Recently in Economics Category

I am getting a little weary of the news lately when they discuss "the economy".

The nation has just experienced two national economic bubbles.

The first irrational bubble was the stock market in the late 1990's. The nation went bezerk for Internet stocks which crashed to Earth in a few years. Ooops.

Then we "recover" from the stock bubble with an even bigger, even less rational housing bubble. Such a huge bubble and huge financial loss that we are still very much in the aftermath with 2M foreclosures and the federal government backing 3/4th of the nations mortgages through Fannie Mae and Freddie Mac.

In the middle of these two crises, President Bush invaded two nations which we are still at war with. The wars in Afghanistan and Iraq were not funded with a war tax. Instead we cut taxes and have watched our deficits soar for years.

A few years after the crash of the housing bubble, we are just starting to feel the pain of all that government spending and borrowing as our state governments quickly start to fall apart and cut services deeply.

That is the background. Those events over the past 10 years set the stage for today.

But the news acts as if those things never happened. As if we were all born yesterday.

How do you feel today about the economy?

Why isn't the recovery happening faster?

Good grief! The media only seems to make us dumber every year. Those were HUGE problems with huge, long-term affects. You dont just wake up in the morning and everything is all better. That kind of thinking was at the root of the bubbles in the first place.

Any reasonable business would look at these events and use common sense to determine that it was a good time to be cautious. And that is what the media is reporting. "The recovery is slow because businesses still seem cautious."

They damn well ought to be cautious and so should everyone else. Our lack of caution and common sense has been disastrous for us.

We also haven't gotten much help from our government. For years Fed Chairman Greenspan watched the bubbles happen and did nothing. He even argued that a housing bubble was not even possible. A vain man who let the nation down.

Congress and the President also let us down with their tax cuts, increased spending and complete failure to do anything responsible about health care costs. Those problems are all still growing with no solution in sight. I wont even bring up global climate change.

It should only take half a brain to look at these things and feel a little cautious about the future.

But there is more.

So much of our economy is now based on financial instruments and on entertainment.

Unlike China, our nation is not investing heavily in infrastructure like roads and bridges and schools. We are barely investing in those things at all. Our money goes towards movies, video games, and cell phones. Our economy is now based on non-essentials which are generally manufactured in other countries and that should also make you cautious, American citizen.

I dont expect the media foolishness to stop because reporting on today as if there was no yesterday is the easiest thing for them to do.

But when you hear these useless "is it fixed today?" stories, at least you can think about the big picture and how we got here. And be a little cautious.

Remember when retirement meant 65?

I just got my annual social security statement.

Full retirement now means 67.

To get the highest monthly payment, the statement suggests waiting to 70.

Similarly retiring at 62 yields the lowest payment.

That 70 number looks attractive... I sure hope you love your job.

And more importantly, I sure hope it loves you. I find it hard to imagine doing the job I do now at 70, given the competition from college hires and the developing world as well as the rate of change.

Im sure there are a lot of folks who plan to work until 70. I just wonder if there will be jobs around for them to work.

This year Ive been working on an idea, a big idea that I have been having trouble expressing. But here goes...

Animals have a life-cycle. Can a system like capitalism have a life-cycle too? Can it be young and naive in one nation but old and past its prime in another?

Think about MTV. I remember when it came out it. It was pretty rough. They played that horrible Buggle's video 24/7. Over time the music video matured and got more sophisticated. Then MTV realized that music videos just didnt keep one's attention so they completely changed their format to the present one, 24/7 reality shows.
MTV today is barely recognizable from its start in the 1980's which is true for just about any topic since WW2.
Think about a product or process. It starts off simple, gets increasingly sophisticated, often it changes so much it is unrecognizable today from 50 years ago or it is completely gone.

We call this progress and the guiding force behind this progress are the basic rules of capitalism. Make more money.

Cars, car manufacturing, steel, mining, banking, computers as well as systems like trade or banking. The Cold War with the Russians came and went in the last 50 years as did entire thought systems, the big ideas of communism and socialism.

The nature of human beings may not change much over the centuries but a human being does. We start out very simple, grow stronger, come into our prime and then start a long decline. What does an 80 year old think when looking back to when they were 30? Can you recognize an 80 year old from their photo at 10, 20 or 30? Are the changes welcome? Are they desirable?

The idea I have been struggling with is that our system of capitlaism is reaching 80 (in the USA) and the affects are not pleasant now and getting worse. Capitalism itself may not be sustainable in a way that is agreeable for Americans.

