Friday, March 06, 2009

Fear Itself 1: Is it the Apocalypse?

Like all of you, I've been watching and reading the business news - which has become just "news", more or less, which says something ugly about our economic situation, when you think about it - with the sort of grim displeasure that an old Roman noncom must have received the news from the frontiers in the latter parts of the 3rd and 4th Centuries AD. The situation is not just bad, it's the kind of bad that promises to be irretrievably bad; unresponsive to remediation short of further disaster, sure to bring further woes in its train before any glimmer of hope will emerge.And I understand, to a fair extent, how and why we got here. Which is where, so far as I can tell, I differ from about 94% of the Republican Party and 101% of the wing of the GOP who gets their "news" from Rush "I'm the boss here, bitchez!" Limbaugh - these idiots apparently still think the problem was that we didn't let the geniuses at Bear Stearns and AIG package MORE derivatives and mortgage-based securities. Normally the issue of "what shall we do now" is the most difficult place to find a place to stand in a shitstorm. This time, with a fairly clear view of the bottom of the porcelain funnel cloud and the recognizable sight of Saint Ronnie's ass centered thereon (symbolizing his stated conviction that regulation of natural monopolies and oversight of traditionally larcenous financial grifters was a pile of used food), the 27% of the American public that still believes that there were weapons of mass destruction hidden in the pool cabana out behind Saddam's place in Tikrit is unwilling to even hint that we might be in trouble because for the past twenty-nine years we treated our nation's economy like a slush fund for malefactors of great wealth and a Nigerian-oil-minister-style confidence scheme.

But the point is that we have a pretty good idea where we're going and why we're in this handbasket.

Whether or not we can do something to prevent the coming economic train wreck is, IMO, a matter of real uncertainty. The current pileup is pretty unforgiving in its indictment of the current economic paradigm that the wealthy and the well-connected have conspired with the Party of Wealth to foist on us. Turns out that basing an economy on paper profits, irrational consumer spending, the enrichment of a tiny minority while flatlining income for the rest and exporting living-wage jobs was not a good idea - whooda thunk it? But the same bunch of chipmunk pesterers and bloviating fatheads who helped get us into this mess has a vested interest in keeping us from rejecting their True Belief.

And we aren't much more help - we'd rather cling to the fantastic promise of becoming superrich than face the reality that most of us will die in debt. It's no coincidence that the rise of the Moron Economy has coincided with the insane popularity of idiotic fairy tales like "American Idol" and "Who Wants To Marry A Millionaire" and the other yes-I'm-a-mouthbreather-but-I-could-still-win-the-lottery forms of entertainment. We've become a nation of fatuous fantasizers, of credulous couch-potatoes, who would do well as the slasher-fodder in a Wes Craven flick, persisting on opening the closet in the darkened hallway and stomping off into the woods when we should know enough to get in the Plymouth Fury and just drive like hell to the biggest town close by.

So by being stupid ourselves and electing people who kept telling us that stupid was the new smart and what the hell was so great about being smart, anyway, we've driven ourselves into the Hellmouth of Economic Reality, and we pretty much deserve the hiding we're gonna get. For those who tried to prevent this from happening, who kept their expenses low and the cash reserves high, well, hopefully they will ride it out. But the rest of us? Sauve qui peut, mon ami.

Thing is, you remember how this all started as the "subprime mortgage crisis"? And how we're still hearing about how the big problem is that housing starts are down, and that real estate values are dropping like a paralyzed park pigeon?

Well, the whole "housing starts" thing got me thinking as I listened to another report of gloom and doom in the construction industry on the radio the past week. And it made me start to wonder, not about the coming Great Recession which, when you really look hard at it, is just another 19th Century "panic", the sort of thing that Keyenesian economics and New Deal regulations were supposed to head off until we decided to spend our national treasury killing brown people because the hate our freedoms and that regulation was for pussies.

No, it was the notion that "housing starts" were and are a fundamental indicator of economic health.

Because my little family lives in a house built in 1922.

It's not a nice house for 1922, like some of the lovely mansions up on the West Hills, in Laurelhurst or Irvington. It's a little 1920's shitbox, slapped together to sell to a grocer or a windowdresser or a ladies' hatmaker. The construction is average, with the exception that the lovely straight-grain fir reminds us that before we cut all the damn trees down we could use good wood for common dimension lumber without a thought.

Nope, it's the 1920's equivalent of the identical little cottages in Levittown, the sort of place that exploded in the late '40s and '50s as everyone wanted their own home.But here's the thing: it's perfectly sound. Replace the roof every twenty years, stay ahead of the dry rot and keep the footings dry and the damn thing'll last another eighty-seven years. Or more. Theoretically, my son could take over the house from us, raise HIS kids in there, and then deed it to his oldest to raise their kids in. Or not; hell, for all I know the Peeper may be a swinging batchelor until he dies, throwing Wesson Oil parties for the grannies down at the Catholic retirement home next to Roosevelt High some time in 2088...the point is, Mojo and I can happily live the rest of our lives in our little house. And one of our children can, after us.

We don't NEED a "housing start" for the next eighty years or so.

Okay, one of the kids will...assuming that his or her spouse doesn't come with a house from THEIR parents. But we could, if we tried and if we wanted to, live perfectly comfortable lives without ever needing a contractor to build us a new house. And if we did, there's half a dozen similar little houses for sale right now within ten blocks of our own.

So. It would seem that to need a "housing start" what you really need is more people. Families with four kids instead of one or two. Immigrants moving in from another country. A constant stream of people moving out of rentals into homes.

That seems insane to me and let me explain why.

Maybe it's the scientist in me, but that kind of limitless population growth - as translated into "housing starts" - seems, in the long run, unsustainable.

Let's think about it. Almost every natural system has checks and counters. Get too tall, stay too short, and Nature usually has a way of sorting you out. The slowest gazalle becomes Cheetah Chow; the fastest dies of starvation in the dry season because it needs so much more grass. Sardines have mackerel, mice have cats, lemmings have cliffs. And we see the counterexamples every day. The cougars and wolves keep the deer numbers down. We kill the cougars and wolves, the deer explode, the browse is devoured, the deer starve.

Now, it seems to me, we have built a life system - not just an economic or industrial setup but an entire way of life - that centers around living off of things that depend on having more people to make and sell and build new stuff for. I'm the same as most of the rest of you. If nobody builds that house, that shopping center, that Wal-Mart, that pornographic knicknack store, nobody hires a soils engineer to give them foundation recommendations, nobody hires me, I don't get paid and I starve.

