AU Blogspot

In updating my economic forecast for the new year, I surprised myself.  I walked into the spreadsheet moderately gloomy (I thought) and plugged in conservative numbers.  Out came the fairly pleasant forecast that is pictured above.

There’s weakness in the current (fourth) quarter, and then things look better.  I did put some dreadful numbers in for housing construction, but that sector is now only 4.5 percent of total GDP.  I clobbered housing starts, but that doesn’t have a huge impact on GDP.  I brought down the growth rate of consumer spending for a couple of quarters, and kept inventory growth down to near zero in the first half of 2008.What’s keeping the forecast up?  Export growth will remain strong, and import growth will weaken.  Nonresidential construction, though it will decelerate, still grows at a nice pace.  Late in 2008 I see business spending on equipment and software recuperating.  Defense spending grows at the recent pace, then the growth rate slows.  I have less confidence in this area.

Why the disconnect between my economic outlook and the news reports?  I think it’s a weighting issue.  For instance, when the housing starts numbers come out and they are rotten, that fact is seized on by the press.  Same thing for falling home prices. (more…)

Paul Krugman is simultaneously one of the most respected and controversial economists in the world.  Named by The Economist as “the most celebrated economist of his generation,” Krugman’s provocative opinion pieces in the New York Times often set the tone of political debates that appear across the cable/network television and talk radio wire.  It’s not uncommon for Meet The Press’s Tim Russert to relentlessly grill Presidential candidates on Krugman’s latest “op-ed”, so it’s clear that he does project quite a lot of political influence whether you agree with his analyses or not.  In this video, which you can view by clicking on the image above, you’ll watch Paul Krugman’s recent presentation at Google Headquarters.  Enjoy the video.  I look forward to hearing your perspective.

Ryan Rode
Interactive Services Manager
Ashworth University       

            Thanks to Louise Docker for permission to use this Photo.

If you owe the bank $100 that’s your problem. If you owe the bank $100 million, that’s the bank’s problem.” J. Paul Getty 

Individual mortgage holders are in the first situation; together they are in the second. 

I want to look into this whole situation of freezing some adjustable rates (that are scheduled to increase for adjustable rate mortgages) more - because I don’t really understand what is actually involved in the “agreement.” 

My impression is that the government is paying nothing, giving no other incentives (like reducing taxes owed). With that being the case, I can’t see why some people think it is bad. Some people are saying it is unfair to people that were careful.  They don’t get this benefit. That makes little sense to me. One of the things you have to learn about investing and personal finance is there are no guarantees. You enter into mortgages with your best guess about what will happen (as the lender or the one receiving the loan). 

From my understanding of what is involved, the government is using some moral persuasion to try and get lenders to step up and provide more favorable terms than originally agreed to. I’m not that confident such a thing will end up happening in practice, but I don’t have a problem with the attempt. (more…)

 
              Thanks to Tom Hensel for permission to use this Photo.

Fears of the subprime mortgage crisis spreading into other credit markets prompt the question of whether our economy could operate without the volume of credit that we’re used to.

Our economy could be healthy with much less credit than is common now. Businesses could operate with greater equity and retain more earnings. Consumers could defer spending until they had saved enough money for their purchases. It could work.  There would be a loss of efficiency, but not a total breakdown of the economy.

However, a sudden transition from our present, credit-heavy economy into a credit-light economy would be disastrous. Many companies have business models based on financing receivables, inventory and capital spending. They could adapt over time, but not suddenly. On the consumer side, today’s buyers use credit. If tomorrow’s would-be buyers need to save for first, then in the meantime no big-ticket consumer purchases are made. (more…)

 
          Thanks to Matthew Perkins  for permission to use this Photo.

I recently received an email from an individual (who will remain nameless) that wanted to know why it was they felt like they would never get ahead financially. A feeling of being stuck in the rat race of life, struggling to never get ahead in the end. My answer to his question was simple and it paralleled the ideologies expressed by Robert T. Kiyosaki in the book “Rich Dad, Poor Dad”. The answer is one that is not readily taught in our school systems. Before I give you the answer to why you aren’t rich yet, let me first ask you a couple questions and see if you can’t figure it out yourself.

Question 1: How many different assets do you own?

Question 2: How much passive income have these “so-called assets” of yours produced? 

