Monday, November 3, 2008

The Little Depression

If we do get an economic depression, and there are signs aplenty that we will, it will be short lived.

That's my crazy investment thesis. When I search my feelings, I cannot see how a protracted depression is in the cards. (Yes, that's how I imagine I decide things: the mind leads the gut, but it is the gut that ultimately [thinks it] "knows".) So what after-the-fact arguments do I have to support this view?

The Velocity of History

The obvious is easy to overlook. History unfolds, unwinds, at an ever faster pace. The dynamism of the world is incomparably greater today that it was some seventy years ago. The rise and fall of actors on the world stage has been both amplified and shortened. The rise of new corporate titans such as Google, and Microsoft before it, is historically breathtaking. And so is the fall of the once mighty.

So if things get bad quickly, then likely they wont stay bad for as long as they did last time.

The Information Currency

Imagine we're in a depression. I wont bother describing how horrible things have become (no job, no credit, foreclosures and soup kitchens). Still, does the internet still work? Do cell phones still work? Do airplanes still fly?

Of course everything will still work. We wont somehow fall into the dark ages--at least not from an economic calamity. No, the better question is "Will these things still be plentiful?" If the cell phone owning homeless of today are any guide, then the basic communication tools will remain around even in the hardest of times.

Now imagine how trade could possibly come to a standstill. Retailers have gone bust, distributional channels are somehow broken, and producers have no efficient means to meet consumers and sell their goods, so prices plummet driving even more folks out of business.

I submit that was the real cause of the Great Depression: a breakdown in distribution channels. That the failure of distribution channels was caused by financial mismanagement is a side issue. The point is "If we can somehow avoid a systemic failure in the distribution of goods and services even in a crippled financial regime, then the economic rebound will lead the financial rebound; not lag it."

Todays communication tools (most notably the internet) make it easy for producers to meet consumers. The new distribution channels (think eBay) are efficient, many, and resilient. It is hard to imagine how these can disappear. Ultimately, that back door through which consumers and producers can meet will alway be open.

If capital is not just a store of wealth, but also a "signal" that allocates resources to a purpose, then information too, when it reaches a certain "critical mass", acts as an agent that repurposes and reallocates resources. The big difference between now and seventy years ago is that we can find each other.

Positive Black Swans

And lest we forget how improbable predictions generally are, let us enumerate a number of technological game changers that might lift human economic activity. Odds are there will be a game changer; moreover, it'll likely not be any mentioned here.

  1. Clean, cheap energy
  2. Quantum computing
  3. Mind/machine interface
  4. Stem cell and tissue regeneration
  5. Cognitive enhancers (drugs)