Before reading this post, take a moment to review some Work the System tenets:
- Per Ockham’s Law, the simplest explanation is usually the correct explanation
- The world is not a confused mass of sights, sounds and events. It’s a collection of systems.
- A system has a single primary purpose
- An efficient system that is disrupted by an exterior force will become less efficient
- In most cases it’s best to tweak an existing inefficient system into efficiency rather than to altogether discard it, starting over from scratch
- The systems mindset has nothing to do with politics, religion, mysticism or self gratification. Instead, it’s a simple, dispassionate and mechanical approach to navigating life.
Deflation, Inflation and the Beast I Won’t Buy
I’m at the local Audi dealer and I sit in a 2010 fire engine red S5 Coupe. My faithful six year old Subaru sedan waits nearby, forgotten for the moment. I’m being disloyal to my silent little friend.
I turn on the S5’s ignition and the guttural rumble of the V8 goes right to my belly. I open the door, step out and walk twenty feet to the front of it to look at the S5 straight-on. Broad shouldered and crouched low, it’s a gorgeous road-beast and its been over forty years since I’ve felt this much passion for a car. (You guessed right. It was a ’65 427 Corvette…).
In my twenties I swamped out toilets, rode garbage trucks, scrubbed kitchen pots and dug ditches, but now, thirty years later I’ve figured out the money/freedom thing and I have the required sixty-large to buy the S5.
If these were normal times I’d write a check for the beast right here, right now. But I won’t do that today because the economy is in a fire-storm and I’m damn nervous about it.
In run-of-the-mill recessions, the jostling of opposing forces are normal, but this downturn’s gyrations are different in both sensibility and magnitude. There are gigantic, opposed pressures that struggle for dominance and the question must be asked: Are we headed for serious deflation or inflation? This question’s flaw is in the inference that one or the other of these phenomena is going to begin to occur sometime in the future. Fact is, they’re both at full gale right now so a better question is, which one will win out?
Deflation is propelled by lack of value. It’s on a steam-roll, both the cause and the result of downward price pressure. In its lowest denominator, an economic system is ruled by supply and demand, and here in late 2009 there is much to be sold and few buyers willing to buy. Jobs are scarce which means there is an over-abundance of talent and therefore lower wages. Prices for hard goods, services, land, homes and businesses are inexpensive because there’s little demand. There’s too much supply/not enough money and in its worst embodiment it can morph into a Great Depression.
My reasoning in forgoing the Audi purchase carries over to my business where I am holding back on any major infrastructure investment. Multiply my hold-tight posture by 23,000,000 – the number of small business owners in the United States – and one understands why there is price decline, rising unemployment, little investment and tough times all around. Because of unpredictability about the future, people like me – business owners with some cash – aren’t purchasing either for ourselves personally or for our businesses. And if things are not being purchased, things are not being produced and the spiral is relentlessly downward.
Inflation? Per government’s unprecedented printing and borrowing of money, the massive input of new cash being injected into the economy is violently fighting off the black hole of deflation. “Government stimulus” is nothing more than the dumping of dollars into the system so people have something to spend. In the best of times, inflation is the ruse governments play as they quietly encourage currency devaluation in order to pay back today’s debt with future money that will be of less value. But right now the increase in the supply of money - necessary to fight off a new Great Depression – is unprecedented, and if things get out of hand there will be hyperinflation.
So the hooligans of deflation and inflation silently rage against each other while business owners like me stand by, paralyzed, waiting out the battle. Why hire employees or invest in infrastructure if there is no clue to what the future holds? And anyway, if one considers making an investment in order to take a chance at earning a profit, it’s clear that Uncle Sam intends to tax away huge chunks of whatever profit might emerge. It’s the quintessential lose-lose proposition.
From the systems mindset perspective, the problem is obvious: The private sector primary system is under assault by the government primary system which zealously hammers away at personal incentive by plundering the bottom line with taxes, over-regulating and generally treating business owners like me as prey – sucking the desire for risk out of our veins. Sorry about that graphic image, but in viewing the events of the recent past through the systems mindset, it’s clear this is a case of a healthy host under assault by a robust parasite.
