Megacrisis
Bifurcated economy, or upper class gambling casino?
There’s working class reality, then there’s Wall Street, where the rich go to gamble and play.
I’ve never been an investor, other than in myself. Maybe its because I was born in a working class family, and I never had sufficient resources that I was OK putting at risk of loss in someone else’s venture. Structural advantages or disadvantages really do shape personal decisions. It’s not just about individual choice or gumption, but also how big the “downside risk” is for any given individual.
Then again, I wonder how many of the investors gambling on companies private and public made their fortunes doing exactly that — gambling.
Maybe that’s why I have an aversion to it. My foremost skill is my ability to grok a big picture filled with seemingly disparate, unrelated things.
My first really personal memory of “the economy” came during the very first class in my MBA program. It was March, 2000 and I was sitting on the far left in an aisle seat of one of those massive theatre-style classrooms. Dr. Lisa Barron was teaching Organizational Behavior, which should foreshadow the irony of what was about to happen. My class text contained articles like "When Young Managers Deliver the Pink Slips", The New York Times (2/16/2000) and "A Threat in the Air", American Psychologist (American Psychological Association, 1997).
Suddenly, About a week into the class, about 1/3 of the class is gone. I remember seeing Dr. Barron looking rather nervous as she introduced the work for the day. Two days later, 1/2 the class was gone. This time she pointed out the news: The economy was “beginning to melt down” and the absences represented students that had to unenroll, either because they lost their education benefit, or more likely, because they lost their job. What struck me most was how little power anyone had. They were in the hands of their companies, and their companies were cutting them off instantly. Many of them, I remember, lost their houses and had to move away.
I realized then that there was a sort of cast system in education. I was at UC Irvine, where working students lost their jobs and had to go pick up the pieces of their lives and rebuild. Then there was Stanford, USC and UCLA where there were a lot of kids taking jobs at the same dot-coms and becoming paper millionaires upon signing. These kids, groomed by their upper-class executive parents, worked laser-focused on timeline to when they could exercise their stock options, cashing out to become real fiat multi-millionaires.
As the years went by I noticed that the disparity between “work” and “gambling” was much, much bigger and pervasive than I thought.
I understand the concept of risk-reward and I get that there is a marketplace created where people can choose to participate in the risk-reward of a company with their own money. This makes sense to me. It makes sense to you, too? Right?
What didn’t make sense to me was the magnitude of collateral damage that occurred economy-wide with each subsequent recession. In 2000, half my class lost their jobs in one week and had to move, because they made the choice to go work for those crazy dot com startups. Did they get paid exorbitant salaries? Yup. Did they get nutty bonuses when the companies didn’t even have revenue, not to mention profit? Yup.
But in 2008 it was much, much worse. And weirder.
2008 was way bigger than the dot com collapse. US unemployment peaked at 10%, almost double compared to the dot com bust. The S&P 500 fell by 57% from its peak, compared to a 49% drop during the dot com debacle.
How could a recession triggered by one industry — housing — cause such widespread damage across every sector and across the world?
The Pandemic
The recesssion associated with the Pandemic brought other issues into view.
What rights does a government have over its people, when all we have been talking about for hundreds of years are the rights people have over their own elected government? What happens when the government presumably wants to help, but its competency comes into question? What about Innovation? Why can’t people not only have the support of government but even get more support than others for trying novel ways of overcoming barriers to doing business the traditional way?
It wasn’t that we were left with more questions than answers. The Pandemic demonstrated that our elected governments were inept at handling almost any manner of government administrative problem during what was probably the lowest mortality disease we could possibly experience.
What I haven’t mentioned is who won and who lost during the Pandemic. The winners: Wall Street stakeholders saw epic gains, and so did landlords and property owners. Just how much did houses appreciate? It wasn’t unusual for a vanilla house in suburband Irvine to increase in value 45% in under 18 months.
Think about that: A house bought for $750,000 in 2000 took over 20 years to appreciate so something like $1.4 million. Then BAM, the house was worth over $2,000,000 in a matter of months. What the holy hell was going on?
It’s called the Cantillon Effect, and basically what you saw with Wall Street and Real Estate being the biggest “winners” of the pandemic being the wealthiest Americans. While the working class struggled and failed. The rich got exponentially richer. Regular Americans? Poorer and poorer, even poorer than some 3rd world countries.
What about the next recession?
I believe one hell of a financial crisis is coming our way. And I think it will be so big we may as well start calling it a megacrisis.
With each subsequent recession, the intensity and severity is increasing exponentially. At the same time, the apparent bifurcation of the economy is evidenced by the largest chasm of all between the wealthy an the working class.
Compared to 2000, 2008, and 2020 our current situation isn’t about just one bubble, it’s about an economic megacrisis made up of every possible bubble that can exist at the same time. Housing, banking, commercial real estate, education, health care, you name it, it’s in trouble.
Imagine all these bubbles popping all at once, each capable of sending shockwaves across global markets. It will start with a shock, which we have no shortage of possibilities: A government default, major financial hub failure, or a geopolitical move gone sideways. All it takes is enough to shake major players to start pulling back funds, which leads to banks freezing, then runs on banks, and ultimately into an unstoppable downward spiral of real economy paralysis and civil unrest.
This megacrisis will start with a swell large enough to wipe away hundreds of trillions of dollars of wealth and value, and leaving the local, national and global economy wrecked.
Update: I started writing this post several weeks ago. Nothing in our current reality can withstand that kind of time frame. As of 24 hours ago, the elected President of the United States started selling a memecoin called $TRUMP and sold tens of billions of dollars worth of….. nothing. Then, within hours, the memecoin $MELANIA was posted for sale and sold billions more. This wasn’t a charity raise. This was what we refer to in the crypto space as a memecoin, or more correctly, a shitcoin. The value of a shitcoin is determined by its brand. And the incoming President of the United States decided one day before his inauguration to take billions of dollars from Americans dumb enough to give their hard-earned money away, as well as whoever else wants to buy favors with the president, as all of the money raised is in untracked accounts.
Why do I end this post on this note?
It could not be more appropriate. We are at the onset of a megacrisis as a country and as a planet. And what most Americans chose as their solution to the country’s problems is a grifter.
