Archive for February, 2010

More on Thinking; (pronounced “moron thinking”)

A recent article accused many of us pragmatists as “chicken littles”.  In spite of my rather large size, I felt the author was referring to me. Mr. Epstein sited examples where the economy was experiencing a recession, but then later recovered.  His logic rather simple: history repeats, and seen it happened before.

Mr. Epstein does not bother to discuss what propelled us out of recessions in the past, or why the recessions occurred in the first place.

The first example was from winter of 1983. Growth was expected to be a low 2.5%, but actually came in at 7.8% for the next four quarters? Perhaps it would be helpful if we understood that our economy grew in the 1980s because of the proliferation of computers. Borrowing was vital. A company had to become computerized, and investment in technology was critical to survival.  The technological innovations and productivity gains were massive. There is nothing on the radar now that is capable of producing the type of productivity boost that came from computers. Perhaps the financial soil is every bit as fertile as it was in 1983, but we don’t have the right crop.

The second example came from 1992. The economy slowed, but recovered. The economy slowed in 1990 as we awaited the January invasion date for Desert Storm- the first Iraqi war. The economy recovered fast in the spring of 1991 and then leveled out. The leveling out appears to be a slowing, but is a result of percentage changes being compared, rather than absolute levels. Then the economy began to grow dramatically. Mr. Epstein chooses to compare the low level of Consumer Confidence in 1992 to the low current levels as “PROOF” that we are on the verge of an economic rebound. Consumers are too pessimistic at the bottom he argues, and therefore the low levels of confidence now set the stage for recovery. The only difference is that the cell phone was just being introduced…  One of the most fantastic advances of mankind ever.

When we try to understand our economy, we need to step back from the numbers. The numbers don’t tell the real story. The numbers help to understand the scope and magnitude of issues, but can often confuse the reasons and explanations. The economy should grow as a result of healthy investment and productivity gains. Currently, the economy is slow, business is slow, investment is slow and for good reason. There are not “must have” technologies like computers, cell phones and the Internet forcing individuals and companies to get up to speed. It should be slow. If there was indeed a “better mousetrap” then our economy would grow- as it should.

I am not sure if the sky is falling. I am very scared. I get scared when I read articles that encourage us to stop thinking. I get scared when authors use contrarian logic as a guide to economic policy. I get scared when I think we just blew a $1,000,000,000,000, a trillion dollars, on things we didn’t really need.

j.o.y to the world          

peter

Sunday, February 28th, 2010 Uncategorized 3 Comments

Economic Insight

There is a scene in the “Simpsons” T.V. show, where the teacher, Ms. Krabapple, asks the class a math question. Millhouse raises his hand, and as he stares at his calculator, and proudly answers, “LOW BATTERY”

 As I read articles and listen to economic discussions, I often find myself comparing the speaker, or author to Millhouse. It is all too common to hear people talk about the data showing improvement, or the numbers turning up, without understanding the specific reasons or mechanisms that created the improvement.. For instance, an economist might say productivity is up, without any understanding of how the productivity gain was achieved.

 If I lay off 1 person, and keep production unchanged, my productivity is higher. Certainly that is a lot different than borrowing money and investing in plant and equipment, which also increases productivity.

 Thinking is allowed.  But too many economists and market strategists rely on their formulas and historical relationships. These economists are staring at the statistics on productivity, and consumer confidence and other metrics, but have never seen the inside of a factory. These are the economists who say things like, “ at this point in the business cycle, employment starts to turn higher”.  These economists do not try to understand the data, or look past the numbers; they simply crunch the numbers, and report the findings. Their predictions do not take into account the global macro economic trends that are driving the world’s economies.

 Think people. Who is hiring? Who is firing? Ask your friends, talk to the cabbies and doormen. Understand that our economy is experiencing a major contraction. It is not going to magically mend itself. The government can’t spend a bunch of money on repaving roads and expect stimulus to result.  It does not work that way- just like breaking and then repairing broken windows is not going to stimulate business.

 Recovery is the wrong term. This is the new world. The last 10 years, were a façade, built on reckless lending practices. Our economy chugged along as housing boomed. Stupidity reigned, and very few stopped to think. How can house prices go up faster than incomes? Are houses learning to be more efficient? The price of houses increased because cheap money poured into the market. Take away the cheap money…and well thinking is allowed.

 J.o.y. to the world

 peter

Saturday, February 27th, 2010 Uncategorized No Comments

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