Here’s another unsavory conclusion, compliments of systems mindset analysis: Private business systems are constructed to make money. Government systems are constructed to spend money. Draw your own conclusion.
Having said all that, are governments of any value? Of course. There must be regulation, court systems, roads, defense, etc. It’s just a matterof degree. I’ll go through that in next week’s post.
As the government’s encroachment on the private sector gains momentum, the private sector becomes ever more dysfunctional – and as the private sector primary system becomes more dysfunctional, private sector subsystems become more dysfunctional too…and unless you work for the government, these dysfunctional subsystems include you and me.
So business owners who have survived this far wonder what to do next, frozen into the logical defensive posture of hoarding cash while everyone down the line suffers as a result.
But here’s the thing: There is a best strategy for right now and it’s open to everyone. In whatever you do – within your circle of influence – be sure you’re climbing the right ladder and then become incredibly efficient at what you do. For most of us, this “best strategy” is two-pronged: one by one, optimize the small systems of our lives as we simultaneously keep up with current events in order to decipher the final winner of the depressionary/inflationary war that seethes underneath. Ultimately, one or the other will dominate and then the investment path will be simple and obvious: If it’s to be deflation, hard cash will be king. If it’s inflation, spend cash on things of lasting value. And what if we wallow in this economic malaise for a long time to come? Cash will continue to be your best friend.
Of course, there’s something additional we can do: Lets vote clueless, manipulative government-first politicians the hell out of our faces before they completely ruin our free-market economic system. (I suppose there is a some small possibility things can be salvaged without overt trauma, considering the mounting ground swell of opposition to current governmental interference. Perhaps government will be forced to back off and these system-wounds can heal in something less than a fall-off-the-cliff scenario.)
My little Subaru continues to run perfectly and the last time the two of us passed by the dealership, the Audi S5 beast was still for sale.
-Photo by David Rosenthal
{ 33 comments… read them below or add one }
You perfectly hammer home the point on private vs. public sector with “[...] it’s clear this is a case of a healthy host under assault by a robust parasite. ” Dead on.
As a previous S4 & TT owner, I can say that you’re missing a hell of a ride when you get on the gas pedal, but also sparing yourself an equally massive headache when you realize your turbos are blown out and can’t recoup your money in the least when you sell. Savvy decisions, and clearly driven by a systems mindset. Great post.
David
Great article. Today’s WSJ has an editorial that reinforces what you wrote. Here’s the link: http://online.wsj.com/article/SB10001424052748704779704574556002170312732.html
Sam, great article with an astute observation about gov’t building systems for spending money and business being system for making money.
BTW my trusty 1987 Buick Regal keeps on keepin’ on. Nearly 300k miles and in great condition. I can’t begin to figure how much money I haven’t spent not buying new cars all these years.
Wise decision Sam. I suggest that for anyone who has the wherewithall, to get themself a place in the country, off the grid. I think we are headed that way. City life will not be pleasant. I also recommend the exchange of that green I.O.U paper for cold hard cash. That’s right – that cold, hard and shiny metal. Our Constitution says that the only real money is gold and silver. When our paper money was backed by gold and silver it was good but when Nixon took us off the gold standard it started the long slippery slope. I must admit that I am less optimistic than most but all I can see for our future is the total collapse before the rebuild. Unfortunately, the collapse will be very painful, even intolerable for many. I liken it the the control demolition of a building in slow motion. Once the button is pushed each floor falls away just before the floors above it hit – a free fall. And, there is no stopping it. It must all hit the ground. The last election was the equilivant to the ‘Perfect Storm’. We were promised ‘Change and Hope’ and what we got is Change and Hype. We got what we wanted, someone with no resume ‘leading’ the most powerful country in the world. Anyway, Happy Thanksgiving to all.
My understanding is that the Global Financial Crisis originated in the deregulated US financial sector, whose greed and ignorance led to a world-wide network of virtually-untraceable, high-risk and ultimately-worthless financial products (derivatives). Governments around the world had to step in to prop-up the perpetrators, in order to save national economies. Far from the government being parasitic on business, it was unfettered greed and criminal irresponsibility among obscenely-paid corporate executives that unravelled the world’s financial markets.
