The problem starts with libido dominandi, or lust for power, something around at all times and all places. A particular expression of the problem occurs within the economy when a government manages to take over currency and credit. People are so fearful of government ever taking control of currency that when the Federal Reserve Bank was formed in 1913, it was done so under the legal fiction that the bank we refer to as the Fed is a private, free market entity. In the free market private companies do not have their chief picked by the President of the USA, its operations are not overseen by Congress, and it’s offerings are not strictly monopolized, such as we have in the USA. So in USA we have the government printing currency and fiddling with interest rates.
Click read more to read on... Although today almost all currencies are printed by governments, places such as Switzerland have a higher rate of gold backing the paper so the Swiss Franc is considered a relatively “hard currency” and in Hong Kong private companies, three at last count, print the currency, probably the last of the free market currencies on earth. In Hong Kong the free market competition keeps each currency perfectly equal to the other, and a;; three flexible and resilient enough to serve a world trade nexus.
By printing money governments can tax the poor and aggregate wealth in the hands of the elite. Excess printing of money leads to inflation, but the magic is in the fact that time does the tax collecting. When new money is printed, those who get it first beat the inflation; those who get the new money last bear the inflation. Government gets the money first, then the bankers, USA workers get it last, as the new money works its way into the system, from banker to industry to commerce to paycheck. (One third of USA currency is circulating overseas, the foreign export workers are the hardest hit in this system.)
The printing of money is announced after the fact. If Monday there are 100 units of money, and a loaf of bread is 1 unit, and on Tuesday the government prints another 100 units of money, then on tuesday a loaf of bread is worth 2 units. But only government and banks know this on Tuesday, so they pay one unit. Wednesday industry catches on and raises prices, thursday commerce catches on and by Friday your paycheck is the same, but the price of bread is now 2 units. Go ask for a raise, but the problem is your employer is feeling the squeeze too.
The other whammy is interest rates. By fiddling with the rates, the Fed distorts economic calculation so the result is misallocation of resources. What we see know in 2009 is the bust part of the boom and bust cycle that comes with centralization of interest rates. By lowering interest rates, finance began driving the economy with an emphasis on debt, industry was transferred overseas as the cost of management in USA skyrocketed.
Gross distortions began to emerge, a false economy booms that promised the stock market always goes up and real estate prices never go down. A giant ponzi scheme wherein people invest more and more and are paid back in what appears to be exorbitant returns, which they [plow into more junk, bigger homes to store it, and even more junk, with mini-warehouses, and retailers getting larger and more specialized to make acquisition easier and faster and restaurants to feed people too busy getting to bother cooking and shorelines are cleared of mangrove forests in exotic pristine lands to make room for resorts for such busy successful people to relax and airports are hodgepodge expanded to accommodate the traveling people who are selling CDOs and Interest Rate Swaps to pensions and the Government regulators who assure us everything is on the up and up and a legal drug called coffee is sold everywhere to perk up people who need to be at it in the race as soon as the dawn breaks and more and more diversions for the kids of the parents who are doing so well and private schools and soccer moms and hospitals serving a medical structure that give us perfect teeth but turn our bodies into toxic wastelands as MRSA awaits you unchecked for your next visit and subsidizes a transportation system that assures we remain stuck in 1920’s technology where we pay more to get less but everyone has a car but don’t worry, if we can just get the right person in office, then we can deal with teh terrorists who are the soource of our problem or the global warming which is the source of our problem either way we can put vast resources ins the service of some blasphemy pleasing to televagelists and all will be well, except that is what everyone says every time and half the time half the people get their wish, and of course logically at not time can everyone get their wish so the impossibility does not down on people educated in a system so distorted that 1/3rd of the kids drop out of high school and another third cannot read their diploma, but don’t worry, we’ve designed drugs that keep such people broken, and can be had with or without prescription, and we can finance a war on some drugs to fight the latter when people denied proper health care manage to self-medicate but then comes the bust.
The bust is just the correction when something that cannot go on stops. The damage is not the correction, such as we are in now, the damage was done during the boom. Small business does good while doing well in part by filling in the voids left from the bust. A loaf of bread, some carrots and dandelions, a jug of wine...
Big business and politicians are now about seeing what they can get away with. Quite a bit, it appears. A good strategy is for we in small business to say, “hey no bailout of auto industry without eliminating the dealership monopolies...” or any argument that ties you gaining freedom every time the powers that be want to bail out their system. This is a fun part of business, cutting a sustainable deal when you have something to offer, and you know what it is, and so does the counter party.
Come on in, the water is perfect!
Saturday, December 27, 2008
How Busts Happen
Mish Says Something Possibly Misleading
I have been recommending Mish Shedlock for solid analysis and recommendations of how to navigate these stormy economic seas. He is spot on continuously, mainly because he is infomed by the Austrian school of economics.
I cannot think of a worse time in history to be starting a business.
Mish is a securities analyst, which means his bailiwick is registerd corporations, essentially big business. Mish well understands a key feature of any bust is excess capacity. Big business, properly understood, has the job of lowering costs and widening acces to material goods and services. With so much excess capacity, and prices falling from deflation, more big business with more capacity is hardly necessary.
Mish is such a big shot now he is unreachable by mere mortals such as me, but I suspect if I argued it is a great time for self-employment and starting up a new small business, he would agree heartily. In fact, I believe he would agree that a major part of the recovery will coome from the effortsw of small business to fill in the voids left from the coming crash.
Friday, December 26, 2008
Regression to the Mean - Merry Christmas!
