Tag Archive for economics

Could the U.S. Be Held Hostage By China?

I decided to have an educational movie night and rented checked out I.O.U.S.A from my local library.

While things (mostly economic things) have deteriorated terribly since the film was produced in 2008, one short segment of the film stuck in my mind:

If we journey way back in time to 1956 (I wasn’t even born, and I definitely didn’t learn about this in history class), there was a hostile little scuffle called the Suez Crisis.  Here are my shorter-than-CliffsNotes. (If you like the full thing, read a book.  Or search it on Wikipedia.)

Location:  The Suez Canal is a waterway (mostly manmade) from the Mediterranean to the Red Sea through Egypt.

Aggressors:  France, the U.K., and Israel

Defender:  Egypt

Spectators (the angry, belligerent kind):  Soviet Union and the United States

Context:  The aggressors weren’t stoked that the leader of Egypt (Nasser) nationalized the canal at a time when Britain was trying to maintain strategic control of this valuable shipping way for oil and goods.

Why I’m telling this story:  The U.S. didn’t really want to get involved, but finally Eisenhower threatened to cut off financial support to Israel and also threatened to sell of the U.S. Government’s Sterling Bond holdings.  This would have caused Britain’s currency to fall, sending them into Depressionville.  Basically, financial pressure from the U.S. caused three powerful countries to back away from a highly valued prize.

——

Flash forward to present day.  The U.S. is in a tremendous amount of debt (duh).  For the first time EVER, 32% (4.45T) of the total debt ($14.1T) is owned by foreign countries.  Everyone knows who owns the majority.  Of course that would be China with 36% of that $4.45 trillion.

Dear reader: You should be reading between the lines and already cursing under your breath at the ridiculousness that the tables of turned.

Pretend for a minute that the Chinese (for any reason) don’t play nice with the U.S.  Let’s say, for example, that they’ve been growing their naval fleet (true!) and decide to take control of the Suez Canal tomorrow.

The U.S. immediately reacts and pulls out our fighter planes, nukes, drones, invisibility cloaks, and whatever else we’ve been buying with all of our military spending. But China isn’t concerned because they’re one step ahead of our awesomely expensive attack methods.  They threaten to sell off the $4.45 T worth of U.S. bonds they own, effectively collapsing the dollar.

Uh oh.  Goodbye U.S. dollar.  Think of the currency crash we would experience.  Think of the global repercussions, since the U.S. dollar is the reserve currency of the world.

The euro’s not doing so hot right now. We can use Swiss francs or Chinese yuan.  Hate to say it, but the world’s probably gonna look at the currency that can actually support global trade.

——-

Anyway, I don’t really know the full repercussions, but I just wanted to touch on the point that the U.S. in a very dangerous position.  Let’s show some fiscal responsibility and put joint bills together.

Insert Personal Bias Here: There are two ways to balance a budget: spend less or make more.  Anyone that takes one of those options off the table (I’m talking to you Tea Party) without negotiating shouldn’t be in Congress.

I’m just sayin’.

This has been another fear-instilling (thought-provoking?) article from

~Nick, the Self-Taught Economist

 

Another Sign We’re in Crazy Town Looking Over the Ridge into Depressionville

The markets are shifting back and forth so fast that day traders are foaming at the mouth, and the average person is getting whipsawed like a kid’s head on one of those old, rickety wooden roller coasters.  But if you step back and look at the big picture, it’s a scary sight – especially for Europe.

 

What am I talking about?  Anyone that follows the news has heard of the countries on the euro that haven’t been playing nice.  Here’s a list of the 23 countries that use the euro as currency, and the ones on the verge of default are designated in red.

1) Andorra
2) Austria
3) Belgium
4) Cyprus
5) Estonia
6) Finland
7) France
8 ) Germany
9) Greece
10) Ireland
11) Italy
12) Kosovo
13) Luxembourg
14) Malta
15) Monaco
16) Montenegro
17) Netherlands
18) Portugal
19) San Marino
20) Slovakia
21) Slovenia
22) Spain
23) Vatican City

Interestingly, when the euro was introduced in 1999, the economists that put this idea into action had the sense to require a few stipulations for the countries that wanted to join:

  • A budget deficit of less than three per cent of their GDP
  • A debt ratio of less than sixty per cent of GDP
  • Low inflation
  • Interest rates close to the EU average.

But (not-so-wisely), the economists never wrote into the agreement what would happen if countries moved away from the euro.  Now, with countries as big as Spain and Italy having trouble staying solvent, it’s not unlikely that countries with strong economies (i.e., Germany and France) would have voters that want to avoid getting dragged down with the whole ship.  To read more about the sovereign debt crisis, click here.

