Tuesday, October 30, 2012
Friday, June 26, 2009
For the first time since 1993, the US saving rate finally surge to 6.9 percent (saving rate were hovering around zero prior) as total income increase by 1.4%. However, commentators and economies alike view this as a negative in a time of recession. Poor consumer spending could slow down the economy as a whole, putting businesses out of businesses. I, on the other hand, view this increase in financial responsibility as a key step in economic recovery, because, unlike the reckless shorter solutions that are being implemented at the cost of trillion of USD, increase saving start to solve a fundamental problem that caused the recession. A natural step by the market and by people to correct an error within the system. Read on to know what I mean.
One of the biggest problem behind the current recession was the fall of the housing bubble. The housing bubble started due to two main factors: liquidity pumped into the system to deal with the .com bubble crash, and the Communities Reinvestment Act. The increase liquidity provided the money needed to start the housing bubble as investors moved their money from the market to real-estates. The Communities Reinvestment Act forces lenders to take on risky account in large quantity. Smart institutions realize they don't really want to hold on to these risky loans; hence, they repackage these loans and used it as collateral to funds their own investment. This proved to be a very successful moves which increased the demand for bad loans. Using bad loans as collateral, institutions started to repackage them and these bad collateral in turn become a major piece in many institutions balance sheet with each risky loan being held by server institutions as collateral. Lenders that didn't copy the same behavior would be left out of the market. Furthermore, with risky individual being able to buy homes, banks now offer them a home equity line of credit (HELOC) to further increase their lending businesses and improve their balance sheet to investors. This fuels an American culture that was already full of reckless consumers.
Credit demands have to be fill by saving, but with a saving of less than .5%, how are American spending like they never have before? One was foreign investment, but that can only go so far as America need to keep its capital account positive to offset the trade imbalance in the current account. To meet the credits demand in America, financial institutions how have a tremendous tool at their disposal due to the housing bubble, the Communities Reinvestment Act, and HELOC. With increase housing price lead to demand for houses from speculator, the CRA make for easy access to these houses for those that would otherwise not qualify, these new house then help creates wealth for new individual that increase their demand on more speculation, this again increase demand for houses, and all this start a vicious cycle that is the bubble economy. Then there is the added HELOC that help finance anything else. With a situation like that, how is it that we not see what the end result would be?
After all that ranting, the question remain: why is an increase in saving a positive thing when we need consumers to help businesses get healthy again? Simple, in this environment, healthy consumption is much more important than reckless consumption. Businesses at this point does not merely need consumer to sustain them alone, but they need financial institutions to start lending again so as to help them meet payroll and give them stability. With a 6.9% saving rate, that is neither extremely high or low. It is also a legitimate first step toward solving our current crisis by providing banks with a solid base to start lending again. Growth is fuel by both investment (a function of saving) and technological progress. We had lose that formula for growth for a long time, and this is a step for getting back to where we were.
Secondly, the decrease in spending could be a huge positive in this environment where there is too much money being added to the system. This decrease in aggregate demand could be what is needed to fight off inflation while still having the abilities to fund all the "recovery program" in the short term. Without this increase in saving, sadly, I would see huge inflation right now which would defeat any hope of recovery that we might have. I would like to end this entry by saying that we should all be happy that we, as American, are naturally fixing this recession by behaving rationally, and to think positive as sign are pointing toward a recovery.
Wednesday, January 28, 2009
We are still losing jobs, banks are still in trouble, we still lack capitals, and overall confidence is low. Then we see that the new administration is planning to add about a trillion dollars ($1,000,000,000,000) to the national deficit, which mean we are potentially facing a national debt of over $10 trillions dollars. Even for a $13 trillions dollars economy, $10 trillions is a bit to much to handle, especially given the bleak economic situation we're in. Optimism? I think it is more of a delusion than is it optimism that is rallying this market.
Saturday, January 24, 2009
The buy and hold investors had long excited the market, leaving room for only the bravest souls looking for a quick buck. Viewing the market in this way, the market will be operating on a rally than dumb approach. If one go back and look at the market for almost any average/good companies within the last month (companies with a positive cash flow), than one can easily see this trend. One day the market will be down due to profit taking, and the next day, market again rally due to the price drop from the profit taking the day before. Then one just need to buy when the mass are selling, and sell when the mass are buying.
Of course this is merely my observation. If one is to "invest"/trade, one certainly would need to understand the risk involved, and do one own due diligent. Come to the game with a game plan, adjust to the market, but never let emotion/fear/uncertainty change the game plan. Only proper DD should be able to do that.
Thursday, January 24, 2008
Every politicians, at this point, are talking about tax cuts to stimulate the economy by increasing consumers spending. A popular and politically safe response, but is that really a solution? Consider this; in a politically and economically uncertain nation, how willing are you to spend your money frivolously? It is true that current consumers' spending had gone down, but that is not a cause of the current economic turmoil, but it is a result of the turmoil. Restoring consumers and investors confidences are a must at this moment, but it is not done with tax cuts or by reducing the interest rate, as these things are only short term solution for a long term problem. The root of the current economic woe is something much deeper, something much more integrated into the American economy that must be fixed, and tax cuts are not the solution.
What is causing the current problem is a very simple concept known as moral hazard. The problem with moral hazard in the United States is that it run deep, deep into the very blood of the United States economy, the people. America runs on credits, money that doesn't really exist. What fuel this credits demand? Foreign credits, and bad mortgages, and when these two things unravel, the economy unraveling along with it.
