The economy is usually a pretty popular topic in the news, because is truly touches everybody. With the crises that have hit in the last year or so, the economy has become even more popular than usual. Plenty of people provide advice and opinion about what is going to happen in the future and what the causes are. The current situation demonstrates why it’s important to understand the economy better, not just for now, but in general. There are certain things in this society that should not just be left to the experts, because they affect us and it’s essential for us to understand what our politicians are doing, no matter the political party or the philosophy.

The Cato Institute provides analysis that I find helpful.  Below are two videos with Daniel Mitchell of the Cato Institute in the first discussing Keynesian economics and somewhat how it relates to the current situation and the second from 20/20 discussing the bailout situation. I think it’s important to get differing perspectives on these issues, so these videos are not definitive. I hope they help some of us become more enlightened and give us a desire to better understand what’s going on with our nation and world, economically speaking.

I think the first clip is good to watch, even if you don’t agree with everything he says. His explanations are sound and he makes some great points. he one weakness I found was the way he discusses Hoover’s implementation of Keynesian policies. He uses this as an example of Keynesian’s failure as a policy, but Mitchell doesn’t provide enough support to show this to be specifically causal. The years shown are the start of the depression. This example would have been more useful had Mitchell attempted to show that Hoover’s policies led to or exacerbated the impact of the depression. This is still a video that’s worth watching.

The second video is from 20/20, also featuring Mitchell, where John Stossel tries to find out where all the bailout money went. He doesn’t discuss the philosophy behind the bailout as much as governments failure to manage the bailout properly.

Here’s a video from the Brookings Institution about the economic crisis.  I can’t say I agree with everything and I find the Cato videos to be more informative (call it bias).  I still thought it was worth watching.  Barry Bosworth is fiscal policy expert and worked in the Carter administration (his CV is available here).

 

Tim Harford, the Undercover Economist, is putting his two cents in for us young folks to not only buy some stock, but even go into debt for it.  I’m not sure I’d got the debt route (maybe it’s a deep psychological issue from my childhood), but buying stock would be at the top of my list of where to use extra cash.  But enough about me; here’s Tim’s article from Slate.

Being in the Silicon Valley during the current economic crisis has been interesting. It has been especially insightful to compare the “Dot Com” crash 8 years ago to the current crisis and to see how the crashes have effected businesses differently.

I was surprised to realize that many businesses, especially in the tech sector, learned from the mistakes of their ancestors. It has been this resilience that prompted me to put together a short list of ways small businesses can survive the current crisis – and even come out on top at the end.

1. Cash is King – Regardless of the size of your businesses, cash is going to be king over the next 18-36 months. Up to even a few weeks ago you could pretty much count on your local bank giving you a small business loan or being approved for a business-use credit card. Unfortunately, the liquidity of the market has “thickened” dramatically and has made those opportunities shrink to almost nothing. You’ll no longer be able to rely on loans and credit to get you through the month. From now on… cash should be your #1 priority.

2. Don’t Focus on Growth – This sounds like bad advice for any small business owner, but the truth is that many businesses are going to continue along the same growth pattern as before and find themselves beat to hell by the time they emerge from this crisis. This is the time when you need to hunker down and just wait out the storm. This will benefit you not only in the short term by ensuring you don’t go bankrupt, but will also put you in the perfect position to make strategic growth decisions after the crisis is over. For example, by keeping you expenses down and your cash account padded, you will be in a position to spend quickly right out of the gate – purchasing your competition or just beating them to key customers – because you have saved for what I like to call the “sunny” day.

3. Focus on Value – Since you’ll be cutting back on expenses, spend time on the things that don’t cost that much money but add value to your business. Instead of spending $10k replacing an old machine, spend $100 in phone charges to re-connect with your customers, or improve customer service. Invent new ways to add value to current products without spending a ton of money. That investment of time and energy will pay for itself 10x.

