Short-term unbalanced thinking has gotten us economic pain. The dangers of short-term thinking in economic matters became particularly evident to me in the late 1990s. At that time I said to colleagues that if the U.S. does not change its course, it is heading towards major economic difficulties. I made that statement after studying the trends of many economic statistics, particularly those of debt accumulation and savings rates.
Illustrating the short-term thinking at its worst is the current dire situation of Detroit’s Big Three auto makers.
In 2001, I quoted Maryann Keller, a top auto industry analyst in my still unfinished book, Investing for the Soul. She said in a Forbes article that year, “[That] Chrysler, GM and Ford spent billions of dollars to buy their stock in the open market since the mid-1990s… It was always obvious that product spending [developing new autos] was being sacrificed to provide trading liquidity [ease of selling stock] for big investors while boosting earnings per share. GM, Ford and the Chrysler Group today [remember this was 2001] find themselves with growing gaps in their product portfolios as they lose market share…”
Short-termism pervades current thinking in economics, finance and business. Examples of this are everywhere. In economics, the U.S. Federal Reserve is always trying to fine-tune interest rates to effect relatively short-term changes. In finance, managers of ‘long-term’ mutual funds turnover their portfolios more than 100% a year (refer to page 18) as they are primarily evaluated on their latest quarterly results. In business, many CEOs who want to embed in their companies’ long term beneficial environmental, social and governance (ESG) actions—are handicapped by investors looking for short-term gains.
Even today, the financial bailouts are ad hoc arising from the immediate financial market chaos. However, over the next year it will become apparent that this short-term oriented government borrowing and spending binge will not solve the basic long-term problem of excessive debt. In fact, it only adds to it. Every family knows that you cannot forever borrow more than you earn and spend your way out of debt.
Soon, the U.S.A. will have to face-up to the reality that, either willingly or coerced, it will have to save more and spend less. It would be best if this could happen gradually over say, seven to ten years. That might well have been possible in the 1990s. But today though, it is unlikely as many consumers have hit the ‘debt wall.’ Unable (or unwilling) to borrow, they are reducing their spending significantly.
I believe next to hit the debt wall will be numerous businesses in the first half of 2009 followed by the possibility of the U.S. government itself, perhaps in the final six months of that year. Then a new reality will dawn in the minds of Americans and people everywhere. Their thinking will have to change.
Very few economists and financial market participants attempt to understand the connection between our thought processes and economic behaviour. Yet it is so obvious! The only permanent way out of this mess is for people everywhere to gain an inner sense of balance and well-being while developing their creativity and intelligence to earn more.
Such balanced, developed individuals will not sacrifice their longer-term material and spiritual goals for short-term gains like a drug addict needing an immediate ‘fix.’ This is the central, unacknowledged task, for individuals everywhere amidst this economic turmoil. When accepted, it will usher in an age of Enlightened Economics and bring unprecedented global affluence.
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© Ron Robins, 2008.
Enlightened Economics 