It's Confidence, Stupid!

The French have a saying: “Plus ca change, plus c’est la meme chose.” The more things change, the more they stay the same. Or as some might have it these days: “The more things change, the more they get worse!”

No doubt, there’s a lot of angst out there. I hear a lot of people saying things like, “At least we have our health!” That’s when you know things are really bad. What they really mean to say is, “I’m feeling really crappy about the world and I’m going to try to make myself feel better, starting with this little mind game I’m going to play…”

At MXenergy University – our in-house continuing education program – we have been having monthly “current events” sessions. So far we’ve managed to deconstruct the Bernie Madoff scandal, the President’s bailout proposal, the imminent nationalization of the big American banks and the potential for revolution in China. It seems that everybody is asking themselves the same, largely unanswerable questions: How did we get ourselves into this mess? Who is responsible? Where are we going from here? Are there any signs of good news? How long will this go on?

Along with the unanswerable questions are some seemingly incontestable principles. For example:

1. Never underestimate the ability of human beings to lie to themselves until they believe it.

I owe this adage to a dear friend in Omaha who is a student of markets. By markets I mean anywhere people go to buy and sell at negotiated prices. Ordinarily we think of the stock market; the futures market; eBay. But we also have the local farmer’s market; the antique store in the country; the souvenir stand by the Great Wall.

One of the most notorious markets is the real estate market. Some people would say that real estate is the source of all of our current economic woes. But it is more accurate to say that the real estate market is where many people got into trouble because they took on too much debt. Many real estate investors believed that houses could only go in one direction. That is, up. Not.

Now, it would be easy to blame this naive view on unsophisticated players. Surely professionals know better. They would not make the same mistake that the ordinary mortal would make when buying a home. They would understand that markets can go up and down. That some markets can be very volatile and go up and down a lot. That if you borrow a lot of money to invest and the market goes down instead of up you can end up owing a lot more money in a hurry.

Unfortunately, it was not only the naive man and woman on the Street who believed their own PR. It was the professional as well. You would think they would have learned the hoary lessons that excess leverage can lead to disaster. Think Dutch Tulips, South Sea Bubble, Panic of 1907, Stock Market Crash of 1929, Hunt Brothers Silver Market, Long Term Capital Bank, Dot Com Bubble. Yet when the market is moving up, who wants to be a skunk at the picnic, a Chicken Little crying “The sky is falling, the sky is falling!” How much easier is it to persuade ourselves that somehow this market is different.

2. Nobody can see the bottom until they bounce.

I wish I had a nickel for every talking head that has “seen the bottom” over the past few months. The only guy who saw the bottom recently was Chesley B. Sullenberger, the pilot of US Airways Flight 1549 that landed in the Hudson River. And he was lucky. The rest of us will just have to wait until we land, open up the emergency door and walk out on the wing.

There is an old saying in the commodity markets that the market does not bottom out until the last guy starts selling. When every last trader has given up hope, the market will be ready to rally. Of course, that never happens. But in many apocryphal stories there is a grain of truth. You know how forests work: periodically they burn and new growth seeds itself in the charred remains of the old forest. That is essentially what happens with markets. And it is what appears to be happening with our entire global economy. We are experiencing a raging economic fire that is consuming the undergrowth of inefficient, bloated, over-leveraged businesses. In their place will rise stronger, more resilient and tougher organizations.

Until we make the same mistakes again, of course.

3. It’s confidence, stupid.

We used to think it was all about the economy. It turns out the economy is simply the first derivative of something far more important: Confidence.

Roosevelt was right in his first inaugural address: “We have nothing to fear but fear itself.” Fear is what put the Japanese economy into a two-decade funk that it has yet to crawl out of. Fear is what held the world economies back in the 30s. Fear is what is now keeping us home, cutting back our budgets, cutting up our credit cards.

The stimulus package is designed to get money into people’s pockets. But it will fail if people don’t start spending. If people are worried about where the next paycheck will come from they will not spend. They will save. And if they save, prices come down. Income goes down. Fear will grow. And people will save more.

Where people save is another worry. Everybody talks about how deflation has hurt Japan and how that is a great risk in the world’s developed economies today. True enough. But think about it: if people saved by putting their money in the bank, and the bank lent the money to others, it wouldn’t be so bad, would it? Savings would help fuel regeneration. New businesses could find credit. More people would be put to work.

No, the worry is that people do not put their money in the bank. They put it in their mattress. They keep it in cash. Or gold. That is why gold just crossed $1000 an ounce. That is why, despite a decade of deflation and a culture of frugality, the Japanese are saving less! My theory is that the statistics that show lower savings are reflecting savings in the bank, the savings that you can count, the savings that people report. The money in peoples’ mattresses is not showing up in the official statistics. It is not getting reported. And it is not getting invested. It is not fueling regeneration. It is fueling fear.

We are at risk of going from a society that saved too little to a society that saves too much! Remember Rudolph Giuliani after 9/11 scared the bejesus out of New York City? Get out and spend, he said. Don’t let the terrorists win. Live!

Today more than ever we need that confidence. And we need it soon.

4. Raise my taxes. Please!

I favor the current stimulus package because I think it’s a nice balance between tax cuts (about 1/3 of the bill) and spending (although I could quibble with some of the uses.) But while I favor tax cuts for people in lower economic brackets and for businesses that put people to work, I do not favor tax cuts on people in higher brackets.

We have to stop thinking of taxes as an unadulterated evil. Yet we have put ourselves into that state of mind through decades of political pandering by feckless leaders who try perennially to buy our votes with money. We forget the principle that Oliver Wendell Holmes, Jr. is said to have expressed: “Taxes are the price we pay for civilization.” (Actually, Justice Felix Frankfurter reported that Holmes’ secretary said something like, “Don’t you hate to pay taxes?” and Holmes replied, “No, young fellow, I like paying taxes, with them I buy civilization.”)

Imagine if you lived in a utopian paradise where every need, every whim, every fantasy was satisfied. The price? 100% tax. Would you accept it? Of course.

Now imagine a different kind of utopia in which you were assured that you would keep 100% of your income. No taxation. Not a dime. The price? No services. No paved roads. No public education. No snow removal. No public hospitals. No social security. No air traffic control. No regulation of drugs; food; safety. No military defense. No local police. No fire fighters.

You choose.

Is it too much to ask for honest leaders who make the case for a civilized level of service at a reasonable cost? In wartime we accept sacrifice. Why can’t we accept it in peacetime?

5. We are our brother’s keeper.

So what do we do? That is the question everybody wants answered. The only answer I can summon is that we change the way we view the world. We have lived in a world where we were takers. Where we believed our own PR that things would continue to get better. That a rising tide would lift all boats, and a rising market would bring prosperity to all.

Now we must learn to be givers. Starting with our loved ones. Extending to our friends and reaching out to the stranger. Extended unemployment benefits, for example, are an example of how we as a society have chosen to care for the stranger among us when that stranger is in need. Restructuring (not extinguishing, mind you) debt, so that people who owe money have a chance to pay it back over time, the same way a company like ours gives people extended payment terms when they run into trouble.

I’d like to hear your answer.