4. Collect – One of the things you can do to add value to your business and increase cash flow is by collecting on your accounts receivable. If there was ever a time to go after those delinquent customers… now is the time. If you don’t have an invoicing system in place there are tons of free and fee-based services out there – from PayPal to FreshBooks. You can even use Excel as long as you are actively trying to collect that cash.

5. Don’t Give in to Hoarding – During this time when “cash is king” you should avoid buying in bulk or otherwise stockpiling supplies or inventories. Although the parable of the ant and grasshopper might come to mind, now is not the time to be hoarding. That extra spending drives expenses up, depletes your cash reserve, and at the end of the day might be worth nothing. What good is a pallet of copy paper at a discount if you don’t have a business capable of using it. You will always be able to buy these items later even if you pass up a small discount now. That “savings” could prove disastrous to your cash flows.

6. Leverage Technology – There are tons of websites, web services, and other technologies that can help save you money. For example, trade in your $600 flight and $400 hotel for that sales trip to Chicago for an online meeting service instead. These days you can share a presentation, hold a conference call, or even converse via webcam – with nothing but a DSL modem and $50 a month for the services. You can also step up efforts to find better prices on products or services you normally use – by simply performing a simple Google search. Buying you your widgets from ABC Company for the past 5 years shouldn’t prevent you from searching for XYZ Corp who is offering the same widgets at 50% off.

Here’s a look at Reason Magazine’s take on the bailouts.  Times like this need a good dose of libertarian humor.

http://reason.tv/video/show/590.html

 

As you may have heard Exxon Mobile released the financial results from the second quarter. The Company broke its own record for the largest quarterly earnings ever booked by a corporation – $138 billion of revenues for net income of $11.68 billion. That turns out to be about $1,486 each second of every day!

The news of the insane profits instantly fueled the hate towards the public face of high gas prices – the oil companies.

Obama said in a statement, “Perhaps the only thing more outrageous than Exxon Mobil making record profits while Americans are paying record prices at the pump is the fact that Senator McCain has proposed giving them an additional $1.2bn tax break.”

And on Obama’s heels, four senior Democrats in Congress called a press conference critisize the largest US oil companies for spending more on stock buy-backs to enrich shareholders than on energy exploration.

Some argue that Exxons profit margin of 8.5% is significantly lower than other blue-chip stocks and that the company is actually not making that much money. But its hard to hear the words “record profits” at a time when there are “record prices.” It doesn’t take much to convince Americans that the two are related.

But the real question is, are the two related? Is a profit margin (defined as the net income divided by revenues) of 8.5% too high for a company that sells a commodity? After all, it is publicly held and must do its best to earn a healthy return for its investors. Aren’t they just doing their job.

After a little research, and a pass through their most recent press release… I’m convinced its a little bit of both. Is Exxon taking advantage of the high gas prices? Probably. Are they the root of all evil and the cause for the $4.95 gas in San Francisco? Probably not.

I spent a few minutes pulling up the most recent financial statements for a few other commodity companies to see if a 8.5% margin was fair. I was surprised to learn it was:

Exxon: 8.5%
Coal: 9.2%
Sugar: 4.6%
Aluminum: 8.3%

Of course this back-of-the-napkin approach has its flaws. An in-depth look into the financial statements of these industries is needed to get a clearer picture. However, it does shed a little light (or at least a little perspective) on the subject of high gas prices.

As much as I would like to blame big oil for the dent in my wallet, I’m not sure it’s entirely their fault.

If you haven’t heard, the California city of Vallejo filed for bankruptcy protection this week after they were unable to come up with over $17 million to balance the budget. The story prompted me to ask, “How does a city go bankrupt?”

The short answer is: just like the rest of us.

Sometimes there are extenuating circumstances like a rash of lawsuits or a natural disaster that drains the city coffers dry; however, most cities go bankrupt because of poor management and even worse budgeting.