The other whacky thing that’s happening in Europe is little Switzerland.  The little Swiss franc has become the strongest currency in the world because investors are scrambling to find a safe place for their money.  Besides gold, the Swiss franc is one of the best options.

Normally, a strong currency is good.  But Switzerland is too small a country to have the world’s investment dollars poured in.  As the value of the franc goes up (because increased demand = increased price), it is impossible to export anything out of the country.  Here’s the 18-minute radio story if you want to hear more about this.

So the funny thing is, the Swiss government is considering tying the Swiss franc to the euro to bring it’s value back into check.  What a huge friggidy-freakin’ mess!

So what does this all mean for the U.S.?  It means that the road to recovery is not likely coming in the next five years.  I can’t wait to listen to the President’s speech tonight to see what he has to say about the forecast.  Watch it tonight, Sept. 8, 2011 at 7pm Eastern.

Okay wise reader, how do you think the Eurozone crisis will affect the U.S.?

 

~Nick, the Self-Taught Economist

 

Think My Predictions Are Crazy? Listen to This…

Think my predictions the other day about an economic calamity are facetious?

Listen to this podcast developed by Planet Money of NPR and hear the similarities (except they’re talking EU and I’m talking US).

It frightens me to think about how likely much more likely the situation seems to me.  Everyday it seems to becoming more and more real…..

Enjoy.

<<< click here to link to the podcast >>>

~Nick, the Self-Taught Economist

Economic Calamity

If the economy was a female, she's probably do something like this...

This article will either scare you stiff or make you laugh because you’ll think I’ve lost my marbles. But either way, hopefully you will think about the “what ifs” associated with some kind of economic calamity.

To give you some context, it’s not like I’m any sort of conspiracy-theorist, whacko, or maniac. I’m a level-headed guy. I studied biology and Spanish in college and I had to learn to question everything.  I read the newspaper.  I don’t live under a rock nor do I take any medication for any tendencies.

Even before I started studying economics seriously, I wondered how everyone could trust that a one dollar bill (U.S. dollar) was worth one dollar if the government could just print as many as they wanted. The more I learn about the current U.S. economic situation, the more fearful I’ve become. The following is my best prediction for a worst-case scenario in 2012 or 2013:

1.) The stock market crashes, losing 95% or more of it’s value. This would be exactly as some experts (most of which are smarter than me) predicted, known as the “dead cat bounce” after the last crash in 2007-2008. Precious metals and treasuries rally during the crash, but eventually top out and crash as well.

2.) Banks fail. First the investment banks beg the U.S. government for additional funding, but there will be no money to give (was there ever?). The elected officials want to do another bailout, but the American people erupt in chaos and demand that the companies fail.  No matter how many banks fail, credit seizes and any size loan is virtually impossible to obtain.

3.) The ripple effect of the banks hits Europe, China, and other creditor countries especially hard. This starts the erosion of the major currencies. The dollar and the euro inflate rapidly and investors jump to safer currencies.

4.) Meanwhile, U.S. companies contract along with the credit and are forced to lay off hundreds of thousands and then millions of workers.  Companies that rely on sales of middle class luxuries (lattes, massages, fancy clothes) shutter their doors.  Companies that sell to the upper classes will be affected, but not as dramatically.  A massive lower class is created, and without federal aid, is unable to survive.

5.) The housing market continues to fall into a giant sinkhole. Recent college graduates are burdened with student loan debt and families are unable to afford assisted living centers for older family members. Families move in together, with multiple generations living under the same roof. Many homes are boarded up or burned for insurance money.  The value of real estate dwindles.

6.) Americans continue to be scared of the U.S. government and corporations.  When individuals try to withdraw cash reserves at their local banks, they are told to come back later. This quickly hits the news and mass panic ensues.

7.) Rioting occurs throughout the country, mostly in large cities.  The national guard is called to maintain control of the bigger cities.  The presidential administration is forced to withdraw troops overseas to serve as peacekeepers within U.S. borders.

8.) The U.S. continues to operate, but at a different capacity than the one we’ve all been accustomed to since World War II. The U.S. will no longer be able to “police” other countries. Military spending is cut drastically and America is unable to provide significant protection to ally countries.  By now, most of the wealthy class has moved their money to international opportunities like Japan, Brazil, and other developing nations.

9.) The U.S. people will go through years of electing political candidates that promise “better business sense for the government” and “fewer taxes”.

