Things could get better. But they could get much, much worse: An economic preview and personal convicitons.

The Great Wave

The Great Wave

Are you sick of this yet?   Even if you’re unaffected by the recession of late, it’s likely you’re sick of the news, commentary, posturing, and problems.  I know I am.

Yet I can’t seem to let it go.  As a culture, I think, we all tend to look for some as-of-yet undefined, great, “The End,” somewhere ahead – a cataclysmic final page to the story of the individual, nation, or world.  It’s built into our upbringing as Americans.  And, just as I did during the first few days after September 11, 2001; I find myself wondering, “Is this it? This time?”   And though I find myself feeling more worried over time instead of less, I still feel confident in answering, “Nope.”

Similarly, I’ve been asking myself over the past few months “Is it over yet?  Is this it? Is now the time when things start turning around?”  Agian, I feel some level of confidence in answering, “Nope.”  What I want to do is tell you why I think that way.

The problems we face today, I feel, are caused by two problems with the great American economy.  They are specifically that we embrace debt, and that certain parts of the American Lifestyle grow in expense faster than the average earnings of the average American.   This second problem simply feeds the first, as we buy on credit so we can have the things we can’t truly afford.   We do this again and again for things as basic as insurance coverage to cars, homes, groceries, and any number of other things.  Eventually our flow of income is completely diverted to other sources and bills start going unpaid.  The once profitable flow of cash and income turns back upon itself in a crushing wave of debt.

Because Debt and payment plans in general are  such a basic part of the American Lifestyle it’s become an investable and insurable asset in the economy.  But when this debt wave began to crest  and break, those companies who invested heavily in debt instruments found themselves suddenly worthless.  (An example, I recently read that insurance giant The Hartford has a stock value now less than the actual value of it’s vast cash reserves.  Wild.)

It’s been a rough ride so far.  I’ve worked with several young families who one week had plans to begin their retirement investment program, or insurance program; and the next week they call to say they’ve lost their jobs and will be moving home with mom and dad.  (Mom and dad are usually in pretty dire situations, too.)

The big problem is that there are certain parts of the average American’s budget which grow bigger and bigger each year or each generation.  These monsters eventually consume the rest of the budget and force the individual into insolvency.   These are especially:  The cost of Health Care, which inflates at about 7% per year (or doubles in cost every 10 years if you want to think of it that way) and which increases as a person ages;  the cost of housing, which, on average, inflates at about 5% per year;  and the cost of an advanced education, which costs, on average, 7% more each year.

Most people only gain about 3% per year on their income.  Do you see the problem here?

With the help of the recent government plans and bailouts, etc, there could be an end to the current financial crisis very soon.  Things could get better.  But it could get much much worse.  Here’s how:

The U.S. Government is just like an individual in some ways.  The Government also has a budget, has ongoing financial obligations, and carries a huge amount of debt.   In recent times, that ebb and flow of income and payments has remained essentially in balance – though there are always those who disagree.

However, by the end of the next decade, a massive swell is moving down the pipe.  For most of us, we’re hoping that if we ignore it it will go away.  It wont.  It’s the cost of social security, medicaid and medicare.  In about ten more years the monster of health care doubling yet again plus the huge amount of retirees combine to completely devour the federal budget as it is today.

There are only two outcomes:  the federal aid programs continue, thus necessitating a vast tax increase; or the federal aid programs are diminished, thus requiring each individual to care for his or her own families’ needs.

It is most likely, in my opinion, that the government will write itself a credit line, trying to swallow up this problem in a long stream of gulps rather than all at once.  More credit means a much larger debt payment in the budget.  More payments means more taxes and cut programs.

Now imagine for  yourself – your health care costs have more than doubled as you are now 10 years more unhealthy and health care costs have inflated at 7%.  Your children’s education now costs twice as much as it does today.  And your tax bill has just increased.

Add to those the car payment, house payment, utilities, and other living expenses.  Will you have enough to even get by?

Now imagine if this begins to happen today.  More debts go unpaid.  More banks become insolvent and start to call in the debts they’re owed by the average cardholder.  The cycle continues and industry after industry fails.

In reality, these things have been going on bit by bit for a long time and will continue long after we’re through the current crisis.  It is unlikely that the ’08-’09 recession will suddenly be driven into a second great depression.  If things get worse it will probably be gradual and will take place after the recovery from our current recession.  Putting off problems is our national pastime today just as it has been for the past century or so.

