I’ve spent the last couple of months reading quite a bit … trying to make sense of the economy; the economic green shoots that are apparently springing up all around us, and the withered stocks that are dying before our eyes.

The cost of building and construction materials have sky rocketed over the past couple of years.

I’m trying to figure out if the cost of materials is going to drop dramatically, continue to increase, or stay the same. This impacts our decisions to purchase materials early or hold off until we really need them.

Bear with me …

My reading eventually seemed to centre on credit expansion and contraction, the definitions of inflation and deflation and the true value of the dollar we use everyday for our economic transactions.

It appears that our woes of the last year are due to unchecked expansion of available credit (a.k.a. the credit bubble). To further increase our standard of living we leveraged our existing equity using this credit and everybody felt like they were wealthier. The apparent sad reality is we were all living on borrowed wealth and when the first people defaulted (the infamous subprime borrowers) a cascade of defaulted loans occurred that is causing all of our supposed wealth to disappear (the process of deleveraging). Depending on who you listen to the process is almost over or it has barely just begun.

Many analysts point to the real estate bubble that rocked the Japanese economy in the eighties and nineties as a precursor to what the global economy is now experiencing. The Japanese economy has not yet really recovered from this bubble, and the last two decades are referred to as the lost decades in economic terms because the stock market has never matched its pre-collapse highs.

For that matter my holdings in the Altamira Asia Pacific equity mutual fund certainly never went anywhere. I bought in the early nineties and just decided to sell it all last week. Nobody can accuse me of hasty decisions … Some analysts state that our global credit bubble is massive compared to the Japanese experience.

All of this talk about credit expansion and contraction seems to naturally lead to a discussion of inflation and deflation. Inflation exists in an economy when the available supply of money and credit increases faster than available real goods and services. In other words growth in the money supply exceeds growth in goods. Deflation occurs when the supply of credit and money decreases relative to available goods and services.

So, contrary to my old assumptions, increasing wages or decreasing costs for goods are not necessarily inflationary or deflationary. Increasing wages are however typical in an inflationary period, and decreasing costs are not unusual in a period of deflation. The potential irony of a deflationary period is that although costs may be decreasing (as is currently happening with real estate prices in the United States), our actual ability to buy is poor because the money and credit supply is collapsing (deleveraging). I always assumed deflation would be a good thing because we would get more bang for our bucks!

The foregoing has really led me to think about the value of the dollar bills in my wallet. Don’t worry! I have not rushed out and put my life savings into canned goods … yet! We all accept dollars in exchange for goods and services. We are confident that the time spent earning dollars will allow us to buy the stuff that we need to live comfortably. However, if enough people lose confidence in the currency system for whatever reasons, then the usefulness of dollars becomes questionable (think Zimbabwe).

The picture at the top of the post shows my favorite green shoots this year. I planted a plum tree this spring and it is doing really well. The darker green leaves were on the tree when I planted it and the lighter green ones are the new shoots.

I planted the tree about twenty feet away from the sheep barn, and filled in around the tree with compost (This is not a parable … the tree is not the economy, and the compost does not represent banks).

I also made an automatic water system for the sheep this year. This means that the water fills up automatically as the sheep drink from it. It works a lot like a toilet … not surprising since some of the parts are for a toilet.

The best part about this system is that it drains right underneath my newly planted plum tree. Every time the water system is flushed the plant is watered … gray water at its best!

So … where does all of this leave me with regard to timing the purchase of materials for our house project? Completely confused! For all of the reading I have done I cannot make heads or tails of the direction of the economy. I do not know if we are headed for green shoots or barren stocks.

Given my recent passion for gardening it is interesting to me that economic descriptions are still rooted in the environment, while we act like the economy and the environment are completely decoupled. For all of its potential for poor results, I think I’ll stick to the green shoots I can actually grow. There are not so many conflicting theories, and when things fail the cause is pretty obvious!