Storyline: On June 19th if some act in greed, en masse, the global economy will totally tank. What is special about June 19th is that in the financial realm it is known as the quadruple witching hour. The final hour of the stock market trading session on the third Friday of March, June, September, and December, when in addition to the expiration of option contracts and futures contracts, which indicates a triple witching hour, the expiration of single stock futures (SSFs) also occurs.
What is extra special about this June 19th is that by raising the H1N1 Virus to level 6 in an emergency secret meeting today, establishing a global Pandemic status, it triggers the force majeure clauses in contracts. Force majeure or “act of God” is somewhat ironic because if there are acts out of greed then the very system that permitted it will collapse by an act of God. Normally a force majeure clause removes the obligation to honor a contract, due to natural events beyond one’s control. So while in reality the somewhat mild H1N1 (swine flu) virus which is hardly a threat or cause for alarm could be used as a legal excuse to not honor contracts. However the real reason the contracts cannot be honored is not a result of the virus but rather the greed and corruption of those that had been running the system which failed because of imbalance due to greed and corruption. Of course if certain numbers can resist temptation, acting from a holistic perspective, then the system, as a result of collaboration, could be reconstructed without a total failure, or maybe not.
This could really get interesting and I am starting to see that the truth may be making a play to bring certain things to light and triggering a major systems evolution, and in fact a realization is coming that will bring change. It is a bit like a game of chess.
See it does and is happening in reality; check out this Google news search for force majeure.
http://news.google.com/news?pz=1&ned=us&hl=en&q=force+majeure+
At one link we find this good question, what is the answer?
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Economic Force Majeure
Source: Blake, Cassels & Graydon LLP - Does a severe downturn in the economy constitute an event of force majeure? If you can no longer get financing because banks do not have the money to lend, can you claim force majeure because events are beyond your control?
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The answer could be yes and no, depending on the role one is playing and in what context.
Here are some perspectives I proffer.
The Global Accounting System (monetary systems) are a man made creation it is not natural. If the Global Accounting System were based on natural principles we might say it was then beyond our control, however it is not at this time. The Economic System is actually manipulated and some things are contrived by independent agency attempting to produce effect, in other words unnatural cause. We have an economic system where there are some natural market forces at work but it is really dominated by human nature. Of course there are events that influence the system both natural and man made. In this context we might say the answer is “no”.
We also have the economic participants who must in order to live and sustain themselves utilize a system that is beyond their control, it is controlled by others sometimes to the controllers benefit and not that of the economic system participants as a whole. Therefore the inability to obtain financing to allow continued value creation could be considered beyond their control. In this context we might say the answer is “yes”.
One could also open up a can of worms with something I have pointed out long before, man is a part of nature, so any thing man does is an act of nature in a greater context, of course that also means that man is subject to the laws of nature, and if doing something that causes imbalance, threatens life or creates suffering, it will be corrected or if that is no possible destroyed by the natural forces of nature. In other words when an element in nature stops listening to the signals from the rest of the elements in the system it may cause dissonance and disruption in the system and threaten the whole body and therefore for the body to survive, if it cannot be corrected it must be destroyed.
There will be much greater understanding and realizations as one completes the articulation of economics in an easy to understand manner from a scientific and natural perspective and disseminates it. This will highlight the flaws of the current systems design and destroy the illusions that it is based upon that lead to detriment not benefit.
I also note that many in executive management may not intend detriment however when seeking guidance from those with vested interests one is getting distorted or inferior advice which results in detriment to the majority and the system as a whole. Management’s key deliverable is the correct choosing of individuals or entities to play support roles which include the ability for discernment of the truth and reality behind appearances and the ability to detect a compromised agent or those lacking in capacity.
I was talking to a friend who is pretty well off. He is the General Manager of an international hotel chain and a non supporter of President Obama. He is totally against taxing the rich and stated the reason. You know the rhetoric. 40% of people don't pay taxes, etc..., why should the rich suffer because of people like that. The conversation went on and he said that because of the new tax reforms people are moving to tax free or lower tax states and operating their businesses electronically. He said it with such satisfaction that I was appalled and all I could say is: 'That's not right'. Although I thought my words were lost on him, I just couldn't say anything else.
My stance is this. We don't live in a vacuum, or maybe some do. The money made by most businesses is the result of someone else is working. If it were not for the workers things would not progress. I understand workers are paid wages, but who gets rich? Not the workers. There are many reasons why, but most of all it because of high taxes unfairly distributed among people of varying economic stations.
I do not profess to be an economic genius, but I can add and substract. If anyone wants to educate me. Feel free.
The Recession Survival Fair will take place on 6/6 at the Brooklyn Brownstone School in Bedford-Stuyvesant, Brooklyn. Volunteers are needed now. Details here:
http://signsanssignified.blogspot.com/2009/05/recession-survival-fairvolunteers.html
I am proud of our Obama's announcement today.
It is wonderful to see a smart, strong young man stepping up to the plate and doing what needs to be done. It is wonderful to see one of my "Change This!" Wish List items getting attended to. (see earlier blog "Change This!")