I’m sorry to hear that the US is still in dire straights. The situation is stable and improving here in Australia, where the financial sector has always been more tightly regulated.
I recommend a recently-made, three-part, British documentary, called Addicted to Money, which gives the history and etiology of the GFC and describes the structural changes that are already underway to try to avert the multiple crises we are facing on a global scale. The case is made that governments cannot save us without the contribution of free enterprise. Governments should not engage in commercial and entrepreneurial enterprise; they have to raise money in other ways (per taxes) in order to govern and build infrastructure. It is the role of business to innovate, invent, and generate wealth (and, yes, pay taxes). The US is currently yoked to China in an uneasy and probably-unsustainable economic arrangement, but even if the rug is pulled on this relationship and the US is put into a further tailspin, it WILL utlimately survive and revive, hopefully stronger than before–if valuable lessons are learned from the GFC.
Enough from me. Loved your book, Sam.
Thank you for letting us know we’re not alone in our silent bewilderment at government manipulations …
Great newsletter today! Thanks.
Thanks, Sam, totally agree. BTW, “Work the System” is a great book! Happy Thanksgiving–Patrick
You got my attention with Deflation, inflation….
Thank you and Happy Thanksgiving to you and your family and your employees Sam.
Thanks again for a great newsletter – I always enjoy your thoughts!
Personally, the past few months have been overwhelming – the recession
has me swamped with consulting engagements. To cope with demand, I’ve
outsourced all non-income-producing activities (tax, accounting,
travel arrangements and so on) to focus on my customers. I never
thought that bad times would be good times.
One thought I wanted to share with you: I sent details of your book to
one of my financially distressed customers who needs a grasp of
systems thinking. I’ve been trying to ground her great ideas with
three anchors:
* value proposition (what problem am I solving?)
* service offering (how do I solve the problem?)
* business architecture (have I got the right people, processes and
technology for a sustainable business?)
In a meeting last week, she gave an exasperated:
“No! I don’t want to read these books and do those things, I want
someone to write my business plan so that I can apply for finance!”
Sometimes, failure is a much-needed lesson.
warm regards
I read your article on the conflicting forces of inflation and deflation with great interest. A few observations, if I may (just my own views, of course):
1. In my view, there is a problem that I believe affects your country and certainly affects mine (the UK). It is that we now have governments formed largely of professional politicians. Few of these people have had a career in business or in other walks of life such as the military prior to joining the political system and eventually running for office. This is a relatively recent phenomenon and certainly not something envisaged by the Founding Fathers when they drafted the US Constitution and the Bill of Rights. The outcome is that far too many people in our governments are divorced from the reality of the economy; running a business, making payroll etc. etc. Hence the over-regulation and tendency to spend money that those in government now appear to think of as “theirs” when it is in fact “ours” as taxpayers and citizens.
2. In the western world, we all looked into the financial and economic abyss about a year ago. Governments felt a need to be seen to act, and thus to avert disaster. That may have been achieved temporarily. However, the huge and artificial economic stimulus that has been given has sown the seeds of the next set of asset bubbles, in my opinion. Part of the reason for this is that I feel it will be almost impossible to navigate safely down from the high, knife-edge ridge of stimulus without over-correcting unintentionally. The result will be a second economic dip and probably more to follow. George Soros (for whom I have no great liking but great respect as an astute investor) wrote in the Financial Times some months ago that he expected the growth graph of the western economies to look like “an inverted square root sign”. In other words, down, up a bit, way down, flat….. Whether the cause is deflation or inflation may become irrelevant.
3. Many of my clients (mostly bankers, lawyers, etc.) are talking about recovery and saying that things will simply go back to the way they were pre 2008. Many in government are trying to blow on those sparks of hope. In my opinion, that view is entirely misguided. In the western world we have seen a seismic shift in our economic world and one that will likely alter our collective life vehicle permanently. The trick will be to predict what that new world will look like and adjust accordingly. My recent experience indicates that few people are equipped or willing to contemplate such changes of environment or such adjustments to life vehicle.
