Red Ink

Growth and profits mask a variety of problems.  They hide business inefficiencies and the money suck of corporate adminis-trivia.  They also conceal unproductive staff.


leapThe final career leap


But most of all growth and profits obscure the extreme value subtracting forces of bloated management teams.  During good times it is unclear what these smug fellows do.  During bad times it is lucidly clear that most of them ain’t worth a darn.

When the profits inevitably recede, the senior executives, with their silly 24 point project reviews and cumbersome project execution requirements, appear lost.  They’re left exposed, with their pants down, and without a clue in the world as to what business it is they’re actually in.  What the heck have they been doing all this time?

Where does the money come from?  How is it spent?  Over time, and in the absence of a watchful eye, the rising tide of growth gradually submerses the answers to these questions.

Then, when the answers are needed most, it is too late.  While management was busy developing mindless risk management protocols and clumsy 9 step work flow approval processes the answers had drowned.  But instead of drowning under the rising tide of growth, they’d sunk below a hemorrhaging sea of red ink.


"What if we don't change at all ... and something magical just happens?"If all else fails, there’s always magic…


Rotund and Heavy

Unquestionably, nothing fails like success.  A long run of business success can lead to complacency.  It can also lead to making hasty entries into new markets to the detriment of existing core markets.

At some point, usually after success compels management to do foolish things, the gods stop smiling rays of sunshine down upon a company’s balance sheet.  Shortly after, the losses pile up like dead wood in an overgrown forest.  One spark and the swollen salaries and bonuses disappear in a blazing inferno.

Economies, like corporations, also grow rotund and heavy.  In particular, their bellies blow out after a lengthy run of growth and development.  Making things worse is the fact that an advanced economy can rest on its laurels, and accrued capital, for an extended period.

But as the currency’s debased, the society’s also debased in lockstep.  Before you know it the Presidential election has become an outright mockery of the democratic process.  In effect, it becomes a grotesque reflection of a disfigured populace.


1-chart-of-the-day-silver-roman-coins-may-2011We have seen it all before. Back when the Roman Denarius still contained nearly 100% silver, the Roman Empire had just passed its peak in many respects, a highly advanced and powerful civilization. As Rome’s emperors began to debase the coin of the realm, they unwittingly debased everything. The accumulated capital (in every conceivable sense of the word) of their forebears allowed them to muddle on for a very long time. But the riches evaporated… morals and morale increasingly crumbled… and eventually, the once great empire itself crumbled.


You know the decline is well underway when all respect for the practical limits of government and the judicious use of common sense, and a light touch, to govern the affairs of the people has been lost.  That’s about the time political graft and corruption become the dominant operating model.

In the later stages of degradation, how to federally regulate the use of public restrooms for those conflicted with the sex designation on their birth certificate becomes the central focus of popular discourse.

The point is, miracle economies always lose their magic sooner or later.  The luster fades.  And growth dissipates beneath a series of irrational and intolerable raids by the treasury upon the common man.


Prepare for the Unthinkable

In the United States, and the world, the great economic growth miracle peaked over 40 years ago.  Here we turn to the Wall Street Journal for edification.


“The quarter-century from 1948 to 1973 was the most striking stretch of economic advance in human history.  In the span of a single generation, hundreds of millions of people were lifted from penury to unimagined riches.

At the start of this extraordinary time, 2 million mules still plowed furrows on U.S. farms, Spanish homemakers needed ration books to buy olive oil, and in Tokyo, an average of three people had to cook, eat, relax and sleep in an area the size of a parking space.

Within a few years, tens of millions of families had bought their own homes, high-school education had become universal, and a raft of government social programs had created an unprecedented sense of financial security.”


Alas, that sense of financial security has been a mirage.  In the early 1970s, when the quarter-century of economic advancement stalled out, something else happened.  About this time the dollar’s last ties with gold were unconditionally severed.


Nixon’s infamous “temporary” gold default – it paved the way for the greatest credit bubble the world has ever seen.


Since then, public and private debts have exploded.  What’s more, as debt has increased, it has been at a declining and diminishing economic return.  Debt’s gone up.  GDP’s gone down.

In practice, over the last 40 years the deception of funny money and rapid credit creation is what kept the illusion of growth and prosperity alive.  But over the last 8 years that illusion has been shattered by the following realities:

Oceans of red ink.  An over indebted economy.  A debauched currency.  A debased culture.  A despoiled political process.  Criminal leaders.  Budding civil unrest.  And much, much more.


2-debt-and-gdpNixon’s gold default and its aftermath. We have muddled on for a long time… – click to enlarge.


Obviously, something’s gotta give.  Like a management team that has driven its operation into the ditch, an entire housecleaning’s in order.

Welcome to France circa 1788.  The unthinkable is about to happen.  Have you stocked your provisions for the long winter ahead?


Charts by: Dylan Grice, SocGen / Tulane University, St. Louis Federal Reserve Research


Chart and image captions by PT


MN Gordon is President and Founder of Direct Expressions LLC, an independent publishing company. He is the Editorial Director and Publisher of the Economic Prism – an E-Newsletter that tries to bring clarity to the muddy waters of economic policy and discusses interesting investment opportunities.




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