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Do Economics Matter?

HongKong

I write generally about three topics on this site:

  • Personal Finance
  • Investing
  • Economics

I list them in that order based on what I perceive as the general public’s interest level.  Most people are concerned with getting out of debt and maintaining a budget – Personal finance issues.  Those who have succeeded at those tasks become more interested in how to put their savings to work for them and become interested in investing.  Very few people proceed to an interest in policy and economics, and perhaps rightly so.  It’s certainly not immediately clear that an understanding of economics is beneficial to your personal wealth.

The Case for Economics

There are obvious reasons to believe that an understanding of economics should be a great asset in your financial life.  Inflation is one of the examples.  If I judge accurately what future inflation will look like, this can greatly improve my ability to choose good investments.  If I can look at upcoming legislation and see what its effects will be, I should be able to capitalize on that.  It seems like a slam dunk that an economic view should be a great boon to my financial freedom.

However…

Sadly, economists have a habit of being spectacularly wrong.  Even when they aren’t completely wrong, it’s very difficult to profit off of their decisions.  For example, right now treasuries are already priced very low because of a perception that inflation in the future will be high.  So even if that perception is correct, the expected price change is already “baked into the cake;” and if they’re wrong, there’s a chance for spectacular loss.

So Why Bother?

Despite all this I have a nasty habit of continuing to write about the big picture, particularly policy.  One reason I do this is because I believe that a basic understanding of economics can help you make wise decisions in your day to day life, not just in your investing life.  The law of supply and demand may not be useful in deciding whether to buy Microsoft, but it can be useful in starting a business or in deciding what political policies to pursue.  While the value of economic understanding may be questionable for investing purposes, its value in life is much less questionable.

The More Things Change

Many sage investing professionals have a saying:  The most dangerous words in the English language are this time it’s different. Each time that politicians proudly proclaim that we’ve defeated the boom and bust cycle for example, we know how the story always ends.  The more things change, the more things stay the same.
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Long Term Joblessness

Jobless

The unemployment statistics in America are confusing.  Sometimes you will see unemployment go down without jobs being created.  How can this be?  As it turns out there are many different definitions of unemployment and the number you see is only one of them.  In fact, if you don’t have a job for a certain amount of time, you’re considered to be “out of the workforce,” and no longer counted in the common measure.  As it turns out, long-term joblessness is a danger to societies and this has implications for many of us in our personal life.

Measures of Unemployment

In understanding the impact of long term joblessness, it’s good to understand how unemployment rates are calculated.  In America there are six different unemployment numbers, U1 through U6:

  • U1: Percentage of labor force unemployed 15 weeks or longer.
  • U2: Percentage of labor force who lost jobs or completed temporary work.
  • U3: Official unemployment rate per ILO definition.
  • U4: U3 + “discouraged workers”, or those who have stopped looking for work because current economic conditions make them believe that no work is available for them.
  • U5: U4 + other “marginally attached workers”, or “loosely attached workers”, or those who “would like” and are able to work, but have not looked for work recently.
  • U6: U5 + Part time workers who want to work full time, but cannot due to economic reasons.[1]

So as you can see, sometimes a job seeker simply “gives up.”  They’re no longer counted in unemployment statistics, but they certainly don’t have a job.  As it turns out, this is actually the worst kind of unemployment, even though we don’t see it measured very often.

Long Term Havoc

A study by the Cologne Institute for the German Economy is one of many supporting the belief that the longer a person is out of a job, the less likely they are to return to the workforce.[2] Their job skills atrophy and they lose hope.  They basically get locked into a self-reinforcing cycle of poverty.  You may know someone like this, who used to be in the workforce, but now seems unable to return. (more…)

  1. Wikipedia — Unemployment []
  2. German Think Tank Says Joblessness Behind Poverty []
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Gifts for Investment Nerds

As a finance nerd who is very hard to shop for, I thought I might take some time to give some hints to those of you who have to shop for people like me. Here are some clues of gifts you can get for boring folks who only like to talk about the stock market and economics:

A Subscription to the Economist – I have had subscriptions before, but I can’t ever get through them in a week so pretty soon I have a pile in my entryway.  That being said it’s SO much cheaper to get a subscription and if you giftee is a frequent reader of the Economist it could be a very appreciated gift.

A copy of Thomas Sowell’s Basic Economics – This is a great read for someone who is interested in economics.  While he occasionally dabbles in partisan politics, this book is much less “agenda driven” than many of his other books, particularly Economic Facts and Fallacies.

A Single Share of Stock Cerificate - Most of us trade almost completely electronically anymore and we almost never actually get to hold any physical symbol of our interests. You can get these from OneShare.com. Right now you can get $20 Off Complete Framed Stock: Use code HOLIDAY09.

Gold Coins – Much like the stock certificate, this gives us something physical to represent what we spend so much of our time doing.

Classic Books – Even if they’ve already read them, it can be nice to own a copy of something like one of Peter Lynch’s classics, or the Intelligent Investor.

Stress Relief – Get something to take the edge off during the trading day.  I like stress balls, but there are tons of options.