We have a lot of housecleaning to do - at least it's springtime and time for it anyway. I can't wait to watch this Failed Lead Executive Extirpation Program (FLEE, for short ;) become common practice as we go about our economic recovery. I look forward to courageous, honest and deserving players taking the place of a too-long-entrenched uncaring régime - good thing you have a lot of résumes to choose from.
My prayers are with you folks and, for what it's worth, I'm around for ya.
All My Relations, Gramma Willi
P.S. Bringing the Indian Tribes into the UN is a sheer stroke of genius. Mad props to everyone who is behind it! Suggestion - put some of those savvy Native Elders at the helm of some of these organizations.
With incentives for commercial buildings and warehouses to implement this renewable energy technology, which also reduces green house gas, creates jobs, creates growth, reduces the trade deficit (oil), and strengthens the US dollar; this green energy technology will also give the US economy a boost.
The increase in demand will also result in more competition, research, innovations, and improvements. With the installations being concentrated in cities (commercial buildings) any maintenance required should also be competitive.
Hello friends,
I am just going to let you how my first time as an event's Host went. To tel you the truth it was not like I expected it to be, but I learned from it, and next time I will be more prepared. We went to a K-Mart store located in Bellflower on Rosescrans and McNab , CA and we could not hand out pledges because for them to let us do so, we have to contact their headquaters, and since it was week-end headquaters was close. Also I expected 8 people who sign up for the event, , and only 6 peoples showed up, only 3 was from the signed up list. and I am wondering if there is something that I did wrong or if the event was not advertized enough. How do people actually get more people. The weather was not favorable so we could not really do much. but it was my first time I guess, I hope next time will be better. I am counting on any of your advises, strategies in how you made your event more successfull. I will be reading your post with interest.
Thank you
Salma
"Dr. Kamran Mofid is a visionary activist committed to the evolutionary transformation of social, ecological and spiritual values. His is a vision of a healing world, in which justice and peace are increased – rather than diminished – by the process of globalisation." -- Common Ground
http://www.cg.org/news_list.aspx
Alma and Clifford Pearson Distinguished Speakers Series
Location: Samuelson Chapel - California Lutheran University
"Kamran Mofid is founder of the Globalization for the Common Good Initiative and co-founder/editor of the Journal of Globalization for the Common Good. Born in Tehran, Iran, he received his bachelor’s and master’s degrees in economics from the University of Windsor, Ontario, and his doctorate in economics from the University of Birmingham, U.K. In 2001 he received a Certificate in Education in Pastoral Studies at Plater College, Oxford..." http://www.callutheran.edu/calendar/event/1787
To listen to the lecture please click here: http://www.callutheran.edu/CLV/
"Outside ideas of right doing And wrong doing, There is a field I’ll meet you there." -- Rumi
My small business was in the brink of bankruptcy failing miserably during Bush era, but since President Obama took over it became an overnight success, my sales jumped from an average $20 a day to over $200 a day, last 5 weekends my daily sales were $600; what a great improvement my outlook for future is brighter now with full of confidence I waited patiently and now my boutique will not bankrupt, what a relief that is!
I look forward to hearing from all concerned readers of my blog please feel free to share your stories & comments, have a bright & wonderful day!
over whether tax cuts or bigger government are the answer to our economic problems is like listening to the captain and the first mate of the Titanic argue over whether more and smaller buckets or less and bigger buckets are the answer to their situation.
You know what would be to impressive and a confidence builder? If Obama came out and said, “I am not sure how to fix the economy just yet, but we have determined what the problem is. While I can not assure you that I can keep any of you in your homes or keep you from falling into poverty, but I can promise that your kids won’t be in the same situation.” That would signify to me that he actually understands the cause of our current situation.
Throwing money at the big banks and the irresponsible housing lenders and borrower is about as impressive to me as George Jr. bombing camels to protect America from guys with butter knives from taken over airplanes. Neither are actually going to keep the condition from being repeated. At least when it comes to guys with butter knives on a plane, I can trust Americans will rise up and fight off the offending situation. I am not sure that I can count on Americans to stop agreeing to terms they don’t understand, and borrowing more money then they can afford to.
When everybody involved realizes that taxes and incentives are red herrings and economically unsound ways to influence circulation. Lowering taxes on the wealthy doesn’t cause them to start businesses. Lowering taxes on businesses doesn’t cause them to hire more people. By the same token charging hire taxes and redistributing the money to the poor doesn’t make them any less poor. The government creating temporary jobs only gives people false security and unpredictable income.
If the administration could put somebody to work following the money once it reaches the market, I would feel much more comfortable. So you send a stimulus check out. Where does the (in the last case) $1500 go when you send it to them. Obviously they were paying their bills, or maybe they weren’t and for that month they do. If they buy merchandise, how much of it is retained here in the US and how much is spent on places outside the economy.
If Obama announces he has put somebody in charge of following money as it enters and leaves our economy, I will feel much more comfortable with the faith everybody is putting in him.
Our Human Nature is Beyond a Response to Stimulus
An emerging problem facing many people today is that the price of a product that is presented to the consumer does not accurately represent the consumers’ real costs. I would challenge any person to walk into any new car dealership and figure out what will be the real price to be paid or the real cost incurred based on the listed price on the sticker, the advertized price with or without rebates, unknown “APR’s”, dealer price, employee price, and whatever information you can gather from the internet. I know that agreeing on a price, weather cash or credit, can take hours. And when I am finished negotiating and driving away in my new car I wonder if what I agreed to pay was really fair or did I hurt myself by paying too much? I wish I knew!