Which should, actually, give you hope. After all, if a city staff of 15 accountants can’t balance the budget, it can’t be that easy can it? Granted, balancing a city budget is a little harder than your family of four, but it is based on the same principles. Unfortunately, however, cities get caught up in union negotiations and local politics which prevents them from making the same decisions you and I might make. For example, politicians aren’t too popular when they need to raise taxes to increase revenues. As a result, many politicians hesitate to raise taxes while at the same time keeping city service levels the same. And, just like a personal budget, you can’t survive very long when your income doesn’t cover your expenses.

Federal Bankruptcy Help:
To help cities in dire straits the US Government enacted the first municipal bankruptcy legislation 1934 during the Great Depression. Although similar to other bankruptcy chapters in some respects, chapter 9 is significantly different in that there is no provision in the law for liquidation of the assets of the municipality and distribution of the proceeds to creditors. Could you imagine the city being forced to liquidate city roads, sewers, and parks? The town Burger King could end up owning the park by your house!

Instead, chapter 9 is generally limited to approving the city’s bankruptcy petition, confirming a plan of debt adjustment, and ensuring implementation of the plan. But most of the time, cities use the courts to simplify debt repayment and to eliminate the need for multiple forums to decide issues.

In the more than 60 years since Congress established Chapter 9 bankruptcy legislation, there have been fewer than 500 municipal bankruptcy petitions filed. Although chapter 9 cases are rare, a filing by a large municipality can— like the 1994 filing by Orange County, California—involve many millions of dollars in municipal debt.

In the case of Vallejo, its the largest city in California to declare bankruptcy, and the only one to do so because of long-term economic problems. City officials have said that the city has been hit hard by the weak housing market and rising public employee salaries and benefits. In fact, 80% of the city’s budget is set aside to pay for police and firefighter protection.

What Happens After Bankruptcy?
Almost nothing as far as you and I are concerned. Water keeps flowing, garbage is collected, and the roads and parks are maintained. Generally, the city’s larger development projects get put on hold, and long-term projects are scrapped for the time being. The government can be dissolved and taxes can be raised to cover the shortage. But generally bankruptcy gives the city power to impose terms and conditions for salaries and benefits unilaterally. The city obtains the upper hand to force terms with respect to its collective bargaining agreements including police and firefighter unions. So why it’s probably safe to assume that day-to-day life will remain the same, you can also count on your city taking a huge step backwards in terms of financial prosperity. That city library that was planned for next year – you won’t see that for at least 7 years. Relationships with city workers will have to be mended, and the city government will have to regain the trust of the citizens, or find people who are more capable of running the city,

Countrywide Financial (CFC), one of America’s largest home-loan lenders, tried as hard as they could today to deny the rumor that the company is filing for bankruptcy. However, as today’s stock performance shows… nobody seemed to be listening.

But today’s press announcements and market reactions brings up a few interesting observations about investing:

1. Sometimes market activity has nothing to do with performance. Countrywide could be just fine, but at the very hint of bankruptcy, investors take their money and run. It’s a knee-jerk reaction that has more to do with emotions and fear than actual performance. This is one aspect of investing that you just can’t plan for.

2. Sometimes investors know more than the company. I throw this one out there with a cautionary warning. At times, a few savvy investors can spot the warning signs early enough to bail right before a stock tumbles. The key is to watch those investors Perhaps Countrywide isn’t going to file for bankruptcy, but chances are that the investors believe the story is not only possible, but plausible.

3. Sometimes companies lie. I know, it’s hard to believe but Countrywide could be lying through their teeth. I’m not saying they are, but they could be. This is when you break out the spreadsheets and financial statements, pour over the figures, and crunch some numbers in the form of ratio analysis. You need to try and determine on your own if Countrywide could file for bankruptcy soon. What is the debt to equity ratio? Does it have enough cash on hand to pay interest this year? These are the types of questions you should be asking yourself before you jump ship yourself. Who knows, if you’ve done your homework Countrywide could be the perfect stock to BUY right now!

