There are a lot of things going on in the world economy these days. China on the rise, currency ups and downs, European bond crises, etc. It is tough to see a path forward through all this.
The US economy remains sluggish, and the recent decision by the Federal Reserve to do more "quantitative easing," has not met with universal approval amongst its trading partners. The Fed would probably appreciate some sensible help from Congress, but lacking that, it is probably doing the best it can.
Congress itself is in a bit of a bind. First of all, it is composed mainly of lawyers, an occupation that does not specifically prepare its members to deal with matters of economics, business or finance (except for the legal aspects of those fields).
Secondly, it is somewhat at the mercy of the various passions and fears of the general populace. E.g., we can't have too many foreign people coming into the country, because they would take jobs away from Americans.
A lot of things going on, a lot of mud to wade through...
Thursday, November 11, 2010
Monday, September 20, 2010
Manifesto
Preamble: There is nothing wrong with wanting to help people, but it is a mistake to think that in order to do that we have to punish people who are doing well. It is a mistake on many levels, not the least of which is the fact that people who are doing well are a vital part of the economy, and it is better for all concerned that they not be punished for doing well. Among other things, they provide natural "stimulus" to the economy.
1. The fact that some people have more money than others is just a natural fact that flows from the natural differences amongst individuals. The statement in the Declaration of Independence that "all men are created equal" is just a statement of what happened at the beginning, not a statement of how everything should turn out in the end. We should all start out the same at the starting line, and in America we have tried hard to create that condition. What happens after that is up to the individual.
2. The fact that some people have more money than others does not make those who have money automatically bad. Similarly, the fact that there have been some bad people who acquired wealth illegally does not mean that ALL people who acquire wealth are not playing "by the rules." Furthermore, there are plenty of laws that can be enforced against those who do obtain wealth illegally or actually unfairly.
3. Americans, statistically, give more money to charity than any other people in the world. They want to help. Many of the richest give huge sums.
4. The economy is not a zero sum-game. If some people get more, it DOES NOT FOLLOW that necessarily others get less. On the contrary, the EXACT OPPOSITE can happen. Because of the GROWTH factor, EVERYONE GETS MORE!!!!!!!! If a business grows, provides needed goods or services and creates jobs, everyone benefits. If "everyone" includes the owner of the business, well, that is the fulfillment of the American Dream for him.
5. To expect everyone to end up with the same amount or even remotely similar amounts is unnatural and artificial. It is a nice thought, but to try to force that outcome gums up the whole works.
6. To take money away from key people in the economy (those in positions to enhance economic growth) and from productive businesses is DESTRUCTIVE to the economy.
7. To take money away from people who make a lot because they are highly skilled and do work that is of major benefit to the society as a whole (e.g., doctors, engineers and such) is DESTRUCTIVE to the society at large.
8. Rich people are as imperfect as everyone else. They can be obnoxious or caught up in the trappings of their wealth. This is not nice, but it is not a crime. They should get religion or something, but taking money away from them is not the answer.
9. If we stop punishing productive people and businesses by taking resources away from them, the scariest thing about it would be how fast we will grow. (And of course sometimes we would go too fast and have a crash. Then we would start this debate all over again.)
10. There would be plenty of money and resources to care for those unable to care for themselves. The flow of money to charity would be immense.
11. The government is NOT the best entity to help those who need help. It just creates jobs for politicians and bureaucrats.
1. The fact that some people have more money than others is just a natural fact that flows from the natural differences amongst individuals. The statement in the Declaration of Independence that "all men are created equal" is just a statement of what happened at the beginning, not a statement of how everything should turn out in the end. We should all start out the same at the starting line, and in America we have tried hard to create that condition. What happens after that is up to the individual.
2. The fact that some people have more money than others does not make those who have money automatically bad. Similarly, the fact that there have been some bad people who acquired wealth illegally does not mean that ALL people who acquire wealth are not playing "by the rules." Furthermore, there are plenty of laws that can be enforced against those who do obtain wealth illegally or actually unfairly.
3. Americans, statistically, give more money to charity than any other people in the world. They want to help. Many of the richest give huge sums.
4. The economy is not a zero sum-game. If some people get more, it DOES NOT FOLLOW that necessarily others get less. On the contrary, the EXACT OPPOSITE can happen. Because of the GROWTH factor, EVERYONE GETS MORE!!!!!!!! If a business grows, provides needed goods or services and creates jobs, everyone benefits. If "everyone" includes the owner of the business, well, that is the fulfillment of the American Dream for him.
