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Economy update - The original State
Of The Onion, January 2008
How do you get an economy out of balance, and what are the effects? We have history with that. Consider the following:
The smart thing to do is to hold onto money. Keep it in your pocket. If you are a merchant or industrialist, lock up the market so that no one else can compete. Strike favorable trading agreements with those with whom you get supplies and keep all others out. Build your own little empire... a monopoly. This is the way to create a successful business, right? This is the way to make stockholder's eyes dance, right?
Capitalism in the hands of the tight-fisted mean that power and control are in the hands of those at the reigns of industry and trade. These were the industrialists late in the 1800s and first third of the 1900s who worked people to death, ignored the suffering of humanity, underpaid workers, and only put money where it would build their empires. These were the Scrooges of the world.
What didn't happen during those years? Companies failed to innovate. They failed to expand. They failed to put money into the economy so that there would be more customers. The banking system failed to include the general public in its system so that people could become better off. After all, people believed, borrowing money was not healthy, and paying people more money was a waste of money.
European economies were overstrained by war after war. People were starving and there were no jobs. Their economies did not have the power to recuperate. Trade with the US and the world fell. People generally lacked confidence in their economies. In the US, banks loaned money against security, and as recession deepened people and businesses defaulted on their debts, so banks were stuck with worthless property. As fear set in, the money supply tightened, furthering the downward spiral. In 1929, the Stock Markets failed, and by 1933 all the world was in the Great Depression that lasted through the 1930s.
The preceding paragraphs were ripped from my 2007 State of the Onion, in which I created an overview of what we have learned from economic history from The Commanding Heights, by Daniel A. Yergin and Joseph Stanislaw, (copyright 1998, 2002 by Daniel A. Yergin and Joseph Stanislaw), and added economic principles from Understanding the Process of Economic Change, by Douglas C. North (copyright 2005 by Princeton University Press.
The Fed is currently trying desperately to stop the US economic slide, (and its impact on economies around the world) but is the Fed on the right track? The Fed can't lower interest rates further without causing inflation, which is much more destructive to the economy.
Do we have conditions similar to the 19th. and 20th. Centuries?
1. Are industrialist hoarding wealth to themselves? "In the mid-1970s... the wealthiest 1 percent of Americans owned about 18 percent of the nation's financial wealth. By the close of the twentieth century, the share owned by the top 1 percent had soared to 40 percent, the highest share in the nation's history, with the possible exception of the estimated 45 percent share reached around the turn of the century, the age of the robber barrons..." - The Battle for the Soul of Capitalism, by John C. Bogle, founder and former CEO of Vanguard Mutual Funds.
What is happening in industries to create this state of affairs? Bogle points first to corporate managers who take an unequal share of the wealth for themselves. Corporate managers earn more in a few minutes than most of the corporation's individual employees will earn in a lifetime. Secondly, he points out that mutual fund managers siphon off one-fifth of the gross returns from investors, and more than three-quarters of the future accumulative wealth of stocks. Yet the investors take 100% of the risk.
We have glorified the quick acquisition of wealth to the point that stock holders and corporate managers are locked in a dance of quarterly guidance, frequent phone calls for guidance, and stock performance. In this atmosphere of instant communications, every tick of the stock market, every guidance adjustment, every product sale, every new government report (awaited on TV in hundredths of a second), and every quarterly report has instant affect on the stock market.
The good news is that unlike the days of the robber barons, who simply socked the money into the bank and there it stayed, today's managers reinvest the money in stock, which makes more money available to corporations. The bad news is that they invest (we assume) in high performance stocks and companies that run very lean (maximizing corp. profit), which often means companies with low wages. The worst news is that you and I have no choice about where the money goes. This means that it isn't apportioned in ways that necessarily help the economy.
2. Are corporations creating exclusive trading circles and controlling prices? This is a difficult one to measure. To be sure, controlling prices (artificially inflating them) is an anti-competitive activity, and works against the free market. Third-world countries often have exclusive trading circles as a major element in their economies, so they don't grow. Let's take the example of the medical field, which I constantly write about. Profits in the pharmaceutical industry are the highest of any industry in the US. Do they need help? President Bush refused to sign into law any legislation that prevents the government from negotiating drug prices for prescription coverage. Let's take the oil companies. Their profits are at record levels. Do they need help? Currently they are getting tax breaks. Under this Republican administration, favored corporations (read those promoted by special interest groups) are getting anti-competitive practices. Instead of free market opportunity, they are getting protected or favored treatment that eventually leads to economic corrosion.
