Is This the Best We Can Do Mr. Greenspan?

Posted on September 18th, 2007 by Will Marre.
Categories: Leadership, Community, ADP Diary, Uncategorized.

Economists are more arrogant than weather reporters. They not only try to predict the future, they attempt to control it. But like all things humans try to control, the real world is far more complicated than our limited understanding of it. When their plans don’t work, they stand back, smoke a cigar and write a book.

Thank you, Alan Greenspan. After 18 years of expanding the money supply that recently financed the turn of the century tech bubble and the greatest housing inflation in history, you’re saying that we are all in for a prolonged recession with double-digit interest rates and no growth (USA Today). The main reason Greenspan gives is that Chinese labor is growing more expensive so (dangerous) stuff from China is going to cost more at Wal-Mart. Unfortunately, I am not making this up. He said this is to Lesley Stahl in the interview for 60 Minutes (cbsnews.com).

It is time to break this economic myth that labor costs are the primary cause of rising prices. It’s become patriotic to restrain wages by any means. But it’s not. In fact, it makes us all weaker. This faulty thinking has led to a world of unrelenting economic insecurity for the typical American. Males between 25 and 34 earn 17% less than their fathers did. The average American household sees $2000 less in real income than they did in 1975 and that’s with more people per household working longer hours! (economy.com).

Meanwhile, low real inflation is a tragic myth. In the 1990’s budget pinheads in Washington decided to change the way we calculate inflation to avoid cost of living hikes in social security. This is a serious deception. They overweigh any price that declines and don’t count prices that rise on the most important things (financialsense.com). Just open your eyes. The inflationary price of assets has exploded on all the things that matter. The house I bought for $40,000 in 1975 sold recently for over $500,000. This is a three bedroom, two bath 1960’s tract house bomb with tar covered compressed cardboard sewer pipes. That’s a 350% increase in real dollars. College tuition is up 300% in 25 years. We spent $1.79 per gallon for gas 5 years ago. Is today’s $3.00/gallon gas any better? Or does it just cost more? Yes, inflation is really low for hamburgers and CD players because we use Illegals to make our food and Chinese peasants to make our electronics that keep our wages right where they need to be. Meanwhile real inflation is raging on all the things that matter, and we may be headed for a big fat recession. And we’re supposed to think this is the best we can do?

Much of this is unnecessary. Real inflation is mostly caused by bad economic policy, special interest tax and trade policy, and a host of other myopic leadership blunders. The biggest thinking error of all is to think the labor costs is the primary cause of inflation therefore it is a national goal to keep labor costs low. The real cost of goods and services is mostly driven by waste. It’s everywhere. All the non-added-value materials and effort that go into building, manufacturing, unnecessary shipping, inventorying, packaging, and handling only add cost. Eighty percent of the raw materials and energy consumed to make a car are not in the final product. A typical 3000 square foot home can easily be constructed in 30 days if the work and materials are organized. How many homes are built in 30 days? The music industry makes more profit per song (about 60 cents) from an itunes download than a CD that they manufacture, package, ship, unload, and stock, while another layer of retailers handle, sell and put it in a plastic bag so you can spend time and gas driving back and forth to the store. So why do music companies, and builders, and car manufacturers do what they do? Because they’ve built their business models on assumptions that are no longer sustainable. Every industry has its bad habits. But please don‘t blame inflation on labor. Inflation is the product of leadership. With new leadership and new thinking we can invent ways of making and consuming that lower costs and raise living standards everywhere.

In the meantime, we are not powerless. All of us have suffered from creeping inflation in our own lives. Our old habits may cause us to spend time and money on activities and stuff that no longer add value. We all know the greatest compensation in life is not money or stuff. It’s loving friends, enriching experiences and satisfying service. So the real question for each of us is, “What thinking habits are enticing me to waste time or money on things that don’t enrich me? What new priorities, activities and experiences would bring lasting satisfaction?” As we look to a bumpy future, these personal choices will have a lot more impact on our well-being than some arrogant economist who actually stimulated inflation and blames us for wanting a piece of our own productivity. Get even. Live well.

7 comments.

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John Clinton
Comment on September 20th, 2007.

I think your insight that efficiency of distribution / provision of goods is quite notable.

I don’t buy the rest of your arguments, however. I’m especially nonplussed by the suggestion that the recent Fed rate cut is to “bail out the exploitative bankers who’ve made a mess of things.” Where do you get that idea?

Who’s getting the bail out is the consumers who’ve borrowed the money - the bankers just got their revenue (interest) reduced. And bankers just made new lending products available, it’s consumers who took advantage of them to buy houses that they couldn’t afford, who bet on a constantly-rising housing market so they could “flip” their over-priced purchase. Those of us who borrowed prudently are the ones who suffer, as the entire housing sector languishes in their backwash.