(It’s no wonder, then, that the youth of today have to take on more and more debt to get through college.  Nor, then, should it be a surprise that people are choosing to live with their parents for decades longer than they did a generation ago, or that the last thing a person does before leaving this world is to devour all their estate on paying for the high cost of long term care and other medical needs.  But I get off subject.)

The answer to this impending crisis, both individually and in a worldwide sense, is to avoid debt.  If, as a society, we weren’t clamoring for bigger and better homes than our parents and their parents had, and if banks hadn’t been willing to give it to us, treating debt like an unfailing and perfect resource,  it would not have come to this.

Avoid debt as much as you can.   Save up for yourself.  Only those who aren’t already stretched to their budgetary limits will survive if this next wave comes crashing down.

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Here’s a nice blog by a nice guy.

While at work and spending time researching companies and industries in the area, I found a link from a local recording studio to No Sweat Apparel, and the blog of the owner, Adam Neiman.  In his most recent post he discusses how being a Jew and the election of Barak Obama have inter-played in unexpected ways.  It’s worth a read.

Other entries on his blog were also very insightful and well written.  I recommend you check it out.

-Greg

The recession, inflation, and other exciting economics – Or “Why do I pay too much for my car insurance?”

I thought I would express today the reasons, both non-specific and specific, that I believe this country is in a recession and will stay in a recession for some time.

A recession is a decline in business activity over a period of time. Recessions have historically happened in this country a couple times every decade. During recessions there is less money spent and invested and more money put into savings accounts. Recessions may be times of lost jobs and general slowdown in how much we spend as citizens.

There are some people out there who say we’re in a recession right now. They point at the housing market and say “See! There, that proves it! Nobody is buying homes!” The important thing to remember about investment advisers and economists is that it pays to be pessimistic for them. If they project a gloomy future, nobody is upset if they are wrong. Conversely, if a manager of a mutual fund were to come out and say that the future looks bright, he will only keep his job if he’s right.

Don’t listen to these bozos. At least, not for the reasons they’ve come out with so far. Only the history books will be able to give us the true reasons for any recession or, heaven forbid, a depression. What I want to do is do my part to add to the doom by giving you my reasons – and I think they’re pretty good.

Back to the recession problem. The problem that we face is that people just aren’t spending enough. When I don’t shop and Lyn’s grocery store, Mr. Lyn has less money to spend. When he can’t spend that extra money to get the I-pod he always wanted, Mr. Jobs has less money. When Mr. Jobs has less money he can’t hire me to work for him.

The current management takes the stance of “Print more money,” and sends us a few hundred dollars to try to encourage spending. In the short run this makes sense, but once we’ve gone out and spent our tax refund, what then? The fact is that we are in the midst of a massive amount of government spending on military actions right now and yet somehow we still face an impending recession. Imagine what our situation would be like if we hadn’t gotten ourselves into a mid-east military miasma. The government is already pumping billions into the economy and yet it’s somehow not enough.

There are some underlying problems that need to be addressed. I believe that the problem is the increasing cost of things such as homes, cars, health care, and other ‘indispensable’ goods. The analysts point at the housing market as a symptom. I say it’s one of the underlying problems.

The real problem is that there are certain things out there which we call needs which we can’t afford not to purchase. These needs also have associated salespersons, producers, and various clingers-on. Let’s look at homes as an example.

I want a home. I have an income. My home cost can be expressed as a percentage of my annual income. Or my monthly payment can be expressed as a percentage of my monthly income. Traditionally (I mean going back 30 years or more) a home would cost no more than 3 times a household’s annual income. Similarly, the generally accepted advice even as recently as last year was to spend no more than 1/3 of your monthly income on housing. In the last 15 years or so, things have changed drastically.

According to the San-Francisco Gate newspaper, hardly anybody spends less than 50% of their monthly income on housing. Most people spend much more than that. How did this happen?

The price of homes rose much faster than income levels.

Why?

The efficient market hypothesis says that as demand increases (like when I want to buy my home) the price will go up a bit to match. The efficient market hypothesis makes no allowance for “sales” or “greed.”

Imagine selling a home. You built it for a certain cost, say 100,000 dollars. A few years later you want to sell it. Has the house changed? No. If anything, it’s developed defects and flaws. Yet rather than sell it for less you want to sell it for more. And not just an amount adjusted for inflation, either. A home bought for 100,000 dollars 5 years ago in the area where I live is now for sale for 235,000 dollars or more. Again, why is that so? Because people are greedy.

First the owner hopes to move up the ‘property ladder.’ He wants more than he paid for it. Second, the real estate agent wants more and has an incentive to sell the home for the maximum amount possible. Third, real estate developers who purchase and inflate the cost of homes for a profit.

