Rambling thoughts on...

Storm Lessons

-- Electricity is a very, very good thing. I've heard rumors that people actually lived in Houston before the days of air conditioning, but surely those aren't true. Or those people were insane.

-- There are a few catalysts in life for making people's true colors shine through. Things that help you see right to the core of a person. One is stress. Another is when a stoplight blows away and a major intersection becomes a four-way stop. I used to think our city was metropolitan and "with it". Now I've seen the true colors and realize that we have millions of idiot savants who can somehow have the profession to afford a nice car, yet can't figure out when it's their turn to go through an intersection.

-- When the heat is on and food/ice are scarse, life gets real simple. Put another way, the mind doesn't ponder the deeper mysteries of existentialism when it's busy finding a way to make sure the body continues to exist.

-- Whomever thinks that the hurricane put Houston back in 1940s-era lifestyle is forgetting about cellphones.

-- Most people are good. We saw lots of helping hands and selfless acts, and very few angry line-breakers.

Economic Theories

Some people have asked me what I think about the current market volatility, bank failures and federal bailout plans. I practically had a double-major with economics and International Business in college, and my MBA had a lot of training in economics as well, so I know at least a little about what's going on. But I'm by no means an expert. Not that it matters, because not even the experts can predict something as complex and multi-faceted as our economy. And I'm not objective either and I'm perfectly willing to admit that.

Most of my education and training was in the "Chicago style" of economics, the free-market spirit of Milton Friedman. In other words, when it comes to the economy I was trained by fiscal libertarians, people who think the market almost always works better, faster and cheaper than any government entity we might try to use to accomplish things. For the most part I still agree with that. So now you know my bias.

I look at our current situation and think of the rule of the harvest. We reap what we sow. The seasons are the seasons -- we can't change them and must work within them. And if we don't plant our crops in the spring, there won't be any food in the winter. No shortcuts or well-wishing can change it. You can't grow a crop in a week. The rule of the harvest.

I look at our country's economy and see that the inflation-adjusted income of 95% of Americans has fallen consistently for over a decade. Yet the average size of homes continues to increase. So we keep making less yet buying bigger houses. Our national savings rate is negative, and has been for some time. Add up all our citizens and we spend more than we make, at a personal level.

No surprise that the same is true at the government level. Our national debt is over $4.5 Trillion to outside countries/investors, and we owe another $5 Trillion to ourselves in future expenses that are coming, mostly in Social Security and Medicare. So that's almost $10Trillion in the hole. To put that in perspective:

-- The entire Gross Domestic Product of our country is around $15 Trillion. That's the value of all goods and services all of our citizens produce in a year. So if no American eats or buys anything and sends every penny of income to pay for Uncle Sam's debts staring January 1, 2009, we can finally pay things off and have our first meal nine months later.

-- There has never in American history been a period of such high government spending with such low tax revenues. The past several years are unprecedented. We've added another $500 billion to our debt each and every year for the past few years. The government's spending money it doesn't have. And how do they react? In February of this year they gave us all a big tax rebate and asked us to spend it to wake up the economy! They increased the deficit even further at the national level, and encouraged low savings at the personal level!

-- To cheer you up more, analysts estimate that the Iraq war is costing us almost $15 billion a month. 50 bucks per month per man, woman and child in the country, and it adds up pretty quick. In the end we'll probably have spent at least $3 trillion on the war.

The rule of the harvest says that at some point this will end, and it will be very, very painful. Eventually the balance will shift and we will be forced to reach equillibrium. It's called contraction, recession, even depression... whatever, our economic growth over the past decade has been largely illusional and driven by money we don't actually have. So we have to pay for today's growth with tomorrow's money. And with the news coming in lately, tomorrow might have arrived.

What's it mean in real terms? Our taxes will go up. Period. Doesn't matter which party wins the election, taxes have to go up, because we just can't cut a lot of the government expenses. Yes, I know the candidates talk about "pork barrel spending bills" and how they'll cut them, but the fact is that over 50% of federal spending is categorized as "mandatory", and that percentage continues to grow rapidly. In other words it's locked in and we can't touch it. Thirty years ago less than 30% of the federal budget was locked in. So we're more inflexible than ever. Think of Uncle Sam as a household -- his mortgage is getting bigger and bigger while his income is dropping. He can cut the kids' clothing expenses and maybe buy cheaper food, but the biggest expense, the house payment, is fixed.

So 53% of the budget is alreadly locked in. Oh yeah, and 9% this year went to pay interest on all that national debt I mentioned earlier. So less than 40% of our federal budget goes to all the "discretionary" activities. Things like education, transportation, the justice system, environmental research and veterans' benefits. Which ones do you want to cut? Now you see why the candidates keep dodging this question in the debates. The rule of the harvest. We bought things with money we didn't have, and now it's time to pay. With interest. It's going to hurt, but there's no sense complaining or finger-pointing. Let's just knuckle down and admit that it's going to hurt.

The economic crisis is not a surprise -- Henry Paulson (Treasury Secretary) said last week that the bailout plan is something they've been working on for months. I'm sure they were hoping for it to pop after the election, but not even they can control the market timing that well.

Which brings me back to the beginning, and the role of government intervention in the economy. I've been trained to believe that the market is smarter than the government, and I still believe it. So Mr. Paulson can keep his bailout plans -- I don't like them. If a business took on too much risk and might fail, let it fail. Let the price be paid by them, not the taxpayer. If there is value to be had in these banks on the brink, then a private buyer will show up. The market is smart. Warren Buffet just invested $5 billion in Goldman Sachs -- that's infinitely better than a government bailout. If a bank is in trouble but has inherent value, a buyer will show up and see the opportunity. If a bank is in trouble but has no inherent value, it needs to crash and burn. A government bailout is too expensive both monetarily ($700 billion?) and ethically (hey, go ahead and run a bad business and we'll step in to save you).

Rule of the harvest. If you didn't sow good seeds, then the reaping will suck. Sorry. No shortcuts.

How's that for a ramble?

In my next post I'll write about the true root of our economic problems. Hint: it's not the government. Or banks.