Cash Is King

We are in a recession! Wa-hey!

This arbitrary and capricious determination of our economic state was announced yesterday...and apparently we've been in one now since December of ought seven. I no longer have to use quotations around 'recession' anymore.

Of course, all I had to do was ride my bike along MLJ Jr. Blvd. and 47th Ave. here in SACTOWN to see the obvious recession. Day workers congregate at this intersection looking for both unskilled and trade work -- ditch digging, couch moving, plumbing, lathing, etc. When there used to be a few hundred every morning, now their numbers have been reduced to a handful of souls still hoping to land any job.

The recession is one thing, a supposed period of negative GDP...and its effects on employment. Being employed, however, I'm much more interested in the deflationary boom we've been in for the past few months. After a prolonged drunk-on-credit fiesta we're waking up to a punishingly painful hangover, and with credit drying up, we're seeing a massive flight away from everything -- cars, gold, boats, equities, housal units, oil, copper...everyone is selling everything not nailed down to grab cash, or extending their tin cups for bailout cash...because, for the moment, Cash is King. Deflation is negative inflation...dollars in the future are worth more than they are today...nevermind that there might be fewer dollars.

When there is more debt to pay than assets to pay it, the pie is shrinking and the last person hoarding the cash is the only winner. A few winners, and a whole lot of losers...just like every other group of humans you can think of...a few winners and a whole lot of losers.

Look at the interest rates on any treasury bill...almost zero! People aren't worrying about garnering any future interest...they just want their cash equivalents to hold value, unlike everything else that's crashed and burned by 50-60-70%. W.C. Fields once remarked, presumably when sober, that he didn't care for a return on his capital. He only wanted a return of his capital.

The most important thing you can do in an extended deflationary period is unload your debt. Will this be a prolonged phenomena? Who knows.

Say you bagged a 3% rate (yeah, right) on your new 72-month payment plan on that new GMC Sierra. Your real interest rate is the nominal rate (3%) minus inflation, which is now negative. Your real rate is higher. It might be a lot higher.

I suppose I was an idiot an idiot! for spending the last 12-odd years paying down my mortgage. It made less sense during inflationary times, for sure. But if we assume a prolonged period of deflation (and why not, after 15 years of expanding credit) not carrying debt is virtuous.