Some Thoughts on the Economy

[_Analytics]

Couldn't people save money by buying and selling stock? I admit I'm an ignormous on economics, but I thought that stock was in no way debt--that's what bonds are. Thus I would think the economy could work without debt.

Or maybe we could still have debt but on a more limited scale (no credit cards--only secured debt like houses and cars). Yet, I suppose even the limited scale would run into problems such as when housing bubbles pop. Maybe there could be some other rules about counting house prices as risky if the price is significantly greater than the usual price given the income of that area's residents?

Yes (savings could be put into stocks), but with a caveat; things still need to be in balance. The money people save by investing in stocks needs to be in balance with the capital investments that companies make and the amount that others are taking out of the stock market. If the net-inflow to the stock market is faster than actual value that is growing in the system, then prices of stocks will be driven up in bubbles.

With regards to the housing bubble, it was ultimately caused by a high level of irrationality on the sides of buyers and lenders. If the buyers and lenders approached transactions like responsible adults, people wouldn’t borrow more than they could pay back, and lenders wouldn’t issue risky loans. Just a little more sanity and a little less greed would go a long way to help aleviate the risk of bubbles.

[_truth dancer]

Hey Analytics,

Not being an expert in economics let me ask you a few questions.

First, where is the money coming from for our government to loan?

From what I read it seems like we are borrowing from those countries with whom we may not want to be indebted. Might this be a problem?

In terms of the stimulus package, have you looked at the specifics and if so, what percentage of the money do you believe is actually going toward stimulating the economy?

Is there any way to set up some sort of non-government watch dog group to make sure the loaned money is handled properly? Would this be a good idea?

And, what do you think is the best way for individuals to move forward into the future? Save? Invest? Spend? Gold? Food storage?

I'm for the government stepping in and helping out during a crisis, but I am REALLY angry at what has happened thus far and how the loaned money has been managed by those who have public money at their disposal.

Any ideas?

~td~

[_Analytics]

Good questions, and I wish I had great answers. I’ll tell you my thoughts, such as they are.

Q: First, where is the money coming from for our government to loan?

The government is simply borrowing it. Getting burned so badly elsewhere, there are plenty of willing lenders.

Q: From what I read it seems like we are borrowing from those countries with whom we may not want to be indebted. Might this be a problem?

Through the so-called “law of unintended consequences”, this could certainly be a problem. But the thing to remember is that the bond holders have a lot to lose if there were a major inflationary meltdown. Since they have trillions invested in dollars, a weakening dollar would be catastrophic for them. Consequently, this forces them to have their interests aligned with us. That isn’t a bad thing.

In terms of the stimulus package, have you looked at the specifics and if so, what percentage of the money do you believe is actually going toward stimulating the economy?

Frankly, I don’t take the time to look at that for the same reason I don’t take the time to look at my 401(k) statements—too scary and too depressing. Any spending is a stimulus of sorts. Giving everybody “stimulus checks” is a stimulus. Opening up extravagant postage-stamp museums across America would be a stimulus. The question is whether a given stimulus is geared towards the type of investment that will yield the biggest returns. I’m cynical enough to think that there is way too much sub-optimal stimulus (i.e. pork), but that is just a gut reaction.

Is there any way to set up some sort of non-government watch dog group to make sure the loaned money is handled properly? Would this be a good idea?

How about the blogosphere? I think that crowd is doing a lot to hold government accountable right now.

And, what do you think is the best way for individuals to move forward into the future? Save? Invest? Spend? Gold? Food storage?

Heck if I know. What makes sense to me is getting away from the financial sector. I’d get out of personal debt, and then buy stocks in sound companies that produce stuff that people will buy even if the economy is down. Proctor and Gamble comes to mind. What I’d aim for is companies that will stay in business even if everybody decides they’re only going to spend money on the basics. Owning shares of such companies represents owning real value that can withstand a lot. You won’t get obscene returns, but you would get a lot of inflation protection and economic downturn protection. My thinking is all about sustainability. A lot of this mess was caused by too many people taking extreme measures to perpetually make obscene annual returns.

I'm for the government stepping in and helping out during a crisis, but I am REALLY angry at what has happened thus far and how the loaned money has been managed by those who have public money at their disposal.

A lot of people are, and I’m under the impression that the government is reacting to these concerns. I have my fingers crossed.

[_Gadianton]

If the net-inflow to the stock market is faster than actual value that is growing in the system, then prices of stocks will be driven up in bubbles.

..for those who don't buy into rational expectations. Some of us believe as a matter of doctrine, that there are no such thing as price bubbles.

Though, I have to admit this last one is strained my faith.

[_truth dancer]

Hi Analytics,

Thanks for your insights! :-)

We know a lot of people who have lost their jobs, can't sell their homes, and are really in a bad situation right now.

I don't know what people are going to do. They lose their job, can't find a new one, can't move because they can't sell their homes. And, I think it is only going to get worse for a while. I get the sense that we are still at the beginning of what is ultimately going to be a very bad situation.

How long do you think it will take until we see things improving? I read Bill Gates is thinking four years, and I heard yesterday an "expert" say ten years until we return to pre-crisis status.

Like you looking at our 401K is not exactly fun right now.

Seems many experts, (like my fav, Suzi Orman), suggest you keep investing, buying low and all that, still it makes me nervous. I like your idea of Proctor & Gamble.

:-)

~td~

[_Analytics]

Hi Analytics,
How long do you think it will take until we see things improving? I read Bill Gates is thinking four years, and I heard yesterday an "expert" say ten years until we return to pre-crisis status.

I don't know. The fact that it took a long time to create this mess makes me think it will take a long time to dig out of it. But there is a lot of work that needs to be done to transform our economy and society into a better one—it’s just a matter of getting the capital and jobs flowing towards making that happen. We’ve got a lot of capital and a lot of very smart, very creative, very driven people. I’m optimistic.

[_ajax18]

The reason poorer people continue to have multiple children has more to do with 1) irresponsibility, 2) a lacking sense of happiness and 3) the fact that multiplying has its financial benefits to the irresponsible parent. Multiple children in lower income households means larger welfare checks. That's a simple matter of fact and it is no secret that many have taken advantage of this.

I think that fits for America quite well. But what about people living in 2nd and 3rd world countries who in my view are dragging down their own standard of living by populating too much. They don't get welfare for extra babies, but this doesn't seem to stop them from having so many children that they can't possibly pull themselves up to the standard of living they wanted.

The men usually don't stick around so they simply don't care whether the woman gets pregnant or not. The reason they do not use condoms has more to do with comfort and nothing to do with a mysterious desire to see one's genes spread. Again, there is no evidence for this whatsoever.

You have a point that a lot men run once they get a girl pregnant. But why does the girl choose not to use contraception. Does she really want to be a poor single mom with no help?

Kevin you have to agree with me that the drive to propagate genes is one of the strongest forces we possess as living things. Whether subconsciously or consciously, the selfish gene is there and he's manipulating the world to make him the multiply and expand. It's just how living things are wired.

The evidence is evident in every day life. All things being equal, people will favor the man he shares more genes with. That's why it's such an exception or big deal to see people fighting against their own kind. Nobody shares more genes than siblings and in spite of their brutal battles of sibling rivalry, they will almost always side with their sibling vs. an outsider.

If they would submit to this, I venture to say that we could raise the standard of living in the world significantly by sterilizing people after they had two kids. Most wealthier people do that anyway. Would poor people who supposedly don't want lots of extra kids object to this as well? Why? We'd need less economic growth to keep up with population demands, have more time to acquire capital to put people into more effective work. I think it would help matters tremendously.