The finance charges of buying anything using credit must be added to the initial purchase price to know its real cost. The cost of buying anything on credit is hidden or disguised from unaware or ignorant people. The price held in a person’s mind or seen on the sticker certainly does not equal the total payments made over time. It is probable that three different people with three different credit histories will all agree to purchase an identical car at the same price and all three people will incur very different real costs to their lives. Three examples of financing $20,000.00 of the purchase price of identical cars over a period of five years for our three different people of various credit histories could be:
1. Excellent credit…. $20,000.00 at 3% interest over five years is 60 payments of $359.37 totaling $21,562.46.
2. Fair credit…………..$20,000.00 at 8% interest over five years is 60 payments of $405.53 totaling $24,331.62.
3. Poor credit…………$20,000.00 at 15% interest over five years is 60 payments of $475.80 totaling $28,547.91.
These examples are not made to pass any moral judgments’ on borrower or lender. The examples exhibit the difference between the same $20,000.00 price in each person’s mind and the three different total costs of $21,562.46, $24,331.62 and $28,547.91 incurred by each individual respectively. We all know that the real cost of buying an identical car is different for different people in different circumstances. Fair or not, differing real costs for differing consumers is the reality people experience. What is problematic is that many people confuse the price they have in their mind with the total cost that is actually paid over time. The total cost paid over time is reality while the price they have in mind is not. The $20,000.00 price in mind is believed to represent each individuals’ real cost when in the real world each individual incurs, respectively, the different real costs of $21,562.46, $24,331.62 and $28,547.91. What is believed to be real (as price) is not real (as is the total cost over time); the idea that the price accurately represents the total cost when credit is used is mistaken.
Imagine being a person of fair credit, believing he is paying $20,000.00 for a car, and in reality paying $24,331.62 for that car over time. How many times can the $4331.62 mistake be repeated? I do not know. You might say that ‘people really do know how much they are paying or at least they should know’. That may be true: but, the first point is that their purchasing behavior was based on the belief that the $20,000.00 price held in mind was the real price they are paying; and, the second point is that the idea of the $24,331.62 total cost, if it came to mind at all, came to mind generally as an afterthought which had little or no influence on their purchasing behavior.
I wish to drive this point home just a bit further. Imagine being the home owner when I ask you how much you paid for your house. Will your answer be the buyer/seller negotiated price (of say $200,000.00)? Or will you answer with the total cost calculated over time (of say $20,000.00 down payment, $180,000.00 mortgage over 30 years at 4.5% with monthly payments of $912.03 for a total cost of $348,333.52)? Most people say $200,000.00. This may be self deception on a mass scale; a deception that for some people makes huge differences in their standard of living. A home buyer with less down payment or worse credit might agree to this: $0.00 down payment, $200,000.00 mortgage over 30 years at 5.5% with monthly payments of $1135.58 for a total cost of $408,806.90. While there is a $60,473.38 total cost difference facing the different buyers, I will bet, most home buyers will say and believe and behave as though they paid $200,000.00 for their house.
Reality will not be ignored long before it demands to be recognized, and in the real world price does not always equal cost. If I define price as the number that is held in one’s head it will equal the physical number printed on the products sticker or it will equal an amount negotiated (that is often to be financed) between buyer and seller. Within a cash transaction price will equal the cash exchanged for the product or service and most importantly it will accurately reflect an immediate real cost. Within a credit transaction price will not reflect a real cost and thinking that it does can be a costly mistake. Reality for the cash purchaser is different from the reality of the credit purchaser.
Real costs involving credit are the total cost calculated as price plus interest paid over time. If I define cost as what will be actually paid then that number must be calculated and kept in mind if an accurate representation of reality is to influence a purchaser’s behavior. Believing that price equals cost does not make it so. At Wall Mart or at a grocery store the cash, check, or amount debited, is equal to the price of the goods purchased. When those same goods are purchased using a credit card the price printed at the bottom of the receipt will not represent the real cost of the goods for that buyer. It is the knowing and respecting of this fact that price easily misrepresents cost that will influence behavior. Masses of people behave in a purchasing manner that suggests that they do not know or respect these truths. For many buyers using credit the purchase price held in mind never represents their real costs; their real costs are actually out of mind. What they think is the price they are paying is a fantasy held only in their imagination; reality is actually a rising total debt because real things purchased on credit have a higher real cost than at first appears.
As simple and as obvious as this seems it is my contention is that it is the ignorance (by many people, businesses, and governments) of this real difference between that price which we picture in our mind and that total cost which we really pay over time that is at the heart our present economic crisis today.
It is often hard for many people to believe how big their debt is when they believe they didn’t really spend that much. And perhaps they didn’t spend that much, but for what they did buy they ultimately paid a high price. Most people that buy on credit behave as though the price they are paying for the good is what it costs them. In reality it costs far more. With regard to a credit purchase a person’s belief in mind could hold that the price is low enough to represent the thing as being worth buying; whereas, for the person mindful of the real cost that cost is too high to represent the thing as being worth buying. A person’s behavior is based on what they believe to be real; that is, they see reality as the sticker price that is easily held in their head or they see reality as the total cost paid over time. In the first case, when only mindful of price, the price (which does not equal real cost) appears low and they purchase immediately. In the second case, when mindful of the real cost, the real cost (which does not equal price) appears high and they put off the purchase.
