The Edgy Optimist

After a pleasant lull over the past six months, panic over the fate of Europe has flared once again. Just weeks ago the elites of Davos exuded confidence that the crisis had passed; the events of the past weeks showed how ephemeral such certainty can be.

But the easy resumption of dark prognostications is just that: easy. The siren call of Euro-pessimism should be ignored. It was wrong in 2010, and it will be wrong now. Europe faces hard years with no clear path, but that is not the same as dissolution and chaos.

So what changed? The British government of David Cameron spoke with atypical candor about the possibility of Great Britain leaving the Union. Scandals rocked the Spanish government of Prime Minister Mariano Rajoy, and Rajoy himself was accused of accepting illegal payments. In Italy, one of the larger banks, Monte dei Paschi, revealed that it had lost close to $1 billion in hidden derivative transactions. More worrisome, looming parliamentary elections that have seen the incredible (for anyone outside of Italy) resurrection of former Prime Minister Silvio Berlusconi, who has managed to surge in the polls even while on trial for paying an underage woman for sex. The prospect of Berlusconi’s return coupled with a crippled Spanish government have raised the prospect that neither country will continue their long march to structural economic reform.

The reaction of financial markets has been swift and predictable. Bond yields on Spanish and Italian debt jumped after months of calm. Soaring costs of borrowing led to a sell-off in Europe’s stock markets. Said one analyst: “Investors are once again being spooked by political uncertainty from both Spain and Italy as both countries … could derail ongoing and future reform.” As we saw in 2010, 2011 and again in 2012, once that cycle begins, it can deteriorate quickly. Now, Cyprus has asked for financial assistance from Europe. While Cyprus is even smaller than Greece, even that was enough to further unsettle an already unsettled situation.

The sudden reemergence of Euro-fear says something about how easily the financial world and its media slip into pessimism about the current and future state of the world. Signs of stability and the ebbing of crisis are viewed instead as false dawns and head fakes. Hints of crisis and deterioration, however, are given oracular weight and accorded the greatest respect.

As the U.S. jobs market continues its slow, not-very-impressive-but-nonetheless-forward march, one area of the economy still lags. Banks have only very recently begun to lend. Both individuals and small businesses have faced tight credit standards enforced by risk-averse banks; mortgages have been hard to obtain, and small business credit has been tighter yet. From 2008 to 2011, loans to small businesses fell 20 percent. The net effect has been to mute an already muted recovery.

These trends haven’t been confined to the United States. Lending has been even tighter in Europe, particularly in stressed markets such as Spain. While there are some signs of a thaw, the days of easy credit spurring new and small entrepreneurs to create new and innovative companies seem increasingly of the past.

Or so the data points from the banking and credit industry tell us. What they don’t tell us is that as traditional sources of credit and funding have withered, alternate sources have blossomed. We have been so focused on the negative shifts triggered by the financial crisis of 2008-09 that we may have neglected to notice some new and powerfully positive trends.

Apple’s quarterly results this week drew a flood of reactions – almost all negative. Given how well the company did under almost any absolute measure, this is odd, though, for Wall Street, not necessarily surprising.

But the arc of Apple’s rise and temporary fall tells a more troubling story about our current inability to maintain positive momentum about any aspect of our culture. We slay our heroes with casual abandon. Then we wring our hands about the absence of positive catalysts in our world today.

Apple’s stock, already in relative free fall from an all-time high of more than $700 a share, plunged nearly 12 percent on the news. The company has now lost 35 percent of its value in four months – which represents an astonishing $235 billion. This decline alone is larger than all but three companies in the S&P 500, and larger than the gross domestic product of more than 140 countries.

Earlier this week the Bureau of Labor Statistics released its monthly inflation report. The numbers came in at 1.7 percent a year for all items. Excluding the ever-volatile food and energy, it was 1.9 percent.

