Christian Fong

"Government should not be picking winners and losers."  I have a philosophical bias against government using its power to tilt the playing field in the economy.  As an economist, I believe a free market, restrained by government to not externalize its costs onto the public, is more fruitful than a planned economy.  The headlines seem to bear that out.

This month's 'Exhibit A' is Solyndra, Inc, a California-based solar panel manufacturer.  Solyndra is in the news for having received federal government loan guarantees of $535 million, funded by the big stimulus bill of 2009.  Now, the company shuttered its doors late last month and declared bankruptcy.  The day after Solyndra closed, I called a former classmate of mine from the Tuck School who co-founded a solar panel company with a couple of MIT-trained engineers.  I asked him about it, and his response was chilling:

"Christian, 9 out of 10 engineers in my industry could have told you how this was going to end.  By the time the government stepped into that company's path, it was pretty clear to most of us that the technology simply wasn't competitive."

My friend described the fallout of the decision in 2009:

I fielded a call from a journalist a few minutes after Gov Pawlenty, whose shortened Presidential race I served as Iowa co-chair, endorsed Gov Romney for the 2012 GOP Presidential nomination.  The journalist asked if I'd be endorsing, or joining, another campaign too.  As she asked the question, I happened to drive by a small prairie dog village, and the image seemed appropriate.  Iowans are still sticking their heads up from their daily lives to scan the horizon.  Sometimes its from an entrance marked "Trump or "Bachmann" or "Perry".  But its all the same village underneath, and not many of us prairie dogs are really going to be satisfied until nothing new is showing up on the horizon.  When the field is set, we'll venture out and pick our favorites.  Until then, when we poke our heads up under a certain sign, try to ignore us.  Many of us are still watching the horizon!

I read today in Proverbs 22, "The rich rule over the poor, and the borrower is slave to the lender." 

In the context of the debt ceiling debate, it strikes me that the Scriptures predicted the nature of the worst traits of the political class.  Is there a defense to the abuse of power by the rich?  A defense for the current leadership generation (Baby Boomers) selling my generation (Gen X) into economic slavery with this debt?  This D.C. spectacle is Nero's Colosseum, where blood sport lulls the body politic into a lethargy, watching death and slavery unfold as they cheer.  While its greatness burns down around them.  It is burning so quickly.

What is the answer?

I got into a discussion with one of the GOP Presidential candidates about whether a strong or weak dollar was preferable.  "We have to have a strong Dollar," was the instant reply, with a rambling critique of everything Obama had done to purposefully weaken the dollar.  "What's your plan on how to strengthen the dollar," I asked?  "We need more exports, and we need to stop importing so much oil," he said, "because strong exports and domestic energy will keep the dollar strong."

Case study moment for my fellow armchair economists.  What is right, what is wrong, and what is incomplete, with this popular theory?  Hint: Consider, among other things, the impact of 1) imports, 2) global use of the US$, 3) relationship between a cheap/expensive US$ with the attractiveness of US-based goods and services.

From my sister, Liz Parks, who is a socio-linguistic anthropologist, and has been mapping the deaf / sign languages of the Western Hemisphere.

In November 2007, we were sitting in a deaf family’s living room in Arequipa, Peru. Our new friend Melania asked : “Why did you come here?”  When we responded that we wanted to share God’s love, Melania asked for our church affiliation. Reluctant to discuss churches because doors had previously slammed when we said the “wrong” one, Liz answered: “I have a personal relationship with Jesus. I learn more about him through the Bible and talk with Him everywhere I go.”

Melania looked rather confused. “You mean I don’t have to go to church to talk to God? I thought I needed to use an interpreter to talk to God for me. God doesn’t understand my signs so I just save all my prayers until Sunday so the interpreter can speak for me.”

“NO! God understands your sign language perfectly!” Liz said, shaking her head. Melania practically flew to her feet: “This is great! Now I can talk to God myself! I can pray at school for the kids I teach, and at home for my family. I can talk to God all the time!”

"How long will this last," was the question posed to me. Recessions can last a long time, especially when caused by supply-side monetary "bubbles" rather than normal production ebbs and flows. How long? Check the graph for GDP during the Great Depression, and you'll see just how long it can last, and why recovery can be interrupted (1937-38) by double-dips.