But the notion that we just keep building houses, mining copper for wires, making clay into bricks and lime into concrete, oak into furniture, more and more, for ever and ever..? It just seems impractical, when you think of it that way. Certainly the notion that we won't overrun our petroleum supplies, when we know it takes something like ten-to-the-third years to turn biomass into keratin and then petroleum versus something like ten-to-the-minus-third years to locate, prospect, extract, refine and consume it...drill, baby, dr...hunh?So over the next couple of weeks I want to explore this notion that, while what we're experiencing in 2009 may be just a typical swing in the business cycle, we really need to examine our entire industrial society and the economic foundation it's built on.

Because, as the lemmings would tell you, if you realize that you've exceeded your resources only on the way off the cliff, it's probably too late.

36 comments:

Ael said...

Up here, you don't want to live in a 80 year old house. They are cold drafty places.

It's not worth the bother to try and turn them into a modern living space.
Still, you don't need a new house every decade.

FDChief said...

Ael: ..or more than once a generation, really.

The thing about houses is that if the foundation, roof and structural walls are sound all the rest can be upgraded. You can blow in or staple in new insulation, replace the windows with R-whatever triple paned glass, slap some solar panels o the roof...

Where I'm going with this is that we've been thinking of our houses as we think of our clothes and cars and appliances. Make it cheap, sell it low, break it and buy a new one.

And we pretty much HAVE to do it that way, because if we don't the people making cars and clothes and building houses go broke.

I'm starting to think that we've got it fundamentally wrong. That the "don't repair, replace" and "planned obsolescence" paradigms just aren't sane, in the long run or perhaps even in the medium run.

But that's why I want to talk about it - I'm not sure and I'm searching for ideas.

Pluto said...

Time for you to start blushing again, Chief. Once again you've raised an important topic and described it in detail and with an eloquence that is almost transcendental.

I'd love it if we could somehow capture this entry and the best posts from the old Intel Dump and sell them somehow. Of course, that would make you a target for Rush Limbaugh and I wouldn't wish that on my worst enemy.

It probably won't surprise you that I've given considerable thought to this subject over the years. I don't really have conclusions but I'm a little further down the road than you are and I will attempt to share what I consider to be wisdom and let you judge the results for yourself. Thank you for not having a 250 word maximum like Fabius!

First, I'll tackle the little things. Like Ael, I live in a climate that does not encourage people to live in 80 year old houses. The temperature and humidity swings are so violent that even well built houses need serious maintenance after 30 years and need a continuing series of (sometimes expensive) upgrades to maintain your comfort level. So it is logical for home purchasers in my part of the country to consider purchasing a new home instead of an existing one simply to avoid having to deal with these concerns.

But the primary problem that we are talking about here isn't so much one of sustainability (although that is a VERY important issue IMHO) it is advertising.

I read a LOT of analysis from a LOT of different fields and I have slowly becoming aware of an unforeseen event in the long relationship between consumers and producers. At least for the moment, the advertisers have won a huge but unrecognized victory over the consumer and the consumer has completely capitulated.

A side-effect of all of my technical reading is that I pretty much live in a relatively advertising free zone. I rarely turn the TV on, don't read trendy magazines, hardly ever visit the mall, and pretty much tune out anything that looks like advertising automatically.

A side-effect of the side-effect is that I am constantly astonished by things that people buy. This causes me to ask people all the time: WHY DID YOU BUY THIS?

I've been asking this question for the last 25 years and you're going to be amazed by the most common answer: THEY DON'T KNOW why they purchased the item. The icing on the cake is that this WASN'T the most common answer up until about 1995 and it has since beoome increasingly more common.

When I say that they don't know, I'm not giving you the literal answer. I'll give you an example that highlights their decision-making process and how I've interpretted their answers.

A couple that I know lived in a VERY modest home and did a fine job of raising 10 children. They are down to the last couple of kids and have recently purchased a new house with more than twice the square footage of their old house. I was very curious about this as they must have vastly expanded their costs and asked what were the motivations for buying such a large house at this point in time.

There was a lot of talk of being more comfortable (which I could understand, that had REALLY used that old house up) and a number of other reasons that didn't make sense or were contradictory) but it essentially boiled down to a really impressive sales job by a real estate agent.

I pointed out that they are nearing retirement age and probably didn't want to carry the much larger mortgage into their retirement. Their response was that they had already arranged with the real estate agent to sell their house in 10 years and buy another house from him that will be much smaller and cheaper. They also discussed in front of me the possiblity of purchasing yet another new house from the same agent 15 years further on when their needs would change due to anticipated medical problems relating to getting older.

These are very canny, experienced, well-educated people whom I hold in high regard. How did they come to think that this was a reasonable course of action? A sales person came to them at the right time with the right sales pitch and, if they follow though with this plan, the sales person will be rewarded with the commissions from buying and selling at least 3 different houses. I'd estimate his take for a couple of hours of work to be in the neighborhood of $50-60,000. Multiply that by the 100 to allow for P.T. Barnum's rule and this sales person is well on their being a mulit-millionaire. Good work if you can get it...

I'll expound on this theme in my next post as this is getting way too long.

Pluto said...

As I mentioned in my last post, I read a lot of technical analysis across a lot of scientific fields. One area that I haven't been able to read enough of (because very little is published) is the sociological effects of advertising on our society.

What little I have been able to read is alarming (sorry, I don't have any sources at the moment, these articles tend to appear briefly and then disappear). The relatively few scientists who study this have uniformly come to the conclusion that scientific studies of how to increase the effectiveness of advertising are very effective. Unfortunately, I can't quote the studies on how to increase the effectiveness of advertising because they are paid for by corporations that rightly regard this as a major competitive advantage.

While I can't directly measure the effectiveness of advertising, I can track it pretty well through indirect methods.

I've mentioned before that I'm a database software guy. One of the biggest growth areas in my industry is the use by advertisers (especially political advertisers) to "micro-target" consumers and voters. Basically they take huge quantities of information about the individuals (bought from many sources, including all levels of government) and try to figure out how persuade comnsumers to buy their services and/or products.

Karl Rove pioneered this field for Bush in 2000 getting down to the zip code level. By 2004, he was working on individual streets. By 2008 the Democrats had caught up and exceeded him by targeting households.

This means that by 2008 the Democrats (I'm picking on them because I'm tired of thinking about Karl) could send out completely contradictory information to two households that are beside each other and be relatively assured that they could win votes in both households.

Household #1 (101 Elm St.) receives information about candidate Mike Jones who loves America and hates homosexuals.

