The Big Picture

Dave’s Economic Assessment – April 2009

Index

• Executive Summary
• Undisputed Facts
• Not Quite Undisputed Facts
• The Good News
• My Opinion & Predictions
• What Must be Done
• Best Case Scenario
• Worst Case Scenario
• Most Likely Scenario
• Recommended Reading

Handy PDF version

Executive Summary

This work is the product of years of research and months in the writing. It’s an attempt to give a high-level overview of all the relevant pieces of the economic situation this country finds itself in. Most of the ideas have been gleaned from experts far more knowledgable than myself – I’m not an economist. These are simply the most important ideas and facts I’ve come across in my extensive reading about the current situation over the last nearly two years. None of these facts are a secret, nor have they come to light recently. Much of what legislators claim to be surprised about has been known for nearly two years.

For a long and somewhat technical overview, baseline scenario does a great job. I also recommend their financial crisis for beginners. This American Life did some great episodes as well. Here is the short version: We have had 30 years of steadily increasing debt – public, private, and financial sector. Everyone who remembers the depression is long dead or retired, and modern day economists have spent much of this time convincing themselves that the laws of the market, the business cycle, and recessions in general were a solved problem, never to bother us again. The arrogance coupled with the absolute corruption of our current campaign finance system has ensured that wall street has been dictating policy the entire time. Our treasury and Fed continue to pretend that this is simply a liquidity problem, and not a massive ponzi scheme founded on theft and lies. It is nothing more than legalized theft. Trillions of dollars in profit go to people taking insane risks, and when all that can be stolen has been, the bottom drops out. Insolvent banks (including foreign ones) get bailed out by the tax payers to a tune of (so far) 8.5 TRILLION dollars. This is more expensive in adjusted dollars than every expensive thing ever combined – WW1, WW2, the Marshall plan, etc. Most of the bad debt has already been transferred to the public. Fannie and Freddie bought up every piece of garbage mortgages they could get, expanding their balance sheets till they held $5T of the $11T US mortgage market. 90% of these mortgages were originated by private companies, many of them fraudulent. AIG wrote $2.7T worth of unregulated ‘insurance’ with $100B in capital. The taxpayer now owns them both.

We live in a corporatocracy – privatized profits and public losses. We will be paying for their crimes for decades. The $34T problem of the credit default swap market hasn’t even been touched, and it has the ability to do much more damage than a mere $5T in mortgages gone bad. At least mortgages are backed by something of value.

The naive belief in market fundamentalism combined with corruption on an untold scale has brought the world economy to the brink of disaster, and no one in power is even attempting to address the real problems. Our treasury and Fed continue to pretend that this is simply a liquidity problem, and not a massive ponzi scheme founded on theft and lies. The new bank rescue plan is nothing more than the same crappy plan Bush proposed in 2008, but rebranded. It gives private investors a very small risk with huge potential profits, and the losses will go to the taxpayer.

House prices will continue to decline until they are below the historical mean. The losses from the continued increase in foreclosures will require ever more bailouts for the rich bankers who caused the problem. The recession will feed on its downward momentum, only slightly slowed by any government stimulus attempt. When interest rates rise, government intervention will become impossible and there will be massive spending cuts. This will be the ‘other shoe’ that will bring the second wave of pain and create a true depression. There will be no recovery in the next year or two. The DOW will fall below 6000 inside of 2 years, with only the artificial GDP boost from the massive stimulus spending there to provide a little lift. Once that effect has worn off, the market will go back to dropping.

The only course of action I can recommend at this time is the most conservative possible. Get out of debt, live beneath your means, and save. Invest in safe bonds and hedge inflation concerns with precious metals (I see them as a safe harbor, not an investment that will do well). Individuals and businesses should be prepared to survive on a lot less for a long time. Oil and the energy crisis haven’t gone away – OPEC is cutting back production to get the price back up – I guess they didn’t hear the ‘drill baby drill’ campaign marketing slogan. Oil and oil companies might not be a bad investment, especially if China can keep growing their economy.

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Expertise & specialization make their home in a niche

One of my favorite things about the Internet is the phenomenon of the long tail. Basically, the barriers are down and it’s led to an incredible explosion of content & commerce. Shelf space is no longer a consideration, so retailers can afford to either carry millions of SKUs (a la Amazon.com), able to stock nearly every book released or, like youtube.com, provide an endless expanse of content – something to satisfy every interest.

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I remember the first time I heard this phrase – I was in fourth grade and one of the older classes in my school put on a play that in retrospect was completely ridiculous and silly, but I wasn’t quite as critical when I was 9. It was a series of scenes designed to exemplify the law of GIGO: garbage in / garbage out. The scenes got more obvious until they finally explained the whole thing in a terrible song & dance number at the end so even the slow kids could get it (I didn’t get it myself until I heard the song).

So what have I learned since then? Well I found it’s like gravity – once you notice it, you see it working everywhere. It’s easy to think of computers as magic; a big nebulous black box that does stuff way too complicated to explain. That’s only partially true, of course… yes it’s too much to explain quickly, but computers are nowhere near smart enough to correct sloppiness, muddy thinking or poor planning. This to me is the big lesson if GIGO.

Organization is what it comes down to for me. Programmers and database guys learn real early on that there’s a big difference between throwing your ideas together and a carefully planned approach. More average users are starting to discover the same laws – people with years of emails are starting to notice that old messages are getting harder to find. Anyone who’s been online for long will know the frustration of trying to find that bookmark they know they have, only it’s lost in the mish-mash of poorly organized folders.

So what’s my point? As we trundle on towards an increasingly digital world, the laws of GIGO will eventually catch up to everyone. I could have titled this ‘gigo – not just for nerds anymore’. More and more companies are storing all their critical information in databases large and small, but how many users are being taught how to cultivate the data? Every database administrator knows of the prevalence of junk data in systems as they age, and it’s a real problem. Everyone who uses a computer should learn how to clean up after themselves and ensure they are conscientious about their information.

Think of your computer or database as a finicky car, and the data is the fuel. Make sure it’s pure, and you’ll get great performance and avoid a lot of breakdowns.

Never one to be caught off-guard a couple of years too late, it’s high time I hopped on the blogging bandwagon. I’m pretty sure I’m the last person on the planet to start one, so I’ll turn out the lights when I’m done.

I started my consulting business in late ‘03, after the dotcom I worked for went belly-up and I tried some college, but found little practical value in it. I’d been working on web sites and doing some freelance LAN support for years, I think the first commercial site I created was in 2000. So it was a natural step for me to step out on my own. I was lucky enough to pick up some terrific clients very quickly, and have been progressively busier each month.

I currently manage 3 commercial sites plus my own, and manage the LANs of a few local companies. I have a good overall understanding of what works on the Internet, including SEO, usability, content, E-commerce conversion, and advertising.

I’ll mostly be posting information that I think people will find useful – if you have any suggestions or topics you’d like to learn more about, let me know :D