NEW YORK (Reuters) - Merrill Lynch & Co (MER.N: Quote, Profile, Research, Stock Buzz) Chief Executive John Thain said the global economy is in a deep slowdown and will not recover quickly, and the environment recalls 1929, the advent of the Great Depression.
Let's imagine for a moment that John Thain had used the same platform to say something else. Something like "we aren't going to be hiring any more __________ (insert a disadvantaged minority) at Merrill. They're terrible workers, and we find that ___________ (insert advantaged minority here) tend to do much better work for us."
Can you imagine the fallout? It's certainly Mr. Thain's constitutional right to utter a statement like that, but in his position as the Chairman of one of the largest Wall Street brokerage firms, he'd certainly be cleaning out his office the day after such a statement left his lips. And rightly so.
But what true impact would such a statement have on the hiring prospects for _________? Not much, really. Most of us would dismiss his statement as the ravings of an unhinged business executive, and not a single __________ would go unhired. In short, John would lose his job and would probably never work again, but nothing much else would happen of real significance.
A Quick Detour - Market Economies
Market economies, for all their power, operate entirely on human emotion. When we expect things to be better in the future, we make investments intended to capture a return. When we expect them to be worse, we try to pull our capital out of the market and put it somewhere "safe".
When a panic grips financial markets, it's usually the result of one thing; money simply stops changing hands. Our economy is built on money flowing from one hand to another. When panics happen, they're inevitably the result of most players in the economy simultaneously thinking that they can CUT CASH OUTFLOW and PRESERVE THEIR CAPITAL. Almost everybody and every business I know, myself included, is following that exact course right now - trying to save money to protect against future calamity.
But let's examine that "logic" in more detail. As most of us remember, almost every asset that we can buy (gold being the most notable exception) is worth a sum of its future cash flows. An investment in UPS stock only has value to the extent that people keep shipping packages. If the world completely stops shipping packages (unlikely, but stay with me here), the value of that investment is practically zero.
The operative word in the above definition is, of course, "flows". Now let's re-examine the course most of us have embarked upon over the past few months; on one hand, most of us are stopping as many cash flows as possible. On the other, we're trying to preserve the value of our earning assets.
See the disconnect? In a market economy, one cannot expect that all players will do both simultaneously. Without people spending money, the value of all of their capital must inevitably decline. As an example; as a business manager, I start to worry about the future and cancel some capital spending to preserve my cash. But at the same time I've got customers who have their customers doing the same thing. So they stop buying as much. All of a sudden, my decision to cancel those projects seems prudent. But things are getting worse so I cut more. And my customers, under the same pressure, do the same.
Soon, we're all out of business. Was this caused by anything "fundamental"? Not at all. It was caused by everyone doing the same thing in an irrational attempt to have cash available for investment when things "turn around".
How's that again? Waiting for things to "turn around" means not spending until everyone else decides to start spending again. In other words, every player in our economy is waiting to be the last one to start spending again. At the same time, everyone's capacity for spending gets smaller and smaller as the economy deteriorates. It's a classic vicious cycle, and it's an inevitable feature of a market economy.
Back to "Hate Speech"
Mr. Thain's gloomy assessment of the economy, especially from someone in his lofty position, takes on the form of a self-fulfilling prophecy. If all the rest of the players in the economy think a guy as smart and well-positioned as John Thain thinks things are going to get worse....they will inevitably get worse. In short, Mr. Thain's words are going to cost all of us real money, and will delay the inevitable turnaround by a measurable amount. People are going to lose their jobs, including a whole bunch of those poor __________ folks, as a result of that statement.
But will Mr. Thain be clearing out his desk later today as a result of that article? Not a chance. He's simply being "prudent".
Which form of "hate speech" is more damaging? Why do we protest the one and let the other pass unchallenged?
How We Get Out of This
Confidence. Greed. We need people to think "things are so cheap now that I HAVE to buy". They have to see a glimmer of hope on the horizon.
It's the job of people well-placed in this economy to provide that hope. Or, at the very least, to avoid killing it. Mr. Thain should know better, and if I were Ken Lewis (his boss), I'd have that discussion with him as early as possible this morning.
(I might even ask him to clear out his desk.)
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