I had lunch yesterday with one of the sharpest financial minds I’ve met in a long time at a rather picturesque setting overlooking Evergreen Lake, west of Denver.
The restaurant patrons were all well-to-do residents of this wealthy community… in fact, the whole area is like a bubble, largely shielded from any negative effect of the economic fallout thus far. Most of these folks have gone about their lives over the last few years completely oblivious to the global financial crisis.
My friend agreed; he told me, “Most of the people sitting in this restaurant haven’t felt a thing. Their guard is down, and they have no idea what’s coming. It makes me nervous.”
Indeed, there’s a large segment of people in this country who have not been directly affected by the meltdown. They still have their jobs, they haven’t been foreclosed, they haven’t been directly threatened by the government, they haven’t been robbed (by the private sector).
Their experience with the poor economy is second-degree… what they read in the papers or see on TV. But overall they live in a bubble. I can only describe this as the calm before the storm… and people are completely blind to the clouds forming around them.
Being blind to the obvious is part of the human condition. And this morning, a friend from London sent me an email describing a rather interesting experiment on the subject. It’s called the Invisible Gorilla.
Subjects in the experiment are asked to watch a video in which groups of players are passing basketballs back and forth. Half of the players in the video are wearing black uniforms, half white.
The subjects are asked to -ignore- the players wearing black jerseys and count the number of times the players wearing white pass the ball to each other. Halfway through the short video, someone wearing a gorilla suit walks on to the screen, thumps his chest, and walks off.
Here’s where it gets interesting– about half of the subjects participating in the experiment don’t notice the gorilla. They’re so focused on counting the white team’s passes and ignoring everything else that their minds naturally filter out something completely obvious.
What’s more, when they’re told about the gorilla after the experiment, most people refuse to believe it. It shows without doubt that (a) people can be blind to the obvious… and (b) people can also be blind to their blindness.
There’s a lot of this happening right now. A lot of people live in their bubbles, detached from reality and completely blind to obvious signs.
The truth is that the insolvency of entire nations in the western world is an unequivocal fact. And it’s not just Greece or Italy or Ireland. It’s the United States as well.
According to the US government’s own 2010 financial statements, the cost of just three sacrosanct programs– defence, Social Security, and Medicare– exceeded all of the tax revenue collected that year by $10 billion.
In other words, the US government was already in the hole by $10 billion before it paid the light bill at the White House. Or hired any child molesting TSA agents. Or provided bailout funds to Solyndra. Or even paid a single dime of interest on the federal debt.
For several years now, the government has been in a position where it has to borrow money just to pay interest on the money it has already borrowed.
This is the point of no return. Examining the long and distinguished list of countries over the last 800-years that have been in this position before, there is hardly a single example of a nation escaping default and/or hyperinflation. This time is not different.
Now… when the decay comes, it comes quickly. Remember the 2008 Lehman collapse? The markets were plodding along with minor volatility for the months leading up to it. The warning signs were there, but almost everyone was blind to the gorilla thumping its chest. Then suddenly, poof. Trillions of dollars of wealth wiped out.
The same thing happens when a nation collapses. Everything is fine until it isn’t. Look at how quickly the situation deteriorated in Greece. Or Argentina.
We have to force ourselves to wake up… to stop being blind to the giant gorilla thumping its chest right in front of us. It’s easy to believe that nothing bad is going to happen. That this time is different. That this country is different. That the system can’t collapse.
Dangerous words. Things may be fine now, but as quickly as the situation can deteriorate, rational, thinking people have a limited window of opportunity to take action. The gorilla is thumping its chest now. How soon will the next ‘Lehman-style’ event be? Can you afford to wait?
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