Behavior based on mistaking the price for cost has profound ramifications for economic systems. Credit purchases based on this mistake will artificially stimulates a demand for the goods and services purchased because the price appears lower than its real cost. Businesses, however, will actually produce enough goods to meet this propped up demand for all the consumers that confuse or ignore the difference between the idea of a low purchase price and the real cost involving credit. Behavior of persons mindfully considering the difference between a cash price and the higher real costs incurred by using credit will adjust demand downward with regard to any good or service requiring the use of that credit.
Our present economic crisis is based in the fact that a great number of people are being forced to becoming aware of a need to consider this price/cost difference. Their behavior, which led to an over extension of debt and an overconsumption of goods, is a direct result of not considering this difference. Their changing behavior, which is now withdrawing from the use of credit, is based in having in mind the real cost of using credit. When the real cost of credit is kept in mind then demand for goods and services will no longer be artificially stimulated. Demand will come down to a level based on the real costs instead of the non-credit cash price greatly impacting businesses that use credit to help generate profits.
Businesses that generate profits by financing the purchases of their goods or services are now facing difficulties proportionate to their use of that financing for those profits. It is conceivable that some companies switched to generating their profits through financing because price competition for cash purchases drove profits very low. It then became easier to compete for profits based on financing because that financing hid the real costs from most consumers. Automobile companies, retailers such as Sears, conglomerates like GE and any kind of business that has become dependent on their own financing of purchasers to generate profits has contributed to the misleading relationship between price and cost by presenting to consumers prices that seem low when in reality the financed cost is high. When using financing to generate profit the price tag on a good or service will tend to be lower (to entice people into using credit) than what would be necessary to generate that same profit without using financing. It is probable that businesses highly dependent on profits through financing will even discourage cash purchases because selling for cash at the list price will produce little or no profit at all.
Ultimately businesses that financed the purchasing of their own products built a capacity to produce enough goods to supply a market where people behaved in a manner that mistakenly accepted the price as equivalent to the financed cost. Once consumers realize their mistake they will withdraw demand leading not only to an oversupply of goods but also to an over capacity to produce them (the basis of deflation). Thus if the use of credit decreases so will the ability to generate enough profit to stay in business. And if credit tightens an initial oversupply of goods and services will face deflationary pressures (of too many goods needing to attract fewer available dollars) leading to falling prices. Once the original oversupply is consumed the list price on goods will have to rise to a point that will make up for the loss of profit that was generated by financing purchasers if the business is to continue operating. Of course the higher list price will also discourage demand.
Retail businesses (that are not operated as finance companies) generate their profits based on what is paid for the product at the moment the transaction occurs. Whether a good is paid for using cash, check, or credit makes little difference to the retailer at the time of purchase; because, for the retailer the price on the sticker accurately represents what is received in payment. From the retailers point of view the sticker price represents the real cost to the consumer. Inventory is ordered and manufacturers produce goods for a market based on that retail price; but, that retail price that seems real to the retailer is not the same as the real cost to the buyer using credit.
The consuming of products purchased on credit has long term effects on retailers and their customers. From the point of view of the retailer corporate profits should be able to be estimated by taking the price paid by the consumer, minus the businesses costs involving the product incurred, multiplied by the number of units sold. While that will work for past purchases it will not work well for future projections. In reality, the cost of credit is incurred in the future and this has two results: first, future demand will be less than current demand; and second, the real cost to consumers is much higher than the price the retailer receives. Future profits must adjust downward with a cannibalizing of demand.
The lender of credit becomes the collector of the difference between the price paid to the retailer and the real cost to the consumer; the retailer collects the sticker price and the consumer pays to the lender a higher real cost over time. By extending credit for purchases today the lender enables an increased stimulation of demand for today. By collecting payments of interest and principal in the future on today’s purchases the lender will stimulate a decrease in future demand by absorbing the consumer’s future purchasing power. For the unaware retailer or consumer the lender of credit is, in reality, collecting a sacrificial cost from both the retailer (sacrificing future demand) and the consumer (sacrificing future purchasing power); and, both retailer and consumer let it happen because of either ignorance or the convenience of having one bird in the hand rather than having two birds in the bush. Both the consumer and the retailer, when dependent on credit to complete the transaction are related to the lender of credit as addicts are related to their pusher. The lender, who is extending credit to facilitate today’s exchange between buyers and sellers, when those buyers and sellers are blind to the real costs of purchasing things, is no longer profiting by performing the service of assessing practicality and risk; but, the lender is profiting from both purchaser (in lessoning future purchasing power) and seller (in lessoning future demand) by supplying the convenience of immediate gratification to anybody ignorant of real cost assessment.