And for the record: no, I’m not a banker, or anything close to it. Just get your facts straight, or at least make a more cogent argument for your points.

TomK
Comment on September 20th, 2007.

. The main purpose of the FED is to protect the large Wall Street money center bankers and prevent them from failing. In this case, they have become the lender of last resort for all of the toxic paper, CDOs, ((that the banks have created because no one else will buy them anymore. The bottom line is that this will all lead to greater inflation, which is why the price of gold and other commodities have taken off since the FED funds rate was lowered.

In response to Mr.Clinton’s comment, you are partially correct when you blame ‘consumers’ for taking out bad loans. Instead of ‘consumers’, however, you should have more correctly blamed real estate ’speculators’ for taking out these loans. But, had the mortgage industry not fallen for the ‘!00% no doc loan’ credit scam, most of these speculators never would have qualified for the loans to begin with. The legitimate home buyers were simply people trying to buy their first home who were hooked into taking out a loan that they really couldn’t afford. They should either try to renegotiate better terms with their lender, or short sell the house to an investor before foreclosure.

One of the best books on the subject creating a sustainable economy is ‘Natural Capitalism’ by Paul Hawken. In this incredible work, he describes how we can re-invent capitalism and start the next ‘indusrial revolution’ through 4 central strategiies: (1)Radical Resource Productivity, (2) Biomimicry, (3)service and flow economy, and (4) investing in natural capital. These 4 interrelated principles are designed to reduce environmental degradation while creating economic growth and more meaningful employment.

Lyn
Comment on September 21st, 2007.

I like the way you think. I appreciate the fact that you always bring things back around to what really is important in life, no matter what is going on in the world around us. I also like the fact that you somehow have an undertone to all of your statements that encourages us to all take ownership of our lives. Thank you.

Kevin
Comment on September 21st, 2007.

I can enjoy a debate about “the problem”, but somehow I’m more interested with possible solutions.
Here’s mine.
Debt free. About ten years ago my wife and I looked into our finances and discovered what most people are faced with, mounting debt from a mortgage, car payment, credit card debt, and of course the answer to it all the “home equity line”. Just throw it all into the home equity line and you can deduct the interest. Of course our home is worth more, right?
The theory was this, if we could somehow remove the debt payments we could actually afford to raise our kids on two salaries. It’s a long story. I’ll cut to the end.
Debt free for over a year. We own our home (in a nice neighborhood), own our cars, we have a credit card (but don’t use it) and we keep an emergency fund. The bottom line is that we realigned our funds (not much), and built a house with cash and earnings. By living without a mortgage, we freed up funds to pay for construction, cars, vacations and living expenses. After everything was paid off we quit our jobs. I’m living the dream. I can now afford to do the work, that isn’t work.
You probably won the lottery? Inherited money? Cashed in a large investment portfolio? No, just a little money, hard work and a few years of suffering.
I’m sure there’s someone out there that can shoot a few holes in my plan, but whenever I watch interest rates move, I get a little tingle inside, knowing how much it (doesn’t) matters to me today.

Dana
Comment on September 21st, 2007.

How about a little personal responsibility? I make my mortgage payment each month and I buy only what I can afford. I like the debt free idea. The house is the only thing I owe on. I don’t ask for any help but I would like the government to stay out of my business in return. It is about time for the Fair Tax! If we are looking for a way to open up the market and bail us out of and overburdening tax system then the Fair Tax is the way to go.

Jared
Comment on September 24th, 2007.

Very well put! The biggest problem our economy faces right now was caused by exploitive bankers, and to disagree with that would be ignorant. Bankers and Lenders were loaning money to anybody, and thanks to the interest rates being so low it was cheaper to buy a home as apposed to renting. Then houses in most cases doubled in value and the Bankers were at it again offering cash-out refinances, to people who didn’t qualify, using exotic loan programs and shouldn’t have been given such loans in the first place. Cash out amounts that are more than their yearly income caused wreckless spending and laziness. Then when their interest rate started adjusting they suddenly couldn’t afford this new lifestyle they had become used to leaving foreclosure or Bankruptcy as their only options. Which brings us to predatory lending. I peronally know of 5 people that were victims of predatory lending on one project! I am not saying they aren’t responsible for the mess they are in, but it’s not all their fault, Bankers and Lenders are just as responsible. Mr. Greenspan’s rate cut will definately help those who aren’t in trouble, but for those that are it did nothing. Lenders need to step up and find a solution to help the borrowers they took advantage of. If both sides can come to a compromise (even if it is a 50yr loan) then they both can win. Or the Lender can continue with what they are doing and while they are at it they should get their real estate license because they will end up with a lot of homes! I don’t think the Fed’s will come up with a solution, they are too afraid to screw up again and make things worse. Until WE fix things the Feds will keep trying to put bandaids on everything.

Jack
Trackback on January 12th, 2008.

Jack…

I personally must say that it is so interesting….

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