Household #2 (103 Elm St.) receives information about candidate Mike Jones who loves America and will help gay marriage.

Both households think to themselves "I like this Mike Jones guy and I've vote for him because my neighbor will HATE him."

Although I've used the political example because we've all just recently survived it, it isn't as effective as the business version of the same product. Politicians need to communicate via a wide number of mediums and there are lots of people trying to poke holes in their stories so they need to maintain consistency.

Businesses have found that dollar for dollar, the best way to grow their business model is to advertise in increasingly more complicated and effective means. And they have been assisted in this by the consumer themselves.

I guess I'll post another message that further expands on this topic.

Pluto said...

Hopefully this is the last one, didn't realize that I:
a) had so much to say
b) couldn't stop once I started

Hopefully this is making sense and I'm not just blowing swamp gas.

Let's say you're a business owner who runs a factory that makes tooth whitening strips. You want to increase your sales, what is the most cost-effective means of doing that? Probably the internet these days.

You craft a whole bunch of different messages and pay different websites to host them.
1. People magazine shows a message about how the stars use your product and feel better about themselves because of it.
2. A coupon clipping website shows how cheap your product is to use, perhaps offering free samples.
3. Dental hygiene sites get messages about how your product promotes dental health.
4. The list goes on almost endlessly, eventually the gas station pump starts showing your messsages.

Individual consumers respond differently to this barrage of advertising but in aggregate, they start buying and continue buying as herd instincts get them all moving in the same direction.

In my first post on this topic, I made comments that might hint that I regard myself as invulnerable to advertising. THAT IS NOT ACCURATE IN THE SLIGHTEST. Nobody is immune, the advertisers have spent tremendous sums of money to ensure that their messages are well-targetted and that money has been well spent. We the consumer are so completely outmatched that we effectly enter the battle of wits completely disarmed.

The only advantage that I have is that my interests are so far from the norm for this country that I'm out of the direct flow of advertising so it takes longer for me to get the message and I can spend a little more time mulling it over before I reach for my wallet.

Now to tie this all back into the Chief's comments about the current economic situation...

Red Sand said...

Excellent post. There's been some truly inspiring writing taking place on this topic from many sources lately and my main regret is that most people won't listen - the message is too uncomfortable or too complicated or too "depressing" - on the other hand, people used to laugh at the idea of peak oil and now it's at least part of the discourse.

Our house is over 160 years old and we've had to 'consume' in order to improve it - windows, insulation, heating systems, etc. While there are some things that would easier to deal with building from scratch (geothermal, air exchange etc), the house has lasted much longer than anything built during the past twenty years will ever manage. But it's more than housing, it's everything to do with how we perceive growth and wealth and our purpose for being.

I'm just as guilty as the next person - we've got more than our share of toys. But what we're working on is our expectations. We consume within our consume within our means, our only debt at the moment is my student loans, and we do try to examine our decisions. Our next step will be to be more honest with ourselves in terms of lifestyle and over-all resource use, and we are working on that every day.

Pluto said...

Sorry, I really meant for my last post to be the last but I can't stop!

Let's look at the current situation from the perspective of the business owner.

Up until 2007 everything was REALLY sweet! You owned the politicians (micro-targeting and large sums of money work on them too!), the regulators became increasingly fearful of stepping on your toes ("What's good for [fill in the blank] is good for America"), the consumers were spending an average of 101% of their income on your products (no kidding, http://www.bloggingstocks.com/2007/12/21/consumer-spending-exceeds-income-in-november-2007/).

You were earning record amounts of money because your advertising had convinced many a soul that they couldn't live life any longer without your totally unnecessary product. What could go wrong?

On "Star Trek" Scotty, the Chief Engineer, would comment something to the effect of "I canna disobey tha laws of physics... we're gonna hav ta pay tha piper sometime!"

Kirk would immediately turn to Spock, the Chief Science officer, and say "I DON'T like that outcome. Fix it NOW!"

Spock would say something to the effect of "I've just heard about this really cool new financial product that will allow you to avoid the undesirable outcome for an extended period of time. If you'll only sign on the bottom line..."

Kirk: "Great, I'll take 10, that way I won't run out any time soon."

Kirk THOUGHT he was solving the problem but he was only kicking the can down the road. And the can became bigger and heavier each time he did so. Finally the can became so big that he couldn't deal with it any longer and when that happened, the laws of physics reasserted themselves with a vengence.

Now on to the happy side of the story. The Kirk's of the world are not yet the majority and won't be in this iteration. The problem is SO big that it has to be dealt with even if we have to have a "lost generation" like they did in Japan (and I'm fairly sure that we won't be quite that... "determined to be stupid" is the phrase that keeps coming to mind).

Our recycling technology is getting ever more efficient. The Chief worries about "use it and discard it." We do this with milk jugs all the time in our household but we recycle them with near 100% efficiency. I wouldn't be all that surprised if our technology became so efficient that "use it and discard it" becomes the most cost-effective way to keep the economy humming.

At various times I've thought about the desirability of purchasing old filled up landfills. Just think about the raw materials to be exploited! Silver from old photographs, gold and platinum from old electronics, oil from plastic, cellulose (which has lots of uses) from paper, plastic from used diapers, fertilizer also from used diapers.

Want to know another reason that I predict this trend? This is the best model from the perspective of the advertisers and now that they've got us in their pockets, I doubt they will let us out anytime soon.

Sorry for ranting at such length but I appreciate your willingness to listen if you've gotten this far! I promise the TRY to keep my posts shorter in the future.

Red Sand said...

Excellent post. There's been some truly inspiring writing taking place on this topic from many sources lately and my main regret is that most people won't listen - the message is too uncomfortable or too complicated or too "depressing" - on the other hand, people used to laugh at the idea of peak oil and now it's at least part of the discourse.

Our house is over 160 years old and we've had to 'consume' in order to improve it - windows, insulation, heating systems, etc. While there are some things that would easier to deal with building from scratch (geothermal, air exchange etc), the house has lasted much longer than anything built during the past twenty years will ever manage. But it's more than housing, it's everything to do with how we perceive growth and wealth and our purpose for being.

I'm just as guilty as the next person - we've got more than our share of toys. But what we're working on is our expectations. We consume within our consume within our means, our only debt at the moment is my student loans, and we do try to examine our decisions. Our next step will be to be more honest with ourselves in terms of lifestyle and over-all resource use, and we are working on that every day.

Fasteddiez said...