As I become more actively involved in watching the presidential debates and following various candidates, one of the topics that is at the top of my list of concerns is the economy. Specifically I worry about the rising cost of health care, the state of social security, and of course… taxes. Most candidates have touched on this subject in some way or another – proposing a tax cut here or a rate hike there. But there’s one candidate (who I myself do not personally endorse by the way of full disclosure) who has a more ambitious plan:

“Am I running for president to shut down the federal government? Not exactly. But I am running to eliminate all federal income and payroll taxes. And I do mean all — personal federal, corporate federal, gift, estate, capital gains, alternative minimum, Social Security, Medicare, self-employment. Instead,we will have the FairTax, a simple tax based on wealth.”

That quote comes from the website of the former Republican governor Mike Huckabee. The plan is simple in theory, but isn’t new. A grassroots campaign has been gaining popularity after being proposed by a group called Americans for Fair Taxation, and it has already been written into a bill sponsored by Georgia congressman John Linder.

To answer a few frequently asked questions about the proposal… here are a few points you should be aware of.

So how does this change current tax laws?
In a nutshell, it throws out the tax code entirely. That’s right… no more Form 1040, no more dreaded April 15th. Under the plan, you would pay only one federal tax, which would be applied to just about everything you buy: not just the goods you buy at stores (on which most states assess a sales tax), but nearly all services, including health care and insurance, the purchase of a new home or rental of an apartment, even things like a teenager mowing a lawn or baby-sitting for a neighbor.

How much would this tax be?
Depending on how you look at it – 23 to 30% If you purchased a $100 pair of shoes, the price would increase to $130 or 30%. However, the plan’s supporters say that works out as a 23% rate because $30 is 23% of $130. Whichever way you look at it, it would mean about a 30% increase in prices.

How is this fair to those paying 100% of what they earn?
For those of us (including myself) who pay close to 100% of their earnings on living expenses (rent, food, medicine) paying 23% doesn’t seem very fair. However, the the sales tax plan would partly offset this effect by sending every household in America, from the family of a poor single mother to Warren Buffett, a check to cover the taxes on their spending up to the poverty level. If you factor in that cash from the government, each family’s net tax burden goes down, so that the Fair Tax looks more progressive. For example, a family of three earning $30,000 a year and spending all their income would give 7% of their pay to the government; one earning and spending $125,000 would pay a net rate of about 19%.

What about those who can afford to save?
Critics of the plan claim that those of us who have “extra income” that we can put away for a rainy day will be able to avoid paying taxes on that amount. For example, if Bill Gates earned a cool $1 Billion next year, but only spent about $100 Million on living expenses, he would have gotten away with paying only about 2% of his income for taxes. However, if you think about the Fair Tax on a lifetime or long-term basis it makes more sense. Bill Gates could save that $900 Million for 10 years, or 20, or even hold on to it until he dies – but at some point that money will be spent and taxed. Perhaps not by himself in his lifetime, but by someone.

Why haven’t we heard about this sooner? This sounds like a great plan!
Officially it’s because critics of the plan claim that the rate we would have to pay is more like 40%. Unofficially, the reason a plan like this hasn’t been widely publicized, and probably won’t happen for a VERY long time is politics. There are too many special tax breaks and loopholes backed by very well-paid lobbyists. The plan would also limit the ability of legislators to target tax breaks to help favored groups – including many in the middle class. And if the legislature began to create exceptions… the plan falls apart. If you carve out medicine of baby food, for example, the rate would need to be higher for everything else.

So is this plan going to work?
There’s two questions we should be asking ourselves, and our representatives. First, can it work and is it good for America? There are some people much smarter than myself who are working on figuring this one out – crunching numbers and looking at more tax tables that I want to ever see. The second question is can we implement it? This is where the feet need to hit the pavement and congress needs to figure out if it has the courage to implement something like this. If it can work, and it is good for America and the economy, then why is it not happening?