Friday, February 27, 2009

What is Stimulative?

This morning, I was watching Fox and Friends to see what Donald Trump had to say. Included in the group on the couch was Geraldo Rivera. As they were picking apart the stimulus plan and discussing about the pork in the law, something really strange happened: I agreed with Geraldo.

This is pretty weird. It is right up there with seeing a goat flying outside the window of a 747. If you ever find yourself agreeing with Geraldo, then you might go a little dizzy as I did. Just sit down, collect yourself and try to regain your composure.

The Donald was saying that all this spending is going to destroy the economy. All we need is time and everything will be fine. Then Geraldo said it. Stimulus spending is any spending. He used the example of a grape juice museum (which is not in the plan). If the government builds the grape juice museum, while not necessarily what we need, it would still be stimulative. He is right!

Anytime the government borrows money and then spends it is in fact, stimulative in the present time or when it is spent. Yes, over the long haul that money needs to be paid back which will come from higher taxes or inflationary repayment (printing the money). But the immediate effect is stimulative.

So while we may not agree with all the things that are being bought, we should agree that any money that is spent and not immediately paid for with taxes is stimulative.

Monday, February 23, 2009

Status on Projects

For all those of you out there who care, here is the status of my business projects: RentQuick is starting her 11th year and things are going well. Compared to the last recession, we are holding our own. Much of this has to do with the better inventory (Our new Durabooks are a great hit) and a pretty good reputation among our clients. Ultimately, the best part about this company is that after a number of years in trial and error, I have the best team ever. They do more for the continued success of the business than I do.

Hayes Investments: Right now, Hayes only has one empty office space, which is fantastic. In 2008, Hayes Investments started doing project management consulting. We broke ground last week on a 12,000 sq/ft building for a client. Pretty good looking building too. I expect the project management side to continue to grow. We will see how it goes.

DeWitt Crossing: In 2007, the phone was ringing steadily with interest in the project. Right now, I don't think I have had a real phone call on property sales since December 2007. This is where the economy is really being felt. Commercial property is just not going to move while people are retrenching. The unbelievable interest rates help though.

Black Bear Title and Settlement: In November 2008, I purchased Home Front Title from the previous group of owners. We are just getting things where I want them. The office looks great and I expect the revenues to continue to grow this year. Of course, the refi boom will be a great help.

People ask me what I think of the current economic situation. My answer is simple: serve your clients to the best of your ability, pay attention to expenses, try to keep the revenue in line and everything else will work out.

Sunday, February 22, 2009

It's Economics Silly!

Last night I had some friends over for our regular nickle-ante poker game. As the night went on, comments were made about how bad the stimulus package is and how all of this is going to cause rapid inflation.

Of course, the guys saying this stuff were just parotting what they heard on television or the radio. Honestly, do you really think that Rush Limbaugh understands macroeconomic theory?

So what is the effect of the stim and how will it affect the broad economy? To understand this, we must first look at where we are now. In October, the money market pretty much siezed. This caused a ripple effect that quickly caused the failure of Lehman Brothers. Once that hit, then the Treasury Department got involved and pushed through the Toxic Asset Recovery Program (TARP).

After everyone saw that the economic meltdown was underway, then there was a rush to liquidity. You can tell this by looking at the 3 month treasury bills which went to almost 0%. When there is a rapid movement away from leveraged investments to cash, you will see asset prices drop. In other words, lots of people who had stuff that they owed money on sold that stuff at a reduced price. That is part one.

Part two is the forclosure issue. As homeowners go through foreclosure, they lower the value of their homes and their neighbor's homes. This is because when you have an appraisal done on your home, the appraiser looks at the comparable home sales in the area. If Joe down the street sold his home for 30% off then it will affect your home and subsequently what you can borrow against it. This is part two.

Put parts one and two together then you get deflation. Deflation, the opposite of inflation, means that asset prices are moving lower, consumer prices are moving lower, wages are moving lower. It is very, very bad. If you get into a deflationary spiral, then people will hoard money because it will be worth more later. If people don't spend money, then the demand continues to drop and prices keep droping. If prices continue to drop, then deflation increases and people don't spend. I think you get the idea.

So back to the stimulus plan, anyone who understands these forces knows that you cannot let the market fix this on its own. Will the market correct eventually? Sure, but at what cost? This mess will cause massive unemployment, loss of capital, bank failures, hoarding, and eventually price fixing.

As for what it will cost the taxpayers, the choice is simple: either invest in something now, or face lower revenues which will cost the taxpayer just as much.

Here is how it all works:

1. Prices are falling, demand is off causing the risk of a deflationary spiral.
2. The government prints money then uses that money to buy bonds from the government.
3. The money is then spread across the country and is spent. (it really doesn't matter where)
4. As the new money is introduced into the economy, it causes inflation.
5. The inflation counters the deflation which as discussed above is very very bad.
6. Because the treasury actually printed the money, the real national debt does not really increase.

Any questions?