America got to this point because our solutions to every problems is to throw money at it, and hope it will go away. We got hit during 9/11, our response was to spend as much as we can because if we don't, the terrorist win. Our economy started to contract, our response was a stimulus check to stimulate consumers spending. Our wars was failing, let throw more money into it hoping it will be better. Always the short sighted response, never an analysis of the problem. This is all possible because of moral hazard as it is very easy to spend money that isn't there. Just look at the US government and it almost 10 trillions dollars deficit, and look at the American people saving rate and how much they spend. The credits have to come from somewhere. The current economic crisis is not just the blame of Wall Street and the many financials CEO (that should be in jail), but it is the fault of America as a whole. Our fundamentally un-sounded system that merely tout market principles, but hardly operate base upon those principles.
Thursday, November 29, 2007
Lets first consider what an increase in oil price mean for the economy. An oil price increase is fundamentally an increase in production cost, or similarly, it can be view as an added tax on production and the costs of operation. Firms that use oil face a higher cost which force firms to increase price on its goods and services, this in turn force consumers to pay more for certain products which leave them with less income to spend on other goods and services. With increasing price of goods and services - inflation - people would want to find a better paying job, but due to higher operational cost, it become more difficult for firm to hire which fundamentally increase unemployment rate. As one can see, for an energy driven economy like the US, oil price increase mean a lot of things for the economy.
The differences, though, is that in the 1970, there was a shock whereas now, the change came at a pace in which the economy is able to absorbs and adjusts. For instance, what does an individual see what they see a certain price? Subconsciously, an individual would look at that price and compares it to their body of knowledge, determining if that price is a good price or not wherein the price would equal the expected price +/- some variability (market noise.) After such examination of the price, the individual would act accordingly. If the price is much higher than the price the individual expect, they would reason out what the market noise is if any.
In the 70s, when news of supply side shock and high gas prices reach the people, the rational behavior seem to be to run the pump to get as much gas as you can. Now, price climb at a steady pace instead of a rapid one, which allow people to see a general trend which allows people time to adjust their life style, and for company, it give them time to work around the new market price. As any classical economist would suggest, in the long run, everything even out, but life does not work in the long run alone. However, if change come slow enough, then expectation can changes alongside changes and adjustment can be made wherein there would be less market disruption. That is the different between the rational response to oil prices in the 1970s compared to now.
Sunday, October 21, 2007
Excited Over the Growing Russian and Chinese Economies?
Russia and China’s economies are on the rise, and it certainly will become much more significant to the global economy with each passing day. It surprise me when I hear that people are getting excited about a more dominant Russian and Chinese economies because it can then take up more of the global burden held by the US. Consider this, what is different between Latin America and the US economy that allow the US to have deficit of up to $8 trillions dollars, and not crumble? The US is a unique market in that it is a strong and growing market, even in the faces of such a deficit, and it is a highly dependence upon economy by the rest of the world. The US economy not only draw in investor globally, new and old, but it stands as a symbolism for global capitalists. A fail US economy would leads to worldwide disaster, and it is in no one true interest to see a faltering US economy. The uniqueness in how important the US economy is to the world had, in the past, allowed the US to live way beyond its limit. What does a growing Russian and Chinese economies mean for the US then?
First, lets look at an important case in economic development concerning Japan. The Japanese Keiretsu system had, in the past, been accredited to Japan’s success as a developed economy, uniting Japanese culture with business and work. However, the Keiretsu system, like its predecessor the zaibatsu, is a very uncompetitive system that allows for heavy investment into research and development by eliminating competition from the market. This gave Japan a great advantage in rapidly developing itself as a global economic power, and made it one of the most important economy in East and Southeast Asia. This, though, mean that the Keiretsu system is a very inefficient system that does not work well against competition as Japan is starting to find out against Korea and Taiwan.
What had allowed Japan to became so successful in the past waas not so much its economic system, but instead, it was due heavily to the lack of competition in Asia when Japan economy started its boom. Without the option of going elsewhere for the value added good , especially in the area of electronic, Japan made itself into a niche market in the Region.
How does this all applies to the US situation? The US is, like Japan, a niche economy. The US strong stable growth, its size, and its symbolism serves to give it huge global market power, demanding investment from people everywhere, and at the same time, preventing run even in the faces of any bump in the road. Consider that there really is no alternative to the US market in the past, and it is such a large and important market that, like old industries, most investors feel safe enough about any turmoil that the US can recover, and the US had always recovered; the US is extremely special. However, that special-ness is not going to last.
As China and Russia grow, like the growth of Korea and Taiwan in Asia, they become alternative to the US market as Korea and Taiwan became alternative to Japan. When the US economy look weak, there will be alternative, and this will, I repeat, will hurt the US economy as a whole. If you had been reading my articles up to this point, you will know that I had been saying all along, the US have been living way beyond its mean, and the world eventually will have the option of closing its wallet when it see fit to do so. The World Bank and the IMF had been worries about its relevancy in the coming future concerning global economic, while I on the other hand see that they will be facing the greatest of challenges their institution had ever face in the coming future, and their relevancy will be determine by how they will handle something as big as the US. The scary thing about this situation is that it is only a backdrop to other glooming threat to the US current economy: increasing foreign holding of US debt, larger and larger trade deficit, energy crisis, sub-prime lending, unstable wall-street, and a war with a myriad of other things. I believe we are at a turning point in history, and I’m just hoping for the best right now.