People need homes. Human beings require shelter. We buyers, therefore, cough up the dough – even if it is more than we had expected or hoped to pay.  Even if the price of the home is more than the cost of the materials which form it.  We can’t afford not to. The only possible outcome is the inflation of the cost of a depreciating item. (think about it: homes don’t stay valuable forever.  They are about the only “investment” which increases in price year after year till suddenly becoming worthless when the property is judged as condemned.) Some possible outcomes to this scenario include either the beginning of government regulation on home prices, or the formation of an elite property owning class who charges the lower classes rent (only slightly lower than the cost of owning) and thereby prevents the lower classes from ever owning property.

As long as people are “selling” what we humans need, there will be the potential for drastic inflation and drastic recession.

Health insurance.

Think about it. We all need health insurance, yet it’s becoming more and more unaffordable. Why? Because there are people who make a living selling it. Because there are companies getting richer and richer providing it. Because there are lawsuits that justify the health care provider in charging more and more. It has become so expensive to insure employees here in the united states that some companies are paying to fly sick employees to other countries such as India where they receive world-class treatment and stay in 5 star hotels during recovery – and it’s cheaper to the company than the health insurance premiums.  I discovered for myself that it’s cheaper to fly to Taiwan to have my dental work done there (even without the government insurance!) than to pay for it here.

Cars.

As I remember the story, one day an analyst came to Henry Ford and told him that he was doing great, that his business was great, and that he would be out of business within a year. The reason was simple: His cars cost something like 600 dollars which was basically the average American’s annual wage. The people who could afford cars had bought them and there were only a few people left to sell to. Henry went away for a couple of days and when he came back he did something incredible: He increased his employees wages by 600 dollars per year, to be applied 1 year retroactively if they would accept payment in the form of a new car. Naturally, every Ford employee became the new owner of a new car. His decision rocked the world. No other car company, manufacturer, engineering company, or any related firm could compete with the wages he offered. Wages around the nation went up and cars became a necessity for all Americans rather than a luxury for the rich.

Today, perhaps because of strong competition, car prices are not rising as sharply as home or health care prices, but remain a massive strain on the average household’s income.

Education.

Education inflates at about 7% per year, meaning the cost doubles about every 10 years. Income inflates at about 3% per year on average. If nothing changes, we’ll either have an elite, educated class who can afford education, or the creation of a debt class – a generation who starts out their financial lives with enormous debt payments.

Back to our current situation:  the recession.  How can the average American afford to invest, spend, or otherwise help stimulate the economy when the cost of our ‘needs’ has grown to consume our entire income? We can’t.

If nothing changes this mini-recession will become worse and worse. Classes will become divided more and more till there is no more middle-class, just an upper and a working class.  We’re seeing it happen before our very eyes. Unchecked, the recession will grow into a full-blown depression. In the wake of a depression I would not be surprised to see as harsh controls placed on real estate, health care, and the like as there currently exists in the investments world.

The big question, then, is how do we make the change? And will we do it before it’s too late?
I’m afraid I’m not smart enough to know for sure, but it looks to me like it’s either going to be the whole nation suddenly becoming more selfless and less greedy, or it’s going to be the government stepping in more and more.

As much as we fight and hate things like nationalized health care in this semi-free-market economy, it may be the only solution that we can find.  Our only other realistic hope is the creation of businesses which drastically undercut their competition and somehow avoid the trap of inflation (or at least postpone it for another few decades). Realistically, this kind of business doesn’t come into existence until after a depression.

Scary to some, but it makes sense to me. The math is simple. Products with prices that inflate faster than income will eventually be out of reach. If those products are needs then we’ll soon find out just how badly we really need them.

Some Super-Tuesday-Eve Thoughts

I just wanted to say that I find it quite refreshing that we have such a variety of candidates this go-round. Even now that many of them have been eliminated, we still have a healthy selection. In fact, we haven’t had such a selection of real candidates for president since… well, never.

Back in 2000, I remember being rather unimpressed with Gore and Bush. I voted for Bush because somebody said, “Hey, he’s pro-military.” I think the election was so close because America didn’t want either of those characters to be President. No matter who people voted for, many said “I chose the lesser of two evils.”

In 2004, we had the choice between the incumbent who performed decently in a crisis and an admitted war criminal/hippie. I’m sure he was popular with pacifists, but the man is such a waffling imbecile that he didn’t stand a chance. Bush could have clubbed baby seals and eaten kittens and still would have won. Again, the American people faced a lack of options. (Partly because having an incumbent republican president eliminates half the choices). 