That’s about as low as inflation has been in the last 50 years.  Only 1986 (1.1 percent), 1998 and 2001 (1.6 percent), 2008 (0.1 percent) and 2010 (1.5 percent) have come in lower, and a few years in the mid-2000s registered the same.

The disappearance of inflation over the past 20 years, however, has barely dented the pervasive belief that inflation remains one of the greatest threats to economic stability. These convictions persist in spite of all evidence to the contrary: Inflation is nowhere visible. For many, that is just proof that we are living in a lull — a phony war soon to be disrupted when that age-old enemy reappears and wreaks havoc.

This week the National Climate Data Center confirmed what most had long believed: 2012 was the warmest year on record for the United States. Ever. And not just a bit warmer: a full Fahrenheit degree warmer than in 1998, the previous high. In the land of climatology statistics, that is immense. In the understatement of one climate scientist, these findings are “a big deal.”

Almost every news story reporting on this juxtaposed the record with a series of disruptive climate events, ranging from the drought that covered much of the United States farmland and punctuated by Hurricane Sandy in its tens of billions of dollars of devastation. Many also pointed out that eight of the 10 warmest years have occurred since 1990 (though it should be noted that official records only extend to 1895). Not surprisingly, these observations were almost always followed by warnings of more warming and substantially worse consequences to come.

But what if climate change isn’t the disaster we fear but instead one more obstacle that humans can meet, one that may spur innovation and creativity as well as demand ever more resilience? What if it ultimately improves life as we know it?

So we did not fall off the cliff. But the reaction to the news of the deal suggests that we’ve become a culture addicted to crisis, because barely had the vote been taken when the spin from politicians, from the mainstream media, and from the cacophonous web was angry, sullen, and negative.

The problem is said to be, in no particular order: Washington, partisanship, Tea Party ideologues, tax-and-spend Democrats, unions, rich people, America, unemployment, underemployment, the shafting of the middle class, the end of the American dream, the untenable deficit, unfunded mandates, and unreasonable expectations. But maybe the problem is none of those; maybe it’s a deepening love affair with crisis. The perverse lure of descent and an inability to break out of the cycle is threatening to overcome us.

What did the deal actually accomplish? Taxes went up significantly for the wealthy and modestly for most, yet the core of lower rates for the vast majority of Americans was retained. Financial markets reacted giddily and made up some lost ground. And for all of the legitimate carping about the dysfunction and polarization of Washington, the deal was actually bipartisan. An overwhelming majority of both Republicans and Democrats backed it in the Senate, while in the House the deal fractured the Republican caucus. The party split its vote and was then joined by a majority of Democrats.

As 2012 sputters to a close, it wraps up with a yawning gap between widespread economic pessimism and the actual state of economic affairs.

Though consumer sentiment rebounded in the fall, it fell in December, amid relentless coverage of the impending fiscal cliff. Holiday spending was muted. Businesses, meanwhile, cite the unresolved negotiations in Washington as evidence of continued uncertainty and many have put new spending, hiring or investment on hold. The media counts the days (and on some cable news channels, the minutes and the seconds) till we descend the fiscal cliff – adding to the general agitation.

Yet, every indicator of American economic activity has been strengthening. Stocks are up between 8 percent and 14 percent in 2012, depending on the index. Gross domestic product is increasing more than 2 percent a year; unemployment has fallen below 8 percent; wages are steady even as inflation is close to non-existent. Energy prices have declined, and home prices have increased. Debt burdens for American households are now at the lowest level in 29 years, giving the vast majority of consumers more flexibility in their spending

As the fiscal cliff talks evolve and devolve, the latest spat has been whether the arc of federal spending should be curtailed by changing the way that we assess costs. The proposal from the White House is to switch the way cost-of-living adjustments are made for Social Security benefits. Rather than pegging those to the Consumer Price Index as currently calculated, these would be pegged to a “chain-weighted” Consumer Price Index, which would save as much as $125 billion in additional benefits over the next decade.

