Waking the Frog



There’s an oft-told myth that if you put a frog into hot water, it will jump right out, but if you put it in cool water and slowly raise the temperature, the frog will sit complacently while it boils to death. The myth has been disproven for frogs, but I think that it’s true enough for people.

Slowly, over time, changes are made to many areas of life. Each change is disadvantageous for the regular person, and they may complain, but the changes aren’t terrible enough to spark real pushback. Over time, that change becomes the new normal. That new normal is then changed, and so on. And while many wonder why things have gotten so uncomfortable, the widespread outrage that should accompany what’s happening hasn’t been forthcoming in the directed, concentrated way that it should. That outrage probably will appear, but perhaps not until things have gotten so bad that that outrage verges on revolution.

Here are a few more-or-less random trends that I have been watching that tell me the temperature is rising:


When I was a kid growing up in Philadelphia, surging inflation was the top one of the top concerns of the nation. Paul Volker, as president of the Fed, took radical steps to reign that inflation in. This is one of the jobs of the Fed, to work towards price stability. It has always been the theory of the Fed that a little inflation is a good thing. The two percent target that Janet Yellen and other central bankers around the world are putting out doesn’t make much sense, though. As Volker himself put it in a somewhat famous conversation with Donald Kohn, by setting the inflation rate at 2 percent, people will lose half their purchasing power every generation.

There are a number of reasons why the government would see this as a good thing:

  • Inflation is better for people who owe money than for people who are owed money. For example, if inflation is 100% a year and I lend you 100 dollars for one year, when you pay me back, the value of the money will be half what it is today. By driving inflation, the government will owe less in real terms on the massive debt it is carrying now. The flip side of that is that the money I save for my retirement will be worth less too. Inflation, thus, amounts to a hidden tax.
  • Inflation makes the GDP look better: If there is inflation, then there is more money moving in the economy than there was before. A politician can point at a line on a chart showing this increase of money moving and say how well the economy is doing. It’s all smoke and mirrors, though, since that volume of money may be equal to, or even less than, the amount of money moving the previous year.
  • The government can save on social welfare programs. Since the benefits of these programs are linked to inflation, and since, as I will show in a moment, inflation is often drastically under estimated, the government can pay less to servicemen, retirees, and others in the safety net.

Of course inflation is an unpopular thing. Most people will accept inflation at 2 percent. They may not like it, but they figure everything will even out. The figure, though, 2 percent, is also not to be trusted. The formula used to calculate inflation has been constantly tinkered with over the years to keep the number as low as possible. Things that people need most on a daily basis, food and energy, are excluded because they are too ‘volatile’ and would ‘skew the numbers.’ If the method used to calculate inflation in 1990 were used now, inflation would be 6 percent. If the 1980 method were used, it would be a whopping 10 percent.

Other governmental numbers are the same. There are multiple calculations for unemployment. The number the president announces as press conferences is one that exclude vast swaths of people for one reason or another. If the real unemployed/under employed rate was used, it would be a lot closer to 14 percent than 7 or 8.

Savings Account Interest Rates

Again, when I was a kid, my parents opened a savings account for me at a local bank. 25 dollars were deposited which earned two percent compound interest. That money sat for years until the account was finally closed, at which time I got the principle plus all compound interest. Now, the average interest rate for savings accounts has dropped to less than one percent and most accounts have high minimum balances and high fees. Combine all this with the inflation I talk about above, and a savings account really amounts to a losing account, since both the money you get out of a savings account is likely to be less in both value and total number of dollars.

The way this is supposed to work is that by putting your money in the bank, you make it available for them to loan out to someone else. Since the bank charges interest, they will make enough with your money to give you a small reward. That system has broken down. Reports for Australia are that the government there has recently changed a law that allows them to confiscate money in any bank account that has been dormant for three years. This was a law that was already on the books, all the legislators did was lower the number of years an account needs to be dormant. The take: 360 million.

Initial reports of this were much worse than the reality. The actual intent of the law is to prevent banks from eating away at these accounts with predatory fees. Attempts are made to contact the owners of the accounts and there is a process to reclaim confiscated funds. Even given that, it’s a disturbing precedent. Rather than confiscating the money, given that the banks are making money with the assets in those accounts, it would be easy enough to outlaw the fees and leave the accounts alone. With the memory of the bail-in in Cyprus still fresh in our minds, no one should feel secure if they have a large amount of assets in a bank.

Corporate Buybacks

Again, when I was a kid, I can remember corporations being praised not only for their ability to make a hefty profit for the shareholders, but also for their contributions to the community in which the existed. This was before free trade agreements turned the corporations into border-straddling behemoths beholden to no nation and hollowed out our workforce with the ‘giant sucking sound’ Ross Perot prophetically talked about during his failed presidential campaign.

Right now the stock market is booming while the rest of the economy seems to be languishing. One of the reasons the stock market is doing so well is that companies are choosing to invest their earnings in buying back shares of their company. This is a sensible thing for companies to do when the economy is weak. Most company executives get paid in stocks or based on share price. If the company is lagging, buying back stock decreases the number of stocks available, driving the price up. This drives the market price up, increases share price and dividends for shareholders, and increases the executives’ pay. Everyone is happy.

Also, since we are now in our seventh year of Quantitative Easing (wherein the Fed ‘creates’ money out of nothing to increase the supply of money), it’s easy for these companies to borrow money to buy back their shares. The wonderful thing for the companies is, of course, since the Fed is charging a zero interest rate on this money, the companies can get really good deals on these loans. Even better, since Quantitative Easing tends to create inflation, the corporations can reasonably expect to have to pay back less than what they are borrowing.

The problem is that by buying back these shares, the companies are betting that the economy is going to turn sour. They are not using that money to do R&D, or build new factories, reach new markets, or raise salaries of hardworking employees. They are streamlining. Cisco, which is right now in the midst of buying back shares, is also laying off 5 percent of its workforce, or about 4000 people. The company will get a stock bump, the executives will do well, and 4000 families will wonder where there next meal is coming from.


There are a lot more trends that point in the same direction: not only is the game rigged so that the well-off stay well-off while it gets harder and harder for the rest of us, but that the systems is getting more and more unstable. The government and the financial sector are saying that the economy is improving, but people are feeling the pinch ever more deeply. At some point, something will break, and the resulting crash and fallout is not going to be pretty.

By Mark Norton [email protected]