5. To expect everyone to end up with the same amount or even remotely similar amounts is unnatural and artificial. It is a nice thought, but to try to force that outcome gums up the whole works.
6. To take money away from key people in the economy (those in positions to enhance economic growth) and from productive businesses is DESTRUCTIVE to the economy.
7. To take money away from people who make a lot because they are highly skilled and do work that is of major benefit to the society as a whole (e.g., doctors, engineers and such) is DESTRUCTIVE to the society at large.
8. Rich people are as imperfect as everyone else. They can be obnoxious or caught up in the trappings of their wealth. This is not nice, but it is not a crime. They should get religion or something, but taking money away from them is not the answer.
9. If we stop punishing productive people and businesses by taking resources away from them, the scariest thing about it would be how fast we will grow. (And of course sometimes we would go too fast and have a crash. Then we would start this debate all over again.)
10. There would be plenty of money and resources to care for those unable to care for themselves. The flow of money to charity would be immense.
11. The government is NOT the best entity to help those who need help. It just creates jobs for politicians and bureaucrats.
Cover-of-Time Theory
Time Magazine's 9/6/2010 cover proclaimed "Rethinking Homeownership." Inside, the cover story speculated that homeownership may no longer makes economic sense.
Funny thing about the cover of Time. Many times over the years, trends that have appeared on the cover were just about played out and were on the verge of reversing.
They didn't miss the top of the housing bubble by very much in 2005 when they extolled the virtues of owning a home, wondering on their cover if your home would make you rich.
Many years earlier, when interest rates were the highest they've been in the memory of several generations, Time's cover featured those sky-high rates. Not long after that, interest rates were on the way down.
Maybe the editors are just very slow at recognizing a trend. Or maybe they don't put these things on their cover until the trend is on everyone's mind.
If it is the latter, it fits in with the contrarian view that when everyone is stampeding in a certain direction, the best thing to do is to head the other way. If the cover-of-Time theory is correct (i.e., the cover of Time is a contrarian indicator), your home may be about to make a comeback as a valid investment.
Let's hope that is the case.
Funny thing about the cover of Time. Many times over the years, trends that have appeared on the cover were just about played out and were on the verge of reversing.
They didn't miss the top of the housing bubble by very much in 2005 when they extolled the virtues of owning a home, wondering on their cover if your home would make you rich.
Many years earlier, when interest rates were the highest they've been in the memory of several generations, Time's cover featured those sky-high rates. Not long after that, interest rates were on the way down.
Maybe the editors are just very slow at recognizing a trend. Or maybe they don't put these things on their cover until the trend is on everyone's mind.
If it is the latter, it fits in with the contrarian view that when everyone is stampeding in a certain direction, the best thing to do is to head the other way. If the cover-of-Time theory is correct (i.e., the cover of Time is a contrarian indicator), your home may be about to make a comeback as a valid investment.
Let's hope that is the case.
Wednesday, August 25, 2010
That was then, this is now
There is a line of thought that has persisted amongst some people since the financial crisis began, that because it looks similar to what happened in 1929, we must be in for another Great Depression. (Similarly, some media pundits have referred to the current recession as the Great Recession.)
First of all, the fact that something looks similar does not indicate that it is the same thing. There are definite differences between then and now.
It has long been conventional wisdom that the Depression was caused by the stock market crash of 1929. That is not correct. The crash was an early symptom of what was going on at that time, but it was not a cause. It did precipitate a banking crisis which became very serious. But where 1929 diverges from 2008 was in the response to the banking crisis.
In 1929, the Federal reserve kept on following the tight money, deflationary policy it had been following for some time before the crisis. It was a course of action that had been followed many times in the past by those who controlled banking systems, to keep the currency stable and weed out weak and overextended players. However, this time the result was worse than ever before, because the imbalances in the economy, on a long term basis, were more extreme, and the powers-that-be of that time basically read the whole situation incorrectly (to put it charitably). The result was made worse by the persistence in the deflationary policy long after the crisis developed.