4. We in the developed world often forget that half to two thirds of human kind spend 90% of their waking hours looking for food, water (clean or otherwise) and shelter.
Just a thought.
This has all been said again and again…by Reagan, Bush, Cheney and so on. We’re rode their wave of deregulation, overspending, and tax cutting to this point. Why stay on that downhill ride?
I am incredibly offended by your characterization of the government system, being only about spending, and sucking away like a parasite at your precious businesses, which are about making money.
Ahem.
SO I suppose government systems provide no value whatsoever.
Education? Why pay for it?
Roads? Why pay for them?
Defense?
Give me a break, Mister Systems. Your systems fall apart without structures to support them. Governments at their root provide that structure.
Perfectly? Nope. Does government blow it? Yes. As do all human institutions and individuals.
(OH OOOPS. I forgot. You are a system. I am a human being.)
Sam, I am really impressed with this analysis!
Ken
I think it would have been reasonable to add to the post that governments have a positive purpose but I didn’t because it seems to me that’s obvious. In any case, I’ve added a few sentences to the post to address this obvious point. I will point out again, although I was clear about it in the post, that an over-reaching government is a bad thing for all involved (except the government). I appraoch this with a systems mindset: A healthy primary system will suffer when encroached upon from outside by another system. Yet you devolve into a classic ideological rant. I’ll say this much: Small businesses like mine provide the bulk of jobs in the U.S. and if we (as individual systems) are hampered, there will be fewer jobs. The most recent uptick in the GDP was, BTW, due entirely to the stimulous jobs/projects it funded. Rumor has it the next government move will be “cash for caulkers.” From a systems approach, this is not good. You also suggested that the desire, as a business, to “make money” is a bad thing. Here’s a question: Do you have a job? If so, why do you keep going to it? Something other than to “make money?”
Mike: See above. Any number of blogs can provide an ideological approach and I try hard to refrain from that. For my blog, I will stick close to the systems dissection/analysis.
Thanks Helen. Yes, I agree that there is greed and ignorance in the financial sector. But “greed and ignorance” is a problem everywhere and has been for a long time. The government itself — any government, for that matter — can be rife with greed and, especially ignorance. Since “government” pretty much calls the shots, that’s a bad place to have those particular attributes. The financial meltdown here in the U..S. began in the mortgage market and, in my analysis, had to do with government insistence (Google “Community Reinvestment Act”) that banks lend money for homes to people who couldn’t make the payments. Fanny Mae and Freddy Mac were created to buy up ANY loan that was made, purchasing them from the banks. They failed and upon investigation, to boot, the leaders were found to have made enormous salaries and unconscionable bonuses. So, the banks, becasue they were covered –and even coerced — acted logically and over-reached. Why not? They would get paid no matter what and there was negatrive pressure if they didn’t. Similar nonsensical government incursions are everywhere.
As a part of its necessary role, must government regulate? Absolutely. My next post goes deeper into the topic of governemtal and private sector systems…from the systems mindset. Thanks for the kudos re my book, Helen.
You nailed it, Stephen. Thanks.
Hello Stephen in the UK.
I wonder whether your first point would hold up to empirical scrutiny?
Right at this very minute, here in Australia, we have the federal opposition Liberal Party imploding under the leadership of Malcolm Turnbull, a multimillionaire former lawyer and businessman. He is being cannabilised by his own party precisely because he is not an experienced and savvy politician and because he wants to run the party like a business. Turnbull will probably lose the leadership in a spill this coming Tuesday, to one of two rivals, both of whom are professional politicians.
In contrast, the extremely popular Labor government is led by Kevin Rudd, a career politician. He is also a mulimillionaire, but only by virtue of his entrpreneurial business wife, Ros Reines.
Both of these major parties are comprised of a mix of former white collar professionals of one type or another, most notably lawyers, as well as former blue collar workers (trade unionists, farmers, firemen, teachers, nurses, etc.). We even have an ex-garbage collector–Nathan Rees–as our Premier here in NSW.