Sounds wonky, and it is. But so is much of how the federal government accounts for spending, and these metrics intimately shape what we spend, how we spend, and how we think about the present and the future. The primary measure of inflation, the Consumer Price Index (CPI) uses a fixed basket of goods that resets periodically. Chained CPI uses a basket of goods that adjust more fluidly to account for what statisticians and economists call “the substitution effect.” A fixed basket of goods is easier to calculate: just define the basket and then measure the price changes. But in the real world, people don’t passively accept changing prices. They change their behavior. The price of gas goes up? People drive less; they carpool more; they buy more fuel-efficient cars and consume less gas. The price of a domestic flat screen television goes up? They buy a less expensive import. In short, people don’t necessarily bear rising costs passively; they react and shift to maintain their standard of living. The traditional CPI index doesn’t capture that.

For all its wonkiness, the proposal to change the benchmark used to determine Social Security and various other benefits has engendered attacks from all points on the political spectrum: the left assails it as a backdoor technicality that will increase burdens on the elderly and the less well-off; the right scoffs that Obama’s proposals don’t constitute true deficit or spending reduction but are simply accounting tricks, and the media treats it as politics as usual with the cynical corollary that because almost no one understands what these rules are, it makes it easier to enact them.

The Federal Reserve just announced a new round of measures designed to keep the money flowing. Central bankers – not to be confused with the heads of private banks that have received so much opprobrium for their role in the financial crises of the past years – are not noted for their charisma or their communication skills, but their role in shaping today’s world, shadowy at times, could hardly be greater. The question is: Are they helping or harming?

Almost exactly a year ago, on the night of Nov. 30, 2011, the world’s central bankers acted swiftly to stave off yet another near-collapse of the global financial system. In the weeks before, equity markets had sold off hard as the eurozone continued to simmer, but that was a mere warning. The real crisis was soaring costs of borrowing for Italy and Spain combined with a nearly complete halt of lending between banks. That too had been the critical moment in the fall of 2008 – once banks stop lending to one another, there is only so much cash on hand. Once depleted, that’s it. No checks cleared, no money at ATMs, nada. You can easily imagine what happens then.

The actions the bankers took in the dark of night were relatively simple: They told the world’s banks that they would be able to go to each central bank and get funds. That may not seem like much, but in the world of finance, it was enough, and it was everything.

Consumers are feeling optimistic; sales are up; employment hasn’t much improved but neither is it getting worse; Washington is as dysfunctional as ever; and housing is showing significant life. Not the best of times, by any means, but not the worst. Yet, for some, that very calm says a storm is brewing, one of epic and perhaps even biblical proportions. Their opinion may not be a dominant chord, but it is prominent. And it may explain in part why our public debate about fiscal cliffs, taxes and the economic future can verge so quickly into dark, deep and destructive passions.

If you’ve turned on talk radio to pass the time driving from store to store for Christmas shopping, you may have heard an ominous voice jarring you from otherwise anodyne thoughts about the state of economic affairs. “Something bigger and more devastating than the credit crisis of 2008 is about to come our way. … Fail to heed this final warning at your own risk.” This isn’t a public-service message, though it comes with that patina. It is an ad from CritcalWarning6, which has also festooned financial websites with its banners, urging you to click and find out just what lies ahead. So I did.

We are, says Michael Lombardi, the man behind the campaign, headed for a collapse that will make what happened in 2008-09 look like a pallid warmup, plunging the U.S. and the world into a new Great Depression whose long-term effects could be much worse. The U.S. government is bankrupt, says Lombardi, and the Federal Reserve’s policy of “artificially low interest rates” has reached the end of its utility. There are no arrows in the proverbial government quiver, and in conjunction with an imploding euro zone, massive underemployment and far more debt than can be paid off, we are on the precipice, a cliff much more dire than the upcoming fiscal one. Stocks will plunge well below the lows reached in March 2009, and unemployment will make Spain today appear to be a safe haven.