Conversely, in 2008 the Federal Reserve pulled out all the stops in an effort to provide liquidity to the system and even invented new ways to keep everything afloat. There was no deflationary policy in play. One might even argue that the crisis developed partly because the Fed had been too accommodating for too long in the years leading up to the crisis. The Federal Reserve did learn something from the Great Depression. They learned what not to do, and in our present day crisis they basically did just the opposite of what they did then.
Three other factors were different then. One is that, just as the Depression was getting started, major income tax increases were put into effect. That has not happened yet in the present. However, (1) the new health care law could act like a tax increase and be a damper on the economy, and (2) the tax cuts that were enacted during the Bush administration are scheduled to expire at the end of this year. If they are allowed to expire, the result would be an automatic tax increase. It is more widely understood today, even in Congress, that tax increases are counterproductive in a weak economic environment. Therefore there is some hope that Congress will extend those tax cuts for another year. But nothing is certain at this point.
Another difference between then and now is that in the 1930's, world trade was seriously hampered by extremely high tariffs passed by all the major trading nations. There has been a little of that today, but nothing like back then.
The third major difference is that during the Depression, the whole world was affected. Today, several important countries have already resumed rapid growth, in particular China. Germany, whose economy depends to a large extent on exports, is experiencing growth through its trade with China and others. The prospects for US exports to China and India, etc., are good, and some major companies (e.g., Caterpillar) are already benefiting strongly.
Looking back, it almost seems a miracle that we survived the egregious policy mistakes of the first half of the twentieth century, and we should keep in mind that today we are doing our best not to make the same mistakes. Also, today is not yesterday. Today is today.
First of all, the fact that something looks similar does not indicate that it is the same thing. There are definite differences between then and now.
It has long been conventional wisdom that the Depression was caused by the stock market crash of 1929. That is not correct. The crash was an early symptom of what was going on at that time, but it was not a cause. It did precipitate a banking crisis which became very serious. But where 1929 diverges from 2008 was in the response to the banking crisis.
In 1929, the Federal reserve kept on following the tight money, deflationary policy it had been following for some time before the crisis. It was a course of action that had been followed many times in the past by those who controlled banking systems, to keep the currency stable and weed out weak and overextended players. However, this time the result was worse than ever before, because the imbalances in the economy, on a long term basis, were more extreme, and the powers-that-be of that time basically read the whole situation incorrectly (to put it charitably). The result was made worse by the persistence in the deflationary policy long after the crisis developed.
Conversely, in 2008 the Federal Reserve pulled out all the stops in an effort to provide liquidity to the system and even invented new ways to keep everything afloat. There was no deflationary policy in play. One might even argue that the crisis developed partly because the Fed had been too accommodating for too long in the years leading up to the crisis. The Federal Reserve did learn something from the Great Depression. They learned what not to do, and in our present day crisis they basically did just the opposite of what they did then.
Three other factors were different then. One is that, just as the Depression was getting started, major income tax increases were put into effect. That has not happened yet in the present. However, (1) the new health care law could act like a tax increase and be a damper on the economy, and (2) the tax cuts that were enacted during the Bush administration are scheduled to expire at the end of this year. If they are allowed to expire, the result would be an automatic tax increase. It is more widely understood today, even in Congress, that tax increases are counterproductive in a weak economic environment. Therefore there is some hope that Congress will extend those tax cuts for another year. But nothing is certain at this point.
Another difference between then and now is that in the 1930's, world trade was seriously hampered by extremely high tariffs passed by all the major trading nations. There has been a little of that today, but nothing like back then.
The third major difference is that during the Depression, the whole world was affected. Today, several important countries have already resumed rapid growth, in particular China. Germany, whose economy depends to a large extent on exports, is experiencing growth through its trade with China and others. The prospects for US exports to China and India, etc., are good, and some major companies (e.g., Caterpillar) are already benefiting strongly.
Looking back, it almost seems a miracle that we survived the egregious policy mistakes of the first half of the twentieth century, and we should keep in mind that today we are doing our best not to make the same mistakes. Also, today is not yesterday. Today is today.
Wednesday, August 4, 2010
Mass growth
Rosy payroll growth stats released by U Mass on 7/30/10 are thrown off a bit by US Census hiring. The 4.5 percent annual growth rate was the best since 1984, but government spending and hiring played a big role in it. Still, up is up, and the private sector did show some growth. The unemployment rate declined from 9.3% in March to 9.0 in June.
China and other developing countries are growing quickly again. This is good for any company that exports to them, including Massachusetts information technology firms.
