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 !

See you again next time. In the meantime why not sign up to automatically get the next Ultraletter by email?

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Before we get to JQ’s main article today, I just wanted to address an interesting comment we received this week from a reader referring to our views as leftist! So I looked up a concise definition and came up with:
“One who holds a left-wing viewpoint; someone who seeks radical social and economic change in the direction of greater equality. ”

I can see how the valued reader may have come to this conclusion, after all we are all too often having digs at ‘the establishment’. But, just to clarify for the benefit of all, we are not at all anti-establishment. Neither are we particularly socialist.

Au contraire mes amis we believe that ‘free market’ capitalism, though not perfect, is the best system we currently have. We believe that human enterprise should be rewarded in direct proportion to the inspiration and perspiration applied. Most of the time it works pretty well, sometimes perhaps too well (ask the Chinese!) Hence on occasion some powers feel compelled to manipulate it (ask the Americans), for example with trade barriers, subsidies, bailouts, credit pumping and so on. Fortunately though, in its truest form, the free market is a force of nature. It is the combined sum of all human economic endeavour.

In the short term markets can be somewhat manipulated by those with vested interests, be it market makers including the banks, cartels such as OPEC, government policy makers or hedge funds. Their activities influence the herd-mentality bubble-brigade (that includes many of us) who as a group are the end ‘voters’ who bid up assets such as stocks and houses.

As they say in stock market parlance, “In the short term the market is a voting machine, but in the long term it is a weighing machine“. Speculation might work short term, but only sustained hard work or skill pays off long term. In the end the market is far too complex to remain under any one group or nation’s control. It always reverts to its optimum state, and the force of the snap-back tends to be directly proportional to the degree of manipulation (or dumbness) which preceded it.

So, fellow comrades…err….citizens….we are not fuzzy thinking leftists after all. We don’t want to change the world – heck we wouldn’t even know what to change it to. We just want to see through the haze and perhaps get a few faint glimpses of the reality that is so often hidden from us. We want to expose the world of economics ‘as it is’ with a view to steering a course through the murkiness without getting our fingers burned; without ending up penniless towards the end of our miserable existences. Furthermore, being the nice people that we are, we want to share it all with you, our readers. Ultranomics commentary is meant to inform and entertain and to make you think. There are no political agendas or aims to be found on these pages. Honest, guv……

The award for the most depressing story of the week goes to……..

First the Somali pirates, now the Mumbai terrorists. At least the former were in it just for the money. The latter have proven more blood-thirsty. In the last Ultraletter we spoke about the 23rd century utopia of Star Trek. How far we truly are from that ideal.

With just under 200 dead we have no clear idea who they are and why they’ve done it. One thing we do know, they were highly organised and well equipped. They had insiders at the hotels who smuggled in the explosives. They had boats to drop them off, off the coast of Mumbai. They specifically targeted India’s financial hub and went after Westerners in particular. They planned it so well yet left an easy peasy trail of breadcrumbs back to…..you’ve guessed it…Pakistan. Doh!

I am no conspiracy theorist by nature – I even believe that the Americans really did go to the moon, much to the disdain of JQ ! – but you have to ask yourself who would have most to gain from this crime at a time when India and Pakistan are building bridges and getting pally once more? What’s worse is that the average man in the rickshaw falls for it. As surely as A is followed by B the terrorists cause some carnage and hey presto, the steadying relations of the two neighbours are blown to smithereens together with the perpetrators themselves. At who’s behest though, that is the question.

Perhaps Kashmiri activists making a point over territory? Perhaps Pakistan-based Islamic militants making trouble for the Pak govt over their support for America? Perhaps insiders who can’t abide any Friendship with the old enemy? Perhaps it could even be some other nation (or nations) that fear the possibility of an IndoPakChinese Superpower in the sense of military (nuclear) capability or economic strength? Who’s playing the long game here…..?

…..jq takes it further……..keep reading folks

WAR is RAW

12th November 2008, JQ (co-editor)

Every crime has a motive. To actually pick up a gun or knife or whatever and then take a human being’s life usually needs a planned state of mind which caters for that motive.

I used to read stories of the Indian and Pakistani police when the British were ruling and just after the partition. In those days they knew the art of investigation. Back then they used people called “khojis” [the C.S.I. of back then] who could find the clues and track the foot steps of the criminals helping the law enforcers to the motive of that crime! Coming back to these Bombay….oops Mumbai….attacks sit down and relax and then think why don’t the police or investigators with all the modern tools of the trade not actually investigate and plainly start naming names of their arch enemies [or ex arch enemies]? Could it be procrastination or maybe some ulterior motives – but tell me one thing if you can, who has most to gain from an on going Pakistan India scuffle? Now narrow it down to one nation. I don’t have to write the name you know it already.