Here we have some real innovative contenders. I don’t mean to oversimplify these people but it’s irrestable: we have a woman, an african-american, a mormon, and a POW. Talk about innovation. I didn’t think any of the first three would be on the ballot for fifty years. I’d like to think that these candidates reflect an atmosphere of tolerance in the US.

We have a female former first lady and sitting senator. She has a wealth of experience herself and the support of a great former president by her side. She has a strong character and is a trailblazer; she has been the first female parter in her law firm, the first female NY senator, and by jove, could be the first female President. She’s the first one to even have a shot.

We have a talented young black senator who may be a little light on political experience, but he is familiar with social justice issues, having been a civil rights attorney. He appears to be an idea man with strong positions and an air that seems, well… Presidential.

We have a mormon former governor and businessman. Even though he has been criticized as a waffler himself, the man has a record with money. He saved the 2002 Olympics. He is a strong organizer and leader and has a lot of potential. He has also managed to remain active LDS in politics.

We have a war hero and firecracker senator. He has real experience that informs his opinions about foreign policy. He is a centrist and could help close the rift between the left and the right. While he is a republican, he doesn’t swear by their dogma and is open minded enough to adopt other positions.

There are others, including a former baptist minister who plays bass in a rock band, but I think their day in the sun is over.

Anyway, I’ve never felt such divided loyalty between so many candidates. At one time or another I have said to myself about each candidate, “I hope he/she wins.”

We have some good choices in every one of them.

Interesting

I was surprised to see a post on digg that promoted the right-wing point of view.  I link to it here so that you can see what it’s all about.  It’s one of the founders of the weather channel, a guy whose whole life is centered around meteorology, talking about Global Warming / Climate Change.  It makes for an interesting read.  I myself am neither rejecting nor embracing the idea of global climate change, but I am interested in seeing a more balanced outlook on these sites such as digg and reddit.

-Greg

Cognitive dissonance

Voter turnoutSet the way-back machine for 1956.  A nice guy I will call Leon read in his newspaper about a message received from outer space by a woman walking on the beach.  The message indicated that the world would be destroyed before the dawn on December 21st.  Naturally, this woman started a sort of cult.

Leon, being an inquisitive sort of fellow and a psychologist, decided that he would join this group to see what happened when the earth was surprisingly not destroyed and the aliens did not come and rescue the true believers.  He and a few friends went through the necessary efforts to prove their true belief and were soon members of the group.  Here are the events of the night as described by wikipedia:

  • Prior to December 20. The group shuns publicity. Interviews are given only grudgingly. Access to Mrs. Keech’s house is only provided to those who can convince the group that they are true believers. The group evolves a belief system—provided by the automatic writing from the planet Clarion—to explain the details of the cataclysm, the reason for its occurrence, and the manner in which the group would be saved from the disaster.
  • December 20. The group expects a visitor from outer space to call upon them at midnight and to escort them to a waiting spacecraft. As instructed, the group goes to great lengths to remove all metallic items from their persons. As midnight approaches, zippers, bra straps, and other objects are discarded. The group waits.
  • 12:05 A.M., December 21. No visitor. Someone in the group notices that another clock in the room shows 11:55. The group agrees that it is not yet midnight.
  • 12:10 A.M. The second clock strikes midnight. Still no visitor. The group sits in stunned silence. The cataclysm itself is no more than seven hours away.
  • 4:00 A.M. The group has been sitting in stunned silence. A few attempts at finding explanations have failed. Mrs. Keech begins to cry.
  • 4:45 A.M. Another message by automatic writing is sent to Mrs. Keech. It states, in effect, that the God of Earth has decided to spare the planet from destruction. The cataclysm has been called off: “The little group, sitting all night long, had spread so much light that God had saved the world from destruction.”
  • Afternoon, December 21. Newspapers are called; interviews are sought. In a reversal of its previous distaste for publicity, the group begins an urgent campaign to spread its message to as broad an audience as possible.

As an interesting side note:  Leon and his buddies had predicted this exact behavior.   This was the beginning of the understanding of a phenomenon called cognitive dissonance.  It’s something that you do every day.  It’s what makes politicians slimy.  It’s why some people keep buying General Motors cars.  It’s why we stop our new-years diets on January 17th or so.  It’s the reason that I get up in the morning, put on my exercise clothes, then sit and watch television instead of exercise.  It touches our lives many times a day.  We’ll get to more of that in a second.  First a couple more stories.

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Voting

I admit it.  I didn’t vote.  I didn’t care to vote.  I disagree with every candidate in equal amounts.   Now you know.

-Greg