3. Innovation is lagging and not driving productivity? I hesitate to say that US companies are not innovative. Why is innovation important? In order for people to have higher wages and more earning power, which is a major benefit to the overall economy, productivity has to increase. The main driver of productivity is innovation, which means that technology makes the production cost less expensive and creates new products with new markets. There are others ways to increase productivity, which are typically spurred on by intense competition (US or worldwide). 1) Reduce the cost of the product by controlling wages. 2) Merge with another competitive corporation to reduce the overall cost of the product while increasing the number of products sold (reduces competition; reduces personnel). 3) Use less expensive material. All three methods increase productivity but have a negative impact on wages. So demand for products goes down. So business may or may not be innovative, but methods 1, 2, and 3 are substituting for innovation that improves the economy.
The truth of this is in the figures. Corporate profits, stock prices, and many economic indicators have been going up for several years (at least since 2003). But the velocity of money in the economy has been slowing for over a year (meaning we and the government get to spend it less often). Real wage purchasing power for low- and medium- wage earners has declined steadily during the same period, falling 1 to 2% each year. Growth in the number of jobs has been much smaller than historical growth, and is not keeping up with corporate growth.
Is this because of corporate mergers? At the height of the 1990s economic boom, corporate mergers worldwide were $3.4 trillion. In comparison, the 2006 merger mania continued into 2007, with $2 trillion in deals announced early in the year in the US alone, but mergers slowed during the year by the credit crisis.
More specifically: Productivity has been rising, but job creation has lagged. The effect on the overall economy is begin to strongly show up. Retail sales have slowed. Unemployment is on the rise. The December 2007 price increase for food and fuel was 2.4% over Dec. 2006. Productivity increased 1.6% in 2007, and picked up to 1.8% pace for December as product sales lagged, but the three year trend has been only 2% over 3 years. Hours worked has dropped for two consecutive quarters, and is dropping at a rate of 1.5%, which is greater than at any time in the last 4 years. Economists have termed most of these drops "precipitous." Productivity growth was simply from holding down labor costs by cutting employee hours. This has a negative impact on the overall economy rather than a positive impact that comes from innovation.
Note: In general, corporate mergers that result in efficiency can come from modernizing, pooling resources, reducing unprofitable business divisions, more equally distributing the workload among labor, and removing competition that keeps the business unhealthy. This improves the business (productivity, profit) and improves things for workers. But the overemphasis on mergers, and deemphasis on innovation, has a negative impact on the economy both by limiting competition and eliminating jobs.
4. Are wages falling so that people can afford less and less? Wage growth is not keeping up with inflation, and is not keeping up with corporate productivity. We see several results:
5. Is war creating major debt? The US spent $93 billion on the war in each of 2003, 4, and 5. It increased to $120 billion in 2006, and then 171 billion in 2007. In 2008, Bush has asked for a whopping $193 billion. The totals for the "War on Terror" since Sept. 11 has been $691 billion. This has moved the national debt from $5.6 trillion when Bush took office to over $9 trillion. Interest on that debt, $2.7 trillion over the next ten years, reduces spending power by $9000.00 for each person in the US. The impact is, each person in the US will have around $1000.00 a year less to spend, which means US purchasing decreases, which means fewer jobs and wages. The impact of war and debt on the economy is substantial. When small things make a difference, such as when people's purchasing power is right on the edge or causing defaults, this kind of difference can be critical.
6. Are banks are not loaning to people? Banks have severely tightened their requirements for loans. The credit crunch put an end to a lot of mergers and acquisitions.
7. Are foreclosures increasing, and are banks badly hurt by worthless paper? People with mortgages and car loans are defaulting, with 1% of all US mortgage loans being in foreclosure. The mortgage default rates are at record highs. The default rate on subprime mortgages is nearing 20%. In foreclosure are 8% of these loans. Housing prices have declined for the first time since the Depression era, and this is expected to continue through 2010, with possibly another 30% decline needed to place homes back on the market at affordable prices. US and other international banks are not able to recoup their investment in these mortgages and are writing off $ billions in losses.