China and other developing countries are growing quickly again. This is good for any company that exports to them, including Massachusetts information technology firms.
Monday, July 12, 2010
Optimism
Lots of gloom and doom out there, but it depends where you look. A new book has come out bucking that trend. It is called "The Rational Optimist: How Prosperity Evolves," by Matt Ridley. Mr. Ridley is a science writer. His foundation for optimism is: innovation. The long term trend of human history has been upward, he says, because humans are continually innovating. Innovations have led to vast improvements in the human condition, and it is likely that trend will continue. The problem of feeding a couple of billion more people by the year 2110 can easily be solved by the advances in agriculture and biology that are occurring as we speak. In fact, we could have more than enough food, using even less land than we do now. The book is full of statistical evidence that things have been getting better all the time, not worse.
Thursday, July 1, 2010
What can you do?
Realistically speaking, the state of the economy is, well, let’s just say not as good as it could be. We needn’t get into an exhaustive analysis of it here. There is plenty of that in the media, much of it conflicting. But it might not be a bad idea to look at the big picture for just a moment before we move on to things closer to home.
Usually an economy gets into trouble when there is too much debt in the system, and people can’t pay it off. The economy goes into a decline, and by various mechanisms (such as bankruptcy, or the action of creditors simply writing off hopeless debts), the excess debt gets washed out of the system. Then a recovery begins, assisted by renewed lending.
The perils of capitalism include the “business cycle,” which basically describes the action of the economy fluctuating between expansion and contraction. Many contractions over the years (and centuries) have been very painful, even catastrophic, and as time goes on, various governments have passed laws to try to prevent, modify or soften many of the conditions associated with the contractions.
However, you might as well try to legislate against old age. It just won’t work. The business cycle will have its revenge. Some things can be done to delay a contraction. But it just might be that the contraction, when it comes, will be much worse than it would have been if we hadn’t delayed it.
Currently, some debts are being washed out of the system through bankruptcy and such. The real estate bubble is slowly deflating, despite various government efforts to prop it up and ease the pain. “Troubled assets” in the banking system are being “resolved” by government action.
However, the big problem now is that government debt is growing at an alarming rate, and markets are showing investors’ concern about that. Surveys indicate most voters favor cutting the federal deficit, but many in our government want to spend more to stimulate the economy. There is little agreement amongst the so-called experts about whether that would make things better or worse.
These things are important when you vote, but what about now, in everyday life and business?
The lesson of the above considerations is that business and personal finances could be facing some headwinds in the immediate future. No one knows exactly how things will go, but it would not be the best strategy to just assume—or even just to hope--that everything will be hunk-dory by next January 1 (or some such date).
So, what is one to do?
Business strategies:
Businesses that are facing stresses can either (a) give up and go out of business; (b) try to muddle through and hope for the best; or, (c) try to do something effective to make things better.
There is plenty of advice about how to do (c), but if I may I would like to add another “big picture” suggestion:
Your most valuable weapon is communication. Communicating with existing customers and potential customers is paramount. Maintaining and using a mailing list (and/or e-mailing list) of existing customers can be of inestimable benefit to a business. There are also endless means of electronic contact available today—Twitter, You-Tube, etc, etc. (I can’t say I know how to use them all effectively myself, but they are definitely out there.)
Any and all means of contacting potential new customers should be explored: advertising, bulk mailings, etc. (Bulk mailings can be very effective, and cost effective.)
Communication also includes knowing who you are communicating to. Blind advertising and mailings are not the best idea. A little market research—in the library or online—can go a long way. Surveys are also an excellent source of information about your market.
Communicating one on one with customers and allowing them to communicate with you is also extremely important—if not vital. (And when I say vital, I mean it can be a matter of life or death to a business.)
Communication is not going to be the answer to everything, but it is certainly very high on the list of things to do to make things better.
Personal finances:
Although the government and the companies producing consumer goods would like you to resume consuming at all costs, that is not necessarily the best strategy for one’s personal finances. Sometimes one has to consider what is best for oneself and not sacrifice oneself for the common good. (Consuming is not usually thought of as a sacrifice, but in this case it could turn out to be that way.)
Some old strategies (and clichés) are still true. You should have savings. You should budget your money. Don’t put all your eggs in one basket. There’s no free lunch. Get rich quick schemes don’t work.
