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Sunday, February 04, 2007

McNosis, Retiring Boomers and the Silent Crash

M.A. Nystrom, M.B.A.
February 1, 2007
Cambridge, MA

If there was any doubt that the American people were engaged in a deep, collective slumber, one need look no further than the cover story of the most recent BusinessWeek "McDonald's Goes 24/7," for evidence. The article describes the company's new "sizzle" that has its earnings growing like gangbusters, as well as a number of cultural trends that that are transforming both McDonald's and American society in general. While the restaurant chain had previously focused on a growth strategy that relied on opening more stores, it has recently changed its focus to squeezing ever more revenue out of existing stores by: extending breakfast hours (for people on the go), serving different kinds of snacks (for people on the go), and -- you guessed it -- staying open 24 hours a day, for people on the go. Today 40% of McDonald's are open around the clock, compared to just half of one percent in 2002. Talk about growth -- this is a company on overdrive! But these business hours necessarily implies that that it is not just the company, but also the entire country that is on overdrive, too busy to cook, routinely pulling all-nighters and working graveyard shifts.

Who are all these people on the go? At 3:30 in the morning, it is a young man who's just finished a 12-hour graveyard shift at a nearby food warehouse, on his way home to crash. Whereas he used to stop by a convenience store or a diner for his supper, now he says he stops by McDonald's at least five times a week. Dude! I don't care what anyone says, that is not healthy. I guess he never saw the film Supersize Me. Chances are he didn't, because chances are, that like many of McDonald's own employees, he is poorly educated and perhaps a even high school dropout. In the age of "No Child Left Behind," nearly 1/3 of public high school kids will never graduate. This too is part of the ongoing evolution of America - graveyard shifts by high-school dropouts working at low paying jobs, serving ever more people without a moment to spare.

By six a.m. in the same store, the restaurant's wall-mounted flat screen TV's are tuned to CNN, so that customers can stare at the scrolling news ticker as they wait for their McGriddles and coffee in the predawn hours. By lunchtime, the drive-thru is serving 90 cars per hour. Business is brisk because people are busy, the food is cheap and McDonald's specifically engineers new snacks that can be eaten while driving. More than ever, Americans today are in a mad rush to get wherever it is that they are going, and more than anything, that is good for business. There are no explicit limits to this kind of growth, no laws or regulations on business hours, and no minimum wages for working through the night. It is simply what the market will bear. What I find curious about this is that while business people would balk at any kind of centralized government regulations of these kinds, there is no outcry at all over the nation's centrally planned and regulated currency. Yesterday the nation's Federal banking cartel (aka "da Fed") announced the results of its most recent price fixing meeting, and the market cheered!

Few people, neither those working at McDonald's nor those rushing in and out for their meals have time to think about anything as arcane as this. There is little time to ponder the larger issues that may be confronting them or the society they live in. "Eating is something they simply 'check off,'" the article says. There are lots of things on that daily list to check off, and as a result most have become mere bundles of conditioned responses. Ivan Pavlov taught us about conditioned responses with his dog: Ring the bell, give the dog food, his mouth waters. Ring the bell, give the dog food, his mouth waters. Ring the bell, and eventually even without food, his mouth still waters. This is how more and more Americans are living each day of their lives, going through all the motions without the foggiest idea as to why, living lives in a collective state of zombified hypnosis (McNosis). And this isn't just the working class, but the professional classes too -- traders, doctors, lawyers, executives, lawmakers, and the like. There are simply too many stimuli to respond to every day, leaving too little room for actual thinking. So this is what America has become. In such a heightened, frenzied state, a person's responses become instinctual, emotional, governed by the primitive limbic system, or "reptilian" brain.

Traders know that in such frenzied arenas as financial markets this is taken to the extreme. Markets do not plan their movements, but dance to a primal tune. Wednesday, for example after "da Fed" gave the market what amounted to an all clear on Wednesday, US financial markets proceeded to go ga-ga! Stocks rose and bond yields fell in a euphoric celebration. Had anything fundamentally changed to justify such a response? Only the most important thing: perceptions. A certain perception of the future (the Goldilocks future) caused an emotional market reaction, leading the Dow into record territory once again.

Retiring Boomers
Considering the glowering generational storm clouds that are hanging on America's horizon, it makes little sense on the surface that the market is making new highs. Not more than two weeks ago, Bernanke, head of the same Fed that sounded the all clear yesterday, was on the Hill finger wagging at the Senate Committee on the Budget saying they've got to get the country's fiscal house in order, and quick. While things look okay now, he said (if you call a $248 - $434 billion budget deficit okay), they're only going to get worse as our nation's population ages. Boomers are getting older, they're getting sicker and when they start to retire they're going to be expensive, and suck up much of the country's resources. Bernanke goes into this in his speech, but something a little more succinct and readable is here: Tough Times Ahead for Elder Boomers, a short excerpt from Peter G. Peterson's 2004 book Running on Empty.

Peterson goes on to say:

If we can't grow our way out of the cost problem, some say there's another option: inflating our way out of it. Printing money has been the last recourse of governments throughout history. From Revolutionary France in the 1790s to Weimar Germany in the 1920s, regimes under duress have made their ends meet by inflating their spending power ahead of their fixed obligations. Although no one, Democrat or Republican, today advocates a policy of deliberate inflation, many suppose that if all else fails, the government could someday resort to inflation to reduce its long-term entitlement obligations.

Is this a realistic option? Probably not. Inflation usually ends up destroying social trust and ruining the economy. Furthermore, it is a "fix" that can only be used once - indeed, can only be discussed once. The mere expectation of inflation would cause interest rates to leap upward to compensate creditors for the anticipated erosion of their real claims. Even as a short-term palliative, moreover, inflation may not have the desired effect. Social Security benefits are by law indexed to the price level - and Medicare benefits are in effect indexed to it. Yes, inflation would reduce the real value of the formal public debt. But it would do little to reduce the value of our unfounded entitlement promises, which we have seen are many times larger. In the end, deliberate inflation would act like a perverse chemotherapy regime that ravages the body while leaving the tumor untouched.

So there you have it. Just FYI - that's the Chairman of the CFR speaking.

As Bernanke (also (of course) CFR) noted, without radical changes, the long-term economic picture is grim. The debts already pushed onto future generations are staggering, and inflation isn't a potential solution. I think this goes a long way towards explaining the Silent Crash that is already underway. On the surface, the economy looks fine, but peel back the faзade and you see our foundation of prosperity is crumbling. This is clear enough from a common-sense standpoint: As a nation, we can't expect to go on spending more than we make forever -- such are the thoughts of a naпve young country -- though our politicians repeatedly tell us otherwise. At this point however, the collective perception - the McNosis, if you will - is that America is somehow different, somehow special, somehow exempt from history.

In the coming years we'll have the choice between creating a society that is either like heaven or hell. But the first step towards a solution is having a clear and accurate understanding of the realities we face. Creating a prosperous future for all will require very real, deep and heavy thinking that results in a radically re-envisioned society. It will likely require a redefinition of what it means to be both human as well as an American. I'm the first to admit that there is no easy McSolution. It will take more than conditioned responses.

Break No Bones Cathy Reichs

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