8. Have risky loans to consumers and corporations been too intoxicating? After the bull market of the 1990s, investors have expected immense return on their investments. Fund managers, banks, and corporations have been driven to find creative ways to maximize high profits, driving them into riskier and riskier agreements. If easy money wasn't available in the stock market, investors went for real estate, which began as a safe haven for investors after the "dot.com crash." One end result has been "bubbles" that have had nothing to do with reality, such as the dot.com bubble. Another end result was scandals over "creative accounting practices" in the corporate world. Another end result has been bad paper in the housing market that creates risk for investors and subjects buyers to loans that they really can't afford. Another end result is bad paper on loans for leveraged corporate buyouts. Each of these practices has badly hurt consumers, employees, and investors, while costing the economy $ billions in losses.
I'm not a gloom and doom person, but I think a realistic assessment of the risks that we face can help us make the corrections we need to make before conditions destroy us. Since the Reagonomics era, corporations and investors have been given an increasingly free reign in the belief by many that a free market economy flourishes best in a completely free atmosphere. "Supply Side Economics" has moved from a theory to being a hysteria in money markets, with every nuance in government being interpreted by pundits as toxic to business and the stock market reacting accordingly. We see the result of free markets that have no restraint. Realism has evaporated in the face of extreme competition as corporations and investors fail to recognize that productivity at the expense of labor reductions cuts off the hand that buys their products and sends the overall economy downward... hurting them. Time and again the government has had to make new rules and enforce existing ones to curb the excesses of the few that cause major harm to the economy.
The primary thing that needs to happen is for the economy to become balanced, and this will happen when people regain leverage over their wages and salaries. Money is being apportioned in this economy in a very lopsided way - overfunding the wealthy, while stripping earning and purchasing power from the middle- to lower-income earners. The result is, we are beginning a downward spiral that will simply take wealth from everyone.
The second thing that needs to happen is that greed needs to be curbed, either voluntarily or forcibly through controls. Inflated housing prices hurt many people's ability to purchase a home, and then as the housing bubble burst, many people lost their homes and many investors (including banks and lending companies) lost a lot of money, and people who build homes lost their jobs. What began as a safe haven for investors after the dot.com bust soon became a new place for greed to infest. Rapidly rising oil prices, in a market that is acting like a futures market and has no controls, have taken away people's purchasing power and put our economy on the edge. Creative accounting practices have robbed millions of investors of their investment and thousands of people of their jobs, savings, and retirement. Risky investment and risky lending has found the negative edge of those practices - everyone gets hurt. As we get further into an economic downturn, the service sector is beginning to decline, which is depressing the stock market even more. While these market excesses may benefit a few, they hurt everyone. What will be their next target?
The third thing that needs to happen is government has to put an end to the unbridled Iraq war and unbridled spending for it. Iraq must take responsibility for itself - militarily, and politically. We can't prop Iraq up for a continuation of endless conflict within it, as is the rest of the Middle East, without taking ourselves down. We can't sacrifice ourselves at the altar of Iraq or any other country that perpetuates conflict. Al Qaida, which has been profoundly defeated in Iraq both militarily and ideologically among its citizens, is primarily a regional threat and a regional problem. The money faucet has to be turned off - let their oil profits finance their wars.
There isn't a single key to economic success, as neo-conservatives seem to assume with their mantras of "Reagonomics," "small government" and "low taxes." Money doesn't always "trickle down." Small government and limited regulation doesn't always produce effective results. Low taxes doesn't mean a good return on taxpayer investment. In reality, business can be quite stingy, deceptive, and find other ways to stay profitable that actually harm the overall economy. But in the end, people must have money to spend for businesses to succeed. No wages, no business. It's that simple, and that's what we are currently seeing.
To get this straightened out, first people have to have leverage over wages to keep the economy healthy. People are going to have to unite and demand wages. (Unions don't work in today's world - unions always stand in opposition to business, and both the government and business will bust union efforts.) Employees and companies have to enter into a pact in which both parties realize that, "What is good for me is good for you." If companies fail to cooperate, then you can go to national campaigns with bad publicity and bans on sales until stockholders make them cooperate. There is nothing that speaks so loudly as quarter to quarter losses, bad guidance, and getting into manager's pockets. Additionally, a people alliance is needed across the US (and later the rest of the world), that will respond to people trying to get their just due within companies - otherwise bans on sales won't work well. Also, Web ratings systems for companies can help avert potential applicants from working there, driving the best qualified to the competition. Companies doing B-2-B sales are a more complex problem, that may respond to only publicity. This is a better free market method of give and take over wages.
