What the…….!

No really, these are two funky new terms that we have come across this week whilst surfing the web and of course, we like keeping our readers up to trend with the latest fashions.

So – who fancies joining the new Frugalistas?

It’s the latest fashion of the thrifty chic. Living to excess is so last year. Expensive restaurants, SUVs, luxury holidays and overseas homes? – how passe! Definitely no longer cool. ‘Frugalista’ is the new black. Yes folks – you too can be poor and stylish !

Find some hot tips at sites such as Tips From The Frugalista Moms and The Frugalista Files

On the other hand, if you believe Barack Obama, we must all spend, spend, spend – if not at the consumer level then certainly at the governmental level. Its the only way to lift our economy out of the black pit of recession. Apparently! Nick Robinson of the BBC calls this philosophy Obamanomics, which reminds us of a website we quite approve of

In essence what we are alluding to here is something called The Paradox of Thrift – a term coined by the economist John Maynard Keynes in the 1930s, during the Great Depression. He stated that although being frugal and thrifty seems to be the best policy for individuals, as far as the overall economy goes it can be damaging. So the paradox is that the more we save, the more we reduce demand for goods and therefore the worse the economy gets. It can be quite a vicious circle. The slumping economy means businesses invest less, hire less and increase redundancies. Ultimately the effect cascades through the system and overall income for everybody declines, leading to less money for people to be able to put aside and save. Simply put, as a society overall, the more we save the less we earn. In this way the decline self perpetuates. Bear in mind this is all a theory.

In fact it is part of the Keynesian economic theory that is currently in fashion with Gordon Brown, Barack Obama and their global counterparts.

John Keynes’ suggested solution to the Paradox of Thrift conundrum was that to offset the thrift of consumers in times of recession, the government must step in and take their place. Keynes argued that the state should increase public spending – on hospitals, roads, infrastructure projects etc. in order to inject cash into the economy and try to keep businesses humming and people in jobs. This is even more vital when interest rates are also dropping and deflation (falling prices) is happening. Falling prices can reinforce the thrift instinct in individuals when it comes to big-ticket items because no-one wants to buy a new house or new car if they can see that in 6 months time these items will be even cheaper. Hence they stash the cash and kill the till.

Across the ocean, Obama has a Lightbulb moment………….

The Keynes effect is in full force over in the USofA. In fact it seems there is no end to the amount of money congress is willing to hand out to the ailing US economy. A fortnight ago another half trillion tax payer dollars were earmarked to ‘fight the crunch’. This time Bush (remember him?) wanted to address credit and housing, which experts say must recover to pull out of recession. That’s on top of the previous $470 billion bailout of the Wall St financial institutions (Fannie Mae, Freddie Mac and the rest).

Remember this is in the light of the steepest slump in US consumer spending for 30 years. Not only that but this weekend we heard that US employers axed 533,000 jobs in November, the biggest job cut since 1974. The unemployment rate is now 6.7% which is the highest in 15 years. Yet more record breaking statistics, the likes of which we are kind of getting fatigued of hearing now.

When Obama steps in in January he wants to hand out a further $500 billion +. This will be a ‘jobs rescue package’ with a definite ‘Green’ tint. He says that an “Immediate Infusion of money is needed to jumpstart the system” – looks like Obama has some surgeons and motor mechanics on the fiscal team! Amongst his many green-tinted Keynesian initiatives will be to make government buildings energy efficient by changing all the lightbulbs. Also new alternative energy projects will be an important theme. All these projects will create employment. Strangely though, his other initiatives such as increased road building and bridge construction as well as bailing out the big-3 car manufacturers, although meant to create jobs, are hardly going to help the environment. But right now the mantra is, that the price of doing nothing far outweighs that of the Obamanomics megaspend.

Rest-assured, like any theory, the Obamanomics-Keynesian theory also has its detractors. These critics feel that the infrastructure schemes will simply take too long to get off the ground and out of the planning stages to have any meaningful effect. By the time these projects get on line, the economy might already be past the rock-bottom stage anyway. Furthermore the effect known as ‘Rational Expectations’ may kick in. The general population may come to realise that all this hyper government spending will one day in the future have to be recouped through higher taxes. This expectation may make people spend even less than before and save even more, thus somewhat negating the effect of the increased public spending. Tricky isn’t it? But intriguing!

The biggest worry is that these strategies will not prevent a recession or depression, and worse still we may end up with Stagflation – the thankfully rare malady of a stagnating economy coinciding with a spike in inflation, such as that experienced in the 1960s and 70s, which took until the 80s to recover from (I promise to touch upon the how and why of what stagflation is in the next Ultraletter – so stay tuned – I don’t want to fry your brain cells and mine all at once! )

In the UK Gordon Brown and Alistair Darling are going hell-for-leather down the same route as Bush and Obama. The Germans are meanwhile hissing with scorn. Their finance minister, Peer Steinbrück, tore into Gordon Brown’s £12.5bn cut in VAT, describing the move as “crass Keynesianism” that would raise Britain’s national debt to levels that would take a generation to pay off

Whether we are about to see a new era of Stagflation, possibly on a global scale remains to be seen. Even we are intrigued to see if Keynesianism will do the trick this time around. In case it doesn’t just remember we were dubious all along.

continues below…..

