1000 Flowers Bloom

The shrinking economy - a matter of perspective

So the NY Times says that World Bank says that the Global Economy will shrink in '09. realized reading it that it's all a matter of perspective about how good or bad this is.

It seems to me that the reality is that we OVER produced and OVER consumed in previous years, not just a credit bubble but an everything bubble. We're now just getting back to reality with both our production and consumption.

So yes, maybe the amount that we're producing and consuming has gone down. The question I have is, what is the right amount of production and consumption that can be sustained longterm?

The pain that is being felt right now in my opinion is being driven by people not knowing what the reality of production and consumption is. A bit of a vicious cycle, you don't know how much to consume, because you don't know how much of what you produce will be consumed. This is what happens when markets breakdown.

In my opinion the government actions like bank bailouts, stimulus package and budget are trying to stimulate demand to get people consuming again. They are trying to encourage the production/consumption cycle. Doing this could be exactly the wrong answer.

I tend to think that the right answer is to create enormous transparency about what the situation truly is so that people can have a firm basis from which to make good decisions about consumption and production.

Let's start with all these bank bailouts and their toxic assets. Let's remove opacity from the system by aggressively pricing the assets and letting things (like banks) fall out how they may. The uncertainty of not knowing if a bank is or isn't going to make it because of these assets is causing everyone to freeze up. Create transparency here so people can move on.

The government actions of distorting true demand by artificially "stimulating" it and not reducing uncertainty by propping up failing banks is prolonging the problem we will have, not fixing it.

The key economic insight of transparency and free markets works. We just need the courage to let that happen.

Why is deflation such a bad thing?

It seems like deflation worries in the media are fairly prevalent these days. Here's a snippet from a typical article (this from CNN):

"Deflation usually represents a system-wide contraction in demand, with consumers waiting on the sidelines as they wait for prices to decline even further."

Doesn't this happen in the consumer electronics industry all the time? In fact, obsolescence seems built into the model. The same digital camera you bought last year can be had for half the price this year and that cycle of innovation keeps a fairly constant fast pace. You can in fact almost guarantee that you are paying more for the electronics you are buying today than you would tomorrow.

This doesn't seem to stop spending though.

Bailing out the car industry

Bailing out the car industry seems like a crazy idea to me. The market is clearly sending signals saying that the car industry as it is configured now is not effective. We should go ahead and let these car companies fail if they can't make it.

"Automakers already want an additional $50 billion in loans from Congress to help them survive tough economic conditions and pay for health care obligations for retirees."

That's on top of the $25 Billion that has already been given to them. $75 Billion total!

How many car startups could we have for that much money? Imagine it was $100M for each one, you could fund 750 companies that would surely be more effective than the ones we have now!!!

Afraid of the wrong things

I came across this brilliant speech that Michael Crichton wrote (via Brad Feld) called Fear, Complexity, & Environmental Management in the 21^st Century which is a really interesting look at how society gets afraid of the wrong things because of misinformation and then by acting on that lack of information and understanding makes things worse.

Crichton talks about Chernobyl and that there were only 50 deaths there instead of the  15,000 to 30,000 that the NY Times and the Washington Post reported. That's a MASSIVE discrepancy.

I think that the data and the case laid out in Al Gore's Inconvenient Truth was very compelling but Crichton's speech certainly makes me think twice about it.

If our news outlets can't provide us with good data then how can we make good decisions? How good is our data?

Economic value of Blogs and Open Source

Thor Muller from Ruby Red Labs has a conversation with an economist and the conversation turns around to blogs and open source projects like Wikipedia. The economist doesn't believe that they have any value because they don't conform to his economic models.

“I can’t explain them,” he replied. “They don’t make sense in our models.” He explained that the soft, social benefits normal people would use to explain such behavior weren’t measurable, and therefore didn’t exist.

Consequently he has no intent to address the anomalies.

“I don’t read blogs, either,” he said. “If they had anything of value they’d charge for it.”

Fascinating to me that an economist would ignore this phenomena!

In my humble opinion people that blog and do open source get many of the same benefits that an advertiser gets. They get their name out there, are established as experts in a subject area and this brings clear rewards later on.

Another benefit is the sheer joy of doing it. Participating in communities and conversations is plain old fun. People pay for entertainment all the time.

Would be wonderful to see someone do a real analysis of this phenomena though.