There is a term in the science of statistics called “regression to the mean.” The term refers to the fact that when equilibrium is upset to one side, usually there is an equal and opposite action to the other side. As Ho Chi Minh said “to straighten a curved piece of bamboo, one must bend it in the opposite direction, and hold it there awhile.” In the 1980s commercial real estate boomed far higher in Japan than residential prices, and in the 1990s commercial busted far lower. Almost 20 years later, Japan commercial real estate is still working its way back to the mean, from its low.
If you did not start a business in the last ten years, then it was a mistake to fail to do so. There are many businesses started in the last ten years thriving right now, in spite of the economic downturn. Some are failing, or have failed. But many people, quite aware of the fundamental circumstances of providing a value, are doing quite well. Having never been fooled into taking on debt that they could not service, especially with reduced sales, such level-headed business people continue on, doing well.
Those who were fooled by randomness and now find themselves busted, can start over. But having been fooled by the boom, they ought not be fooled by the bust, and neither should you as you start your business in these unusual times. A false economy now, in 2008 and 2009, is busting, and no matter how bad it gets, it is a regression that we see, one that we will come out of in 15-30 years, depending on how bad the government makes this economic crisis. Your business model should assume no boom or bust, your model should look to the stable, the fundamental, the sustainable in business.
A friend of mine ate quite a bit of rabbit as a child during the German occupation of France. It was all the people could get, and the demand was high. Anyone who invested heavily in the rabbit trade at that time would find himself out of business when normalcy returned, and people eschewed that of which they became surfeit. Better to become a roast beef dealer during the occupation, and make more money doing less, and stay in business when the Germans withdrew.
Where an activist like Ho Chi Minh may explain that bent bamboo must be bent to the other extreme to be straightened, I argue why not just start with a straight piece of bamboo?
I spent a lovely Christmas eve in Rome a few years back, where the restaurant tradition is to have a seafood dinner. My bilingual daughter made sure we were properly cared for by the wait staff, and we enjoyed the best and traditional combinations for the celebration. The portions were surprisingly generous, and since the morrow would be Christmas day we would be unable to shop for food for Christmas to supply the apartment we were renting for the holidays. I instructed my daughter to inform the waiter we would be having the leftovers wrapped to take home. My daughter instructed me that “take-home leftovers” and “doggie bags” were not the Roman way, “and when in Rome...” Indeed, the wait staff would be dining on our leftovers.
I looked around and saw the mountains of food leftover on the many tables in the restaurant, and calculated the loss of our table’s contribution would be of no consequence to the crew.
So I replied to my daughter “And when in Gomorrah...? I will tell the waiter in English I want the leftovers packed up. You, my daughter, intervene, explaining to the waiter in Italian that I am ignorant of the Roman way, and incorrigibly american, someone the waiter can ignore with impunity At which point, my child, I expect the waiter will go generous on the ignorant tourist and offer to pack up the leftovers, in contravention of the Italian way. It is worth a shot.
Shortly thereafter I got my chance to instruct the waiter in English, and on cue my daughter cut in with a barrage of Italian apologies and explanations. The waiter seemed to be digesting all of this for a moment, and then in perfect American English stated: “I am from Chicago, I understand, no problem, we’ve got mountains of the stuff already, ... let me pack this up for you... Merry Christmas”
In San Francisco there is Swan’s Oyster Depot at 1517 Polk Street., opened in 1912. With only 17 stools at a bar, it serves very simple seafood, standard beer and wine, and there is always a line. In spite of the fact it is only open breakfast and lunch six days a week, it supports three or four families at a time and has been through the great depression and every other recession since 1912. Danes started the business, and in the last near 100 years it moved to one Italian family, and then another. The model is good and true and beautiful and works at different times with different cultures. Dine there and see what you learn. I usually visit solo, which means where groups must wait a while to find the right combination of stools to be seated together, I can make it in to sit at the odd stool rather quickly. Protocol is to just ask the people ahead of you in line if anyone minds you taking the lone stool.
They have a walk-in trade for carry-away fresh seafood, which is big business too.
The moral of this story is when lunching today on leftover cioppino and rye bread, my wife informed me we eat too much, when fish bits in a marinara broth and a crust of rye bread is more than enough to be happy. I thought of Swans. The business model of Swans is clear and simple and sustainable. Whatever business you start should informed by the example of Swans Oyster Bar model.
Merry Christmas!
Sunday, December 21, 2008
Trade Leads / Business Opportunities
I am not sure what these two articles might have to do with each other, but I sense a business opportunity here...
Perceived Problem In China.
Perceived Problem In USA.
Let me just say that all delicacies moved into the human diet during times of distress.
All Hail The People of Spokane!
This is exciting news! When a wee snow storm paralyzed the government of Spokane, the people enjoyed the benefits of the spontaneous order that emerges out of the chaos of government-run polities. A private company organised a "plow-in" freeing the house-bound where the government could not. Neighbors helped neighbors for no reason other than love. Charity abounded where strangers checked in on strangers. Accidents were left to the insurance companies as people exchanged info and moved on with no police interference. Doctors and nurses are treating people for injuries with NO PAPERWORK involved! Excellent food and fuel is being shared with no interference by licensing authorities. Crime has dropped dramatically in spite of the fact that police cannot respond. Kids are earning money doing good while doing well, and learning life lessons! People are enjoying each others company.
City oppression will resume at a time convenient to the city employees, perhaps after the holidays.
(Why do we pretend the government can assist us, when it cannot? Why do we assume we cannot help ourselves, when we always do?)
Survivorship Bias
Apparently no one over at Legg Mason has read Taleb's book, Fooled by Randomness. Now that Williams run is over, they are putting him in charge of more money.