10.) The U.S. president who finally starts to turn things around will be the president (hopefully a woman) that instills pride in the American people and does what’s best for the people, not what’s best to be re-elected.

11.) The U.S. will go through a long (decades) period of growth and development, but not as the world’s superpower.  Families will reflect on the breakdown of the U.S. government and Wall Street stealing money from the American Dream.

 

Scared?  Laughing this off as irrational? That’s okay.  Even if I’m way off-base, it’s nice to think about this ahead of time, right?  Use your own brain to think about what will happen and how your family will react and adapt to the changes.  If you’d like to learn more about this topic, I suggest The Great Depression Ahead by Harry Dent.

What do YOU think the future has in store?  What did my scenario get wrong/right?  I’d love to hear your comments.

~Nick, the Self-Taught Economist

 

 

The Self-Taught Economist Coming to You From a New Locale!

Greetings to the one or two diehard folks that continue to check up on me here at SelfTaughtEconomist.com!  I had an epic adventure driving across the U.S. to my new home here in Rochester, New York.  After 4,000 miles and 14 states, I promise not to neglect STE for two weeks ever again!  (Well, at least not until we drive back to Utah in three years.)

A lot has happened since my last post.  While daily news isn’t really all that important in the grand scheme of things, the cumulative effect provides significant information about the trend of the economy.  Here’s a brief review and my take on things:

    1. On Friday, August 5th, the U.S. credit rating was downgraded by Standard and Poor’s from AAA to AA+ and with a negative outlook for the future.  This is the first time in history that the U.S. has been considered anything but a bulletproof investment.

Frankly, the downgrade surprised me because I thought the rating agencies were far too corrupt to actually go through with a downgrade.  If the rating agencies were truly unbiased and objective, they would have downgraded the U.S. a long time ago.  But, low and behold…they come up with a downgrade despite a 2 trillion dollar mathematical error on their part.

2.  As a result of the downgrade, the stock market has become incredibly volatile.  In the past two weeks, there have been wild swings both ways (insert joke here), but the Dow has lost nearly 5.5% since August 8th.  Personally, I feel I made the right decision in April when I decided to sell the majority of my portfolio except for a small index fund.

3.  Gold continues to break records and everyone acts surprised, which amuses me.  Silver has superseded where it was when “the bubble popped” and lost a good 30% of its value this summer.

I have significant investment in these precious metals and I will continue to invest in these areas until I trust the U.S. government will stop printing currency and start getting its act together OR I feel that the real estate market or stock market are a better place for my money.

I just watched a scary video today.  Scary because it was honest and scary because it foretold of dark days ahead.  I happened across this video at one of my favorite blogs about money and the economy, SunnahMoney.com.  It’s long (1.5 hours), but I promise it’s worth your time.

Mark Mahoney clearly knows his stuff and this video is only one part sales video for every ten million parts truth about how the economy is headed for major change in the upcoming years.

I would love to have more of you quiet readers leave feedback and comments on this site about what you see!  And as always, thanks for reading today.

 

~Nick, the Self Taught Economist

 

 

The Economics of Higher (Cost) Education

The cost of a college education is outlandish. It wasn’t always this way.  A quick internet search will show that from the about 1900 until the mid-1970s, college tuition increased between 2 and 3 percent per year (adjusted for inflation).

But starting around 1975, college tuition began increasing 5 to 6 percent per year, and by 1985 was far outpacing the overall Consumer Price Index (CPI), which is what Figure 1 represents.  The Bureau of Labor Statistics defines the CPI as, “a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services.”

Figure 1

The skyrocketing rise in college student loan debt is one result of the increasing cost of college.   For the first time in history, student loan debt surpassed credit card debt and is on track to hit $1 trillion by the end of 2011.

Average debt levels for graduating seniors with student loans rose to $23,200 in 2008 — a 24% increase from $18,650 in 2004.

While healthcare has also seen drastic increases, improvements in both the technology and healthcare outcomes somewhat justify this price increase.  Colleges and universities, however, can’t claim similar improvements in student learning outcomes.

To read more about this topic, visit the Project on Student Loan Debt.

 

Why is the cost of college increasing so fast? “Think of the question in terms of incentives,” Richard Vedder, an economist at Ohio State University expounds. “There’s no incentive to save money and keep costs down. All the incentives run the other way. Look at the way a school operates. They call it ‘shared governance.’ What that means is, everyone thinks they run the place. The trustees think they run it, the alumni think they run it, the state legislature thinks they run it, if it’s a public university. At some schools they have student trustees and various boards filled with students — and they think they run it.