Yes, I am pointing fingers at the banks issuing credit to ignorant consumers! I am pointing fingers at payday loan companies serving desperate people seeking loans at loan shark rates! I wonder, what would happen to people if banks would issue enough credit to people that they might have trouble paying it back? If I was a bank, I would like to keep borrowers just under that troubled threshold. If I was a bank I would be interested to know what profits I could generate if, as a bank, I were to raise the interest rate on my customers from 10% to 20% or even 29%. I might even justify the rate increase based on a late payment; I might even use the post office to help generate some late payments by mailing out payment notices near do dates and requiring the payment to be mailed to the opposite coast. I might even raise fees on those late payments. Another thing I might try, if I were a bank, would be to entice credit users from my competitors to transfer their loan balance to my bank by promising an absurdly low interest rate of 0%; I will bet that at the first late payment the interest rate could be raised to 25% -- 0% to 25% in a heartbeat – what a good deal for bank profitability.
Hmmm… if we, as bankers, could only keep people under that painful threshold of not being able to make their monthly payments: Hmmm… if we cannot then the huge interest rates we are charging will have to make up for the amount of people defaulting on their debt: Hmmm… if that does not work perhaps we could get congress to make it harder for people to declare bankruptcy. How profitable can we banks be and what might be the overall consequences?
Hmmm… if we could only get these people out of debt we bet they would thank us and feel relieved: Hmmm… if we could only encourage the debtors to exchange some of their short term debt (such as credit card or auto loan debt) for the equity that is in the home; in this case expensive short term debt will be exchanged for cheaper long term debt. We realize that it would be like taking out a 30 year loan on a car that may only last about 10 years and we realize it would not be a good habit to establish; but, people need relief from their pain now and they deserve a vacation from all their debt. Perhaps people will thank us bankers for bailing them out of their troubles.
What must it be like to have $10,000.00 in credit card debt? At 10% the cost of servicing that debt for one year is $1,000.00. At 20% the cost would be $2,000.00. And, at 29% the cost would be $2900.00. For those consumers habitually in $10,000.00 of debt, at 29%, it means that the goods they purchase every year for $10,000.00 really costs them $12,900.00. It also means that the $2,900.00 of interest payments goes to the provider of finance and not to the profits of retailers or producers; in fact, the $2,900.00 cannot go to purchasing any good at all. In this example, it means that $2,900.00 of the total cost of $12,900.00 goes to the production of no-thing beyond convenience. In this example, it means that $2,900.00 must be subtracted from future purchasing power. In this example, it means that the real cost of goods to consumers that are habitually in debt is very high. It also means that in saving this $2,900.00 there is real hope.
There is hope that once people become mindful of and as long as they stay mindful of the cost of credit their behavior will be modified toward less demand with regard to the real cost of things used. Our present mindfulness of the high cost of credit, whether caused by job loss, out of pocket medical expenses, a credit overextension that can no longer be refinanced, or the actual pains of bankruptcy, will encourage a behavior toward increasing savings. Increasing savings or bankruptcy are the only things that will get people out of at least short term and high cost debt. And pain is the encouraging factor in keeping people mindful of their real circumstances.
Once people are out of debt and as long as they stay mindful of the real costs of things, then the real benefits of working through the pain can materialize. Those benefits will ultimately be a real increase in disposable income of $2,900.00 for the future out of debt person in the above example. That amounts to an increase in disposable income that dwarfs any stimulus check sent to consumers by the federal government last year or coming from the government in 2009. Not only that, by saving, consumers are actually behaving in a caring manner toward themselves. And, that $2,900.00 saved may eventually go towards purchasing a future good or service instead of future interest payments. That could lead to more employment of people that actually produce things that will be used. But, please note, this real kind of recovery can only be achieved by working through the pain. Giving and taking pills to deaden the pain will keep out of mind the things needed to be held in mind if behavior is to change.
As human beings we do not respond to stimuli in the same manner as plants or animals. All organic life responds in a manner of moving toward or away from stimuli. Human beings do not have to respond in the same way as organic beings because we can respond through knowledge of the thing that is stimulating us. It is through thinking and feeling things that are outside us that we get to know them and our place in the world. Things that are outside of us stimulate us into thinking and feeling about them. It is for this reason that what we think and feel about any thing always has to be checked out in the real world. Are we thinking correctly about things? Are we feeling appropriately? Answers to these questions are revealed only through activities we undertake. If we do not get the results we expected by our activities then our thoughts about how something could be accomplished are wrong or our motive to act in the direction we felt to be right is wrong or both our thinking and feeling are wrong. In any case we had better stop what we are doing and reflect. Was what we were thinking and feeling about things accurately telling us something about the real world outside of us or was it really telling us about something inside ourselves? Knowing the difference is what allows us to act as human beings and not just respond to stimuli like plants and animals. Getting to know the world outsides us and responding to it as it really is distinguishes us as human beings. Generally, in getting to know the real world we will sometimes experience pain. Pain is often a sign that we have been moving in the wrong direction. Pain generally stimulates people to wake up and reconsider their relations to the world. Pain says pay attention. Anesthesia for the pain is no cure.
Even the granting of easy credit to help sell the initial over supply of goods left in the marketplace will not place the now known high cost of credit back in the bottle. People are now leery of using credit because of the pain they are feeling; for, it is this pain that is keeping credit’s real cost in mind. Since the real cost of credit is better understood by the consumer the businesses that have supplied the goods and services based on the use of that credit will have to scale back production and they will also have to figure out how to generate profits on goods that are purchased at or near a cash price because those goods that need financing will be purchased by pained consumers more fully aware of the real higher cost of using credit.