Put another way, for the past 50 years our system has been giving the business to other countries and we have been living better and better. Our system now is no longer naive and simple but rather sophisticated and mature. It is looking like the next 50 years will have the rest of the world giving us the business, particularly China. China is our child in this way. 50 years younger than us, looking to us for guidance but indepenent and ready to forge a new way whether or not we like it. (Ungrateful kids!)

For the past 20 years, our natural progression has been away from the manufacturing industries that built our wealth and onto the next step, banking. Banking and investing have been our only source of economic growth since the Clinton administration -- and it just blew up.

Can we rebuild and maintain our finance empire? Can this financial empire stage actually support us? All of us? Sure Buffett and Madoff made a lot of money but most people havent seen a raise in years and now unemployment (and underemployment) are at the highest levels since the great depression.

The capitalist system we have created and fostered (much like children) doesnt owe us anything and we dont control it. With the globalism we pushed to make ourselves wealthier, it is now a force by itself well beyond our control or even the control of national governments. Everone everywhere recognized the desire to make a buck and financial systems are changing much faster than government systems.

So now what?

The stock market is ballooning again less than a year after our "crash" but why? I think the stock market (the industry of money) is greatly separated from the realm of jobs and families, ie real people.

I question whether the jobs will ever come back to the USA. It is more likely that there will never be as many jobs as before. In part that is because of technology which lets fewer people do more with less. (For a perfect example, look at farmers.) There are too many people, and not enough jobs that need to be done. (There are also jobs that lack trained people.)

We will continue to have the highly paid high-tech and banking jobs but all other jobs will go away or not pay enough to support a family.

Think about your experiences at retail and fast food and support on the telephone. Are you getting knowledgable, helpful, happy people because I am sure not. I get indifferent, often miserable folks - they dont love their job, they know they dont make enough now and they know that they never will in that job. The hope of a brighter future is missing and sometimes so is the English as even these jobs have been moved out of our country.

Not quite the Road but not a very cheerful outlook for my daughter.

I dont see any curbs on capitalism and as a result I see a very different future for our country. When I was a kid in Michigan, the morons who dropped out of high school could get a job making cars for Detroit and make enough money to afford a summer house with a boat on the Great Lakes. Not anymore.

Im expecting more people, fewer jobs, and less prosperity overall in the US. The retirement of the baby boomers is going to be painful. Crushingly painful as they find out what it means to not have saved for retirement (but to still have a mortgage for a McMansion).

All that whether or not we have significant climate change.

I dont know if you have heard but the economy is not doing well.

Salaries have been flat for years, the stock market took a fall last year, whole industries are on government-paid life support, and the un-employment rate (including the under-employment rate of people who want to work more but cannot) is higher than the great depression.

As I drive to work, I see all those BMW's and Lexus'.

As I look for a house to live in, I see all those incredible prices, so much higher than average incomes.

And I think to myself: Just how are all these people able to afford so much??

Then I see articles like this and I say: I thought so. A lot of people cannot afford that stuff - and its going to end badly for them.

This was a good article that is a reminder that things are often not what they seem. And if you have been unemployed before, it is also a reminder of just how bad that feels.

Life on Severance: Comfort, Then Crisis

By MARY PILON

Wall Street Journal

NOVEMBER 10, 2009

SILVER SPRING, Md. -- Paul Joegriner hasn't worked since March 2008, when he was laid off from his $200,000-a-year job as chief executive officer of a small bank. But you wouldn't know it by appearances.

His wife, Marzena, shuttles their two young children to private school every morning. The family recently vacationed in Virginia Beach, Va., and likes to dine on Porterhouse steaks. Since losing his job, Mr. Joegriner, 44 years old, has had several offers. He's turned each down in hopes of landing a position comparable to what he held before.

The family's lifestyle over the past year and a half has been propped up by a $200,000 severance package and another $100,000 in savings -- funds the family has burned through rapidly. By Mr. Joegriner's own calculations, the family will be out of money in six months if he doesn't find work.

"It will be D-Day," he says. "But on the outside, no one has any idea that we're in trouble."

Mr. Joegriner is a member of what might be called the severance economy -- unemployed Americans who use severance pay and savings to maintain their lifestyles. Many lost their jobs in 2007 and 2008, and thought they'd soon find work. Now, they're getting desperate.