The wage problem is very complex. In general, the average person goes for the lowest price, so if the product comes from China, it puts people out of work in the US. Major corporations generally compare wages and salaries across the industry, and try to stay competitively within that range, adjusting for regional differences. Corporations are more likely to reduce staff, or to lose people through attrition and then hire new people at lower wages. Small to medium size businesses make up 80% of the employers/employees in the US, and they are much more difficult to influence with national publicity - they typically aren't national. But bans on purchasing their products nationally or locally can work, but keeping in mind that wage increases in some industries and businesses can simply put them out of business. Many companies have the ability to simply shift workload to a different jobber in another part of the world. Removing taxes from products that compete with imports would help level the playing field. Even a wage mediation board would help.
Second, government has to stimulate business in ways that promote the good of all by resolving complex problems that business alone can't resolve, while creating competition, especially now in the energy and medical sectors, which would resolve immediate problems. I have covered this in previous articles on Change - Elections 2008, and the 2008 State of the Onion.
Third, the new administration is going to have to clamp down on corporate mergers and look at whether these are anti-competitive and will have a negative impact on the economy. One way of doing this is to give incentives (tax breaks, lower interest loans) to corporations that use innovation and new markets for growth rather than mergers. (This isn't something that managers and shareholders look at - their main interest is profits, not how those profits are obtained.)
Fourth, steps need to be taken to temporarily compensate the economy for the unlevel playing field created by the inrush of inexpensive goods and the excessive prices on energy. Everyone loves buying everyday items at 1960s prices, and it's wonderful that China is doing well economically and willing to loan the US billions of dollars. But if our economy goes into a downward spiral because of the competition, what value is it?
We need to find mechanisms to remove taxes from US corporations so that products can sell at competitive prices both in the US and abroad. Consumers pay the taxes that corporations pay no matter at what contact point they occur - so it really doesn't matter to the consumer where those taxes occur. A sales tax that is applied to all products is more fair. By lowering prices through corporate tax reduction, prices on products will fall by ~15%, and the tax paid by consumers will then be the same on all items on the market no matter where they come from.
We need to find a way to discourage excessive profits that harm the economy, and if those profits do occur, use them to stimulate the economy. So companies, such as oil companies, that make profits above 12% either need to reinvest their income in new and innovative business (such as alternative energy, exploration, equipment) so that profits don't rise that high, or pay at least half of that profit above 12% in taxes.
It would be easy to return to the days of the late 18th. and early 19th. Centuries when wages were small and people were overworked, unemployment was over 20%, and people starved. All you need is the same elements driving the economy: 1) Industrialists held most of the money and eliminated competition, 2) Companies failed to innovate. 3) Banks foreclosed on worthless paper mortgages and suffered major losses. 4) People had no confidence in the economy. 5) War drained economies. 6) We have the additional problem of enormous personal and national debt corroding income. 7) As fear set in, in the early 20th. Century, the downward spiral led to the Great Depression.
We are moving steadily in the direction of 18th. Century economies that worked poorly, and often failed. It is beginning to have an impact around the world. We are poised for a downward spiral if we don't stop it. Given that this is an election year and those who march blindly to the drumbeat of Supply Side Economics aren't about to agree to anything different, things don't look very good.
Going forward, to prevent our economy from slipping further, we require a government that understands the economic conditions and how to improve the economy. Government over-regulation, as happened in the 1970s, has proved to be a fatally flawed approach. The current single-minded and simplistic conservative approach has favored corporations, in a misguided belief that corporate profit automatically means wage and economic health. We can't have a healthy economy without corporate health, but good corporate health doesn't automatically mean a healthy economy. Just as individuals usually buy at the lowest price, corporations do what they believe is best for them individually, not what is good for the economy. This lopsided focus has led to a continuous reduction in money available to the government for sponsored medical assistance, slow job growth, wages that don't keep pace with inflation, and an economy with low growth rates and which is bordering on recession. For the government this trend will ultimately mean less tax revenue to fund the government so it will become ineffective.
Economic health depends on how money is apportioned in the economy. Money that chases itself in a continuous chase of investment and corporate mergers where profits are simply reinvested in more investments and corporate mergers does very little to help the economy. Jobs and wages decline, and the overall economy goes down.