Credit has no need to disappear. Goods will come to an end of their useful life and need to be replaced. Big ticket items will still need to be financed. And people will be educated by pain as to what they have been doing to themselves by ignoring reality. Like it or not, many people’s idea of how they would like reality to be is not mirroring how reality actually is. A necessary process of disillusionment is affecting everyday life. It is part of a process of getting healthy. What people are coming to terms with is that our present standard of living is being borrowed from our future standard of living. The consumer, in withdrawing from overdependence on credit, is showing a mindfulness of the problem. To believe that the consumer should do more of what is causing them pain by encouraging the further use of credit (by making it cheaper to borrow) is insanity. Saving is an act directed toward the future. It is and act directed at taking care of ourselves over time. And it is about time that the idea of participating in our own care better take root in our minds if it is to have any hope in changing our behavior in our future.
Businesses and governments do not know how to respond to the consumer’s new mind. Businesses and government officials are crying for more stimuli, either through greater government spending (most Democrats) or through decreases in taxes (most Republicans). In begging for the reestablishment of old and blind habits businesses and government desire the dissociation of price in mind from real cost because it is the traditional way things have been done. If they could only eliminate the pain then the consumer’s mind would seem at peace yet stay asleep to reality. But the consumer is awakening to the real problems of the cost of doing things in our habitual manner. And reality is forcing us to stop and reflect on how we are doing things. Reality will painfully stand in our way when we are doing things wrong. Hopefully we can get to know things as they really are and behave accordingly as the human beings we really are.
Maury Garvey, 2/25/09.
Our nation has begun implementing a nearly 800 billion dollar Economic Recovery Plan. This money is on top of the 750 billion dollar TARP, and as we frequently hear would cost over two trillion dollars in total if they were paid for by conventional issuance of treasury bonds. The stated goal of both programs is to head off economic collapse, raise the bottom of the downward trough of the business cycle, and restore the economy to a rational marketplace. Those goals for the economy are our hopes, but we hold back our faith in those hopes because we know that government is a notoriously inefficient spender, and we suspect that corrupt practices and special interests will divert the investment funds into foolish and pointless directions. Experience tells us this is true, so we would be foolish to place our faith in the latest economic theory, or our wise leadership in Washington, or the captains of industry. After all, it was pie in the sky economists, dogmatic politicians and greedy, irresponsible businessmen who put us into the situation we are in. We cannot seriously trust these guys to fix this mess, can we?
Placing our trust in mankind can only lead to disappointment; the Marxists already tried that. While I personally did not spend the wealth that was created for me in the housing bubble, that wealth is now gone, and I have nothing to show for it although I am also not in debt. I did hope we would eventually see a Dow 30,000, and placed my hopes and retirement funds in the stock market, and now much of that money is gone. I guess I can only conclude that I cannot place my hope in my own wisdom. Nevertheless, we live in a deterministic society that believes in the laws of science and nature. Perhaps it is time we stopped gaming the fundamentals of economics to project the disappearance of the business cycle and deal with what the fundamentals of the economy really are. If the wealth I theoretically had when my house was worth the most at the peak of the housing bubble was not real, then what is the worth of a dollar today? The worth of a dollar is the fundamental element that can explain how we can spend our way out of the current economic depression/recession, and the key to how we are going to pay for it.
Since 1973 the value of a dollar has been tied to our nation’s Gross National Product, or GNP. Before that, we were on the gold standard which meant that dollars were tied to the value of gold, or actually had something solid behind them. I was 12 when we went off the gold standard, so I really do not remember being on it, but I don’t see how that was really a big change. The value of gold was tied to how many goods and services could be purchased with it, so it strikes me that the dollar was still worth a percentage of our economic output or GNP. A dollar’s worth today can be described as the fraction 1 over the total number of dollars in the system, and the number of dollars in the system is equal to the value of the goods and services that our economy produces. To simplify this further, if there are 100 dollars in circulation and you have one of them, then you can buy 1% of our GNP with it. The worth of a dollar is determined by the number of dollars in circulation, and the value of the goods and services produced by our economy.
So what has happened to those two variables in the last year? First of all, the collapse of the housing and stock bubbles greatly reduced the number of dollars that were in circulation. Some of that money, like the value of my house and the retirement funds that I did not borrow against, was in unrealized gains, and so was not an actual part of the active money supply, or M1. Much of it, however, was borrowed against and so was in the active money supply. The disappearance of all of that money, in theory, should make the remaining dollars more valuable. In the previous example a dollar was worth 1/100 of the GNP, well if we are now down to 95 dollars in the economy, my dollar should buy more since it is now worth 1/95 of GNP. It is this contraction in the money supply that has made it difficult for banks to lend. The dollars that they had have disappeared!
Another problem that we face in determining the worth of a dollar is that GNP has also been falling. To use the 100 dollar economy as an example, if the money supply fell by 5 dollars, but GNP also fell by 5% then the dollar would still buy the same amount of goods and services. There would neither be inflation nor deflation, just a lot of miserable people who have largely been kicked out of the economy since they have neither a job, nor any assets that they can spend.
