I remember as a child, being fascinated by the story of the Emperor's New Clothes. It seems a not -so-bright ruler coerced one of his subjects into making him a complete new set of clothes. The not-so-willing subject decided to pull a deceitful prank on the not-so-bright ruler.
The tailor in question only pretended to be making a fine new ward-robe for the emperor. Using “invisible” (non-existent) thread, he “wove” together invisible (non-existent) clothing. When the emperor went to view the new masterpiece before it was completed, the tailor spoke in such glowing descriptive words regarding his project that the emperor refused to admit that he could not see the non-existent ward-robe! Instead he praised the deceitful tailor and eagerly awaited the completion of his new “threads”. Various advisors and other persons privileged to view the new clothing before were afraid to admit that they couldn't see anything either! So everyone went on pretending that the emperor was in fact about to receive a fantastic new ward-robe. As the day for it's unveiling dawned, the emperor was the featured guest of honor in a parade specifically designed to celebrate the emperor's new clothes. The emperor came out, clothed only in his non-existent new outfit! Neither he, nor his timid subjects would admit that the emperor was naked; he was wearing absolutely nothing. The fake clothing could not be anything more than what it was: NOTHING! Finally, one young subject who refused to ignore the obvious in order to make everyone feel more comfortable; demolished the charade by loudly proclaiming: “The Emperor has no clothes!” To everyone's chagrin; the fantasy bubble had burst, reality came crashing in.
I have been repeatedly reminded of that story as the events of the past few weeks have unfolded. For years now; the American public has persuaded itself that our economy was thriving; that credit could go completely unchecked; that we could always “spend” our way to economic prosperity. We confused rising stock markets and rising prices with an actual increase in our economic security and well being. We have confused perceived worth with actual value; price with real worth; selling price with value to society. We have allowed ourselves to believe we can eventually afford anything; if we pay for it over time. Houses were no longer primarily a means of providing a home for a life-time; they became a commodity to be bought and sold over a relatively short time span; always purchasing our new home with an eye to being able to maximize our profit when we go to sell.
We have lived in an era of belief that nothing is beyond the reach of our purchasing power: even if it is beyond the reach of our actual income. So credit cards encouraged us to transfer debt from one to the other with no regard to retiring that debt. During any given week: we often received almost an equal number of offers for new Credit Cards; with 0% introductory interest for the first few months; and offers from companies wanting to help us reduce our debt once we were over-extended on our credit cards.
Even the most cautious investors among us honestly aren't sure how our economy works. Banks, stocks, mutual funds, insurance, credit, commodities, pensions: we may understand the basics of many or all of these. But the interaction of every factor which determines the health of “the economy” is difficult to understand at best.
For years we have pretended that the “money” was really there. The debt could be repaid. Our stocks and houses were actually worth the amount we were willing to pay for them. Tomorrow they will always be worth even more. But someone finally noticed that the invisible assets behind the inflated prices are non-existent. The money isn't there; it won't be worth more tomorrow. If the US economy is the emperor in our childhood fairy-tale; someone finally burst our bubble! The emperor has no clothes!!!
Yet even now we seem to act as though this is just a temporary glitch in the system; a momentary stumble on an ever-upward-moving economic growth scale. After billions of dollars has been pledged to prop up the faltering US Banking/Investment Industry; it appears as though many sectors of the economy are continuing with a “business as usual” plan of action. Automotive dealers still pledge to sell a car to anyone, no one will be denied credit. Yesterday, I received a notice from Bank of America that I have been pre-approved for a loan of up to $50,000! I have never applied for such a loan. I neither want nor need such a loan. If credit is supposedly tight; and lending institutions are supposed to be exercising greater restraint in their lending; how can anyone be pre-approved for a loan of $50,000 as an advertising gimmick? We can pretend that prosperity, wealth and success are just around the corner waiting to be realized by one and all. But be careful in returning to economic fantasy-land. The emperor has no clothes!
