Friday, February 27, 2009

The Other Problem with "Changing Momentum"

In supply chain, there is a phenomenon called the bullwhip effect. Basically, when a company is short on inventory, they order a whole bunch to make up for the shortage irrespective of the amount in route. When the previous order arrives and the new order also arrives, they will have more inventory than they have space for.

Now the company has mountains of inventory and they don't make any orders for a long time. Which means their suppliers have nothing to do for a while. Suddenly, the main company runs out of inventory and they have to place a huge order to their supplier who can't meet the order immediately.

That is the problem with having economic decisions made by political figures who only have a 2, 4, or 6 year time horizon. They make decisions that will help them get reelected, but that are not ideal for encouraging long-term prosperity.

In economics, there is an ideal rate of economic growth. For the US and other mature economies, that rate is about 2.5% to 3.5%. They call that range "Goldilocks" because it is not too hot and not too cold.

There may be some short term gains from all this massive government spending, but once the bullwhip effect reaches the money supply, there will be inflation, people's savings will be harmed, and massive tax hikes will be placed on the rich (who are the only ones who pay taxes anyways).

Wednesday, February 25, 2009

The Problem with Bushonmics aka Obamanomics

I make no distinction between the way Bush and Obama have handled the economic uncertainty since last fall. They have had the same problem. They have no freaking clue what to do other than throw spaghetti at the wall and hope something sticks. The bank bailout at the end of Bush's term was just a random number plucked out of the air that sounded big enough to do something to help. Obama's pork-laden stimulus bill is no different. They are just copying the "bold experimentation" of the FDR years.

There is a problem with that approach. There is no certainty or consistency in the market. Obama complained last night that banks are not lending money to get businesses going again. There is a reason for that. If I run a bank, and know that the government is heaving loads of cash out the treasury doors, I am not going to lend a penny. Why?

I don't want to lose my money. If I make a loan to a company that gets bailed out, I probably will never see the money again. And Obama will say it is my patriotic duty not to seek redress. I know people who are stepping in where banks won't and making business loans at confiscatory interest rates and earning good money. Provide a service; collect a fee.

Since September the stock market has been in free fall. The major reason for this is uncertainty. No one, not even Obama, knows what Obama will do. As a business leader, my responsibility is to make the best decisions I can with all the information I can gather. There is no telling what load of manure this Congress will drop next, and until these issues are resolved, I can't invest in anything.

This uncertainty keeps private investors out of the stock market and keeps businesses from investing in new equipment which will improve their operations. Millions (of people and dollars) will stay on the sidelines until there is a resolution. I personally will not invest if the government will be taking over my business. Until I know my investment won't be confiscated, I will keep my money where it will be 100% safe, even if inflation costs me some value.

Monday, February 23, 2009

Two More Things on the Stimulus

I would love to see a little more about this, but land speculation has brought down banks forever. Church history makes that clear. The Kirtland Bank fell along with hundreds of other banks in the 1830s.

Adams Smith was right:

The most important thing is that most debt never stimulates anything. Debt only limits future growth. That is why the Church talks about only borrowing for an education and a home. All other purposes of debt are dangerous. If I borrow money for a TV, I temporarily stimulate the economy, but later resources that could have bought other stuff is instead eaten up by interest payments.

Changing Momentum?

I have been pondering the comments from a friend about the economy. He basically argues that there is a massive downward momentum and the government is the only institution which can change the momentum. I have been uncomfortable about the analysis but couldn't quite decide why (other than the obvious that I don't trust government spending).

The real issue is that there was a bubble and it needed to burst. In recent history, there was a tech stock bubble, a crude oil bubble, a food price bubble (corn, wheat, rice, etc.), a farm land price bubble (this is related to the food bubble), and a housing bubble. I may have missed some, but those are the big ones.

A bubble specifically means that an item is inaccurately valued by the market and it increases in value. Those investors trying to ride the next wave buy, buy, buy. The increase in buyers drives up the price. Prices are determined by the expectations of future gains. Everyone bought houses because they could get cheap money and the value was appreciating.

Whenever there is a bubble, there must be a correction. That is because the market learned that it had made wrong assumptions about the value of the future earnings from an asset. Any attempt to prevent the correction will prolong the downturn.

Looking specifically at the housing bubble, there were several contributing factors.
  • Cheap money from abnormally low interest rates (the Fed was fighting inflation without watching other things),
  • An increase in the supply of buyers (they were attracted to the quick profits),
  • Separating loan origination from the risk of loan default (liar loans came from mortgage agents being paid ONLY for signing up a person for a loan, not their ability to pay it back - people didn't have their income verified),
  • Government over-regulation that forced banks to loan money to those they knew wouldn't pay them back (home ownership is viewed as a good thing for society, so they used Fannie Mae, Freddie Mack, and the Community Reinvestment Act to get people in homes their credit worthiness and income didn't justify),
  • Congress accepting massive political contributions from the institutions they "regulated" (Chris Dodd, Barney Frank, and others - yeah, no conflict of interest there),
  • Financial institutions packaging mortgage-backed-securities as high quality investment vehicles for hedge funds (banks had no way to value the liar loans and the securities only work in a perpetually appreciating housing market - oh, and by the way, there are credit card backed securities too. If the recession is long enough and income decreases enough, people will default on credit card payments just like their mortgages. Then all those financial instruments will have to be written off the balance sheets, too.)
All of that to say that the decrease in asset values is necessary at this point. Government bailouts are just propping up the inaccurate values and prolonging the bubble. The real issue in my view is a debt bubble. And debt makes us slaves to our creditors. This bubble has to burst. Consumers need to live within their means, and government needs to stop borrowing from future generations to buy votes now.

The money to pay for corporate bailouts is either borrowed or printed out of thin air. The obvious problem of this new money is that inflation is next. The last time we had high taxes and inflation was not a time of economic growth in this country.

Every time one of these asset pricing bubbles has burst, economic prosperity was on the other side. The time to bail out this economy would have been about 5 years ago. Now it is too late. This needs to run its course so the world can get back to work.

UPDATE: I added a link above to a New York Times article predicting the bailout of Fannie Mae from back in 1999.

Friday, February 13, 2009

Mortgaging the Future

This comes from Obama's Inauguration speech:
And those of us who manage the public's dollars will be held to account — to spend wisely, reform bad habits, and do our business in the light of day — because only then can we restore the vital trust between a people and their government.
I only have one conclusion watching this stimulus debate. Barack Obama lied. There is no wise spending in this stimulus. There is no reformation of bad habits. There is no business done in the light of day. Not one statement from that part of Obama's inauguration is true.

A few things from Obama's rhetoric gave me hope that he would do good things as president. Instead, he says one thing, and does the exact opposite. Whatever the failings of George W. Bush, at least he was honest. He did all he could to fulfill his campaign promises.

I can't wait to see how many other statements from the Inauguration become void. (That is tongue in cheek. There were good things in the speech, but I am starting to expect that NONE of them will be fulfilled.)

Wednesday, February 11, 2009

Sign the Petition:

I just signed this petition to stop the stimulus bill. I left this comment in the comment section:
At the price tag of $230,000 spent for every job created or saved, It would be cheaper to pay people to stay home! I would stay home for years for that kind of money! But since I do work, I won't see one penny of benefit. Where is the economic justice in that? Robin Hood took from the government and gave to the poor. It is not the government's job to take from those who produce something and spread the wealth to those who do nothing.

Tuesday, February 03, 2009


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