The Daily Reckoning, 9/13/01
"The World is too much with us; late and soon,
Getting and spending, we lay waste our powers;
Little we see in Nature that is ours;
We have given our hearts away, a sordid boon!"
"The attack IS a great blow to an already vulnerable economy," writes my friend Martin Weiss. "As I have been telling you for many months, the world economy was ALREADY teetering on the brink even BEFORE yesterday's attack."
On Tuesday, it got a shove.
Everything changed. But everything remained as it already was. Martin explains:
"Even as the hijacked airlines flew mercilessly toward their targets, a flood of red ink had wiped out over six years of TOTAL accumulated profits of ALL companies listed on the Nasdaq exchange (see last issue of Safe Money).
"Even as the upper floors of the World Trade Center burst into flames, America's largest money center banks had the greatest exposure ever to derivatives - high risk bets that are notoriously vulnerable to unexpected events (according to the latest reports by U.S. General Accounting Office).
"Even as the 110-story twin towers imploded into a great cloud of dust and debris, the world's stock markets had already been tumbling for 18 months or more. The Nasdaq had lost about two-thirds of its peak value, with over $5 trillion in wealth destroyed. The German Neuer Markt, the equivalent of our Nasdaq, had lost roughly NINE TENTHS of its value. The German DAX, the counterpart of our Dow Jones Industrials, was down about 45%, the Nikkei down close to 75%."
But now, for the first time, the fragility and vulnerability of the U.S. has been exposed to the entire world.
People will say all sorts of mad things...that stocks will go up because it is their patriotic duty...or that they'll go up because wars always make stocks go up...or that the economy was ready to turnaround anyway. And who knows...maybe they will be right.
But is it not likely. For the economic picture remains nearly the same as it was before, with one important exception: consumers have suddenly grown cautious.
Americans may proclaim their faith in the system. They will stand with moist eyes, waving the flag and reciting their newfound sense of national unity. They will affirm their belief in American capitalism and their commitment to buy-and-hold investing.
But they will not buy new cars. Nor take luxury vacations. Amid the images of the dead and dying...of bodies falling 100 stories...and mass destruction at the very heart of American capitalism...
...getting and spending, at the margin, suddenly seems less important.
Consumers will wonder if all their frantic efforts to build wealth during the boom years was worth it. They may recall an article in last week's U.S. News & World Report. The article said that people are ten times more likely to be depressed today than people born two generations ago. "Though the quality of life is much improved since WWII," the authors elaborated, "the number of people who consider themselves happy remains flat."
What makes people happy? "Strong marriages, family ties, and friendships..." say the authors.
Rather than spend an extra 15 minutes working at the office...people may decide to spend the time with their families. Rather than upgrade their home computers... they may make do with the one they have until they are feeling more confident.
Consumers are becoming hesitant. Not because they believe the economy is sinking...but just because spending money has suddenly gone out of fashion. Something big has happened that is beyond reason... striking at the deep, dark "rag and bone shop" of the human heart.
Alan Greenspan blamed the economic downturn on what he called a "breach of confidence." For him and many economists, the challenge in America was merely to maintain consumer spending. As long as consumers continued to spend, they reasoned, the economy would continue to grow.
The real problem was not a lack of consumer confidence, but a surfeit of it. Consumers developed, as Dr. Richebacher put it, "an unrealistic and unsustainable excess of expectations in future prosperity...built up in the past boom years."
The more the economy boomed, the more confident they became, and the more money they borrowed and spent. But even as they felt more and more confident, debt loads piled up like skyscrapers, leaving them more and more vulnerable to shocks. Now that they've felt the earth shake...can there be any doubt that they will turn more cautious?
"This is NOT the end of the world," writes Martin Weiss. But it feels like the end of an era.