Imagine India & Pakistan at peace with no lingering Kashmir or river water issues then we can move on to become an economic hub of power, with China we can take on the world, but somehow this probably won’t happen – the “un-named” nation won’t let it happen.

It is all to do with the Art of War which incidentally is one of the oldest books on military strategy in the world. It has had a huge influence on Eastern as well as Western military thinking, business tactics and beyond. Its writer Sun Tzu was the first to recognize in 6th century BC the importance of positioning in strategy, and that your position is affected both by objective conditions in the physical environment and the subjective opinions of the competitive actors [there may well be an Oscar category for politicians] in that environment.

He taught that strategy was not about ‘Planning’ in the sense of working through a to-do list, but rather that it requires quick and appropriate responses to changing conditions [for example in recession create a war to get the economy moving or in case of the subprime crisis create an arch enemy or better still create an alien attack].

‘Planning’ works in a controlled environment but in a competitive environment competing plans collide [race to the moon, missiles and anti-missiles defences etc] creating unexpected situations [9/11, attacks on Pakistan, attacks on India]. So WAR is indeed RAW [incidentally RAW is also the acronym for the Indian spy agency Research And Analysis Wing!]

New World Order

Somehow this reminds me of the term New World Order which refers to a conspiracy theory in which a powerful and secretive group is plotting to eventually rule the world via an autonomous world government. This powerful group would apparently replace sovereign states and other checks and balances in world power struggles.

H.G. Wells advised in his 1940 work “The New World Order” that “when the struggle seems to be drifting definitely towards a world social democracy there may still be very great delays and disappointments before it becomes an efficient and beneficent world system. Countless people will hate the new world order and will die protesting against it”.

You may ask it can’t be. How come sovereign governments are following old bygone theories of H.G. Wells or Big Brother like controlling tactics thought of by George Orwell in 1944 but look around you. Isn’t this world full of seeds of doubt sprinkled everywhere, surveillance cameras to protect us! [normally they are not where protection is really required] speed cameras to protect lives [see my article on speed cameras] biometric passports to protect our identities [we need more protection from bureaucrats losing our identities in the first place] identity cards to protect our freedom from invaders [to be trialled on poor foreign students who have no say hence are targeted to up the statistics in the labours' favour] pay as you drive road charging system that keeps track of your movement! And best of the lot is an airport scanner that can read your mind [for George Orwell's thought police in action see Tom Cruise's action flick Minority Report]

Read the full story here of the real thought police in today’s world

Need I say more to prove that we are slowly moving towards a totalitarian police state at least in the Western world [I am humming hold me kiss me thrill me kill me as I type].

One of the more enduring myths in Western society is that wars are somehow good for the economy. Many people see a great deal of evidence to support this myth, after all World War II came directly after the Great Depression.

I believe it is a faulty belief which stems from short sighted and shallow economics thinking. Let me explain. The flawed logic of this myth is an example of something economists call “The Broken Window Fallacy” which is brilliantly illustrated in Henry Hazlitt’s 1946 book “Economics in One Lesson.”

In it Hazlitt gives the example of a vandal throwing a brick through a shopkeeper’s window. The shopkeeper will have to purchase a new window from a glass shop for a sum of money say £250. A crowd of people who see the broken window decide that the broken window may have positive benefits after all. If windows were never broken what would happen to the glass business? Then of course the train of thought is endless. The glass merchant will have £250 more to spend with other merchants and these in turn will have £250 to spend with still other merchants and so on. The smashed window will go on providing money and employment in an ongoing stream.

The logical conclusion from all this would be that the little hoodlum who threw the brick, far from being a public menace was in fact a public benefactor [Britain has quite a few of these benefactors in ASBO rich areas although they have yet to stir up some economic activity - perhaps not enough bricks - Gordon Brown may consider distributing free bricks at Tesco].

The crowd is correct in realizing that the local glass shop will benefit from this act of vandalism. What they have not considered however is that the shopkeeper would have spent those £250 on something else if he did not have to replace the window. He might have been saving that money for a new set of golf clubs, but since he has now spent the money he cannot do so and the golf shop has lost a sale.

He might have used the money to purchase new equipment for his business or to take a vacation or maybe to purchase new clothing. Instead of having a window and £250 the poor shopkeeper now merely has a window which was there anyway. Or as he was planning to buy a suit that very afternoon instead of having both a window and a suit he must now be content with the window or the suit. If we think of him as a part of a given community then that community has actually lost a new suit that might otherwise have come into being and is just that much poorer. So the glass store’s gain is another store’s loss hence there has not been a net gain in economic activity. In fact there has been a decline in the economy of that community!