“And then there’s the poor president. His job actually is to run it. To do this he has to buy off all these various groups and make them reasonably happy. You buy off the alums by having a good football team. A good football team costs money. You buy off the faculty by giving them good salaries. You let them teach whatever they want, keep their course loads low. You buy off the students by not making them work too hard. I’m serious about that: there’s grade inflation, there’s not too much course work, the reading assignments given to students are much less than they were forty years ago. You make sure the food is good and the facilities are nice. And you buy off the legislators and trustees in various ways: tickets to the big football games, admit their kids if they apply, get a good ranking from U.S. News. All this costs huge amounts of money. No wonder universities are expensive!”

The rest of this article can be read here, but for the sake of my argument regarding the cost of higher education, just keep scrolling down…

 

Higher education must adapt to survive. Since the G.I. Bill after World War II, it has been standard advice that you should “go to college so that you can get a good job”.  Sorry parents, but this advice is no longer a guarantee to a better life.

Now that the cost of college means accumulating tens of thousands of dollars of debt with no guarantee of a job after graduation, students are starting to wonder if college is worth the cost.

Run the numbers yourself.  Let’s look at the University of Utah (my Alma mater) as an example:

  • As of January, 2010, the University of Utah was working on nine major projects on campus.  In total, over 730,000 square feet of new indoor space will be created.
  • I’m not an energy consultant, but I just found a few statistics online that estimate every square foot of indoor space at a college or university costs $1.10 per square foot of electricity and 18 cents per square foot in natural gas (in 2005).
  • That means the University of Utah will see an increase of $934,400 per year in energy costs alone for this new space.  As energy rates are going to increase drastically in the future, this number will double, triple, or quadruple.

The future of higher ed. Don’t get me wrong – higher education will always be valued in the U.S.  But colleges and universities are doing more harm than good at their current price levels.

So what suggestions would I make after my ten years of serving as an administrator and student?  Here are a few:

  • Improve the quality of online courses.  Lectures from top instructors should be filmed and used repeatedly (scaleability improves).
  • Train instructors to become moderators and facilitators for in-class discussion.  Let students read the material and watch the lecture online, but true learning comes from the knowledge construction that takes place during peer interaction sessions.
  • Stop building new buildings!  Schools should seek to build one large, central building that students can pay tuition, get lunch, take courses, and get involved.
  • Minimize the administrative bureaucracy and allow students to “help themselves” using online resources.
  • Take away tenure. Tenure is an antiquated beast that has no role in the 21st century.  Do away with it and perform constant performance checks on instructors.
  • Set the expectation higher for students.  Enough grade inflation.  Make college cheaper, but require true work to graduate.  If a student fails out, give them opportunities to “earn” their way back into the classroom.
  • Change the incentives so that schools operate more efficiently.  Change the governance. Pay extra for cost-saving techniques.

I don’t have all the answers, and I know it’s next-to-impossible to change huge institutions. But things have to change.  I hope I’m part of the process.

~Nick, the Self Taught Economist

What woud you change about the education system here in the US?

 

 

 

 

 

 

 

 

An Introduction to Economics: Prices

I’m just finishing Basic Economics: A Citizen’s Guide to the Economy by Thomas Sowell. The author introduces the book with the following:

What I have learned after many years of teaching and writing about economics is that there are highly intelligent people who want to understand more about the way the economy works, but who have no interest in the paraphernalia of the economics profession.  This book is written for such people.

This is a great book to introduce economics, and I recommend you check it out from the library immediately (as a personal finance aficionado how could I suggest you buy it when you can read it for free!?!).  The following are some of my notes that I jotted down while reading.

Definition. “Economics is the study of the use of scarce resources which have alternative uses.” – Lionel Robbins.  This definition has two key parts:  1) scarcity, and 2) alternative uses of resources.

Without scarcity, there is no economy.  When there is an abundance or a plethora of goods (like the Garden of Eden), there is no need to economize or worry about competing for goods and services.  Scarcity is when what everyone wants adds up more than there is.

Alternative uses of resources is the second key ingredient.  Wood can be made into thousands of different objects, from toothpicks to toboggans.  It is up to the economy to determine how much wood should be allocated for each use. Oftentimes, the strength of the economy is tied to the efficiency of this happening.

Prices. This leads directly to the importance of prices.  In a capitalist economy, when too many toboggans are made, the toboggan manufacturer has to lower the prices in order to sell (maybe even so low as to sell them for less than it cost to produce).  The toboggan manufacturer wants to avoid this, so he or she will reduce the amount of wood purchased in the future.  Products that are selling well will pay more for the price of wood, and wood is efficiently allocated for many, many uses this way.