Report or Newsletter Subscriptions – If you’ve ever heard them mention a newletter or a research service they’d like a subscription for, this can be a great gift.  I’d never go out and buy one myself, but if I got one as a gift I’d use it.

Of course, in the end we know that we’re hard to shop for and will be happy with whatever you give us.  Especially if it’s not depreciating rapidly!

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Why a Clawback Might Be In Order

Photo by: Wildcat Dunny

When the financial crisis was in high gear I argued that the pitchforks and torches being raised against AIG were counter-productive.  I felt like it was a feel-good symbolic gesture that was more for making people feel vengeful than getting at sound economic policy.  I still stand by that idea, however in the face of record profits from companies like Goldman Sachs, one has to reconsider whether the idea of clawbacks don’t have a place in the banking discussion.

A clawback would be some kind of tax levied against the companies that took bailout money, or maybe more broadly to the financial industry as a whole.  While the legality of such a tax may be in question, there are some reasons to consider whether this is a reasonable course of action.  Many of these banks have paid back, or are paying back, the money they borrowed from the government, but that debt doesn’t fully quantify the advantages that financial institutions received from the government.

The first example of this is the asymmetry introduced by preventing various stocks from being shorted during the crisis.  This is obviously beneficial to leveraged companies that are using this stock as an asset to offset their liabilities.  This is on top of the benefits that come from being able to borrow money from the Federal Reserve Bank essentially for free, and the money that is being funneled into the stock market by the low interest rates. (more…)

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A Modest Health Care Proposal

TeaParty

Photo by: nmfbihop

The American health care debate has gone completely off the rails.  The Right, ostensibly in defense of small government, is acting as if we have an option to not address this issue.  Meanwhile the Left is unable to present a coherent vision.  Even worse disinformation is flying from all directions and it’s difficult to have an informed opinion.  It could easily make a person tune out this conversation.

Why You Should Care About the Health Care Debate

One of the biggest reasons that you should care is that unless you’re on Medicare, you’re already footing the bill of socialized medicine.  Medicare is socialized medicine and right now about 27% of the population is on some form of government health care.[1] If you’re not one one of these programs, every dollar of over-consumed or overpriced affects you personally.  However, the situation becomes much more untenable in the near future.  By 2030 it’s estimated that twice as many people, 80 million, will be on Medicare and in the meantime the population will not have grown nearly be nearly as much, bringing the percentage of people on Medicare to 22%, without any other government programs considered.[2] Then you consider how many people are being added to Medicaid and other government programs due to the economic downturn and you can see the problem growing.  Unless you’re for abolishing Medicare, and that’s not a very popular view, you probably need a solution to the demographic bomb that’s headed our way.

I’ve already covered that we have high costs and outcomes that don’t justify the expense in America.  Almost any method to cover people’s medical bills is going to have a component of “socialism.”  Quite simply, those who are older or have chronic illnesses are terribly expensive to insure.  We know these people are going to have health problems.  Insurance at that point isn’t really providing insurance but simply giving them money for their health care.  If you want people who are older or have chronic illnesses to be able to get healthcare if they aren’t rich, others are going to have to pay for it.

If you’re healthy right now, you should care about healthcare because you’re subsidizing those who aren’t.  If you’re not healthy you probably already do care about healthcare reform.

A Modest Proposal

I thought I’d put out there what I consider to be a reasonable proposal and see what my readers think.  If I were going to address the situation in this country here would be my plan: (more…)

  1. As Private Insurance Declines, Medicare and Medicaid Pick Up the Slack – WSJ.com []
  2. Medicare Beneficiary Demographics []
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Is America Still the Land of Opportunity?

Photo by: stephen.moore

When it comes to investing, is America still the most sensible place to keep your money?  This question involves a lot of elements and has no simple answer.  There are however, some pieces of conventional wisdom that may deserve a little extra attention.

Is China the Future?

Listening to the media, you would think the ascendancy of the Chinese is all but assured.  They are one of the few economies to truly start enjoying an alleged rebound from the economic crisis and were already becoming a behemoth before the latest financial woes.  Surely Asia is where the future lies.

What is often forgotten in all of this is that China is not an open society.  In the modern era we assume that the wool can’t be pulled over investors’ eyes.  China however can easily give out misleading numbers to investors.[1] Moreover, because of the amount of their economy that is centrally planned, they can essentially manipulate their own markets very easily.  Their current stimulus may largely consist of creating unused infrastructure to keep their populace employed.[2]

Inflation: The Ugly Contest

Another supposed factor in why our money should be fleeing US Dollars is the hyper-inflation that will be driven by all the stimulus spending.  The thinking goes that any kind of recovery in the economy will be coupled with inflation from all the money that’s been printed to finance the stimulus.  While this seems reasonable, at the same time it’s been suggested that as much as 40 percent of the World’s wealth was destroyed by the financial crisis.[3] With a good deal of that being in America, it seems that we may be able to survive some quantitative easing. (more…)

  1. Economist: The Art of Chinese Massage []
  2. The Economist:: China’s Stimulus: Got a Light []
  3. Telegraph: WEF 2009: Global crisis ‘has destroyed 40pc of World’s wealth’ []