Graph Here

Graph of the day shows home prices from S&P/Case Schiller index, which tracks the 20 largest US cities.  Think we can't fall further?  Consider that Fed's "cheap money policy," often cited as the helium inside the housing bubble, has been pumping since about mid-2001.  Now, the helium is still pumping in (i.e. Quantitative Easing 2 + 0.25% Fed Funds rates) and the balloon is STILL slowly deflating.  It seems less and less likely that the Fed will, in a timely way, end its policy of pushing, pulling and carrying the US economy in a monetary wheelchair.

I don't often rave about an online product.  After all, I've been "surfing the web" since it was a text based system called "Gopher" and a major debate was not whether it was possible to make money online, but whether it was ethical to do so.  I watched IE beat up Netscape, but Mosaic had to come first.  Google upended Yahoo's "What's Cool" page.  But Yahoo had to come first.  Facebook hit Dartmouth "by invitation only" when I was a grad student, but discussion boards had to come first.  Twitter took the world by storm, but texting came first. 

What's the pattern?  Massive disruptive technologies are based on converting known areas (indexing, socializing, short messaging) into a "many-to-many" world.  But everytime they start with a game-changing one-to-many online competitor to "old school" processes.  I'd read about Khan Academy, and in our 'Reducation' (Reform-education, Revolutionize Education, etc) group that I was introduced to it by Iowa's peerless Christian Renaud and education evangelist John Carver last summer.  It was a developing site then.  I returned to it last week, as I looked at how to engage my kids in learning for the summer in a fun way.  Simply put, I believe the next domino is about to fall.

I realize this is the sort of short blog post that will have an obvious conclusion in a few months.  But I find this interesting since I share a weakness with a few other armchair economists: the inability to perfectly foresee the future.  Note that the graph (Click 'Read More' below to see the graph) is for 1Y CDS.  That's a Wall Street instrument that is a "bet" that the US will have some default event in the 12 months, which covers the Debt Ceiling debate.  The cost of a five year "bet" of a serious US default has remained more stable.  My read: the markets are beginning to suspect that over the summer Obama won't agree to House Republican demands for serious cost cutting, and the Senate, marginally controlled by Democrats, has lost the ability to be the adult in the room.  But also that in the mid-term, the economic picture remains pretty stable.  ('Read More' for graph)

Imagine a wedge issue emerging like this, "That other guy isn't as close a friend to Canada as I am."  Perhaps folks would trumpet how many times they have been to Toronto, how they enjoy a good game of hockey, and feel close spiritual kinship to the Mennonite folks in Niagara-on-the-Lake.  They'd point to the other guy and complain that not only does he not know what an icing call is, but actively supported Gretzky's move to Los Angeles.  Maybe even secretly harbors opinions contrary to good relations between Quebec and Ottawa.

Ridiculous, isn't it?  We stand with Canada.  We don't wonder, "What will Britain or Mexico think of our friendship with Canada?"  We don't question their national and cultural commitment to freedom when their politics shifts.  It's not a Democrat or Republican stance.  It's just who we are as their friends to the south. 

Yet in a way that is what is being threatened with Israel.

Israel may be separated from the US by distance, but...

It was announced by US Secretary of the Treasury that we have reached the debt ceiling.  A few things to note, from an armchair economist's perspective:

• It is a self-created crisis.  Imagine you had the ability to set the credit limit on your credit card, and you set it at a level that you KNEW you were going to exceed.  Lousy planning, eh?  The current debt ceiling, at about $14 Trillion, was created in February 2010, when the Democrats controlled both chambers of Congress and the White House.  They created the ceiling...they created this moment.
• You can ignore "the sky is falling" reactions.  Secretary Geithner said there is 11 weeks of what an economist might call "excess liquidity," so that a healthy debate can continue over the coming weeks, or even months.
• The crisis is NOT the debt ceiling.  It is the $14 Trillion of debt.  That is what is causing a threat to America's monetary dominance in world markets, the threat of runaway inflation and hampering our ability to have effective foreign policy in the Far East.  "Solving the debt ceiling crisis" is akin to that classic scene in The Wizard of Oz, when the wizard frantically proclaims, "Pay no atttention to the man behind the curtain."  The crisis is that our national debt is too high, relative to GDP (over 70% of GDP), caused by government spending that, on an annual basis, is nearing 25% of our GDP.  Let's focus on the real crisis: The Federal Budget Deficit.

