BASIC ECONOMICS

(The following are the opinions of the author, and are subject to debate.)

The economy of the United States can be considered as divided into three fundamental structures:

1. Making things, so we and others can purchase them. The value added by American workers comes back to them in the form of wages and benefits, and to the stockholders in the form of profits.

2. Doing things, providing services which make it possible for others to make and sell things. This includes tasks which may not be involved in making and selling, but are needed or desirable for quality of life. For the services, fees are charged which are used to pay wages and benefits to the service providers.

3. An overlying structure which neither makes things or provides services directly related to making things. They are the money manipulators; banks, stock brokers, mortgage bankers, insurance companies, etc. In theory they are the traffic cops of capital. Their role is to gather funds from investors,and use those funds to provide capital to the firms that make things or do things. All three structures rely on the ability of the public to buy things and services.

In the interests of lowering costs and maximizing profits the "making things" structure has shifted manufacturing operations to lower labor cost venues. The reduced product costs has not compensated for the loss of purchasing power by the displaced workers. Voila, a lower GDP!

The money managers discovered that they could get obscenely richer, quicker, by manipulating investment vehicles than in the traditional role of providing capital to the makers and doers. So we got derivatives, sub-prime mortgages, securitized mortgage loan portfolios---a poisonous porridge of investments that contained the seeds of its own destruction. Those seeds have now blossomed, with a vengeance.

Bailouts are not a solution. They will only prolong and exacerbate the destructive process. Only a return to traditional business models, properly supervised, will solve the problems. That will take a long time and cause a great deal of pain. Are we up to it as a nation?

MADOFF made off with everyone's money!

There is an old, and true saw that if something is too good to be true, it isn't. But greed causes blindness, to ethical judgement and common sense. The best, long tested minds in the investment world consider yields in the range of 3-4% to be the norm, and struggle to reach that number on a consistent basis over a significant number of years. Even so, down markets can cause yields to turn negative, and no genius has yet revealed himself as able to regularly predict such downturns and
consistently profit from them. The smartest investors shun market timing. They investigate sound companies that have grown and been profitable over many market cycles, and invest in those for the long term.
If some whiz kid comes along who promises yields forever of 8%, attained by mysterious, secret methods unknown to anyone else, sophisticated or not, he should be approached with extreme caution. Such genius has yet to be discovered, as the
Madoff debacle proves. At least he should be entrusted with a modest percent of your assets, and the balance should be diversified among other, lesser geniuses.
Finally, the failure of the SEC to detect the fraud, which was ludicrously obvious if an even cursory inspection of his operation was conducted, is symptomatic of the Bush administration's cozy, incestuous relationship with Wall Street and its disdain for regulation of business.
The cost of unravelling the Madoff scam will be enormous, and will occupy lawyers, and the courts for many years. That process will likely survive many of the injured investors.

A cure for the American auto industry

Several readers have asked that in addition to exposing the ills of the industry we suggest possible cures. Here goes, and give us your opinion and feedback.
The industry's plants are aged, and do not reflect current technology. An example of the new technology is the new Ford assembly plant in Brazil, where the assembly line is almost completely robotic and can switch from one model to another almost instantly. Suppliers are located in and around the plant so inventory is on a real time, as used basis. Even the transportation of finished cars is owned by and integrated with the production line.
The future of the auto will not involve petroleum to the extent at present. Much R&D money is being devoted to new propulsion systems using electricity stored in batteries, or hydrogen fuel cells. The suppliers of these new fuels are also engaged in expensive R&D. Why not combine R&D in one facility using joint resources. The synergy alone would mean big savings.
A new compensation system should be created to reflect the reality of a reduced market share and fluctuations in the economy. Wages and salaries need to be related to productivity and volume, not a fixed salary or hourly rate, with some minimum level related to cost of living. Call it a piece work pay system.
New materials, not based on petroleum, should be developed to substitute for steel and plastics. That alone could produce a million jobs. Cars should be almost completely recyclable.
Auto prices should be set inversely proportional to mileage performance--the lower the mileage the higher the price. The gas guzzler tax should be retained.
There should be a scientific standard created to rate the pollution value of each model under various types of use.
All the above would rationalize the production, sale and performance of cars, and the costs associated with those.

End of a Seduction

The American auto industry has finally arrived at the end result of its long folly. It forgot that its real business was manufacturing transportation.

When the first autos were made in the U.S. they were designed to replace the horse as a means of moving people and goods. Those early cars were spartan, utitilitarian, cheap to produce and cheap to fuel. They were used by farmers to reach the town, and by people to move between dispersed towns. The roads they were on were primitive so speed and power were secondary considerations. The auto companies flourished without foreign competition.

With the growth of the national highway and road system came suburban development. The auto became the most important means of transport. The emphasis in manufacture shifted to more power and speed and a more comfortable ride. With the postwar improvement in the economy, auto marketing emphasized image. Cars became larger, heavier, more powerful, glitzy, and hungrier for fuel. Autos were marketed as ego massages, catering to the desire to exhibit one's wealth and power. Transportation was an after thought. Obsolescence was built in using styling and limited durability.

Without foreign competition the auto companies became fat and complacent. They agreed to labor contracts which made the auto workers royalty among the middle class. Nowhere in the history of the industry did management contemplate the realities that natural resources and petroleum are finite. None gave a thought to the impact of huge numbers of oversized cars on the planet we live on. And the prospect of foreign competition seemed too remote to be a threat.

Reality has caught up with the industry in a catastrophic manner. To keep the industry on life support by government loans, without requiring it to get back to its basic purpose of making economical, efficient, fuel stingy transportation, is equivalent to restarting a dead heart with a defribrillater. The patient will require that procedure time and again until finally expiring.

Obama's quicksand

The economic ground is shifting so rapidly under his feet, and his team, they may not have any place to stand by the time January 20 arrives. His approaches to the horrendous problems facing the nation may be overtaken by the pace of events. It will require enormous amounts of money to stimulate an economy in depression. That money will of necessity come from the printing presses of the US MINT because our exhausted credit will limit our ability to borrow from abroad without exhorbitant interest rates. Will we end up with paper currency denominated in the hundreds?