Sunday, January 3, 2010


Let me ask a question, what is money? I know what it should be. It should be a way to store productivity. Let me explain.

Let’s say you are a shoe maker. You work really hard and in 6 months you produce enough shoes to secure your financial needs for the rest of the year. Well in the case of the shoe maker you can simply store your excess product in your shop and when you need to purchase something you just pull out a few pairs and trade them for food at the local grocery store or a pair of overalls at the neighborhood clothier, etc. The problem of course arises if you are a dairy farmer. Milk & eggs don’t tend to last all year. So without some way to store excess productivity your eggs will go bad and your milk will sour. This is where money comes into play.

Our shoemaker, once he’s finished producing as many shoes as he wants, can immediately sell all of them and convert his shoes into cash. The same for our dairy farmer, he doesn’t have to worry about his eggs going bad or his milk spoiling as he will simply sell all of his product and convert his productivity into cash. So in reality all money really is is a way to store productivity and a convenient way to convert that productivity into purchasing power for virtually any product one wishes to buy. Let’s face it, how many ranchers are going to want to barter 20 pairs of shoes for one cow. With fiat currency the shoemaker can easily convert 20 pairs of shoes into the purchasing power needed to buy meat to feed his family thorough the winter.

Now let’s say our shoemaker produces and sells enough shoes that he has excess money. He would like to earn some kind of return on his excess productivity so he puts that money in the bank earning an acceptable rate of return (well in normal times he would receive an acceptable rate. Greenspan and Bernanke have destroyed that option). Now let’s say our dairy farmer would like to expand his farm because demand has been exceeding what he can produce. Unlike the shoemaker he doesn’t have excess productivity…yet. So he goes to the bank and borrows some of the extra productivity that the shoemaker “loaned” to the bank. He uses that capital to enlarge his farm so he can meet the extra demand and soon he too is depositing his excess productivity in the bank to be used for expansion in other parts of the economy. This is how a healthy economy grows ...or should grow.

Now let me show you how our government…and all governments think. They don’t see money as a store of productivity. They want to believe money is productivity. They believe they can simply print money and produce productivity. Well, any second grader can probably understand that simply putting some ink on a piece of paper doesn’t mean anything of value has been produced.

So let me run down in simple terms how we’ve gotten ourselves into this mess and why we are nowhere near getting ourselves out of it. And in fact we are just making things much worse.

Even though this has been going on for a couple of decades, the doody really started to hit the fan in 2000 as the tech bubble burst. Actually what should have been a very prosperous period of high productivity driven by the emerging internet business model turned into a bubble because Greenspan kept interest rates too low and printed too much money. All this excess money made it appear that we had way more productivity than we actually did. Businesses were lured into reckless over expansion by what appeared to be true demand. When in reality it was nothing more than money being created out of thin air. Eventually it became apparent to the market that there was massive over production but no real demand for product. As the bubble started to implode all those jobs that were created by the appearance of a robust economy vanished. Eventually the tech sector settled back to a level consistent with real demand. The problems arose in that there was no new burgeoning sector like the internet to create jobs for all those people who were displaced when reality hit the tech bubble.

In its misguided effort to create jobs the Fed printed more money, lots more money, again vainly trying to create productivity and demand with the printing press. That money had to go somewhere and it certainly wasn’t going to go back into the tech sector, that party was dead and gone. What it did was create a bubble in the financial and real estate markets. That eventually produced the much sought after job creation that had been missing. As a matter of fact it produced so many jobs it created good times the likes of which had rarely been seen in history. Unfortunately that still didn’t change the fact that there was a cancer growing in the economy. The fact remained that this wasn’t a real economy stemming from true productivity and savings. It was another phony bubble economy created with the printing press. And as such, misallocations of capital soon began. Financial institutions became terribly overleveraged. The average American became terribly overleveraged. Real estate inventories ballooned on the appearance of massive demand but what in reality was only massive speculation.

Again the bubble imploded. All those jobs that were created in finance and construction disappeared. As unemployment started to soar, the over investment in businesses of all kinds started to get hit. I don’t know how it is where you live but when I drive around Vegas, every, and I mean every, strip mall has at least one vacancy and many have multiple vacancies. Most of these businesses would never have opened if it weren’t for the incredible excesses of `04-`07 that made it appear there really was enough demand for 10 Starbuck’s or 20 fast food restaurants in a two mile radius.

Now we really have an employment problem. There still is no new emerging business model to create the jobs needed to put the massive amount of unemployed people back to work. By the way I don’t buy the ridiculous 10% figure. At some point the government will probably figure out a way to not count people if they’ve lost their car and can’t look for work or are over 50 because they aren’t really part of the workforce anyway…right? Does anyone else wonder how unemployment dropped from 10.2% to 10% last month even though we still lost jobs? Even if we did only lose 11,000 jobs (questionable) how does 10.2% minus 11,000 equal 10%. I don’t know about you but that kind math will usually earn one an F in school.

Realitically unemployment is at least 12% and probably 15%-17% is closer to the truth. And we still have no way to create new jobs. The only bubble that can be created this time is an inflation bubble and that kind of bubble isn’t going to create jobs. On the contrary, an inflation bubble is going to cause many millions more jobs to be lost.

So is the stock market really discounting a V-shaped recovery in the economy? Not unless all this money being printed by the Fed can now do what it wasn’t able to do the last two times they tried it. That being create true productivity and real sustainable job creation.

Hint: It won't!