So, what is a dollar worth today as compared to last year? The unsettling thing is that we really do not know. We know that the economy is contracting, and we know that the money supply has contracted, and continues to contract. Beyond that, we can see that there is an insufficiency of money supply to allow “normal” borrowing to take place. This uncertainty is the root cause of the volatility in world markets, and no argument about “moral hazard” is going to bring certainty. Since our economic problems are now rooted in both the GNP and money supply, it follows that we need to increase both.
Politically, our two parties fall into camps that each address one or the other of these problems, although Republicans have recently started to advocate a hands off approach. Republicans want to stimulate the economy through tax cuts, which basically gives free dollars to the beneficiaries since no corresponding reduction in government services is planned. This is the same as “printing” money to increase the money supply.
The Economic Recovery Plan seeks to expand GNP by creating demand in the marketplace. Right now, the only entity with money to spend is our government since the contraction of GNP makes investment by businesses undesirable. By spending money on fixing roads or building buildings we create jobs that would not otherwise be there, and those workers can then spend that money at the coffee shop, grocery store, or Wal-Mart. So, one dollar invested by the government in that sort of spending hopefully produces many more dollars in spending by the private sector, which increases the GNP. In economics, this concept is called “velocity.” Remember velocity because we will get back to it later, but understand that the velocity of money spent in the economy is likely to be greater than that of money saved in a tax cut. Beyond that, you have to have a job to get a tax cut.
Let us assume for a moment that the government, using either or both approaches, essentially prints the money to pay for this stimulus, since I have no idea who has the money to lend it to us. If every dollar we “print” creates two or three dollars in economic stimulus, then we actually raise our GNP numbers by more than we do our money supply, and a dollar actually gains in value! If we take the 100 dollar money supply, and “print” 10 more dollars, the economy would have to grow by 10% to keep the buying power of that dollar constant. If GNP grows by 20% on a 10% growth in money supply, the dollar is worth more! Now, this sounds like “pie in the sky” type economics!
The reason that this type of approach can be used now is two fold: we have a contracted money supply, and we have a contracting economy. If this approach were used in near full employment economic times, the money that the government spent would actually compete with the money the private sector had to spend and we would not see growth in GNP but would see growth in money supply. That would lead to inflation. Money supply increasing while the economy is stagnant or continues contracting will lead to the type of run away inflation that Germany experienced before the rise of Hitler. The key to a noninflationary increase in money supply is expansion of GNP, and that cannot happen if we are truly at full employment. (It can happen in full employment if worker productivity is increasing, but that is another subject.) The keys here are that we are not at full employment, and the money supply has definitely contracted. The difference between the contraction in money supply and the contraction in our economy is the amount of money we can literally print. We are in a window before the economy has contracted too much. We still have an opportunity to spend, but if the economy collapses, that opportunity will be gone. That is why we must act now!
So, we can print noninflationary money now, but will we ever have to pay the piper? Of course we will. Eventually it is hoped that the economy will recover and grow under its own momentum. At that time, the Fed will lose a lot of control over the money supply as stocks recover and housing values potentially begin to recover. At that time the economy will be “printing” its own money through velocity. (I told you we would get back to it.) When velocity increases the government must decrease money supply or new bubbles, like the ones that did us in this time, will occur. Essentially there are three ways that the government can do this:
1) Reduce spending. Fortunately, the new money created in the ERP has time constraints. Both the tax cuts and the projects will expire. While this does not actually take money out of the money supply, it at least stops pumping more money into it. Further cuts will probably be desirable, but I doubt politicians have the courage to make them.
2) Raise Taxes. If I doubt politicians have the courage to cut spending, I know they do not have the courage to raise taxes. Nevertheless, raising taxes to pay off our debts would reduce the money supply and counter the final option.
3) Inflation. This is the cruelest tax of all, and will eventually lead to another economic down turn. If velocity increases while economic output stays constant, money supply increases while GNP stays the same. A dollar will no longer buy as many goods as it did before the money supply increased. The Fed can counteract this by raising interest rates, but in essence that amounts to the same thing as inflation.
In the final analysis, some spending will expire, some taxes will be raised as tax cuts expire, and some inflation will inevitably occur. The mix of those paybacks will largely be determined by the economic policies we follow at that time.
Does this mean that we are placing our hope in politicians that we have not even elected yet? I guess that it does, and that is not a place I want to place my hopes for a fulfilling life. Nor do I want to trust the latest fad to come out of economic academia, and I have already said that I demonstrated a poor ability to perceive economic reality before this crash happened, so I am not a good place to deposit my own hopes. There must be something greater in which we can entrust our hopes. Maybe if we make wealth a means rather than an end we can escape the trap of measuring our lives against the economy. Forget about what a dollar is worth, what are you worth, and to whom? If we begin the search for those answers, maybe we will resist buying houses that we cannot afford and bidding up the prices of stocks. Both Karl Marx and Adam Smith agreed that the economy would function better if there were better people in it; Smith, however, unlike Marx, did not put forth a plan to accomplish that goal, since he already knew that one existed.