Pluto:

Do you do Business Intelligence - Data mining software? How is that doing in this Economic Perfect Storm?
Is there still a demand for people who know this stuff? Do they have to know all platforms (Softie's Sql Server, Oracle, Sybase, Open Source, etc.)? Sorry about all the questions, but I have always been fascinated by that aspect of Tech.

FDChief said...

Pluto: Intersting, excellent points. From your wealth of terrific talking points let me extract just a few to examine a little more in depth...

First, I have to agree that it doesn't seem coincidental that the rise of the Moron Economy (Now with 88% less savings!) pretty much parallels the development of "marketing" from a sideline or adjunt of the industrial economy into a massive psywar engine with its own power pack. I can't think that we'd be nearly where we are today without the relentless drumbeat of "Buy This! Buy Now! Buy More!" that has provided the continuo for our consumer culture since the end of WW2.

But there had and has to be additional factors here. A general decrease in critical thinking, widespread acceptance of nonsensical and magical worldviews that allow people to believe that buying this or that is a good in itself...while I agree that the merchandizers and advertisers have done a lot of the heavy lifting, the public has helped by acting as stupidly and shortsightedly as possible. They don't HAVE to - "New Coke" and Billy Beer prove that you can't fool all of the people all of the time. But the fact that GMC was able to sell the underpowered, sluglike piece of shit Hummer as a status vehicle...sheesh...

But to me the bigger questions isn't just the buying habits of industrial consumers. It's that the industrial lifestyle HAS to depend on this sort of unrestrained buying. How do you maintain an "auto industry" if you produce an auto that functions perfectly well for thirty years and runs on a minimum of renewable fuel? So instead of a new car every year or three, people are buying two a lifetime? How does a rivethead in Flint make a living?

So I wonder - even if we shut off the advertising stream today, even if we mamaged to up the recycled content and improve the reliability and functionality of mechanical and electronic devices...would we?

Could we maintain an industrial lifestyle with very low or zero population growth?

Because that would be a massive change in the Industrial Revolution. Not sure how we'd get there...but I suspect we might need to find out sometime in the next century or two...

FDChief said...

RS: I can only applaud your efforts to reduce your industrial/commercial "footprint". We're offenders here as bad as anyone - disposable diapers, nonrecycled paper products...

But what I'm groping towards, I think, is an examination of the implications of slowing or even halting human population growth. So what we'd be faced with is not just reducing the numbers of trees cut down to make a new home, but reducing the number of new homes altogether. The implications of that for industrial lifestyles seems immense; all the people who make their living in some way related to development, from loggers and miners to contractors, architects, engineers, realtors...

Big changes there. Can we actually develop an industrial system that DOESN'T need population growth to keep people employed in industry?

Red Sand said...

Your question brings me into the aspects of economic theory that I can't even begin to answer. I don't know how a non-growth-based system would work, although I don't think it's impossible. I don't think it can simply be achieved by tweaking what we've got (and what's currently falling apart) right now, though.

My little corner of the earth is constantly seeking to build up a larger population, trying to find ways to grow, and yet we're physically tiny. I'm quite firmly convinced that population growth would be a bad thing, given the physical constraints and the problems we've already got with managing the health of the environment around us.

When I look at our air, soil, and water quality issues, they seem to stem from our attempts to get more, grow more, sell more, all for less. I guess it's that whole Ishmael dichotomy of leavers and takers and the growth paradigm. And yet, many people around me can't conceive of recycling/ reusing if they can get something new. It seems as though the only way to push the discussion further is by taking it in tiny steps - people are now buying their 5,000 mile salad (or whatever it is)and bringing it home in canvas bags rather than plastic. Two years ago, I would never have thought that change possible. Never mind that it's still empty food trucked from other continents, providing pennies to the producers. Try to explain, no matter how respectfully, why Wal-Mart and Disney and Barbie make your skin crawl and people start to avoid you.

Slactivism isn't enough - buying a hybrid doesn't excuse one from thinking about the bigger issues, and this is the bit I'm struggling with. When you are working with cultures of entitlement with beliefs that have been sold to them in every magazine, tv commercial and public washroom stall door, with beliefs that are amazingly resistant to change of any sort, where do you start? And how do you fight of the self-righteousness that can be a by-product of being the odd thinker out?

I say all of this while being fully aware of the hypocrisy of being a non-producing public servant. While my intentions are focused on the greater good, I can't say that I have in fact produced much that has made any lasting improvements in the lives of others. I haven't created food, provided shelter, healed, or anything else of that nature.

Ael said...

I live in a 50 year old house.

It has aluminum wiring and the walls are too thin (2x4 studs, should have at least 2x8s, better would be 2x10s. It also leaks too much air.

It serves, for now. (I'll raise my 4 kids in it and, since the bedrooms are upstairs, when I or my wife can't do the stairs anymore, we will either give it to a kid, or get rid of it.

We *do* have a serious economic problem. In the bad old days, it took 80% of the population scratching in the dirt to feed 100% of the people (most of the time). Now, it takes about 3%.

Similarly, with factories, etc.
We *could* have a pretty good life with only a few of us "working".

Alas, we really don't know how to organize ourselves into a society where most of the people don't do much of anything (but still have stuff and eat regularly)

Pluto said...

Fasteddiez:

I do a lot of different kinds of work but do dabble somewhat in the type of Business Intelligence work that you are curious about.

It's going very strong in the current downturn because its got such a strong performance track record.

Pluto said...

Chief:
I used to agree with you that the American consumer bears some of the blame for a lack of critical thinking but a couple of the latest studies I've seen disagree with you. I wish I could find the citations, they just seem to disappear so quickly that I half wonder about conspiracies.

The primary finding that concerns your topic is that a lot of these ads are now reaching subliminal hot buttons. Take a look at a print ad for a minute.

There's a good chance that there will be an attractive white woman in the ad regardless of what is being sold. That's because the researchers have discovered that both men and women tend to stop and look at such pictures. There will be other subliminal cues buried in the ad that will increase acceptance of the message.

Finally, they rely on repetition. Advertisers estimate that the average purchaser will be exposed to a message for up to 1,200 times before their resistance weakens and they start subconciously processing the message in their brain, even if they don't want to.

Think about all of the places you see advertising: on signs along the road, nearly every form of media commonly available, on TV, when you use a public restroom, when you get gas. It's nearly everywhere and the advertisers are still increasing their reach.

People who view themselves as being in the center of society are the most susceptible while those who view themselves has being on the outskirts are less susceptible but everybody starts processing at least part of the message subconsciously if the message is well enough crafted and is presented frequently enough.

Your examples of both New Coke and Billy Beer are both examples of poorly placed messages that were either countered by the competition or suffered from inadequate funding. By the way, do you know the most popular soft drink in Canada and Europe? New Code.