To restore balance, the government is going to have to encourage companies to be innovative and create new business, which leads to more jobs. It can do this by 1) Limiting corporate mergers and acquisitions so that money goes where it is needed (stays in the business) and competition flourishes, 2) Encourage new growth in the medical and energy sectors. It can do this by reforming government sponsored programs into competitive programs, and requiring the conversion of Federal and State government energy usage to competitive alternative energy sources, and mandating energy efficiency in new building construction. 3) Have a more reasonable approach to international trade expansion that assists the economies of both nations without destroying them. 4) Pop the bubbles before they destroy something.
People also need to organize at a grass roots level across the nation to get leverage over wages. Corporations only do what is in their self-interest to stay competitive in the employment and product sales markets. If labor was free, it wouldn't be low enough to satisfy growing corporate needs. People have to stand in solidarity and demand wages that are livable and appropriate, or expect wages to continue to decline, and recession, or even depression. To end on a happy note, it's up to us (votes and actions), and I have confidence in us.
Update 1: Market hysteria
The news is out today (April 3, 2008), in Congressional testimony, that Bear Stearns CEO Alan Schwartz believes their company was done in by nothing less than rumors generated by market hysteria. While he left the door open that there could have been malicious intent behind the rumors, analysts generally think that rumor mongering is what the stock market does best. In the end, stock prices rest mostly on confidence in a company's strength, and the mortgage crisis eroded confidence.
The fact is, Bear Stearns had a supportable balance sheet. Their company position was sustainable, based on their risk assessment and risk aversion policies, their balanced portfolio, and their liquidity. The fact is, rumor mongering could have led to a failure that easily could have tipped the balance of the US mortgage financial crisis into a downward spiral that could have been a major disaster for everyone around the world. Investors made a "run on the bank" reminiscent of the depression era.
FDIC deposit guarantees prevent modern day runs on the bank. But investment services own stock, which isn't necessarily backed up by anything but confidence. Bear Stearns stock dropped from over $100.00 a share to ~$70.00 during the mortgage crisis, to $2.00 a share when they were forced by market hysteria to seek a sellout deal with JP Morgan.
What do they think would help? Schwartz thinks that the Federal Reserve keeping a "window open" would allow them to respond more quickly with loans and avert such crises in the future. Congress is looking at legislation that would add more regulatory controls to the mortgage investment community so that lending practices that led to the mortgage crisis can be prevented.
Confidence in stock often leads to hysteria. We see it on both the positive and negative side. Confidence in the dot.com boom led to investments in companies that had no business plan (to actually make money), and when confidence dropped to zero that market crashed. Confidence in spiraling mortgage prices led to overconfidence, highly inflated prices, and poor lending practices, and when the market started its downward turn, hysteria set in and the losses have been staggering for home owners and investors.
Hysteria in the oil market is continuing an upward push on oil prices that are now three times their 1999 prices, creating hardships on people, truckers, airlines, prices of consumer goods.... There is no shortage of oil. No one has even had to stand in line to get it. Hysteria gets deeper when the production is a little tight and refineries lose a plant or production gets threatened in some foreign supplier's country. The only question is, when will this bubble burst, and who will lose money?
In some ways hysteria is like the gold-rush days. Quick riches attract heavy competition for land, and it attracts dangerous practices such as claim jumping and lawless boom towns. Every stock market boom attracts heavy competition for lucrative stock, and the price goes artifically high. It encourages dangerous practices to deliver on those investments, and encourages risky investments. Sooner or later the vein runs out of gold, the late-comers go away broke, and the town becomes a ghost town. In the stock market, the upward winds reverse course, the last investor out loses heavily, and the market leaves devastation in its path.
Regulation that curbs risky practices will help.
While inflation is the biggest threat to the economy, the Fed has learned how to control inflation reasonably well. At the moment inflation is growing and is in danger of growing worse, but it is being driven by other destructive forces. Hysteria is the biggest problem. Hysteria drives investmen
Market hysteriats to fail - up and then down - and lack of confidence prevents companies from hiring more people. The economy tanks. Hysteria has historically been one of the biggest monsters in the economy, and it is the thing that needs tamed the most. As FDR said, "The only thing we have to fear is fear itself."
Update 2: The tight rope of survival, energy, and politicsIn the 1996 State of the Onion, I put in a table showing what it takes at a minimum to financially make it in today's US economy. Since that time, wages have risen ~ 4% per year, and inflation has risen ~ 4% per year. But in two years, oil prices have doubled.