The stock market has made a big recovery from lows of a few months ago. The general tone of the media seems to be that the worst has passed. It seems like people are just tired of hearing about economic collapse so we have stopped talking about it that way and consumer confidence numbers are rising.

But was that really the bottom?

My sense is that we have some really big structural problems and those wont go away in a few months. Simply put, we are used to spending more than we can afford to.

While bank stocks are recovering and GM slides peacefully into bankruptcy, the FDIC released some data on the health of our banks.

I am as eager as anyone to see stability return but it seems like that wont be for a while yet.

FDIC Paints Dark Picture of U.S. Banking

First-Period Profit of $7.6 Billion Was Nice, but Problem Loans and 'Problem Banks' Are Rising

Wall Street Journal

MAY 28, 2009

There also were plenty of negative signs in data released Wednesday by the FDIC. The number of banks on the FDIC's "problem" list climbed to 305 as of March 31, up from 252 three months earlier and the highest level since 1994. Banking regulators don't disclose the names of these problem banks.

Meanwhile, the number of loans more than 90 days past due climbed across all major loan categories. "The first-quarter results are telling us that the banking industry still faces tremendous challenges," FDIC Chairman Sheila Bair said. "And that going forward, asset quality remains a major concern."

Banks continued to aggressively add to their reserves during the quarter. The FDIC said nearly two out of every three banks increased their loss provisions during the quarter and that the industry set aside $60.9 billion in loan-loss provisions.

Despite those actions, banks were increasingly unable to build their reserves fast enough to keep up with noncurrent loans. The ratio of reserves to noncurrent loans fell to 66.5% in the first quarter from 74.8% in the fourth quarter. It was the lowest level in 17 years.

The FDIC said that banks responded to the rising amount of troubled loans by charging off $37.8 billion during the first three months of 2009, led by loans to commercial and industrial borrowers, credit cards and real-estate construction loans.

The agency said the high-level of charge-offs did little to slow the rise in loans at least 90 days past due, which increased $59.2 billion during the quarter, as the percentage of loans and leases considered non-current hit the highest level since the second quarter of 1991.

The problems were spread across all major categories, though the FDIC said that real-estate loans accounted for 84% of the overall increase.

FDIC Chief Economist Richard Brown told reporters said regulators are seeing increasing woes in the commercial real-estate market. "That probably hasn't hit full-force yet," Mr. Brown said.

The 21 bank failures during the first quarter were the most in any quarter since the last three months of 1992. The failures reduced the fund that protects consumers' deposits to $13 billion from $17.3 billion at the end of 2008.

Another pattern that supports my theory that we are in an inflection point of global capitalism, forging new ground with little understanding of where we head.

We thought information technology was allowing us to see into the supply chain and control it better. While that is surely true on some level, the side affect is that we can make abrupt changes faster than ever too. And we may not understand the system as well as we actually thought.

This article makes me think of the "beer game". A business exercise we thought we had mastered.

Clarity Is Missing Link in Supply Chain

By PHRED DVORAK

Wall Street Journal

MAY 18, 2009

The reason is now starting to become clear. The world's complex "just in time" manufacturing supply chains are making it increasingly tough for Zoran, and any other single link in the chain, to know what's going on just a few links away. Sometimes, Zoran itself doesn't even know how its own chips are used: One batch it thought was destined for DVD players instead turned up in digital picture frames.

The recession has exposed a harsh side effect of the supply-chain system. Because modern industry rewards suppliers with the leanest inventories and fastest reaction times, when economic crisis struck, tech companies up and down the line contracted as sharply as possible in hopes of being the ones to survive.

Forced to guess at demand for their products in a plummeting market, everyone hit the brakes, hard. An examination of the electronics supply chain -- from retailers all the way back to makers of factory machinery -- shows that, at almost every stage, companies were flying blind as they cut.

"We're still not sure what happened," says Angelo Grestoni, owner of a California machine shop that mills aluminum parts for chip-making machines. He is many steps away from Zoran on the chain, but his clients, too, evaporated around the same time. Today Mr. Grestoni employs 150 people, down from 600 just 18 months ago.

The cumulative result: The tech pullback may have been overdone. In March, Best Buy Co. said it could have sold more electronics equipment in the three months ended Feb. 28, but its suppliers' deep cuts made it tough to keep shelves stocked. Suppliers "all decided to build a lot less," says Best Buy merchandizing chief Michael Vitelli.