The Paper Boat Set Afloat

I am very pleased to announce the launching of my new website, The Paper Boat.

After several years of publishing via e-mail I have taken the bold step of creating a blog on the internet. In the tradition of my mailings I will continue to bring you articles, information and thoughts regarding personal finance, the housing market and the economy at large. I hope to share with you in joy and enlightenment as we explore the mysterious dynamic waters of the economic flow on our journey toward prosperity.

“The river delights to lift us free, if only we dare to let go.  Our true work is this voyage, this adventure.”
– Richard Bach

Signs of the Stimulus

Here’s an interesting article from ABC News pointing out how more of our taxpayer dollars are being wasted as “stimulus.” The article focuses on partisan politics, so let me say up front that I have no partisan agenda here. My intention is to examine the economic effectiveness and the integrity of this stimulus spending.

From ABC News
Signs of the Stimulus
Jonathan Karl and Gregory Simmons
July 14, 2010
http://abcnews.go.com/

Apparently, millions of dollars of stimulus money has been spent by states on road signs designating areas where other stimulus money has been spent. The signs read “The American Reinvestment and Recovery Act” and “Putting America Back to Work.” The estimated tab for the signs ranges between 5-20 MILLION dollars, depending on who you ask. It seems no accident that these signs are popping up everywhere just as the mid-term election season approaches. So, first of all, is this spending about stimulating the economy or is it about politicians promoting their careers and lobbying for your future votes (on your dime)?

A second concern the article touches upon only briefly is the cost of the actual projects themselves. One project in Washington DC is mentioned as an example:

“On the road leading to Dulles Airport outside Washington, DC there’s a 10′ x 11′ road sign touting a runway improvement project funded by the federal stimulus. The project cost nearly $15 million and has created 17 jobs, according to recovery.gov.”

This is obviously a horrible waste of funding and a failure to create meaningful sustainable work, and from what I have read elsewhere the example is not isolated. This gives rise to another point not mentioned in the article, but which I feel is a fundamental one to look at when examining the effectiveness of stimulus spending. That is the return on the investment. In other words, the potential for the money spent on a project to generate value and income in the future. Too often decisions are made looking only at the short term, and the long term return is not given adequate consideration.

There has been a lot of spending on infrastructure, for example, but much of this spending seems to have been done without vision. We’ve repaved roads that don’t need repaving. We’ve built new roads and bridges to outer ring suburbs. How much should we be investing in a petroleum dependent transportation network when we are confronting issues like peak oil and collapsing exurban real estate? Seems like throwing good money after bad. Our stimulus funds should have been spent on businesses that would grow and create more jobs and wealth. We’d be much better served creating a high speed railway system, for example, or solar energy farms all across the sunbelt. These are projects that would actually give us some bang for the buck and move us toward a sustainable future in the global economy.

Putting people to work on temporary construction projects is like burning tinder. It’s a quick fix and when it’s over we’ve got nothing left. What if we’d bought a few seeds with that stimulus cash instead? We could grow a forest of tinder and trees. We need to think of the long term. We need to think like investors, not like the addicted consumers we are. And what’s going to happen to all those signs we’ve been throwing up across the country? How long are those viable? Maybe someone will start a business recycling them and lead us out of this recession.

Krugman Spots Deflation

As most of you know, I have been warning of a trend toward deflation for some time. The debate about whether we are headed for inflation or deflation has been a huge one amongst economists for the past few years and continues to rage on. Now Nobel Prize recipient and New York Times economics writer Paul Krugman shows evidence supporting a deflationary trend is afoot.