Does the second question change your outlook and perspective of the first question? The word ASSET is defined three different ways. The first way is how the poor class defines it, the second is how the middle class defines it and third way is how the upper (rich) class defines it. The way in which you define this term will ultimately define your financial well being in life (or not so well being). (more…)

 
             Thanks to Don Harrison for permission to use this Photo.

We have too many new homes on the market.  Take a look.  (This chart shows new homes for sale that are either finished or under construction.  The Census Bureau also counts houses on which construction has not begun.  To me, that’s counting some developer’s hopes and dreams.  But the picture is similar by either measure.)

The average number of new houses for sale, including the recent sky-high period, is 295,000.  At the recent pace of decline, which has lasted 13 months so far, how long will it take to work off the excess inventory and bring us down to that 295,000 average? (more…)

 
          Thanks to MontanaRaven for permission to use this Photo.

How many of you don’t think you have enough money to start investing? Living paycheck to paycheck and keeping track of where every penny goes, you have enough trouble making ends meet from day to day, much less putting money away for a rainy day. Many of us that are just starting out, or perhaps starting over, might read this blog to get investment ideas for the future. Not seeing how investments can fit into our tight budgets in the present, we think all the advice we hear is for someone else, or for us to file away for “someday.”

While those of us that live on a shoestring budget are wise to be cautious, the truth is that we should not allow this caution to stunt our growth. Everyone has the potential to invest in their futures – we just may need to take different approaches. (more…)

 
                Thanks to Artur for permission to use this Photo.

From the New York Times, here is an interesting article with at least a couple of good points to remember. First, it does make a difference what company you chose. There are many market conditions where anyone can make money, but those conditions will change. Second, it’s important to look at the type of pay these people get. The CEO’s take huge risks to possibly earn even more money for themselves. It is absolutely no surprise to me that companies write off hundreds of millions in losses. It happens constantly. (more…)

 
            Thanks to Melanie for permission to use this Photo.

The American dollar isn’t nearly as strong as it used to be, according to news that came about this week. Because the United States economy doesn’t look particularly promising at the moment, the dollar fell to a brand new low last week. This news, coupled with the fact that oil prices hit their highest points ever, leaves many economists in the United States with many new worries about the economy.

Among the problems with the US economy are the strangely low earnings from Bank of America, the continually slumping labor market, and the already slumping housing numbers. In addition to that, the Federal Reserve released a report on the economy that was anything but promising. (more…)

I’m about 200 pages into Alan Greenspan’s book, “The Age of Turbulence:  Adventures in a New World,” and it’s shaping up to be pretty decent.  Not exactly a page-turner, but it hasn’t yet been consigned to the fate of most of the books I check out from the library, gathering dust under my desk, envying the inordinate attention I give to my computer and especially FreeCell.  It’s a rather intimidating volume at 509 pages, and is a little light on economics (which is probably a good thing).  The book is thus far composed mostly of anecdotes about his working relationship with various and sundry government officials over his 19 years as Fed chairman.  He apparently had an antagonistic relationship with the first President Bush, who blamed him for losing his reelection, and was on very good terms with Clinton, who he claims was very engaged in economic affairs and boldly tried to implement a deficit reduction plan that ultimately got watered down and compromised to the point of ineffectualness.  I’m just starting the second President Bush years, but already the author has foreshadowed the troubled waters ahead with some ominous language:

“I looked forward to at least four years of working collegially with many of government’s best and brightest, men with whom I had shared many memorable experiences.  And on a personal basis, that is how it worked out.  But on policy matters, I was soon to see my old friends veer off in unexpected directions.  People’s ideas–and sometimes their ideals–change over the years.  I was a different person than I had been when first exposed to the glitter of the White House a quarter of a century before.  So were my old friends:  not in personality or character, but in opinions about how the world works and, therefore, what is important.”  page 212

Greenspan keeps the tone of the book even, with only occasional divergences into the fine points of managing a national economy.  He made a few sweeping generalizations (if anyone is in a position do so and not sound glib, it would be him).  He states that recessions are caused by two factors:  either by an buildup of inventory exceeding aggregate consumer demand, which leads to a contraction in productive activity by businesses until the inventories are sold off; or by a collapse in demand for a product, as happened to travel and tourism in the wake of 9/11.  Knowing which was the cause was important to the Fed in determining how to respond.

The jury’s still out until I finish it, but so far I’d recommend this book to anyone who has an interest in economics and wants some authoritative commentary, as opposed to pedantic technobabble.

John Ash
Ashworth University