As far as investing. Who the hell knows. You can try your best and lose money all the same. Keep it all safe in T-bills? Then lose it's purchasing power due to inflation. Especially when Bernake lowers the rate to 0%. Buy and hold? Great if you don't need the money. But be ready to ride a rollercoaster with your statements. Don't even look at em, if you know what's good for you. Try to get a step ahead and earn on the volatility? You think you can pull off what the all-knowing minds at Lehman Bros, Wash Mu, et al couldn't?

Just hold on tight and be nice to your neighbors.

Posted by Noodles | September 16, 2008 4:54 AM

elenchos, gold doesn't have inherent value, only value other rubes place on it.

rapid inflation might solve some of our debt problems as consumers. it's like chemo.

Posted by Bellevue Ave | September 16, 2008 8:47 AM

Noodles, thats cause tulips gave a stern lesson in manias.

Posted by Bellevue Ave | September 16, 2008 9:14 AM

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