Buried beneath the rubble of Greece's insolvency and the chronic fiasco that is devouring the weakest members of the European Union, a larger question that ultimately will be spoken aloud and debated is this: are we at the end of Thatcherism, Reaganomics, and supply-side economics?
Since 1980, commercial markets have been operating more and more under a laissez-faire governmental thesis to unleash the maximum potential of capital in the marketplace. The co-pilots of relaxed rules and supervision and a secular expansion of debt have guided us into the abyss twice in the last five years. Supply-side economics' principles of wealth redistribution, mainly upward to capitalists, and the temporary or illusionary rise in personal net worth for the average man, may have run its course.
At the beginning of the Thatcherism and Reaganomics era, unshackled commerce benefited from, and some will argue it was the cause of, a secular drop in interest rates, a secular fall in inflation, and the early days of the greatest secular bull stock market ever recorded. Two generations of accumulated middle-class wealth in the richest economy and best educated mass society on the planet was its accelerant.
Any economic theory converted into policy must be able to translate itself from intellectual discussion to practical application with acceptable results. And, the results must prove acceptable and visible to most parties involved with the outcomes for this new zeitgeist to continue with broad societal support.
Embracing a new economic theory, after it gains a foothold in the public consciousness, only occurs when a sustained undesired economic result from the previously employed thesis metastasize into a full crisis for the political class.
The working class - junior partners in the economy were given an invitation to join the gentry class and their senior partners in the early1980's if they would abandon the vulgar thoughts and filthy habits of Marx and Engels, while whistling The International.
Through discounted stock commissions, mutual funds, annuity products, limited partnerships, Keogh plans, 401K and IRA accounts, and other investment opportunities of the noblesse oblige, these new pledges of wealth, privilege and profligate lifestyles seeing their household net worth rise only reinforced in their minds the powers of supply-side economics.
Going forward, supply-side economics was accompanied by continuing deregulation, federal tax cuts and federal deficit spending, a new mantra of "maximizing shareholders' value", creative accounting, and open global borders with reduced or eliminated import tariffs, and technological and financial products innovation.
Below is a summary of the stock market's performance over those years, taken from Wikipedia:
1967-1982: Bear market. Traders deal with a stagnant economy in an inflationary monetary environment. The Dow enters two long downturns in 1970 and 1974; during the latter, it falls nearly 45% to the bottom of a 20-year range.
1982-2000: Bull market. The Dow experiences its most spectacular rise in history. From a meager 777 on August 12, 1982, the index grows more than 1,500% to close at 11,722.98 by January 14, 2000, without any major reversals except for a brief but severe downturn in 1987, which includes the largest daily percentage loss in Dow history.
2000-present: Bear market. The index meanders and then plunges to a closing low of 7,286.27 on October 9, 2002. A cyclical bull peak at 14,198, reached exactly five years later, does not surpass the inflation-adjusted 2000 high. A renewed bear is recognized in summer 2008 and multiple volatility records are set that autumn. Another acute phase in early 2009 brings the index to new 12½ year lows south of 6,469, for a total loss of 54% in less than 18 months. In the following three years, the Dow remains volatile, but manages a near-doubling to 45-month intraday highs just under 12,925 on February 9, 2012.
We now recognize there are too much outstanding private, corporate, and government debt obligations to ever be serviced, or repaid. Vast quantities of underlining assets belonging to this debt are mispriced, dubious in quality, or is virtually non-existent. Over one trillion dollars in compelled recreational debt is tied up in student loans by Generation Y - the Millennials.
The current time value of money is grotesquely warped, in the hope of extending the charade of affluence which us crumbling, and is having a deleterious effect on real savings and unbridled speculation. The notional value of outstanding derivative contracts is incomprehensible when compared to total global wealth. Algorithm trading has perverted daily market activity.
Unlike 2008, when markets froze up or collapsed due to price discovery, un-coerced supply and demand curve changes, and unsound, opaquely-structured investments, laced with greed and fear, what we are witnessing today is basic multiple organ failure of a financial system that is beyond repair and is slowly shutting down.
There are no long term solutions to our existing problems that our current political and economic systems are willing to accept and employ. Therefore, supply-side economics has reached an impasse. For some, the future existence of supply-side economics is an uncomfortable question; equally uncomfortable questions are what will replace it and how soon?
As investors, not speculators, until the world determines its own future, preservation of capital must become an individual's top priority. Casual investing in these roiling times is reckless and tempting fate.
There are only two fundamental choices anyone can make when investing: exchanging principal for fractional ownership, thereby, risking total loss of principal for fractional unlimited appreciation, or, lend principal for a specific period of time, a specific interest rate adjusted for risk, and an expectation of timely payments and the return of principal.
Every investment in the world is a derivative of one of these two fundamental investment tenets.
Today, short-term interest rates are near zero; long-term rates are below 3%. Monetary policies around the world are set for generating inflation to lift asset prices and to jumpstart floundering economies. Entities, globally, that have not already reduced their outstanding debt, are either overleveraged or in the process of deleveraging.
Compulsive-shopping baby boomers are saving more and spending less as retirement and the aging process claims thousands of boomers daily, around the world. Political unrest, inspired by deteriorating economic conditions is only exacerbating a bleak looking future for career and employment opportunities seekers. On every continent, youth unemployment is on the upswing as automation renders their workforce participation less and less necessary.
These headwinds are enormously complex and forceful. Some are irreversible. Until that next new transformative thing appears, 20th century supply-side economics' diminishing returns will be harshly judged in this more challenging 21st century environment.
Ultimately, it will adapt, or, like economic systems that preceded it and became obsolete after failing to adjust, it too shall disappear in the rearview mirror of time.