Making more money is also helpful, obviously. Investing in education is good for that. Or, some people start businesses on the side, get a part time job, or figure out other ways to make ends meet.
It is difficult to predict how the national and international economy will impact one’s life. Who knows if a particular investment will turn out to be good or bad? What unexpected event might happen that would throw off your calculations?
But there are things you can do to try to keep control of your situation. Having a big cushion (which is not all in one basket) to fall back on works well if one can manage it. Being able to handle problems when they come up is also a nice skill to have, if one has it.
Also remember the mustard seed, and don’t give up.
Usually an economy gets into trouble when there is too much debt in the system, and people can’t pay it off. The economy goes into a decline, and by various mechanisms (such as bankruptcy, or the action of creditors simply writing off hopeless debts), the excess debt gets washed out of the system. Then a recovery begins, assisted by renewed lending.
The perils of capitalism include the “business cycle,” which basically describes the action of the economy fluctuating between expansion and contraction. Many contractions over the years (and centuries) have been very painful, even catastrophic, and as time goes on, various governments have passed laws to try to prevent, modify or soften many of the conditions associated with the contractions.
However, you might as well try to legislate against old age. It just won’t work. The business cycle will have its revenge. Some things can be done to delay a contraction. But it just might be that the contraction, when it comes, will be much worse than it would have been if we hadn’t delayed it.
Currently, some debts are being washed out of the system through bankruptcy and such. The real estate bubble is slowly deflating, despite various government efforts to prop it up and ease the pain. “Troubled assets” in the banking system are being “resolved” by government action.
However, the big problem now is that government debt is growing at an alarming rate, and markets are showing investors’ concern about that. Surveys indicate most voters favor cutting the federal deficit, but many in our government want to spend more to stimulate the economy. There is little agreement amongst the so-called experts about whether that would make things better or worse.
These things are important when you vote, but what about now, in everyday life and business?
The lesson of the above considerations is that business and personal finances could be facing some headwinds in the immediate future. No one knows exactly how things will go, but it would not be the best strategy to just assume—or even just to hope--that everything will be hunk-dory by next January 1 (or some such date).
So, what is one to do?
Business strategies:
Businesses that are facing stresses can either (a) give up and go out of business; (b) try to muddle through and hope for the best; or, (c) try to do something effective to make things better.
There is plenty of advice about how to do (c), but if I may I would like to add another “big picture” suggestion:
Your most valuable weapon is communication. Communicating with existing customers and potential customers is paramount. Maintaining and using a mailing list (and/or e-mailing list) of existing customers can be of inestimable benefit to a business. There are also endless means of electronic contact available today—Twitter, You-Tube, etc, etc. (I can’t say I know how to use them all effectively myself, but they are definitely out there.)
Any and all means of contacting potential new customers should be explored: advertising, bulk mailings, etc. (Bulk mailings can be very effective, and cost effective.)
Communication also includes knowing who you are communicating to. Blind advertising and mailings are not the best idea. A little market research—in the library or online—can go a long way. Surveys are also an excellent source of information about your market.
Communicating one on one with customers and allowing them to communicate with you is also extremely important—if not vital. (And when I say vital, I mean it can be a matter of life or death to a business.)
Communication is not going to be the answer to everything, but it is certainly very high on the list of things to do to make things better.
Personal finances:
Although the government and the companies producing consumer goods would like you to resume consuming at all costs, that is not necessarily the best strategy for one’s personal finances. Sometimes one has to consider what is best for oneself and not sacrifice oneself for the common good. (Consuming is not usually thought of as a sacrifice, but in this case it could turn out to be that way.)
Some old strategies (and clichés) are still true. You should have savings. You should budget your money. Don’t put all your eggs in one basket. There’s no free lunch. Get rich quick schemes don’t work.
Making more money is also helpful, obviously. Investing in education is good for that. Or, some people start businesses on the side, get a part time job, or figure out other ways to make ends meet.
It is difficult to predict how the national and international economy will impact one’s life. Who knows if a particular investment will turn out to be good or bad? What unexpected event might happen that would throw off your calculations?
But there are things you can do to try to keep control of your situation. Having a big cushion (which is not all in one basket) to fall back on works well if one can manage it. Being able to handle problems when they come up is also a nice skill to have, if one has it.
Also remember the mustard seed, and don’t give up.
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