Coka Cola figured out what they'd done wrong and kicked off fresh advertising campaigns outside the US where Pepsi had less influence and it worked quite well.

Your comment on the industrial economy relying on continued purchasing is very perceptive and accurate. The current industrial society relies heavily on people needing to keep buying stuff to keep the wheels turning.

Oddly enough, I have a sort of an answer for you and AEL who raised a similar question.

Robert Heinlein proposed just such a post-industrial society in Beyond This Horizon written in 1946. I didn't think much of the main story but it tried to imagine what life would look like in such a society for the average joe. I first read the book in 1983 and his predictions didn't impress me then. They have become more and more accurate as time has gone on. Now I can't figure out if he was just REALLY lucky or if he really did have a working crystal ball.

Lisa said...

Chief: I anticipate your development of "The Attack of the Credulous Couch-potatoes."

Ael: Interesting comment about our not knowing how to re-organize "into a society where most of the people don't do much of anything (but still have stuff and eat regularly.)"

That ability to morph is where the future lies.

Today, we have many people who "don't do much of anything" yet still work 40-hr. weeks. They do not produce anything meaningful for life. We will need to ask new questions: what IS meaningful for life? What is necessary?

What are the limits on personal consumption? Do we have the right to have 10 kids?

We operate under outmoded, primitive belief systems. Religion may be the bane of our existence. We cannot even have a decent dialectic on race; how much less so on religion, as that appears to be purely an issue of free choice. Yet, most of the mumbleheaded adherents can't see the larger picture: that the greater good of any system is how well it complements its meta system (world), not how well-suited one is to be hoisted into the Elysian fields.

While I agree that advertising holds a powerful sway on the target, religion is one of the main tools for creating a porous, receptive mind (as in "receiving" info, vs. assessing it.) It is also the thing that will disallow reasonable living, as there must always be money in the plate, so there must always be more little Christians, or whatever. Birth control is off the table.

Again, the problems are complex: not only is there a subliminal directive to produce future tithers, but issues of patriarchy come into play. So power issues must also be studied.

Aviator47 said...

Lisa-

Actually, those professing religious beliefs have been on the downslide during the past 20 years.

I would posit that the phenomenon you are referring to is the adoption of the new "prosperity Gospel" brand of Christianity by those who are seeking to validate their already existing values, most notable of which is greed. They are highly visible.

More fundamental in our culture is the shift away from being a society of "producers" to a society of middle men (and women) and consumers. There are numerous studies that find that money becomes a proxy for pride in a tangible job well done. You are going to get more admiration for receiving a huge bonus on Wall Street than for handcrafting a violin. Since we are a culture of planned obsolescence, few can take pride in producing something enduring, even if they work in one of the few jobs that produce anything.

Al

Lisa said...

Al,

Yes -- the shift from producer to middlemen/consumer is huge. Humans have a need to feel satisfaction, and at some point, the pleasure of mere consumption delivers diminishing returns. Forget producing anything lasting, how about producing anything of essential merit whatsoever?

Here is where religion dovetails again: One is promised everlasting life, eternal return, whatever. Now, why, if your life has been paltry on earth, do you expect its extension to compensate for its lack of breadth? And yet, we do! Somewhere, there is a place for us and a reward. "God wants to prosper you. . ." and if you miss the boat this time, there will be another one coming.

Religion is not my only bugbear, but magical thinking is. Everyone -- all the do-gooders of every stripe -- talk of how life "ought to be." Few talk about how we really are, as humans, and how we can accommodate those behaviors within a livable paradigm.

It is we who are not evolving. As MLK said, "we have guided missiles and misguided men."

Aviator47 said...

Lisa: Here is where religion dovetails again: One is promised everlasting life, eternal return, whatever. Now, why, if your life has been paltry on earth, do you expect its extension to compensate for its lack of breadth? And yet, we do! Somewhere, there is a place for us and a reward. "God wants to prosper you. . ." and if you miss the boat this time, there will be another one coming.

I do not understand what you mean by an "extension" of life compensating for its lack of "breadth". Would you apply that to someone like Mother Theresa?

I would suggest that you confuse modern day American "Prosperity Gospel" religion with more traditional forms. It is a rather American notion to try to transform the "Seven Deadly Sins" into virtue, thereby creating a religion which offers its rewards in the here and now. If your deity's rewards are in the present, there is no need for an afterlife. Thus, I would suggest further that the "Prosperity Gospel" folks actually do not believe in "eternal reward", and have to cram their rewards into the present or their religion would be meaningless.

Just FFT

Al

Lisa said...

"I do not understand what you mean by an 'extension' of life compensating for its lack of 'breadth'. Would you apply that to someone like Mother Theresa?"

I would apply that to anyone.

Even Mother Theresa herself acknowledged that one's life is only so long, even a saint-in-making. One must accomplish what one can in the here and now.

Her state of presumed grace and hoped-for afterlife does not impact one iota upon the good she was able to perform in her (earthly) life, which is to say, her only "life".

The focus of so many religions on another imagined life seems futility. Here we are, and we take up space and spend resources, and we must die if others are to take our place.

Whether the "rewards" come now or later or ever is inconsequential. It is pretty to think that there is a better day, but this is the day you have, and all of your neurosis are your cross to bear in the challenge that is your life's work.

Religion is so much conjecture and creates so much enmity, I cannot see its benefit, save to impart a feeling of superiority to our antlike selves.

Aviator47 said...

Lisa-

Now you have hit upon my favorite word: Even Mother Theresa herself acknowledged that one's life is only so long, even a saint-in-making. One must accomplish what one can in the here and now.

Folks talk of their accomplishments and actually mean two strikingly different concepts:

1. What one has contributed. Mother T contributed significantly in her life, and yes, wished she had even done more.

2. What one has received. I remember a college administrator responding to the question, "What do you consider your greatest accomplishment?", speaking of her being the first person to be promoted three steps up the administrative ladder. In fact, in any and all discussions of her career, she would never offer a contribution she made to the college, just the promotions she "achieved". Might I mention that her move from faculty to administration took place shortly after her failing to achieve tenure.

One of my mentors in my early years in uniform said that our task was to make a "net deposit to our society's account". He recognized that at times we may make a "withdrawal", but in the end no account can survive if "withdrawals exceed deposits".

The problem with American society is that those who make "withdrawals" tend to so with reckless abandon, and set themselves up as the example to emulate.

Lisa said...

Al,

Nice distinction between "accomplishment" and "achievement".