So, using 1996 as a reference year, what impact has rising oil prices had on a young married couple?
To begin, we must understand economic reality for most people. The average household income nationwide is $65,000.00 for a family of four. In many places it will be around $56,000.00, but expenses are also lower in those areas. In some poorer states (Mississippi, Louisiana) income is considerably less, and existence is always difficult. Shown by the table below, a married couple needs $42,000.00 a year minimum.
A good average for realistic minimum per person income for a family of four is $14,000.00 to $16,000.00, depending on the area in which they live. Social security recipients today average $14,000.00 a year, which in many situations is insufficient when living alone or with just 1 other person. Poverty calculations set the poverty level as ~ $21,000.00 for a family of four, but I'm not sure what that has to do with reality since it is a ridiculous figure. The figures in this article are based on reality - a minimum acceptable standard of living, not some figure based on the 1959 standard of living.According to the Census Bureau, the average US citizen spends 49 minutes a day, or 245 minutes a week commuting to work and back. In metropolitan areas, people commonly spend two hours a day commuting ~60 miles to work and back. People additionally drive, I estimate, around 25% more for other things. So at 45 MPH, they are probably driving on average ~ 43 miles to work and back, plus another 11 for kid's soccer practice, groceries, and other errands. For a month, that comes out to 1,080 miles total driving, and at 20 MPG =54 gallons of gas. In 1996 at $3.00 per gallon this cost $162.00 a month, and in 2008 equals $216.00 a month.
So the people making the minimum required to exist in this society in 2008, pay $54.00 a month more for gas. Where does this come from? Most costs in a budget are fixed. You can't cut the mortgage payment or stop going to work to cut gas costs. In the table below, it has to come from food and miscellaneous. People with narrow budgets don't spend much on miscellaneous, so cutting is very difficult. The kids must have lunch money and paper. The other prices are fixed.
Food and other consumer products have gone up to reflect rising fuel prices. If food prices go up 4%, that's another $20.00 less they have for food. Together with gas, this equals $74.00 a month less for food which is a minimum of 15% of their food budget.
If gas prices reach $5.00 a gallon, and food raises another 4%, this will have eaten up another $74.00 of the young family budget, taking 30% of the money for food. For nearly all of us, a 30% cut in the food budget would be a very severe cut. Another important factor in this is that it throws people into a category of inexpensive food that is more inclined to put on weight, which affects health and the healthcare system - raising costs.
The impact of fuel prices is severe for at least a third of US citizens. Roughly 30 to 50% of households fall in the range shown in the table below. Ten percent of households bring in less than $25,000.00 a year.
2008 yearly minimum wages for two = $44,700.36 to 87,843.23.
People can only cut their budgets so far without making drastic changes such as giving up their home (whether renting or owning). People typically borrow more on credit cards to make up the difference. Payments get late. As a result, interest rates and payments go up, making the family budget worse. At some point the household budget crashes. If there is a mortgage, the mortgage company incurs losses.
We are at the point in our world where little things matter - even on the other side of the world. US agriculture in the 1980s was always in a surplus state, growing so much grain that the government had to purchase and store the excesses, and even pay farmers to idle their land and not grow crops. In 2007, the US still overproduced an estimated 118,000 tons of grain than required. The US can produce more, and even India is producing a grain surplus.
Even though there is no real grain shortage except in localized areas, just as there is no fuel shortage, we have reached a turning point in grain surplus and food prices. Demand has risen closer to production levels, and private investors now purchase the small surpluses. These surpluses used to be given to nations in need, or sold to them at lower prices. Grain is now used for fuel production (ethanol), limiting the amount of surplus grain in the world. Worldwide prices for grain have risen 45% in the last 9 months (June 2008). Subsistence level people are not able to purchase rice, corn, and wheat. This affects a large percentage of the world.
The wisdom of embracing "gasohol" or any fuel that is produced by land normally used for crops, is called into question. Without surpluses, can we survive population growth and massive environmental problems such as flooding and storms that destroy crops? Can a world with minimal income survive at these prices. Have we in the US created a fuel guzzling monster by living 20 to 30 miles from our jobs and demanding private transportation rather than public? Is this model being duplicated in places like China where the problem will be greatly amplified? And will we choke to death from the fumes or boil from greenhouse gasses and global warming? And will speculators on stocks and futures rule the world simply because they can drive prices up.
