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Investment-conomics

So we’ve been all about creating conversations, putting people’s brains to work, airing opinions, etc, etc, etc. It’s time to put our money where our mouth is.

Take a look at this op-ed from the Wall Street Journal. It’s directly related to the past few posts I’ve put up, and one would think that it has a certain air of legitimacy for anyone who reads it, seeing as it was vetted by the WSJ and published in their in-print newspaper. However, I’ve already weighed in on this—and rather than repeat myself, I thought I’d take some perspectives from people I’ve talked to about this particular issue. Both of these people are quite educated when it comes to finance, although we’re intentionally leaving out their credentials. Because really, even though someone has an advanced degree or has worked in a specific sector all of their life, does that make them inherently more trustable? Probably not. Fact checking most things is probably a good idea, no matter how man courses the source has taught. However, it is instructive to see some other, conflicting opinions from the financial world—and hopefully this will help you all figure out what your own opinion on this is. And then share it with us via email or, if you’re so inclined, via comment.

We’ll see how this goes—test runs are always a lark. Also, the opinions contained below are just that: opinions. And they belong to their respective owners.

Doug———————

Interesting! I do agree with this version of I-side economics to a degree. Investment is better used as a stimulus than a government grant because of the funding implications. An investment is usually funded by an excess of something, i.e., cash in the bank, more income than expenses, etc., while a government grant must be funded by something, i.e., taxes, budget imbalance, etc. The investment requires a payback or it ceases to be an investment and just runs to $0. The government grant has no return requirement and is in effect a gift, no payback, dead end.

The economic stimulus by the Obama administration, while a government grant, was a good starting point to kick start the economy. It was supposed to get things rolling, stimulate spending, and create initial jobs would hopefully would lead to other jobs, not by just getting more dollars into the pocketbook of people, but by creating better roads, easier access to places where people would spend additional money, etc. The problem was consumer confidence. The initial jobs that were created by the stimulus did not cause additional money to flow into the economy. The consumer confidence about the economy was low enough that people did not spend the additional money, but started saving for a rainy day, preparing for some worse economic times ahead. And because of the mistrust of the banks and Wall Street, where did the savings go? Under the mattress or into the cookie jar. Compounding this was the banking crisis, in which the rating agencies were critical of the banks and thus, gave them bad ratings due to their lending habits. So what happens? The banks tighten credit, shore up their balance sheets and, in effect, remove money from the economy. The downward spiral continues.

Now onto the I-side. Henry Ford created the middle class by paying his workers more than the market rate, thereby creating a class between the rich (lots more income and assets than expenses and liabilities) and the poor (expenses >;= income, liabilities >;= assets) now known as the middle class (a little more income than expenses and a little more on the asset side than the liability side). Henry Ford did what he did to retain experienced workers rather than train newer lower paid workers. Was Henry Ford also being generous with his wealth by making his employees a little more wealthy and independent? Maybe. Either way, he made an investment in his employees. His return? His employees may not have worked any harder than inexperienced folks, but by being experienced, they were certainly more efficient–thereby providing a return to Mr. Ford. Now if Henry Ford just employed who ever showed up to work first and paid them the market rate or slightly below, you would probably see a degradation in the quality of work (initial return to Ford = cost savings, long term return = decreasing quality in the Ford product). Current day auto producers suffer from this in a slightly different form: the impact of unionized workers. Everybody is paid the same, no reward for better quality or exceeding productivity minimums, etc.

Therefore, food stamps, unemployment and other forms of aid are necessary to help people get through tough times (short term assistance) but they cannot become a way of life (no long term return).

Ethan———————

…Demand is increasing because of the increase in discretionary spending, which in turn provides a greater investment in the industry. When you hit a recession, discretionary spending falls dramatically. Things like coats can be bought later, or so our reasoning goes, right now I’ll just spend my money on necessary things. That doesn’t mean that the demand for coats has been permanently lowered, only temporarily so, and by increasing discretionary spending you can return coat demand to normal which allows the business to survive.

The thing is, when you exchange money for goods/services you are effectively investing in that business because the excess, or profit, from that purchase will be reinvested into the business. In a bad economy with a poor outlook for, say, coats, no investor…is going to make a significant traditional investment in a coat maker (too much risk for expected return, investors look for growth markets). Unfortunately, the coat maker needs the investment to sustain production and continue a) keeping people employed and b) being in business generally; without it they will in fact go under. Once again, they are not going under because coat demand has been permanently reduced, but only temporarily so.

The Volt subsidies are an attempt to reduce emissions resulting from burning fossil fuels. If you don’t care about that, then you need to read a goddamn book. Or invest in a salt water purification company/buy a house on a goddamn hill.

Economics is about investment, and this guy’s argument is that the best type of investment comes from the upper echelons that have established that they can invest well. I say that’s bullshit, and it’s bullshit because: 1) rich people got lucky–there’s no statistical proof that they are better at making decisions or that their decisions are anything more than random; 2) There aren’t enough investors willing to take the low returns that define certain industries like coat making. Consumer spending is the investment that those businesses need. Also, investors are prone to human psychological biases; that coupled with their ability to quickly make/unmake positions leads to a roller coaster ride of over reactions and the tailspin economy that we are in right now. People are afraid to invest, so the government has to. Banks refuse to loan money because the new norm is much lower leverage and higher capital reserves. That’s the whole reason the Fed is buying back bonds with the QE3; there’s no money moving in the economy because private investment is stalled over concerns about the European debt crisis and consumer spending. I’m not afraid to buy a goddamn coat because of Europe. In fact, I just bought a new coat because its cold. The government, to the same extent, will continue to invest in its businesses while encouraging both consumers and traditional investors to invest through whatever way they deem fit.

So yes, he’s saying that coat makers aren’t important to the economy. He is either dumb or lives on a tropical island where it’s warm all the time. A third option is that he’s betting global warming will eliminate the demand for jackets for the rest of time. My money is on the last option.

Let us know what you think here or below in the comments. And, more importantly, stop shouting into the void and talk to people whose opinions you trust about this. Then talk to people with opposing opinions (and try not to simply laugh to yourself while they’re speaking–this is something Joe Biden can do because he’s the VP and convention exempts him from rudeness during televised debates. Also, I’m sure that if he was to do this at a Christmas Party when someone is talking about how good their cookies were, he’s probably get a slap or a stern talking to. From what I hear (which is nothing credible) Jill doesn’t tolerate rudeness).

Currently Listening to: Dragonette – Live In This City.

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About Kyle

"I'm so enriched by my friends' political Facebook statuses and tweets!" said no one ever. So then we made a blog to continue said opinions over more that 140 characters. Op-eds, partisan-ship, unbiased reporting, pop culture, and book recommendations. Look at the headers, n00b.

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