Because we are so goal- and status-oriented, we prioritize the latter (which is often simply conferred upon us) over the former. Dirt under the fingernails is somehow seen as inferior to magical ascension up the ladder by virtue of our affiliations, etc.

"Getting over" and "more for me" are today's watchwords.

FDChief said...

Lisa, Al: I think you're on to something here.

In the past 100 years we've gone a long way towards redefining ourselves. At one point, I'd say that for much of human society, you "were" what you did. You were the tribal hunters, the mati/patriarch, a farmer, a smith, a priest. You were identified by what you contributed to your family, clan, tribe, village, people, nation.

But it seems that was most of us have shifted over from producer to consumer we've "become" who we "are". We're "the department head", third in seniority, the employee of the month...

It worries me that we seem to have lost a lot of the connection with what we do. A lot of us no longer think of ourselves in terms of what we make, what we grow. And our societies seem to have grown similarly more flexible and yet more brittle. So many strangers to each other, and yet voyeurs into those strangers' lives through the television news...

Pluto: Interesting your comments on the old Heinlien novel. I was thinking of that, and his similar observations in "The Door Into Summer" as getting close to the heart of my concerns. We can now make and grow more with fewer hands than any time in human history. But all those surplus goods and foodstuffs have to go somewhere. Right now they support this immense superstructure of "non-producing" people - accountants, public servants, soldiers, investment bankers. But what happens as the technologic capability to produce gets ahead of society's ability to create "non-productive" jobs for people - specifically, the sort of laboring and maufacturing jobs that people without higher cognitive skills can do.

Henry Ford paid his rivethead well not because Hank loved him some rivetheads, but because they'd turn around and buy Ford cars. So as the manufacturing jobs shrink, who will buy the cars, the gas grills, the Budweiser?

Right now the system works because population growth takes up the "slack". But what happens now that most industrialized countries are barely keeping pace with mortality or even falling behind?

Red Sand has the same worries I have - how do we restructure our system - which now values "labor-saving" and efficiency - to deal with a static population? How does an industrial society work at zero population growth, or, at best, very low growth?

Lisa said...

Chief,

I hope you are able to see T. Friedman's, "The Inflection is Near," which addresses some of this.

Many have become "human doings" versus "beings". Heidegger warned about seeing people through their "toolness" or instrumentality, and getting caught up in mindless gossip and all the other inane trappings.

As you suggest, we live vicarious, voyueristic lives, "having" 700 friendsters, but not really. The Post had a nice article the other day about how quickly our modalities of connectivity (did I say that?) are evolving, and how Twittering is the trend, but it is reducing the quality, the subtlety, of communication.

Pluto said...

I'll throw in my two cents on resource depletion even though I feel like I've overposted already.

My wife and I recycle well over 50% of our total waste, primarily because our local government has instituted several programs that make recycling financially very attractive.

We also strongly prefer to buy used whenever possible. Why? To save money.

Where am I going with these comments? Recycling technology has already reached the point in some cases where it is cheaper to reuse existing resources than it is to buy items made with the original materials. This trend is going to be magnified enormously in the near future as individuals face tougher economic times and increasingly efficienct recycling technology comes on line.

The "use-it-lose-it" culture is already going away, folks, and that trend is going to accellerate in the future. Not necessarily because of environmental awareness (although that helps because you folks bring up perfectly good points) but because people are finding that the old unsustainable lifestyle isn't working for them anymore.

I'll give you an example of what I'm talking about from history. By 1910 America was virtually denuded of trees. Logging wood for raw materials for housing, industry, and fuel for fires had taken an incredible toll. Farmers, ranchers, and strip-miners all viewed trees as a nuisance, to be rooted out whenever possible. The few lonely voices for conservation were mostly drown out by shouts for more progress (Theodore Rooseveldt was a major exception).

But that attitude has changed over the last 100 years. We've become aware of how important trees are to our future and have started planting them by the millions. I've read comments from knowledgeable people that we now have more trees than at any point since 1820.

Metal deposits aren't renewable so this isn't an exact comparison, but I think something similar will happen in the future. That forward-thinking individuals will start looting landfills for the refined metals rather than digging up new ones.

If I'm right, the basic model of factories producing goods consumed by factory workers will not need to particularly change.

Several people have raised the good point that we don't need as many people to produce the goods we need to survive. So what?

The services-oriented economy in the US is already far larger than the goods-oriented economy and is continuing to grow rapidly.

Admittedly the services-oriented economy doesn't sell things that people absolutely have to have to survive but they make a living by providing services that the consumer can use at a cost lower than having the consumer do it themselves. I'll give you an example from my life.

My water heater started breaking down so I called a reputable plumber and they replaced it. I could have bought the water heater, hauled it into the basement, and installed it myself. But I SUCK at plumbing so most likely I'd have messed things up royally and we'd have had either leaks or no hot water for a considerable amount of time. It was well worth the extra cost based on those factors alone.

Next post I'll address the two flies in the ointment I'm creating.

Aviator47 said...

Pluto-

I don't think anyone has a problem with the tradesmen in the services industry. My opinion is that the culprit has been the merchants of "Wealth Creation". All kinds of money looking for growth opportunities arising out of money itself. It was this "excess wealth" that was thrown (and I do mean thrown) at lenders to be used as leverage for reckless lending.

As I have posted in the past, one definite cause of the credit crash was having to lower lending eligibility standards to be able to lend all the money that was looking for borrowers. Once everyone who could rationally afford a mortgage had one, there was still billions looking for customers, and thus the sub-prime and "liars" market began to blossom. Add to that that much of the lending was to allow people to extract the equity in their homes to support consumption, and you had a truly irrational system. Taking on a 30 year encumbrance on a house to pay for a much shorter lifespan car, for example, is lunacy. But it was easy to do.

Since home values and outstanding mortgage obligations are a matter of public record, it was easy for aggressive lenders to sell "home equity lines" and equity extraction packages that were "pre-approved". And, to add to the foolishness, one could add a second mortgage that raised the ante to 125% of the home's value and still deduct the interest. Our very tax policy fueled the fires.

Of course, the bill for the "free lunch" has arrived, and all too many people are shocked, to include Alan Greenspan. If the chairman of the Fed can be ideologically duped, is the bulk of the population going to be far behind. After all, all of this "created wealth" had to feel really good until the bill arrived.

WASF

Al

Pluto said...

Al -

As usual, your comments are perceptive and right on target. The first of the two flies I wanted to address was housing, or more accurately, how housing was used to help create the current mess.

The second issue is energy, which is a much bigger problem, at least for the time being.