Of course, I realise that political life is different in other countries, like the UK and the US.
What I do think is lacking, everywhere, is a proper job description for “politician”, as well formal training leading to a qualification for that job, and regulation of the political profession by a professional body which would register and certify members according to stringent professional standards, and, finally, ongoing professional development to remain employed as a politician.
Of course, finance/business/commerce/economics is just one of a diverse range of government portfolios. So we would probably need specialisations within the primary profession of “politician”, as is the case with most other professions now (medicine, psychology, engineering, education, etc.). These professionally-trained politicians would be expected to gain real-life experience in their specialisation before becoming employed as politicans, or during their tenure as politicians, as happens now with most professions. If they don’t pass their real-life tests, they don’t get a job in politics, or they don’t get to stay in politics.
Just some thoughts.
Thanks for the clarification, Sam. I didn’t realise the US (Bush?) government had forced the banks to provide those high-risk mortgage products–loans which had no basis in reality–to highly vulnerable individuals who had little or no chance of servicing the debt. Why, then, has so much blame and resentment been targetted at Wall Street–home of the so-called, contemporary Gordon Gekko’s?
Sam
Great article.
Japan is moving towards deflation as their Bond Market yields are starting to rise caused from insurance premium increases and a strong yen. Japan has two factors moving the system towards deflation: an aging population and less manufacturing output. Where are the good robots when you need them?
David
Thanks David. One other positive about keeping my old Subaru: I don’t worry so much about grocery store parking lot dings…
This is good, Eric. Thanks!
-s
I am not absolutely positive a complete collaspe is coming. This country of ours is resiliant and if policies can be reversed soon, a LOT of investment money is going to come out of the woodwork, new jobs will be created and lower taxes will actually help pay down the deficit (like they did in the past) . We could still recover from this, I believe.
That being said, Linda and I are scouting around for some back-country, self-sufficent land….
Thanks John
Best to you too, Paul. We have much to be thankful for.
-s
I can’ty add to your comments, Louis, except maybe to say that your client’s response is more than common. People have to DO something for a change to happen.
Japan sure has had the heck kicked out of it over the last 20 years…
Thanks Ken. The next post will go deeper into the government and economic systems and how they interact. I compare North Korea and the U.S.
Lyle: 300K miles? Whoa. Same motor?
Thanks Jerry. “Bewilderment” IS the word.
Thanks Patrick. Best to you too.
I recently had a stunningly similar new car experience as you reported on. The lease on my ’06 Cadillac CTS was set to expire. I was really being pressured into buying/leasing a new car, but I also had the option to buy out the lease on my existing car. My internal struggles as to what to do were quite intense. The economy was also an issue for me, but moreso was the fact that any new car I got would depreciate by several $K the moment I drove it off the dealership.
Plus one of my “guiding principles” is that I take care of my stuff. Except for a door scratch, my ’06 CTS was really in great shape and it truly still has all I want in such a car. I actually liked my car much better than the two test drives. I knew the dealer would make much money off of the resale.
Bottom line, I made the happiest decision I’ve made in awhile by sticking with the ’06. The car saleswoman accused me of not being able to change. Maybe so, but the car is happy, and so am I. For the next year or two, I’ll get my moneys worth with this.
As for you, I really thought that you would go for the new one since writing such a check is now less of a challenge for you. But your advice for all of us on handling the current economy is much appreciated.
I am really hoping for someone who will rise up and stand up for a return to sound government principles and policies. And I hope that we get the Dems the hell out of Congress in 2010. The president is just the lining on the bird cage, the problem is people keep re-electing for life, the same families and sick politicians who tell us one thing and leave us with another.
But I digress. Oh, I did just buy an Audi A4, so it must of been tough sitting in a new one, every time I see those new S5 Audi’s, I just want one. But delayed gratification is my personal system. And I just waited and saved to trade my trusty old 92 Olds Bravada for a low milage 01 A4, I needed a reliable car to go along with the entrepreneurial ninja image I’m building, and I had to do it without being a poser, which meant, paid in cash.
I’m so glad I found your book and blog.
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