Ancient Wisdom for Troubled Times

02/19/2009 1:21 pm EST

Focus: MARKETS

Howard Gold

Founder & President, GoldenEgg Investing

Unprecedented. Unlike anything we've experienced in our lifetimes. You hear these phrases a lot these days in discussions of the financial crisis and stock market meltdown.

That certainly seems true, with the global scope and complexity of the crisis. Who ever heard of collateralized debt obligations (CDOs) or credit default swaps (CDSs) a few years ago? And if you heard the word "TARP," you'd probably have thought it was a fish.

But on a deeper level, there's nothing unique about this-it's all about greed and denial and lack of foresight, things that go back to the very beginning.

I was reminded of this a few weeks ago in synagogue where the congregation was discussing the story of Joseph. Now, you don't have to be Jewish or Christian or even a believer to appreciate this tale. One of the first great family sagas in world literature, it inspired writers like Dostoevsky and Thomas Mann. But it also has some sober lessons for us, too.

Joseph, you might recall, was the favorite son of the patriarch Jacob. That enraged his elder brothers, who sold him into slavery and brought his many-colored tunic soaked in goat's blood to his aging father, who grieved for the son he thought dead.

Imprisoned on trumped-up charges in Egypt, he successfully interpreted the dreams of two fellow inmates. So, when Pharaoh himself had a disturbing dream, he summoned Joseph to his court and laid out the details.

Here is how Joseph interpreted the dream, in Robert Alter's fine translation of Genesis:

"'Look, seven years are coming of great plenty throughout all the land of Egypt. And seven years of famine will arise after them and all the plenty will be forgotten., and the famine will ravage the land.'"

Then, in one of the earliest recorded acts of chutzpah, Joseph advised almighty Pharaoh to "'collect all the food of these good years that are coming and let them pile up grain . And the food will be a reserve.for the seven years of famine. that the land may not perish.'"

Pharaoh immediately put this 30-year-old former slave in charge of the effort, with extraordinary powers. "And Joseph piled up grain like the sand of the sea, very much, until he ceased counting, for it was beyond count,'" the text says.

Result: While other countries starved, Egypt survived the seven-year famine. Joseph's brothers came to Egypt from famine-torn Canaan to buy food, and they ultimately reconciled. The family settled in Egypt and, well, you know the rest.

So, Joseph was the Nouriel Roubini of his time. But Pharaoh listened. Wall Street and America did not.

For the last few decades, especially this one, Americans and other consumers have been living in a debt-induced dream world. While prosperity reigned, we reaped the rewards, but many of us did little to prepare for the hard times we face now.

The US's total debt exploded from 155% of gross domestic product in 1975 to an astounding 355% of GDP in 2007-the vast majority of that increase coming from the private sector, according to Reuters.

US household debt, powered by credit cards and cash-out refinancings during the housing boom, hit 100% of GDP in 2007 while savings shriveled to a measly 0.4% of disposable income. Consumers in other countries joined the party, as household debt hit 112% of GDP in Spain and 107% in the United Kingdom.

Wall Street also went on a binge as it went whole-hog into proprietary trading of subprime mortgages and complex derivatives and leveraged up in some cases by 30 to one. The firms also paid outrageous bonuses to people who had few qualifications but happened to be in the right place at the right time.

So, when things came crashing down, the firms had nothing to fall back on, except the US taxpayer-the bottomless well from which so many failed businesses draw the water they didn't set aside while they still could.

Which leaves the US government. Afraid of deflation early this decade, then-Federal Reserve chairman Alan Greenspan cut the federal funds rate to 1%. That helped perk up anemic growth by turning a housing boom into a bubble. But without sensible regulation, fraud went unchecked and companies and individuals took on far more risk than they could handle.

Meanwhile, Congress and President Bush went on a spending spree-two wars, two huge tax cuts, massive expansion of entitlement spending in the Medicare prescription-drug benefit, No Child Left Behind, and endless earmarks and other pork-barrel spending.

Throw in the first phases of the bank bailout and the national debt ballooned to an estimated $10.7 trillion at the end of 2008-75% of GDP-from $5.7 trillion at the end of 2000, or 58% of GDP.

And President Obama's economic stimulus plan and the inevitable additional billions we'll need to bail out the banks could push our annual budget deficit above 10% of GDP, its highest in decades. Not too much extra grain piling up in our silos now.

That's unfortunate, because we've definitely entered the lean years of Joseph's prophecy. And instead of having the reserves to tide us over, we're digging ourselves deeper into the ravine of debt that got us here in the first place. 

That's not true of one major country, though: China, which salted away nearly $2 trillion in foreign currency reserves in the boom years when American and European consumers couldn't get enough cheap goods manufactured in the Pearl River Delta.

Now, as Chinese exports plummet and at least 20 million rural migrants have lost their jobs, the government has plenty of money to boost infrastructure spending and stimulate its economy. It also may have a few loose renminbi around to keep buying our Treasury bonds and keep America afloat, too.

China is no utopia. Its problems are daunting-hundreds of millions of rural laborers and educated urbanites who all hope to move into the middle class, horrible pollution, rampant corruption, and a still-weak consumer economy.

But at least in this one area-the surplus-wouldn't Barack Obama love to be in Hu Jintao's shoes?

Like Pharaoh, China listened and set aside reserves for the years of famine. Maybe Joseph spoke Mandarin, too.

Howard R. Gold is executive editor of MoneyShow.com.

Related Articles on MARKETS