Unfortunately I had a bad night last night and can't seem to get my thoughts into enough order to make it worth your time to read what I have to say. Hopefully I can post something of value tonight or tomorrow.

Aviator47 said...

Pluto-

As an anecdotal example of the mortgage madness, I would offer a neighbor in the States.

He bought his house for $190k in 1996 with 10% down. In 2005, at the age of 67, he refinanced it for the third time, for $450k for 30 years. By 2006, he had invested some $75k in improvements to the house, so his total out of pocket into the house was under $100k, yet his total equity was zero. The $$$ he extracted from what could have been over $200k in equity, he spent on lifestyle, some of which was the significantly higher mortgage payments from the ever higher mortgage..

In late 2006, he put the house on the market at $600k, but it was too late and over priced. It sold in 2008 for $459k, and he had to pony up some $30k to close the sale.

Had he simply financed the $75k in improvements and never extracted the equity, he would have realized a gain of $200k rather than a loss of $30k at the time of sale, and would not have paid all the interest on the ever increasing debt. But he really thought he was pulling a slick deal, and blamed his eventual loss on everyone else.

And, lenders were looking for folks like this and found many of them.

Pluto said...

Okay, I'm back and ready to finish my second rant in one FDC topic.

Housing, or more particularly, the housing bubble is not an accurate measure of trends in America; bubbles never are.

I won't argue that we didn't seriously deplete natural resources during the housing bubble, we did. I won't argue that millions of people made stupid decisions that they will regret for the rest of their lives during the housing bubble, they did.

What I will argue is that all bubbles end, and it has begun to do so.

I've been watching the housing industry since 1990 or so and it slowly expanded from a relatively minor part of the economy to being the major driver of economic growth. This was simply unsustainable, particularly because, as other have already noted, our population is probably going to start declining sometime in the next 20 years.

Now comes the important part of any boom: the bust. This is where we get to clean up the mess we've made and return things to the status quo. This is going to take a LONG time for several reasons.
1. Housing just plain goes slowly. It takes time to build houses and infrastructure. If we were to embark on a project to tear down the extra houses it would take time to tear them down. This is unique compared to past boom/bust cycles because the booming goods (tulips, baseball cards, pet rocks, etc.) could be produced and discarded relatively quickly.
2. The size of the purchases needed for the housing industry mean that we are facing more than one boom here. We've got several debt-oriented busts going on at the same time.
3. The US government is understandably interested in assisting its citizens(/protecting voters/protecting its tax base) and is interfering with the normal boom/bust cycle in ways specifically designed to slow it down under the theory that if it can be slowed down, perhaps it won't hurt so much.

Side note: There are two schools of thought on pain; the get-it-over_quickly approach and the bit-at-a-time approach. When I was young, I preferred the bit-at-a-time approach until I realized that the anticipation of the next coming installment was actually worse than the pain itself. I've primarily been a get-it-over-quickly kind of guy since then.

4. How we clean up this mess will determine our financial, personal, and national security of decades to come. Band-aids won't do for messes of this scale, only a recalibration of the entire system, so this sort of thing:
a. are less likely to happen again
b. have less impact
c. so deeply reward people who did bad things during the recent boom.

Side note: People keep noting that "things are nearly as bad as they were in the Great Depression."

While I agree with them, it isn't because our economy is in that much better shape. If you look at Shadowstats.com's list of alternate economic data, you'll quickly see that we've changed how we measure such data and that if compared with the original measures of economic growth and well-being, we AREN'T that much better off than they were in the Great Depression. So why aren't we suffering as much?

Several reasons:
1. Reforms since the Great Depression have provided a safety blanket (the concept of which would have floored any economist in 1928)

2. Households have more income earners relative to necessary expenditures. In 1930 if Pa lost his job the family had 6 hungry mouths to feed and no income. In 2009, if Dad loses his job the family of 3.5 still can rely on Mom's income.

3. The economy of 1929 was structured to extract the maximum possible wealth from the low and middle class as possible. Wages were kept low and savings were basically zero. The survivors of the Great Depression never forgot that lesson, and although the savings ethic has been seriously eroded, at least people know what it is and how to do it this time around.

So while we can quite legitimately get upset about the waste of resources involved in the housing bubble, it is not an accurate predictor of future developments.

Now on to Energy...

Pluto said...

As you may recall, my basic thesis is that as natural resource extraction become more expensive, recycling technology will become more cost-effective and the demand for continued natural resource extraction will fall, eventually becoming zero.

I've already addressed two issues with this theory:
1. Bubbles that cause people to make poor long-term choices based on inaccurate predictors of future economic developments. This is extremely painful but has the advantages of:
a) being relatively short term
b) being so noticable that people learn from their mistakes relatively quickly

2. Successful advertising is a much bigger issue because it tends to mask trends so people don't recognize them as quickly as they normally would and sometimes don't respond in completely rational ways. I don't currently see a way to overcome this issue in the short-run but no amount of advertising can completely overwhelm reality, "American Idol" excepted, of course.

Finally, there's the big issue with my thesis, energy. My thesis can be boiled down to a simple pseudo-mathematical equation: "Old products + energy = New products."

Unfortunately, energy, as currently consumed is using up non-renewable natural resources and there are no viable ways to reduce this.

People talk about ethanol, solar, wind, and other renewable energy sources but the problem is that they are either energy neutral (ethanol) or suffer from a lack of energy density (less bang for the buck). Have you priced putting enough solar cells on your roof to get off the grid? In my region thats about $20-40,000 and we get lots of cloudy days... Wind energy is better in this region but a wind turbine runs $400,000 and somedays the wind don't blow...

So what do I recommend regarding this problem? Sorry, I don't have a solution.

There are any number of stop-gap solutions:
1. Conservation - People drove less when gas was $4.00 per gallon. We aren't there right now but, for a large number of reasons, we will be again sometime in the next 5-10 years.

2. Renewable energies - While they can't REPLACE coal, oil, and natural gas, they CAN reduce our need for it. As extraction-related energy becomes more expensive these options become increasingly attractive.

3. Nuclear - Very attractive from a lot of perspectives but waste management is a big issue. People point out that France gets roughly 70% of their power from nuclear and seem to be doing okay. I respond that last I heard (20 years ago) they were dumping their waste into the ocean in 55 gallon drums in French Tahiti. That's NOT a viable long term solution for the entire world.

4. Energy production research (aka Other) - Right now my personal favorite is a different form of nuclear fusion. Look them up in Google under "fusion reactor wb-7 emc2." This will lead to a whole host of information that answer any of your questions from a variety of viewpoints. The frustrating thing about trying to follow this story is that much of the research is being done under DARPA's secretive management and you can go for a decade without news.

