Friday, November 27, 2009

HONESTY IS THE BEST POLICY

When I was growing up I always heard the phrase "Honesty is the best policy". This can be applied in many ways, as you can speak about being truthful to someone about an event or facing the reality of the situation. So even at the expense of looking bad, one should always understand that a delayed consequence in most cases is always much worse than confronting the reality as soon as it arises.

This has been the demise of Jamaica. We have simply failed to confront our reality for too many years and have suffered as a result. In my book I looked at Jamaica's economy (through numbers) since 1962, and the thread that underlies our economic demise is that for most of our 47-year history we have just failed to confront our reality and deal with it. Because of that we have continuously postponed our development by always telling ourselves a lie that all is well, not necessarily in words but by our actions.

Gloom and doom
In fact, over the past few years people have always told to me that I'm always predicting gloom and doom for the economy. And in fact just over a year ago someone said to me that I should stop being so pessimistic and "think positively". Only recently I was told that someone else said that I and three other analysts were being too negative on the economy and that we needed to talk it up.

My response to these accusations is that I have always believed that "honesty is the best policy". Because when we are honest with ourselves then we truly recognise the challenges we face and that is always the first step to deal with them. But when we continue to lie to ourselves, we continue to do things like borrow more money to afford the new car and new clothes, only postponing the day when the truth cannot be deferred. And so Jamaica finds itself in that situation today, where we can no longer postpone the truth of our reality.

There is, of course, a subtle distinction between realism and pessimism. Encarta defines them as (1) Pessimism - "tendency to see only negative or worst aspects.and to expect only bad or unpleasant things to happen"; and (2) Realism - "a practical understanding and acceptance of the actual.rather than an ideal or romantic view."

So people tend to confuse pessimism with realism because of their own lack of understanding of the circumstances. In other words, if a train is coming directly at you, then being optimistic that it will not hit you without action is stupid. So if you do not understand that the train is going to hit you and dismiss the warning as pessimism then it will of course hit and kill you. On the other hand, if you accept the reality that the train is coming, then you can act and move out of the way to avoid being killed. This is the purpose behind plans and budgets.

And this distinction, in my view, is one reason why the global financial crisis has caused so much stress for so many, and even closer at home why many individuals find themselves in difficulty after the collapse of the unregistered investment schemes.
In March 2007 when it was obvious to Greenspan and even two local analysts (Ralston Hyman and I) that the US economy would enter recession, the great Bernanke and Paulson were confident that the US would not enter recession and the bias was still towards monetary policies geared towards tightening. Similarly, many local persons were unwilling to accept the reality that the unregistered schemes were in fact unsustainable and thought many who warned to "check before you invest" were pessimistic.

The consequences of both are on record for everyone to see.

Benefit of realism
If, on the other hand, both situations were looked at from a realistic and analytical point of view, then much of the pain that the world and individuals go through today could have been avoided. The world may still have fallen into recession but policies could have been put in place earlier to make it less painful. And if persons were more realistic about the investment schemes, much individual pain could have been avoided.

The problem is that people always find greater comfort in going with the crowd and so would rather believe what the crowd is saying rather than the minority. This is why markets crash, for example, because people usually follow the herd mentality and flock to investments along with the crowd, which inevitably leads to bubbles and eventual market crashes. There is nothing that replaces good and solid analysis.

So if you think about it, if Jamaica had faced the reality of our structural economic challenges decades ago then we would be in a much better position than we are today, and therefore "honesty is always the best policy". But we get there not by calling down "fire" on all those we deem to be pessimistic but by carefully analysing why they are pessimistic and comparing it against our own well-researched findings.
So when the National Anthem says "give us vision lest we perish", I think we need to add to that: "and allow us to properly analyse and interpret lest we be blinded".
When I listen to some of the analyses relating to the present challenges we face I only see a repeat of the same mistakes made, as a lot of the analysis and solutions are misguided. The one thing you want to do when faced with a challenge is first and foremost maintain a clear head and do not rush to judgement and solutions, as this is just as dangerous as taking the line of optimism without foundation.

Last year (2008) I had indicated that companies and individuals should have started to put their house in order for what was coming this year. Those who did are better today than those who did not; even though survival is never guaranteed, at least you get to live longer than those who did not.

As we go into 2010 the probability is that the economy will decline further, which will be exacerbated by the fact that many companies and individuals did not prepare adequately. But we can see a better 2010 if the correct choices are made at the country, company, and individual levels. The question is, will we continue to be optimistic without foundation or face the reality and allow for well-founded optimism?

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