There’s a reason why Dinosaurs became extinct………..

Sorry to harp on, but those car makers from Detroit – General Motors, Chrysler and Ford – are getting really irksome. They don’t have any money left to fund their inefficient production lines, boring car designs and private executive jets, so now they’re loitering around Capitol Hill, Washington trying to beg some off the taxpayers. This is why the word ‘Shooo’ was invented.

I remember learning in biology class about Darwinism and survival of the fittest. We were taught that the dinosaurs became extinct 65 million years ago due to some cataclysmic event, most likely a comet impact, from which they were unable to recover. Does this sound familiar at all, Detroit folk? No doubt that dinosaurs walked the earth for over 165 million years, but when their time was up, it was up! There was no bailout – period!

But it had to be that way – they were no longer viable in the changing climate. Their large size meant they were resource-hungry and inefficient. They’d had it easy for too long. They could not adapt, so nature allowed their era to come to a close. Were it not for that event however, it’s unlikely that the meteoric rise of the mammals could have occurred. The wondrous creation known as Homo Sapiens may never have had its time. We have been around perhaps only a couple of hundred thousand years – yet look at the astonishing things we have done.

The point is that entities, whether species or companies, should not be given life-support beyond their natural end. If we do that, we will never find out what ingenious ideas or objects may have come in their place. In any case, even if we do try, the end is usually just postponed, not averted.

T Rex was late again to the Extinction Convention

We can understand the quandary facing the politicians. The US car industry reckons it accounts for 1-in-10 US jobs, of which 250,000 are direct employees. In addition, a bankruptcy or failure of the Detroit Three would threaten billions of dollars of financial instruments, according to credit market analysts. On an international level there are also many hundreds of thousands of jobs in related industries that are likely to suffer. So there are a lot of people’s livelihoods at stake here, and we are not callous enough to not care about all of that, so we say go ahead lawmakers, give it a shot. Where you have spent billions on the bank bailouts, why not give some to the car makers too? If you like you can send a couple of cheques our way too. We are sure you wouldn’t even notice a few K’s amongst all those billions.

Ultimately though, it appears that these corporates have already squandered their advantages. Their cars are inefficient and the quality is simply not there. They had decades to get it right. They didn’t have to export since their target market, i.e. the biggest consumers of cars in the world, was at their doorstep. They could understand their customers needs since they were from amongst them. They had the ear of politicians and finance was easy. It was all downhill driving. Yet now the world has decided that they do not want Detroit cars. They want German and Japanese cars. Maybe they don’t want cars at all and they just want LCD TVs instead. So by bailing them out, congress is saying to the world “NO, you must have our cars!” – The world will answer, “Hello? We don’t want them!!”

2009 ain’t lookin’ too good for the Detroitosaurus Rex.


more divine inspiration follows….

Ultranomics and Obamanomics? Now try Godnomics – the pilgrimage to zero interest rates…

The latest round of interest rate cuts around the world have taken rates to amongst their lowest points in half a century. In the UK, USA and Japan they are approaching 0% and according to some analysts are likely to get there soon.

It hardly seems fair.

Yet there is another school of thought, which predates our modern day economists by a fairly wide margin and that could shed an alternative light on the debate. We all know (or should do) that the three major monotheistic faiths, Judaism, Christianity and Islam all have in their literature a prohibition on interest. The Torah, The Bible and The Quran all advise against dealing in interest, whether charging it or even paying it. References on these can easily be googled so I won’t elaborate here.

To my understanding of the idea behind this prohibition, it seems that just like the Paradox of Thrift mentioned above, there is another paradox when it comes to interest. Although at an individual level it may seem totally reasonable and even desirable for banks to extend loans in return for interest so that we can buy a house or start a business, on the macro-economic level it may eventually play a large part in causing the booms and busts that we experience. The theists will argue that taken as a whole, the harm caused by interest is far greater than the good that might come of it, hence it is not allowed. It is a complex subject and not one that can be covered in detail in this Ultraletter, but one worthy of a separate article which we promise to write up soon in the name of research and understanding. In the meantime here is an excellent guide from one of the UK’s leading ethical financial advisers, 1stethical.com, on the subject of Interest based lending in the modern banking system

At the crux of it though, the ‘good savers’ that put their cash away into savings accounts were after interest income without risk, or making money directly on their money without doing any economic activity, e.g. trading or renting out an asset. They were not actually contributing to the economy by spending or investing, but rather trying to earn money whilst taking no risk, i.e. capital was secure. Accordingly since no risk is being taken, to be honest they deserve no reward. It could be argued that its the people buying houses, paying stamp duty and VAT in the process, then spending thousands doing up their houses in the pursuit of happiness and profit who are the real stars of the economy. They are the ones who put their butts on the line! Those amongst them who took too great a risk, i.e. self-certified loans beyond their means or where they had a shaky cashflow, have been punished automatically by losing the asset they acquired.

The Board of 'The Bank of God' do some blue-sky thinking

Suffice to say that with falling rates across the globe, whether willingly or not, the world’s bankers are getting closer to a more divine banking system month-by-month! We wonder though if they will ever see the light. Our breaths are not being held !

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