On The Ongoing Depression


I often get questions about this or that related to various market moves and what I have repeatedly asserted is an ongoing economic depression we entered in 2008.

Many people doubt the truth, but arithmetic cannot be doubted.  It just is; your options are to either accept it or deny it, but you can’t change it.  And arithmetic says we’re in a Depression.

Let’s go through this one again.  The real GDP growth is the red line.  That’s simply the nominal number less government deficit spending.  Why must you subtract it?  Because if you don’t you are double-counting the government’s spending — you are at the same time counting both the debt issuance (which goes into the private economy) and the purchases by the government with the net debt issuance.

This is a distortion and you must subtract it back out.

Once you do what happened — and is still happening — becomes clear.  We would have to post up nearly 10% annual GDP growth with deficits where they are to have actual economic growth.  That’s not going to happen, which means we’re actually destroying purchasing power instead of growing the economy.

So given this, what do you do?

Here’s the bottom line folks — in the depths of The Great Depression 75% of the people had jobs.  There were also places in the country where the economy was doing ok.  Such is true now as well.

So here’s the deal in a few steps, for how you survive (and even prosper) in this environment.  I’ve spoken of all of this before but not in “one place”:

  • Figure out what you’re good at.  We’re all good at something.  I’m a good computer programmer, network designer and systems administrator.  I’m passable at a number of other things, including working on various mechanical things (e.g. cars, boats, etc.)  I can run a lathe or mill, if the need arises.   We all have aptitudes — figure out what yours are and make a list.
  • Write it down.  Yes, this means a formal business plan, complete with pro-forma financials.  It will take you a month or two of evenings and weekends to put it together at minimum if you do it right, so start now.  If you have multiple strength areas you want to take a shot at you need to write more than one.  This is critical; if you don’t do this you are almost-certain to go off the rails somewhere along the line and fail.
  • Do not have debt.  Debt is a millstone.  Everyone says that inflation “makes debt easier.”  No, it doesn’t for you.  It does for the lender, but not for you.  The reason is that your cost of living will rise faster than your wages and income will, and that will make paying the debt harder, not easier.  Don’t fall for that line of crap, it is a lie and you will lose.  Under no circumstances should you borrow against any existing asset you hold; if you wish to use one or more assets as part of your capital base (see below) liquidate it right up front.
  • DO have actual things that are, or can be, immediately-liquid.  That is, actual excess capital.  This means cash, believe it or not.  If you want to hold something “solid” make damn sure it’s immediately convertible at a stable price.  The reason for this is…..
  • Be prepared to, and always be on the lookout for, opportunities to exploit your strengths at some other poor bastard’s expense.  They will come.  When they come you will need cash — not loans.  Bid lower than even you think is reasonable and make the other guy cry.  If it is really the opportunity you think it is, which is formed as much of his desperation as your desire, he’ll hit your bid.  Being told “no” is ok; there will be more opportunities.  Your business plan from above will stop you from overpaying if you actually wrote one and adhere to it.
  • Do not, under any circumstance, lever up once the bid(s) gets hit.  This means no debt in operating and growing what you put together.  Period.  You have no way to know when or if we will get back into a truly inflationary situation where that strategy will work.  Odds are that it will be a decade or more before leverage will pay for the common man again.  If you violate this rule the odds are 80% or better you will go broke.

That’s it.

People who followed this path in the 1930s did anywhere from “ok” to very well.

This is how I built MCSNet.  I started it literally in my closet with a PC running a customized Unix OS and a handful of modems; there’s still the upper floor of a 2-flat in Chicago, I suspect, that has a big fat telco cable coming into that closet.  With the thing called “profits” I grew the company, rented a small office and then a much bigger office.  I started with just me while working full-time at another job, got laid off, then added one person, then ultimately more until it was roughly three dozen employees.  If you need more funds than you can obtain from operations sell some equity to people who are either accredited or exempt (e.g. family with capital.)  Resist the temptation to grow at a speed which exceeds what you can self-fund; it is very tempting but in this sort of economic environment it is an open invitation to an instant disaster — don’t do it.

Note the “got laid off” up there.  If I had been geared up to any degree at that point everything would have blown sky high.  As it was it didn’t, and that’s why — no debt and thus no debt service to sap cash flow.

You will not get rich quick via this path.  You will inoculate yourself from the vagaries of the economy to a large degree, and you will be risking only your sweat equity, without losing assets you have already acquired and need.  You’re no worse off if you fail this way other than in your time and whatever liquid capital you put up; you won’t lose your house, your car, your shirt.

There will be plenty of people who say this is “un-exciting.”  Well, it is.

It’s also a good, solid way to find success — if you don’t cheat (such as by levering up or using debt) — even if the economy continues to suck.

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