The three Ds—the three legged stool of the prosperity economics since WWII—were: the Dollar, the Debt economy and the Drive of entrepreneurialism.
1. The Dollar offered a stable monitory framework. Its universal reserve currency status based on the Bretton Woods agreement and the belief that “the dollar was as good as gold” made for monetary stability.
2. The Debt driven economy produced a framework in which everyone could profit. It was designed in two layers. Any person or business taking a loan (going into debt) could find creative ways to turn this leverage into profit by producing goods and services that returned more than the cost of the debt. The banks were at the top to manage this leverage of borrowing money. They, of course, made the greatest profit. The banking system utilized the fractional system and monetary inflation controlled by the Federal Reserve to create opportunity for all and made profit in the process.
3. The third leg of the prosperity was the eternal Drive of ingenuity and optimism embodied in the entrepreneurial spirit. Drive was unleashed in the market of opportunities and ideas, supported by a stable dollar, debt and property rights.
Suddenly, it appears that the first two legs are breaking down. The dollar status has been shaken. The debt derivatives economy has been stretched to the point where it had no choice but to snap. It snapped like the Yellowstone Fire of 1988. This is the meaning of the Fannie and Freddy government takeover this weekend. All of a sudden everyone is deleveraging – trying to exit debt and replace it with cash and the system crumbles.
Why did it take 60-80 years for the big stock market cycle to suddenly change? Active earning and investing life spans usually average some 40 years. One and a half to twice this duration is enough to eradicate institutional memory. That’s when the system snaps and the rules of the game shift.
What can the Yellowstone Fires of 1988 teach us?
On August 20, 1988, a day now referred to as “Black Saturday”, gigantic firestorms in Yellowstone sent flames as high as 200 feet into the air. These fires grew so large that they created their own wind. Smoke plumes pushed up to 30,000 feet. Many people, including leading ecologists thought that Yellowstone would never recover or that it would take hundreds of years for its fauna and flora to populate the park again. Here is what scientists learned and what it can teach us about the deleveraging fire storm on Wall Street.
1. Expect a lot more pain as a result of the great deleveraging of Wall Street – The Yellowstone fire burned more than half the total acreage of the park. 793,000 acres were affected by fire and bout 300 large mammals perished.
2. The Treasury efforts to contain the crisis will help some come out better but it’s overall impact will be limited – The 1988 firefighting efforts included 25,000 people, the largest in U.S. history. 120 million dollars were spent. This huge effort saved human life and property, but had little impact on the fire itself.
3. The natural cycle of deleveraging will run its natural course – The advance of the 1988 fire was finally stopped in September by rain and snow.
4. An amazing new cycle of innovation and opportunities will be unleashed – The Yellowstone fires created a mosaic of burned and unburned areas that provided new habitats for plants and animals and new realms for research.
5. When the deleveraging cycle has finally run its course and everybody is exhausted and depressed, recovery will be faster and stronger than anyone imagines – In Yellowstone Park, seeds released from pinecones took root almost immediately. Lodgepole pine seedlings began to grow at the rate of an inch or two per year. Wildflowers were abundant by the following spring, and the grasses and shrubs were green and flourishing.
6. Certain sectors and businesses will benefit from the deleveraging cycle and will come out on top – In Yellowstone some of the grasses that the elk needs were more nutritious after the fire. Bears grazed more frequently in burned sites than they did in unburned sites. The fires have had no observable impact on the number of grizzly bears in greater Yellowstone. Cavity-nesting birds, such as bluebirds, had more dead trees for their nests. Nutrients from the ash caused the vegetation to prosper and grasslands returned to pre-fire appearance within a few years. Aspen reproduction has increased because fire stimulated the growth of suckers from the aspen’s underground root system and left behind bare mineral soil that provided good conditions for aspen seedlings.
7. A major economical shift takes place every 60 to 80 years. This is part of the cycle of life – In Yellowstone, the fires turned out to be a necessary and beneficial part of the natural cycle of life, death, and re-birth.
© Aviv Shahar
Aviv Shahar :: Sep.09.2008 ::
America, Money & Market Behavior ::
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