Buying Low

Looking around in the current economic landscape there are many opinions on what to do with your money, if you happen to have any. There are many actual examples as well. There are lots of mergers, acquisitions and smash-and-grabs in the corporate world of course, and the more basic if unconventional example of Morgan Stanley just buying a lot of oil. It is not by accident that this is happening.  It is the basic principle by which any investor makes money, buy low, sell high.

It is also not by accident that some businesses seem to be doing more of the merging and acquiring than others. When a recession hits, there are a few categories you can group firms into. Those that saw it coming, those who didn’t, and those who did that expect political connections to bail them out.

The ones who didn’t see it coming are the ones probably going bankrupt or getting bought out or perhaps finding themselves the unwitting recipient of some TARP money. The ones who saw it coming are the ones who were prepared for it and got their house in order. Those are the ones who are most active now.

Companies like GM and Chrysler surely saw this coming, no company that big fails to forecast such drastic changes in the economy. They are obviously now relying on political connection to keep them afloat despite their mismanagement.

I guess the point of this post is to remind myself and others of two things. Pay attention to the future and remember that there is always opportunity. When you see bad times ahead and you either save an extra penny a day or you make friends with the local politician, be prepared.

New Slogan, Same Junk

With a new year, president, and economic stimulus plan on the horizon, it’s easy to be lulled into believing that the fall of 2008 was simply a bad dream and are now delivered from disaster by the swift and wise of Washington. If we briefly look at what has been done so far, not much has changed. Just some money moving hands (like from the taxpayers, to the special interests.) if we look ahead we see much more fundamentally unsound shifts in wealth.

Obama is looking to take steps to keep unemployment at bay and keep our economy from being in a recession for too long into his story-book presidency. Not that i fault him for wanting such things, especially in our “do-something” economic policy era, but his failure to understand economics and basic human nature (a la free market) are really going to hurt our chances of economic prosperity any time soon.

Unemployment is bad, no doubt. Recessions are not good either. However when proposing a solution to both problems, one must consider that manipulating an economy is almost a zero-sum game that you’ll always lose.

When the government creates jobs via public works, the money to pay for those jobs must come from somewhere. Taxes are levied on businesses, which reduce the likelihood that such taxed firms are going to create jobs themselves, and upon consumers who will consume less, generating less profit for businesses and again reducing the new jobs created by genuine economic growth.

The government can also print the money, debasing the currency. This allows for short-term prosperity in the form of quickly created jobs and economic activity but in the long run it creates problems. Inflation distorts the distribution of true wealth, a topic i cover here, but in short:

Think about how much prices seem to rise constantly (like gas, food, etc.). Then think about your paycheck. If prices rise faster than your paycheck, you are experiencing the downside of our government’s inflationary policies.

Remember how earlier i said economic planning is almost a zero-sum game? If we are simply shifting jobs from one place to another then it doesn’t really matter does it? Whether Wal-Mart hires one more door greeter or gets taxed and someone is hired by the government to build a road, what difference does it make?

Besides the fact that the job for the Wal-Mart greeter was created via economic growth and the government job via a politicians whim, the problem is inherent in the name of the solution:

Job Creation

When jobs are created simply to create jobs, they are done inefficiently. That Wal-Mart greeter would have been paid fairly relative to his utility to the company and to the demand for Wal-Mart shoppers to be greeted upon entering. In other words, his job is sustainable and represents true demand and growth. That job wouldn’t exist unless it was profitable for the company to create it.

The government created job is inherently being done in the most inefficient way possible because the government isn’t concerned with profit or the benefit of anyone but the people it is paying. The government will hire the largest amount of people at the highest price possible because that’s the point, job creation.

It will be more expensive than it needs to be, the jobs will be temporary and artificial (once the work is done, then what?), and it’s all at our expense in one way or another. The economy is worse off in the end. The need and then supply for jobs is distorted in an unsustainable way and everyone pays for it.