No wonder I see the sun of tomorrow shining in the east and it is shining its brightest over China because the only bricks they carry are for building new projects. They don’t seem to plan on breaking neighbourhood windows or even the windows of the next town and they are certainly not trying to “SORT” the world.

jq@ultranomics.com

more ultranomics below…..

Back with TK in UK……………

Companies…….

The classic Atari videogame: Breakout

Do you remember that old Atari videogame called Breakout, where the ball would bounce around the screen smashing any brick that it touched? That reminds me of the toxic debt originating in the US subprime debacle, the effects of which are still ping-ponging around the globe smashing companies and financial institutions in their wake.

After knocking out Iceland (the country, not the UK frozen food retailer which probably is worth more) and giving the worlds largest bank, Citigroup a hefty thwack, the latest UK bricks to be smashed last week were two household names in retail – I am referring of course to Woolworths and MFI. Who would have thought that good old ‘Woolies’, founded in 1909, having survived the Great Depression, two world wars and several recessions would meet its demise in the crash of ‘08? We are wondering where that wrecking ball is on its way to next? The world it seems is smaller than we ever thought and remarkably its all interlinked through the subprime debt network. John Lewis, Marks & Spencer – batten down your hatches. Ford, General Motors, Chrysler – run for cover now!

Houses…….

Well you would hardly be surprised to know that UK house prices fell again in November, albeit by only 0.4%, a much more moderate slowdown compared to the 1.3% fall of October. This is according to the statistics from Nationwide, UK’s largest building society.

Prices are down from a year ago by an average of 13.9%. Mind you you’re still doing OK as long as you bought more than a couple of years ago. Average prices are still £25,000 higher than they were in 2003. Those who bought more recently will need to ride out the storm – but if you do need to sell try to avoid those ‘buy and rent back’ profiteers. There may be some genuine companies out there but there’s plenty of sharks roaming the waters right now.

As for where we are headed in 2009 with house prices, its anybody’s guess – including ours. We do dabble in property so we have a gut feeling you see. Mine says that falling interest rates are going to tempt professional landlords into the market in a sustained way from here on in, although that won’t be enough to revive the market. Thus there will be no recovery in 2009 although a bottom may well be reached during the middle of the year.

How we go from there will depend on other factors such as bank lending improving, recession abating, unemployment steadying etc. The other main factor will be human psyche. We will as a nation need time to forget the panic of 2008 and the fear instilled by the subprime meltdown. Once we forget we will then start dippping our toe back in. At the moment though fear and worry are still the order of the day. That’s all my gut has to say on the matter for now, apart from some gurgling.

Jobs……..
The chancellor Alistair Darling was on BBC Radio 4 last Tuesday (25th Nov) insisting that Labour had reduced unemployment so significantly since coming into power and that most of the jobs created by Labour had been in private sector. I mean “Wow” – the art of propaganda and misdirection is obviously very much alive and kicking.

It is true that between 1998 and 2006 there seems to have been around 2.2 million new jobs added. Unfortunately 1.3 million of these have been public sector, inc admin, health, teaching, social work. As for new jobs for women, a whacking 90% all job growth for women was in the public sector, i.e. funded by the taxpayer! The West midlands actually saw a drop in private sector jobs of 2% while public jobs increased 25%!!

Why is this important – after all isn’t a job still a job, regardless of public or private sector? Well true at an individual level its great for those getting the job. Yet by creating all these government jobs they do not directly benefit the nation’s economy. Instead we all as taxpayers have to pay these public wages.

Of course we don’t mind the teachers, doctors, nurses – give us more. But its the pointless pen-pushing jobs in City halls up and down the country that we object to, each with attractive salaries, bonuses, generous final salary and index linked pensions. These public workers spend more days on strike and are 25% more likely to take sickies than those working for private companies. There are 818 workers in town halls earning more than £100k, paid for by me and you. Yet as a nation if we want to prosper we need industry, and people employed in industry. Thats the only way to turn a profit – by making products and offering services and exporting them to other countries. Paying each other to potter about organising this and that does not create wealth.

And…guess what? Its going to get worse! The Centre for Economic and Business Research (CEBR) reckons the state will be hiring another 50,000 workers while at the same time private jobs will continue to slide as the economy falters. The old soviet communists would be proud. What a warm feeling, being in the embrace of the all-knowing nanny state. Yes Gordon, take our taxes and spend them as you see fit. You are wiser and cleverer. Give us our daily bread, and our jobs. Since you employ us, we will of course return the favour and vote for you. After all, those nasty Tories might take away our cushy jobs. Lets not call it buying votes though – lets just call it mutual back scratching!

For another take on the Mumbai Terror attack check out pkpolitics.com here.