Strings and monsters
By Daniel M. Ryan
My earlier piece explaining my reasons why there will be a mere slowdown seemed overly optimistic in retrospect. Another writer has pointed out that the Index of Leading Indicators has dropped for three months in a row, which is a sign that an outright recession is probable. Due to this now-probability, the Federal Reserve dropped its Fed Funds rate another fifty basis points last Wednesday.
Whether or not I was whistling past the graveyard is not the subject of this column. Instead, I'll be discussing a phenomenon that is often treated as a hidden gremlin that mysteriously pops up when economic trouble arises: the oft-cited "pushing on a string."
Put simply, the pushing-on-a-string effect is monetary deleveraging that takes place at a faster rate than the central bank's addition of reserves. As a result, the money supply stays stable or even drops, despite the central bank's best efforts to increase it. When exposed to the light, the gremlin looks far less frightening.
Especially when examined while lighted. In order for such deleveraging to take place, there has to be a mass-scale conscious effort to both pay back debt owed and to not contract sufficient new debt to replace it. Since money creation is done through the loan-granting part of the credit system, a wholesale move away from debt has to be the source of the deleveraging.
It seems somewhat of an understatement to say that this shift of the tide – and, given us Canadians' fondness for debt and Americans' mainlining of it, there would be a real tide-shift – would be telegraphed by the popular culture. A "leading indicator" of such a phenomenon would be the replacement of the real-estate-success infomercials on late night TVs with financial-planning course that are explicitly sold as debt repayment aids. Instead of being a Saturday Night Live spoof, "Don't Buy What You Can't Afford" would be marketed seriously, and taken to heart by a large swath of the public.
The corporate world would be flooded with the more sober equivalent of those above-mentioned hypothetical infomercials too. Business magazines would put debt-ridden companies that decreased their debt-equity ratios on the cover. The CEOs of such companies would get a lot of interviews. The Milken-era slogan "the discipline of debt" would be consigned to the same ashcan where psychometrics and Galbraithesque "strategic planning" have been put. New slogans would arise, such as "the discipline of debt retirement" or, more outrély, "don't be a debt-hole." This trend would be as obvious as Casual Fridays' was in the previous decade.
To put it bluntly, the advent of "pushing on a string," as a serious concern, is not a scary monster that leaps out at us from behind a tree when we're not looking. The cultural antecedents, especially when contrasted with present-day consumer and corporate behaviour, will be so glaring that this reversal of trend will be one of the most telegraphed ones that can be. We'll all know it's coming.
Those who are fond of pushing the "string" around as a worry should know that debt repayment, retirement and refusal to re-enter were the in thing back in the early 1930s. Lord Keynes was such a controversial figure back then because he bucked what was then the conventional wisdom on the matter.
Nowadays, the conventional wisdom is almost the opposite. Hence, the pushing-on-a-string bogey is, as yet, far from jumping on the economies of this continent. Regardless of the longer-term effects, the two central bankers of North America have little to worry about in that direction as of now.
And, if that bogeyperson does make an appearance, there will be a lot of advance warning. We're just too inured to debt undertaking for any surprises in this regard – and our pop-culture organs are too quick to jump on a new major trend for a serious spate of monetary deleveraging to sneak up on us while we're unawares.