The new normal

BY BRUCE SHEPPARD

If you live long enough, and most of you will, you will see that what is vogue now,  in 30 years will become in vogue again and will be branded as the new normal.

This is the last blog in what has been quite a long series intended to be a guide to the principles that will enable you to achieve freedom and independence in your lives, at least financially.

Let us start with the old normal, then the new normal and the possible paths towards the new normal and the equally possible diversions from it. The old normal was, at least for the Western advanced economies, economic activity that had these characteristics:

• Thrift was bad, want was good, consumerism was the religion and earning a dollar and spending more was enabled by easy credit.

• Asset values continually inflated thus enabling more credit to be advanced thus allowing production and consumption to advance.

• The economics of Comparative Advantage fuelled the mantra of free trade, so that those who could produce things with a comparative advantage over others could export to each other.

• Continual population growth and aspiration growth fuelled economic growth and rising real incomes for some but not all.

• Immigration and foreign investment was good, because this too fuelled asset value growth and economic activity.

• Governments were allowed to get bigger, as the pie, at least in nominal dollars, was growing bigger perpetually and thus central government sizes crept up, largely to deal with the consequences of free market activity left unchecked (welfare) but governments largely left economic activity unregulated.

This state of affairs has existed for the last 60 years and accelerated dramatically over the last 25 years. The culture of greed, winner take all, free market where everyone aims to maximise their own position and do so in a monetary sense was the "Old Normal".

Probably the first warning of a sea change was the 1980s, when the culture of the free market truly took off.

The warning that this might not be all it is cracked out to be was the level of immorality in business that started to emerge, with very public scandals and failures. The mass collapse and bail out of the global banking system two years ago was the end off the old normal.

What inspired this as the final in the series, was no less than two economists now talking about a new normal, and one even challenging one of the underlying principles of economic theory "utility".

That is, the economic thinkers are beginning to talk about fundamental economic change, and also fundamental human values changing. Sorry take that back. Economists are simply now recognizing "values" in economics.

So the characteristics of the new normal will be thrift. Earn more than you earn, save the balance. For a while, and a long while that will take the form of de-gearing.

Now if all households do this, or even a significant majority, we will have a depression of unequalled proportions.

Now what these economists did not consider was demographics and the carnage of the financial crisis.

In traditional savings based economies you have a bell curve of age, with the old not earning or working, but rather living off capital, thus the net savings rate is less than it will be in this "normal".

This time there are more old people and they have had their saving eliminated to a very significant degree, so this time, the savings imbalance will be extreme and some sort of equilibrium can only be achieved if investment opportunities ( here or abroad) consume those savings, or if government takes those savings and spends it while promising to tax future generations to pay it back, i.e. grows even bigger. Sovereign debt instruments may not be the safest instruments in the future.

The next feature of the new normal will be bigger government and more regulation of economic activity. This is already evident.

Now if free trade and free population flows are to survive into the "new Normal" as the West starts saving , the East will have to start consuming and will have to reverse their trade surpluses.

If this occurs export and trade opportunities and the necessary investment to support this will avert the second phase of the "new normal". My bet is this won't happen, China will continue to save export and invest and buy foreign assets, in an attempt to colonise the world.

The only response to this is protectionism, and the abandonment of free trade, this too is part of the prophesised "new normal".

Now this is not so bad, free trade is not all it is cracked out to be, at least not in the world as it is today.

The only comparative advantage China, India and other like economies have is low labour costs, ie: workers who will work for peanuts.

What this means is that progressively our workers will also have to work for peanuts, but we get cheaper trinkets.

So free trade gives us cheaper trinkets, and the cost is rising unemployment and lower unskilled wages, rising welfare and  despondency.

Protectionism will reverse this. So the real test of free trade is this, has our ability to buy things with our reduced income in aggregate increased?

Over the last 20 years , yes, free trade will not produce the same uplift in the quality of life over the next 20 years.

Likely protectionism will. Protectionism means an even more regulated economy, an even bigger government and certainly exchange controls and bye bye to the floating dollar.

Now before we examine "utility" in the new normal, the consequences of protectionism are nationalism, and militarism. And the bigger the military build up the more likely someone will use it.