My generation will spend our lifetimes working to pay for today's spending.  The question is not, "How can we figure out a way to borrow more money."  The question is, "What sort of country sells their childrens' future to make their own lives more comfortable?"  As usual, the crisis is deeper than dollars and cents, and gets to a spiritual crisis.  What will it take to turn the hearts of the fathers to their children?  Apparently more than a self-created debt ceiling crisis.

In 2008, Corridor Recovery was founded by a group of civic leaders during the Flood of 2008 and I was honored to serve as CEO.  Corridor Recovery coordinated over 5000 volunteers, with 160,000 hours spent cleaning over 1500 homes, businesses and churches, culminating in the creation of the Linn County Volunteer Center. It co-founded the Linn County Long-Term Recovery Coalition, which helped over 1500 families get back on their feet.  It led "Operation Hope" during the darkest days of what was the 4th largest natural disaster in US history, to remind the city that even in the darkest of times, the light of hope remained strong.

We rewrote the playbook in Cedar Rapids.  Red Cross recommended we not enter homes...we did anyhow.  State government recommended we be careful to not cross "church and state" lines in cleaning up churches...we did anyhow.  One big business questioned the appropriateness of its volunteers "mucking out" small businesses that didn't have proper insurance...we did anyhow.  We just did what was right.  The community never let us down.

As we approach the three year anniversary of the Flood of 2008, and mark the end of the three years that civic and business leaders asked me to lead it, we begin a transition.

This morning I'm watching the markets absorb S&P's newly announced "negative" outlook on the US debt.  I don't see Obama's plan helping, but rather just kicking the can down the road.  How?  By claiming that "creating a plan to solve the problem" is enough, but then delaying the actual fix until after the next election.  That behavior, so typical of politicians, is a millstone around our own necks.

By the way, when Congress reconvened this January, I put a trade on my personal account that the yield curve would steepen.  That is, a "long" position on short-term US Treasury debt and a "short" position on long-term US Treasury debt.  Why?  My belief was that the US government would do everything possible to keep borrowing costs low until at least the 2012 election.  Simultaneously, that the federal government would use low borrowing costs as an excuse to fail to rein in entitlements, thus driving the federal deficit to unsustainable, long-term levels.  Historically, in other markets, that either requires planned inflation or causes a credit downgrade in debt. Either way, the yield curve would steepen dramatically.

I wish I was wrong in that trade, and I wondered if the House's "Ryan Budget" might have pushed it the other way.  But so far I'm seeing monetary and political history repeating itself.

The government is aiming to cut $35 - 40 billion of spending in the new budget, agreeing that a trillion dollar deficit is the new reality.  I had a good discussion over coffee this morning about whether this plan should be characterized as "still stealing from our kids" or "finally a step in the right direction."  We settled on "both" as the honest answer.  Here are the details:

http://tinyurl.com/5u9mw3d

Is inflation coming?  A few reasons to believe it will: 1) "The Fed is printing money, and that always causes inflation."  2) "Gas prices are so high, isn't inflation obvious?"  3) "My salary has been stuck for three years straight, and my budget would be shot to pieces if prices go up.  Murphy's Law applies...inflation is coming." All good watercooler topics.  In sum, a weak argument.  An Armchair Economist would do better to watch US Capacity Utilitization.  If the number is low, inflation is further away.  If high, watch out!

Why? Supply and demand is still the basis for pricing in competitive and open markets.  Simply stated, it is hard for Company A to raise prices if Company B has the ability to respond by making more, spreading out their costs, and selling more at the old price.  As a result, with excess production capacity, Company A and B might be losing money, but neither can raise prices.  Even if their own costs are rising!  (Beware the "business owners just pass along costs" argument...it implies robust demand and capacity utilitization.)

So how is US Industrial Capacity Utilization doing?  In a word, "Lousy."  Simply put, the US can produce a lot more stuff.  And helping it do so should be the primary policy concern of the government.  (Industrial production = private sector jobs.)  Where capacity utilitization is high (energy) or the markets are becoming less free (health care) inflation is creeping forward.  But overall the numbers might reassure you that we all have a bit of time before Murphy's Law kicks in on inflation.  (Click below to see the official statement from the government data, and the link to the data.)