In 1979, two tycoons, the Hunt brothers, tried to drive up the price of silver by purchasing all of the reserves with their enormous wealth. Their move was momentarily successful, but then actually backfired and sent them into bankruptcy. Recently one French trader, Jerome Kerviel, jolted the market through massive incompetent investments, covered by fraudulent means, that resulted in major losses.
Currently the stock market can be driven into manic price increases by the rush to get in on the next safe and lucrative sector, driving that sector into hyperdrive and foolish actions. Current oil and food prices probably have little to do with market manipulation or incompetence, just the irresponsibility of investors that is inherent in current capitalism. The idea of responsible investment is an alien idea. When supplies are a little low, speculators can drive prices through the ceiling, just to get high returns on their investments. Small things at the right moment (tipping points) have major impact.
Most of the politicians have been pushing "pure" capitalism for many years. Well, pure as long as it coincides with what the special interest groups want. The idea is that a free market regulates itself. We are seeing the folly in that. Special interest groups pay to get what they want, whether it is in the country's best interests or not.
Deregulating natural gas prices simply added inefficiencies as everyone tried to become a supplier. Each supplier has to have its own organization, so efficiencies were lost and prices went way up. Some electric utility companies went so far as to manufacture shortages so that they could justify price increases. Enron traded stock with phony divisions on the books and financially destroyed itself, its employees, and its investors. Mortgage companies sold mortgages to people who couldn't afford them and threw the entire banking system and the economy into meltdown. The list of irresponsible excesses continues to grow.
What we are currently seeing is a "rush to greed" spawned by the high investment returns in the 1990s. Like an engine without a governor, a sector can "red line" and destroy itself. We can't let this continue. Each one of these gold rushes lines the pockets of some investors, and then turns back on us - we all lose.
What will it take to solve these problems? Individual effort will help. A growing awareness of these problems will help: fund managers and individual investors may be less likely to invest if they know it's a bubble that will burst and hurt them. Accepting responsibility will help. But expecting that corporations and the economy are going to solve these problems is a completely unrealistic expectation. Both corporations and the economy go where easy money is: highest return on investment. It's mindless. It requires responsibility and leadership.
Leadership, leadership, leadership. Leadership has to set the agenda and decide how we are going to get there in the most cost effective way, consistent with the public's wishes. It is going to take some government intervention in the form of regulation in the stock and futures markets. Hype thatendlessly pushes up prices has to be recognized for what it is - hot air with no value - and controlled.
In energy, it is going to take a lot of leadership to resolve transportation and energy problems. People in metropolitan areas despise driving choked highways for two hours a day to get 20 miles to work and home, which also makes a major contribution to global warming, and they hate the inability to find parking. But they despise public transportation even more. The problem continuously gets worse. Some leader has to find what the public wants for transportation and lead us there.
We have the technology. With magnetic trains, and fast switching capabilities, we should be able to capitalize on electric powered commuter cars that can join moving trains to travel over the majority of the commute to get the high efficiency that is integral to the train, and benefit from the time and energy gains of not stopping and starting. Such a commute would be a pleasant and private ride for the commuter with few moving parts to maintain.
Leaders and engineers with vision are required to make something like private mass transit happen. It badly needs to happen. But so far our political leaders have been content to let pure capitalism proceed on its own in its march to pain and destruction of us all: SUVs for driving to work and school at 12 MPG, smog, and global warming. SUVs are personal image and marketing wise, with high return on investment, but not smart: rising gas prices are putting major automotive companies out of business, while making it too expensive to drive, and causing too much pollution.
The conservative era in Congress with its overemphasis on small government and the free economy, has done too few progressive things to address long term energy efficiency, energy supply, transportation problems, and investment regulation problems. This style of government must be seen for the ineffective and harmful government that it is.
On one hand bloated government, excessive regulation, and corporate policies that create monopolies but lack investment or innovation, and fewer and lower paying jobs, create poverty for most people. On the other hand, failure to lead and regulate is costing millions of people their homes, causing global warming, causing market failures, robbing people of money through high oil and food and credit card interest, and causing job loss. The standard of living and world economic health areslowly sliding into the abyss. Progressive and conservative have to work together to enhance and balance each other for effective government.
In November, we have to elect politicians who understand the necessity of innovation and some form of regulation to the health of our economy. We have to elect politicians who are leaders and who can find the right solutions to problems such as fuel sources and healthcare. We have to elect politicians who understand the necessity of working together.
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