Assuming it is not global Armageddon, and likely it will not be, we have had 65 years to do that, New Zealand is a nice place to be, nowhere.

Utility, in an economic sense is monetary. It is generally considered to be the capacity to consume the things you want. Work is considered to only have the purpose of producing the ability to consume.

The underlying precept of a market economy is that every participant in it works (sometimes immorally) to maximise their own utility. Thus greed is the fuel source of the "old normal".

In a debate now eight years ago on ethics, I advanced the principle that behaving well was more rewarding that behaving badly.

A finance professor rubbished this saying the only proven economic theory is that all participants work to maximise their own personal utility.

Two years ago when I met him again he was talking about a much broadened concept of "utility".

Now economists are writing books called the "happiness economy."

What this means is that economists are beginning to think that "utility" is happiness not money, and what this means is part of the new normal will be a redefinition of economic worth, to things we can hardly contemplate today.

For example the Buddhist monks will be valued for their thinking, the people who clean the beaches of garbage just of the love of doing it will be valued, and economic process will have to change for this to occur.

The political systems to support this will not be what they are today, such an economy requires strong leadership in which democracy can not endure. Thus the causalities of the new normal will over time be politicians. Thus politicians have a very high stake in averting the new normal and keeping the old normal going as long as possible.

Now there is some sense to this anyway, as a quick shift to a new normal of thrift, and protectionism, will have cataclysmic social consequences and it will take at least 20 years to stabilise, possibly it is better to take 60 years and have 50 of transition, so what has to happen to keep the old normal going while households are de gearing and saving and old people are washing up on the beach of welfare, with no savings or investments?

Firstly the asset and debt bubble has to be stabilised without savers thinking they have lost their savings and so that those who hold assets still think they have an asset, as in this environment households are more likely to spend than save.

Secondly governments need to find new ways to raise taxes without the public noticing.

And thirdly society, this means government, need to find ways of redeploying labour into activities that are valuable to the community, so that full employment is at least attempted to avoid social anarchy.

Now all of the above is happening the western world over, to enable the fool's paradise of the old Normal to continue on for a bit longer.

In the US they are printing money. This will have the effect of fuelling inflation and asset prices and they will keep doing this until the debt on those assets can be paid in full, so that no one thinks they have lost anything.

But of course they have lost the spending power of a dollar.

So those who save and hold nominal dollar assets, rather than things like shares and property are losing their spending power and wealth to pay for the excessive borrowing and consumption of others. Great message.

In addition they, Europe and little old New Zealand are socialising debt.

We are doing this by paying out investors capital and taking ownership of the underlying assets into crown ownership (this means borrowers' debts). Same net outcome, as printing money those who borrow are rewarded, maybe, and the subsidy comes from all citizens by way of increased taxes. Fairer in some ways than inflation.

The world is champing at the bit to be taxed for carbon, a well hidden new tax.

Governments that can borrow are doing so, including New Zealand, while households continue to de-gear.

In effect nationalising the nation's foreign debt over time and spreading it through taxes across the whole population whether they like it or not. In short government borrowing is just another way of socializing the debt side of the equation rather than the asset side.

So governments the world over are fighting hard to preserve the old normal, but when households stop spending and start saving, en mass and start moving around the planet to more favourable places to live and be free and happy, the old normal will end abruptly.

It would be far better if governments accepted the transition to the new normal and managed it rather than trying to perpetrate the old normal.

So with all of this uncertainly does anything I have "advised" that you do to achieve freedom and financial independence change? No.

The only slight change is that as inflation and printing money is still a likely outcome over the next 20 years, holding some assets and some cash even up to the date of death makes more sense than simply holding cash.

The path to freedom is as it has always been from the time man became tribal, and it will never change no matter what the collective nonsense of humanity does.

It remains:

• Work out how to be useful.

• Work out what you love and are passionate about.

• Do not be a whore; only work with or for people you admire and trust.

• Earn a dollar spend less.

• Avoid slavery, in the modern world this is debt.

• Learn and develop your skills so that you remain useful until you die.

I think you now are kitted to pursue "freedom", and regardless of your means financial freedom is about thinking and your own actions , not the actions of others.

So ends the long-winded series.