But the information that does leak out seems to indicate that cheap, non-polluting, nuclear power is possible if we're willing to drop some real money into the effort.

So that's it, a future based on a recycling-oriented economy seems to be at least as likely as the next concept and is a whole lot healthier in the long run. Anybody who can help this concept become a reality sooner is humbly and respectfully asked to get their rear in gear.

Thank you for listening so long. Good night, and good luck.

Pluto said...

I made a mistake that I didn't catch in my last post:

"Unfortunately, energy, as currently consumed is using up non-renewable natural resources and there are no viable ways to reduce this."

should have read:

"Unfortunately, energy, as currently consumed, is using up non-renewable natural resources at a frightening rate and although there are ways to reduce this, it will not end for the foreseeable future."

Andy said...

But it seems that was most of us have shifted over from producer to consumer we've "become" who we "are". We're "the department head", third in seniority, the employee of the month...

That shift began with the industrial revolution and the creation of the middle class. Unfortunately, consumerism is one of the defining characteristics of a middle class.

Personally, I don't think things have changed that much. People are basically the same as they have always been and we are just as vulnerable to our human foibles as ever. Here's just a taste, or you can google "patent medicine."

Not much has changed in 125 years IMO.

Al,

Your neighbor's story is similar to mine. We bought a house (built in 1905 actually) in Florida just as prices were starting to boom for $150k through a VA loan. A couple years later we refinanced and took out 75k of equity for home improvements and some critical maintenance (FDChief - the cost of ownership for an old, wood house if Florida is very high) Near the peak, the house was valued at $450k, so we had $200k in equity.

We moved out of Florida just after housing prices peaked and put it on the market. We went with the list price the realtor suggested based on the market data and at the time I thought it was maybe $20-30k too high but largely justified by the comps. Unfortunately, those comps were OBE as prices were just starting to decline, so we were quickly way overpriced. Within a couple of months, the market was beginning to decline rapidly and our price reductions were consistently on the backside of the downward wave for a year. The steep declines caused buyers to stand aside and wait - not just for our property, but generally, which fed the cycle of price declines.

Anyway, after many trials and tribulations we sold the house for $200k. We had actually agreed with the buyer on a sale price of $225k, but the appraisal came in low (200k). Appraisals are a huge problem in Florida now. During the boom times, appraisers inflated prices, now the opposite is happening. Appraisers are purposely undercutting prices. A few of them admitted to my realtor that banks have put the fear of God into them (by threatening to cut off their business), so they are currently undervaluing properties to appease the bankers. It's plain to see what they are doing when looking at the comps, their valuation calculations and the wildly different values different appraisers reach given the same data.

We had three appraisals on our house in the space of about three months as a result of various contracts we had to sell. The agreed selling price each time was between $210-$225k. The appraisals came in at $165k, $187k and $200k.

We took the last one and had to bring almost $40k cash to the closing ($15k to cover the outstanding principle, then the commission, closing costs, etc.). It's been a tough road, but we're glad to be rid of it finally. That area was one of the worst for the housing bubble.

In hindsight, I think for the most part the decisions we made appeared to be good ones at the time given the information we had. We knew there was a bubble and that was one of many reasons we didn't borrow against all the "equity" we had. We made good improvements to the home with the equity we did take out. We expected a correction, but not one of that scale. We certainly did not expect appraisers to undercut a contracted price by $50k thereby killing the deal. There are actually a lot of buyers now - we had several offers on the house which we accepted - but the appraisals end up killing the deals. It's just as irrational as the boom was currently.

We thought about keeping the house for a while and selling in a few years when things even out, but a 100 year-old wood house in Florida requires a LOT of maintenance, which I can't do out-of-state and is quite costly to contract out for. And rents are going way down too.

Anyway, that's our story.

Aviator47 said...

Andy-

Sorry to hear about your house story, but it is not similar to our former neighbor. Our neighbor increased his mortgage by some $280k (165%)over 10 years, of which only $75k was invested back into the house. The remainder was vacations, leasing a car, etc, all of which here not expenditures that would retain or increase in value, as a home might hopefully do. In short, he was extracting equity to use as disposable income, a practice that was far too common.

Aviator47 said...

Another anecdotal example of how irrational the financial world in the US became:

My nephew, a self-employed general contractor, set up a program of socking away $350 to 400/month for his two children's education. He would let the money amass and then put it into 5 year CDs as a safe bet. He didn't want to risk these funds in the market.

In 2002, he had a CD worth some $25k about to mature. At the same time, he got an offer from a credit card he held from MAJOR bank to take advantage of a promotional 0.9% interest rate for balance transfers or "convenience checks", good until the balance was paid off. He had a credit limit of over $28k, and was using the card for his business purchases, paying the balance due each month.

So, he locates a nearby office of MAJOR bank, and inquires about CDs, saying he would like to invest $50k in a five year CD. They quoted him something like 5.25% APR (higher than he could get for a $25k or $50k CD at his regular bank). He said he would return, went home, wrote a "convenience check" for $25k and deposited in his regular checking account at LOCAL bank and waited for it to clear. He then took that $25k, plus the $25k from the matured CD and walked back to MAJOR Bank with a cashier's check and bought a $50,000 CD.

For the next 5 years, he dutifully made a $450 payment to the credit card account. The cost of borrowing the $25k for 5 years was less than $700. The interest earned on the borrowed $25k was about $7200, and the extra interest earned on his original $25k by raising the level to $50k was about $300. Total earnings about $6,700. He figured that if he simply put $450/month into low risk savings for these 5 years, he probably would have earned no more than $2,500. As he said when he told me about it, "In effect, MAJOR bank paid me $4,500 to borrow $25k for 5 years, and the monthly payments were slightly higher than what I was already putting into savings. That's as insane as can be."

I wonder why we are facing a financial crisis?

Aviator47 said...

Clarification:

For the next 5 years, he dutifully made a $450 MONTHLY payment to the credit card account.

Pluto said...

I read your nephew's story with interest but don't really see anything insane about it at all.

The bank decided it wanted to launch the 0.9% promotion, presumably they had taken a look at the cost and decided it was worthwhile.

It also offered the 5.25% CD because it could make money, perhaps LOTS of money, loaning that money to other companies at much higher interest rates.

Kudos to your nephew that he could recognize the opportunity when it presented itself.

My only concern is that I've heard about some high-rate CD's that aren't actually CD's and don't have the full protection against loss.