From the New York Times
The Conscience of a Liberal
Trending Toward Deflation
Paul Krugman
July 11, 2010
http://krugman.blogs.nytimes.com/2010/07/11/trending-toward-deflation/

What is deflation? Simply put, it is the opposite of inflation. Inflation is the expansion of the total money supply and deflation is the contraction of the total money supply. I believe it is important to include credit and debt wealth when looking at total money supply, as has been put forth by the Austrian Economists. Ours is an economy built on access to credit, and one that is falling apart as credit shrinks and debt wealth evaporates. (Krugman, incidentally, is not of the Austrian school, but subscribes to the Keynesian model the Fed and government use which does not account for debt and credit availability as part of money supply in the same way.)

Many imagined that with all the stimulus money the Fed was pumping into the economy we would soon find ourselves with an expanded money base and risk of inflation or even hyperinflation. People would suddenly have a lot more money and so merchandisers would be able to charge more and more for their goods. But since the banks are in such a terrible state teetering on the brink of collapse, the stimulus money they received in order to keep credit and loans flowing was never lent out. Instead of trickling down into the economy it was hoarded by the banks themselves in a mass effort of self protection, and so has never had an inflationary impact on the economy.

Deflationary pressure is also stemming from the collapse of available credit and debt wealth.  According to economist Dean Baker of the Center for Economic and Policy Research in Washington DC, the housing bubble created EIGHT TRILLION DOLLARS of imaginary wealth that will eventually completely evaporate. The 700 billion dollar stimulus package was no match for that kind of destruction of wealth in the economy, and so even if it had reached the general public and made its way into actual use it would not have been enough to stop the contraction of the total money and credit supply.

What does deflation mean for you in practical terms? The most pressing issue is that any debt you hold will become more and more “expensive” to pay off. Today’s dollars will be worth more and more tomorrow. Already we see how this has happened in housing. The same $500K that bought you a modest home in Los Angeles five years ago will now buy you two! So already your money is worth twice what it was in real terms. If your money is going toward debt, therefore, that debt is costing you twice as much as it did five years ago in real terms. The face amount of your debt payment has stayed the same, but what that money can buy now has increased. On top of that, if a deflationary spiral takes hold more jobs will be lost and all markets will suffer.  In times of deflation prices go down, but our ability to pay falls even more sharply.

What to do? First and foremost I reiterate what I’ve said in the past: get out of debt now! It would also be wise to avoid taking on any further debt until markets stabilize. This is a time to save. Rather than thinking about investing you may want to concentrate on how to keep what you have. Ben Franklin’s old adage, “A penny saved is a penny earned,” is apropos of the times. Only, in a time of deflation you might think of it as “a penny saved is two pennies earned… maybe more!” If you can live frugally and are able to save you will see very good opportunities to invest later on down the road. Let the storm pass. It is probably a good idea to limit your exposure to stocks and real estate now. Stay in cash and short term treasuries. By saving you are earning.

Meredith Whitney Confirms Call on Spending Rebound

Well here it is in the press, then.  Three days after my post Recovery Is Not, Meredith Whitney said in an interview with CNBC that the rise in consumer spending is due to people no longer paying their mortgages, and that we are unequivocally in for another dip in housing.  Hey, do you think she’s been reading my e-mails?  No, really – she’s an awesome economist and I want to be just like her when I grow up (except for the part where she marries the pro wrestler- I’ll keep my amateur one, thank you.)  She hesitates to call a “double dip” for the economy as a whole, but that’s typical of economists in the press.  If the evidence is not overwhelming they will not indulge in predictions, lest the news becomes a self-fulfilling prophecy or lest they end up wrong and thus damaging their credibility and careers.  I, with little to lose on that front maintain it is likely we will see a broader dip, as housing is at the core of all the trouble we are in.  I would not be surprised to see that happen in California, at any rate.

If you have ten minutes to catch up on economic news, I highly recommend you take a look at Meredith Whitney’s fabulous interview with CNBC (and note- it is a rare occurrence indeed to find an economist who justifies the description “fabulous” when interviewed).

From “Business Insider”
Meredith Whitney: The Rebound in Consumer Spending is Just The Result of People Not Paying Their Mortgages
by Gregory White
6/21/10
http://www.businessinsider.com/