In speaking with people about the president’s Economic Recovery Plan, a common question from both supporters and detractors is: “Has the government ever succeeded in something like this?” As a person with degrees in both Economics and History I can state confidently that there have been several times in recent history where something like the current plan has succeeded in reversing our country’s economic fortunes. Perhaps the one example that best illustrates the point is the post World War II example of the Servicemen’s Readjustment Act of 1944, or GI Bill.
As World War II was drawing to a close President Roosevelt and many of our nation’s leaders faced a daunting challenge: what will happen when more than 15 million soldiers, sailors, and airmen get laid off from their jobs at a time when demand for the industrial goods produced by war time industry collapses? The country had faced a similar crisis after World War I, and lack of action had led to the veterans’ “Bonus March” of 1932, and contributed to the depth of the Great Depression. Social upheaval and economic collapse were a very realistic fear!
Harry W Colmery, a former Republican National Committee chairman, was one of the earliest proponents of a government program to mitigate the effects of the war’s end on the economy. Warren Atherton of the American Legion greatly influenced the content of the bill, and Arizona Democratic Senator Ernest W McFarland guided the legislation through Congress. So, the bill had initial support by the minority party, was greatly influenced by a “special interest group,” and was championed by the majority party! The Economic Recovery Plan also enjoyed initial support from Republicans, but largely managed to escape special interest input because the speed in which it was passed, and ended up having to be passed by the Democrats with little support from the minority party.
The main parts of the bill were provisions for college or vocational training, and one year of unemployment benefits for returning service men. So, it invested in our future by creating a more educated and skilled work force while deferring many people’s entry into the work force, and provided immediate help to the unemployed. Subsequent legislation, after the war including the Employment Act of 1946, and various programs aimed at making home ownership a practical goal for most families also had a stimulative economic effect. The Marshall Plan, with its buy American provisions did as much to bolster our economy as it did to rebuild Europe.
While our challenges after World War II were brought on by different circumstances, they were similar to the problems we face today: industry that needs to be retooled, a collapse of world wide demand caused by the inability of consumers to pay, a surge of suddenly unemployed workers, all of which is happening after years of deficit spending by the federal government. The actions that the United States took spurred demand across our economy by directing government spending into programs that created long lasting value for our nation. The Economic Recovery Plan has exactly the same goal.
Our country’s reaction to the economic challenge that it faced after World War II was hugely successful and can largely be credited with creating the middle class that became, and remains, the main economic driver in the U.S. economy. Our country eventually had to stop deficit spending, and bring forth a balanced budget when the economy got to a stable point, but it can be said that government fiscal (spending) policy has a long and mostly successful history as a tool for dealing with economic hardship. President Obama’s Economic Recovery Plan, like the GI Bill, is aimed at solving a problem BEFORE it gets out of hand. History says that it can work, and it is worthy of our enthusiastic support.
When you are sinking in quicksand the natural reaction is to kick your feet and struggle. The problem is that kicking only causes you to sink faster. I know this is going to come as a blow to those who are trying to say, “The government should help us because we can’t pay for our house”, but you are mistaken. I am sorry. The only thing that this home rescue plan is going to do is cause the rest of us to go down with you. Not to mention your attempted salvation will result in the prices remaining artificially high.
I am going to piss off a lot of people, but I don’t care. It is kind of the same response you get when you tell an addict that they have made bad choices. “but everybody around me were making the same choice.” If you are in a mortgage you can’t afford, it is because you were irresponsible. That is not a disputable fact. However, everybody wants to make “responsibility” a relative figure. It is not. If I should go belly up and be unable to afford my mortgage, well then in the end I was irresponsible. In nature they call that “dead”. In the US we call them “victims”
Here is an idea that will work right now. It has to be acknowledged that when we draw ourselves out of this mess we are going to change the way we functioned before or we will end up in the same place all over again. (As it is many of our “stimulation techniques” remind me of the pirates from a few months back that drowned trying to swim to shore with all of their ransom money. Sometimes you got to let go of those things that you hold dear to survive.) One major change that could be enacted right now and have an immediate impact is wage reform.
By wage reform I don’t mean those old worn out ideals of “fair wage” or “living wages”. Those all have the same problem that our current minimum wages does, no relative direct connection between the top and the bottom. What I would propose is that (here come the cheers from the right) we completely get rid of minimum wage. But hold on, (now to re-anger them and confuse everybody else) We should replace it with a “minimum percentage”. What that simply means is that the lowest paid, toilet scraping janitor on your company payroll or any other direct employee would have to get at least X% of the highest paid, probably the CEO, employee on the books.
The title refers to the stimulus package recently passed by Congress. Sung to the music of “Celebration”, by Kool and the Gang. Watch it here.
Credit In The Simplest Terms Possible. I Think
Let me ask a few questions. You can think to yourself or shout the answers out loud. Do you have a credit card debt? Do you know anybody who doesn’t have a credit card debt? You know, you are out at the bar or to eat with them do they always pay in cash? Do you know anybody over 20 that has none of the following. Home loan, car loan, school loan, or credit debt? Do you know people who work hard, make a decent wage, do the right things financially, but are still struggling? Do you have a years worth of savings accumulated in case joblessness or illness occurs? So how can it be that so many of us are working our butts off, making an alright living, not living lavish lives, and still could not make it a year with out income. Now, under that guise let us talk about the affect of credit on the US economy.