In non-capitalist governments such as socialist or communist governments, the efficiency is often decreased because the free market does not help allocate resources efficiently into alternative uses (the government allocates resources).

Prices are simply messengers conveying basic supply and demand within a society. For example, prices show us that there are not enough beach-front homes for everyone to live in.  In this case, demand is high and supply is low, so prices increase.  If the government announced a new policy that no home on the Malibu coast could sell for more than $50,000 this would not change the reality that there are more people than beach front homes (even though more people could suddenly afford this option).

In a free market, prices work extremely well as messengers.  Companies basically guess what consumers want and the demand for these products allows prices to rise or fall. When Toyota created the Prius, it was a success with consumers and over 2 million cars have been sold from 2001-2010.  Compare this to the Plymouth Prowler, of which only 8,100 sold from 1999-2002. During this time, Plymouth incurred such losses that it was taken over by Chrysler.

Without feedback, Plymouth would keep making the same mistakes forever.  But free markets provide quick feedback and when a company can’t adapt to the best interest of consumers, it often ends in bankruptcy.  While this sounds cutthroat and harsh (especially for the employees of Plymouth), this efficiency is in the best interest of the public because it is the public that allows demand to determine the products that stick around.

Prices can help supplies rise and fall. If there is a crop failure somewhere, other food producers race to get there to beat competitors and take advantage of high prices. While this seems self-serving, it actually ends up helping everyone because competition gets the food to hungry people faster.  It is the lack of competition (like the US government agency FEMA) that causes slow response rates similar to what happened after Hurricane Katrina. The picture to the left (taken in the Superdome) is a reminder of the failure of FEMA to help the people of New Orleans in 2005.

Scarcity causes competition. Another benefit of the pricing system is that it prevents direct animosity between competitors.  If a Catholic church at one end of town is saving for a new addition, they are directly competing with the Islamic mosque at the other end of town that needs those same materials for their own addition. Luckily, each religious institution, while competing for products, isn’t pitted against each other in the same way they would be if the government was doling out money or supplies.

Incremental substitution. Prices also help serve people’s needs better because of incremental substitution. If the prices of oranges go up, some people will continue to eat the same amount, some will cut back a little, some will cut back a lot, and others will go on to eat another fruit.  Not everyone stops eating oranges all at the same time, which would cause mayhem for the economic system.

Economies of scale and diseconomies of scale. What is the price to make something? That depends.  If you make one it could cost “x”, but if you make 100,000 of the same thing, the price per unit drops way down (like Henry Ford producing Model T’s, which has revolutionized transportation).

Interestingly, when a company gets too big the company can’t manage all of the working departments as efficiently.  Jetblue can move more efficiently and cheaper than the big airlines.   This is an example of diseconomy of scale.

Costs and capacity. Costs vary depending on capacity. When reserved seats on an airplane are paid for by 180 people, the remaining 20 people that fly standby pay very little.  The tradeoff is saving money for giving up reserved seating. This is the same reason you can score super cheap hotel rooms or cruises during certain times of the year – something I can teach everyone to do!

Specialization. Car dealers make tens of thousands of cars per year but not a single tire. They buy them from Goodyear, a company that can make tires more efficiently.  Car dealers also don’t try to run dealerships across the country.  They sell cars to people who own dealerships who can determine the price and sell the car more efficiently than the manufacturer because they know their respective markets.

Middleman. Once a company realizes it can outsource a part of the process and save money, a middleman exists.  A newspaper company rarely owns their own newsstand.  Many companies are terrible at realizing they should outsource –causing them to be outcompeted and they are forced to go under.

In conclusion, I know this was a long article about prices.  But prices are fascinating to me and I think few people realize what prices tell us.  I also had some great business ideas while writing this article because you start to learn about how companies run.

For example, all you need to for a successful startup is to first recognize an area that a company is not doing efficiently.  Then, specialize in that one specific process and prove to them that you are going to save them time or money.  There have to be about thousands upon thousands of companies that use this as their primary source of revenue and still thousands more opportunities for this to be done!

Of the four types of prices (consumer goods, labor, borrowing money, services), I’ve pretty much only touched on consumer goods.  There’s a lot to learn, but that’s part of the process.  If you have recommendations or suggestions, I’d love to hear what you think.  Just leave a comment or email me!

~Nick, the Self Taught Economist