In Defense of Permabears

A recent comment on my blog was submitted by Bob Kraus who writes:

“For the most part, the US economy has grown and grown and grown throughout its history with mostly only hiccups representing the breaks in growth. It seems that for every year of growth, you might only have a month of contraction. The problem is that most bears who’ve had any reasoning behind predicting that the US banking system would fail were permabears. While permabulls are right 90% of the time, permabears are wrong 90% of the time. Why are they willing to be wrong so much? It seems obvious to me – permabears WANT the US economy to fail (perhaps they are mostly communists, who knows). As a result, no one EVER listens to them. It was kind of like when the National Enquirer claimed that John Edwards was having an affair. No one listened because they have a history of sensationalizing everything. Bears are no different.”

Before I respond to Bob, I wanted to define some terms so that all readers could follow what we’re talking about. A bull is someone who feels optimistic about a particular form of investment. I am bullish on investing in gold, for instance, because I feel gold is going to go up. The converse of being a bull is being a bear. I am bearish on the US stock market and US Dollar. Sentiments can change from time to time as the value of various investments change in comparison to each other. The term permabull is someone, such as Ben Stein, who always seems to be bullish on the stock market regardless of current events or what PE ratio the stock market is trading at, just as a permabear is always down on the stock market.

Thus Bob is saying that the only people who predicted this downturn where people who were permanently pessimistic regarding the American economy. He speculates as to our motives, that we want the US economy to fail because we are Communists at heart and just hate the operation of the free market. In summation, Bob argues that permabears are to be ignored because they are wrong 90% of the time and the US economy will soon be back to expanding year after year.

Bob is wrong. Individuals such as Warren Buffett were saying that the US stock market was a bad deal a decade or so ago, and he is hardly a permabear or a Communist. Speaking entirely for myself, I am a permabear because I feel the American economy is doomed to fail. I have not adopted this view because I am a Communist, but because the modern economy simply doesn’t make sense to me. The way I look at it, Economics is about the exchange of goods and services. In order for a society to proper, it must allocate its resources and labor towards the efficient production of goods and services that people want. If a society succeeds in producing goods that another society wants, then they may engage in trade. But trade between societies must be a zero sum activity: one society can not consistently run a “trade deficit” to another society whereby it gives less in the trade value of goods and services than it consumes. How can a society continue to convince another to deliver less in value that it is itself offering except to make up the difference at some future date? Real goods and services are all that matter. I do not measure wealth in terms of dollars, but instead in terms or how many its “real” (commodity based) value. Similarly savings is properly measured in terms of unconsumed economic goods; I say goods because one can not “save” an unconsumed service.

I feel our society is doomed because we have moved away from this common sense approach. We have used fiat paper money to be used in place of savings. Instead of consuming fewer economic goods that we produce, we just introduce more paper money to finance our projects. Similarly, we seem to have convinced foriegn governments to go along with our scheme. Instead of demanding that we produce and deliver to them goods and services of the same economic value that they deliver to us, they have agreed to merely acquire our paper dollars.

And we have gone about our merry way as a society. This monetary inflation has taken the Dow Jones from 850 or so in 1980 to 14000 last year while the value of gold has performed dismally over the same time. Clearly, the last 20 or so years have been the domain of the permabull, while permabears such as myself have had little choice but to sit back and scratch our heads that an economy could seemingly prosper in the midst of every increasingly levels of debt and monetary inflation. But I believe we are now seeing the end of the era of the permabull.

Everything in permabull land is based on confidence: both at the consumer level and at the international level. Foreign governments wouldn’t take our inherently worthless bits of paper in exchange for their real goods and services if they did not have confidence of their value. I suppose it’s conceivable that they will continue to have confidence in our monetary system as the Federal Reserve pulls money out of thin air to aid failing banks, but it doesn’t seem likely.

So you see, it’s not the writings of Karl Marx that stir the souls of permabears, but instead those of Adam Smith. The permabulls may have been laughing at us for the last twenty years or so, but we were the ones laughing today., and I must confess that it felt really good.

4 thoughts on “In Defense of Permabears”

  1. Are we in economic trouble? Absolutely. It is going to be a very painful 3 or 4 years for most Americans – and that is saying something since almost no recessions last more than 18 months.
    Yet, the US is still left holding the cards. Who is better off, the guy that trades paper for oil or the guy who trades oil for paper? Keep in mind that when we were trading paper for oil, every billion dollars worth of paper that they got was worth 50 million barrels of oil – but now it is only worth 10 million barrels, so we traded a depreciating asset for an appreciating asset. Yes, we hosed the rest of the world, but what is new? We’re still one of the most capitalistic nations in the world, and that gives us an inherant advantage. Would you rather bet on Europe and their 30 hour work weeks and 9 month work years? In the long term, neither will the rest of the world. Yes, the dollar will continue to fall in value and Americans will consume less foreign products (because who can afford them with such a weak dollar) and the world will consume more and more cheap American products (think America = the new China). The good news is that American products, unlike those of most nations, dont’ require massive use of resources to produce. We’re talking about technology – software, computers, pharmaceuticals, etc. These types of industries will continue to prosper and since they aren’t really made from limited resources, the cost of production won’t increase allowing for ridiculous profit margins. While that happens, the US will become the nation with huge trade surpluses which will provide the money needed of huge budget surpluses.
    At the same time, while the rest of the world talks a big talk with things like the Kyoto treaty to address the limited resource of oil (ok, it was supposedly to address global warming, but lets be serious as to their true motives), it is the US that is making breakthrough after breakthrough in SOLVING these problems instead of forcing bandaids of “if we consume 10% less, that will give us 2 more years before we run out” type of policies. You know the value of oil – don’t you think the value of these technologies won’t also be worth an astronomical amount? Yes, I’m bullish on the US (long term, not short term), but I just know that someone has to prosper from the lack of initiative and laziness I see around the rest of the world, and it seems the US is poised to be that someone. We will always have business cycles, and during a small percentage of time at the bottom of those business cycles, we’ll even see economic contraction, but in the end, the US economy IS still poised for continued long term growth.

  2. I see things as just the opposite. America is losing the technology war. Our education is a joke and we are spitting out less and less qualified individuals with unique, innovative ideas. Meanwhile, the education in other countries is skyrocketing and they are producing people who will become the new CEO’s and inventors in the coming years. We won’t see the results immediately, but change is coming…and the U.S. won’t be able to keep up!

    BTW, Preston, I am about halfway through you book. It’s a good read, especially considering the recent economic catastrophe. I am curious why you think gold should be the standard of monetary policy as opposed to some other commodity. Though problem: If gold were still the standard and in the future we discovered gold on another planet…how would that affect the economy? Supply and demand would dictate that gold would immediately see a reduction in value because of increased supply. I am curious as to your opinion on owning land.

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