Tuesday, March 09, 2010

Measuring Misery

If misery truly loves company then there has hardly been a better time for misery to find companionship than today.

High and epically long duration unemployment, a decade of flat to falling wages, a lost decade for stocks, several years of falling home prices, a massive ongoing foreclosure wave, unsustainable household debt, bankruptcies, bailouts, frauds and ponzi-schemes… the list of miserable things seems to go on and on.

Yet quantifying the general level of misery is a pretty tricky task… one person’s misery is another’s good fortune.

A home that falls into foreclosure after having lost 30% of its peak value gets miserably wrenched away from one owner only to be delivered on the cheap to the next.

Those miniscule “quantitatively eased” interest rates benefit newly minted debtors while decimating those relying on interest rates for fixed incomes.

Falling home prices work to push many existing home owners over the brink of insolvency while simultaneously granting a lower cost of living for those just forming their households.

Who’s to say whose miserable? … even the foreclosee must eventually breathe as sigh of relief… yet his bankers despairs have only just begun.

In any event, back in the 1970s the “Misery Index” gained notoriety as a quick read on the state of the nation’s despondency.

At that time, near-runaway inflation was a real problem so the collective sense of “misery” was essentially defined as rising prices in the midst of generally weak economic conditions… stag-flation.

So, the “Misery Index” was simply the sum of the two… the inflation rate + the unemployment rate.

As you can see from the chart below, using the 70s definition we should be materially less miserable today.

But this indexing of misery is obviously a fishy business… it’s all dependent on which variables you believe best represent the hopelessness of the times in which its formulated.

The unemployment rate is likely a good all around figure to include but given today’s trends can you suggest another?