The Dynamics of Relationships and Economies

It's in the evening. You and your girlfriend are watching TV together in your living room. You get up to go to the bathroom and then return. A few minutes later, your girlfriend does the same. But she storms out of the bathroom, accusing you of leaving the toilet seat up. You're surprised and  not sure why this is a big deal. She doesn't like your body language at all. You two get into a huge fight. 30 minutes later, your relationship is over. What happened?

The immediate cause of your relationship ending was you leaving the toilet seat up, which pissed off your soon-to-be ex. But obviously that wasn't the most important thing. There were other things that happened in the past, that your girlfriend put up with, and your relationship muddled along for a couple more months. And then that fateful night, you leave the toilet seat up for the umpteenth time, and then your girlfriend dumps you.

A couple weeks later, you realize, after half a dozen beers and talking with your best friend at a bar, that your relationship probably turned irreparable somewhere between you forgetting her birthday and getting fired. Everything before those two events, you figure that your relationship was still in a good state. And everything afterward, although you didn't necessarily know it at the time, was just time spent running out the clock.

After a great recession, when the country's intelligentsia conduct a postmortem, they are always eager to find some sort of origin event that started this whole mess of things. The proximate cause that kicked off our economic recession was the financial crisis in the latter half of 2008. But if you talk to conservatives, it really began with the Community Reinvestment Act (signed into law under the Clinton Administration) or Greenspan's loose money policy after the Asian Financial Crisis and the Dot com bubble. If you talk to Democrats, it happened when Gramm-Leach-Bliley repealed Glass Steagall or when Wall Street first started securitizing mortgages in the late 90s.

Because when we analyze the history of tragedy, the proximate cause is never seriously considered as the most important factor. Why would it be? Events set in motion years before happened and influenced everything that happened after, and once the situation deteriorates badly enough, it just takes one swift kick to topple the whole structure. You're not going to blame yourself for forgetting to put the toilet seat up; you blame yourself for forgetting her birthday or you blame your boss for firing you or some other event that happened in the past that is obviously more important than something trivial like the position of a toilet seat.

At any point in a relationship, any event or action is viewed with a certain set of expectations by either party. However, when the relationship's status changes (for better or worse), those expectations change, and that influences your future decisions. The most extreme example is your partner winning the lottery. Suddenly, expectations change and everything you used to do is viewed through a different light: why are we still going to this dingy restaurant, why was their gift to me for my birthday so cheap, etc.

Economies are the same way. When things are going well, there's always gonna be some worrywart muttering something about dangerously low interest rates or an aging demographic profile or increasingly expensive Federal spending programs and we just nod our heads and continue about our business unperturbed. And then the recession happens and suddenly those problems seem much more worrisome and more worthy of our undivided attention, even though those problems existed before things got bad. They just seem much worse in comparison now.

Chuck Prince, one of the former chiefs (and there are many former chiefs) of Citi, once famously remarked that "as long as the music is playing, you have to get up and dance". He was referencing the tremendous performance of Citi's LBOs and trying to allay fears of reduced liquidity (the music stopping) hurting future deals. It beautifully encapsulates economic cycles and relationships in general because when things are good, everybody's an optimist. And it's only when the music stops that we take a more sober look at how things truly stand.

There are numerous psychological studies that suggest that, individually, our analytical and decision making skills deteriorate when we're in a good mood and that they tend to sharpen when we're in bad moods. It's hard not to make the similar connection to relationships and macroeconomics.