Wednesday, January 28, 2009

Snow (Ice) Day / Macro Economics

We needed to close the warehouse today due to the snow / ice storm that come through the Washington area over the last two days. Most of us managed to get in and take care of business yesterday in the snow, but the ice that followed today pretty much closed everything down. If you have an e-mail inquiry in and haven't heard back yet, don't worry, Jamie and I will be working on them later this evening here at home and all morning tomorrow to get caught up. We'll have quite a few orders to catch up on tomorrow.

OK, so I'm spending a rare afternoon not working, reading the news, and wondering back to my Macro Economic days in college 16 years ago. The thing that strikes me in all the economic headlines is how difficult it is to figure out what the data means. For instance, home sales apparently turned around a bit in December, and inventory was down - BUT - 45% of those sales were banks dumping foreclosed properties for whatever they could get, accounting for a huge drop in median home price levels. The MSM will spin it however they want, but is that a good thing, or a bad thing? The proposed 825 Billion so called 'stimulus' is so large the number seems to loose all meaning to the masses, and will be financed strictly through more borrowing. This is in addition to the 750 Billion TARP funds, which is in addition to the existing budget deficit, whatever that is (it seems to change from week to week). I have to wonder just how much debt our government can really afford to take on. In other words, how much annual tax revenue, which is a direct reflection of our national productive capacity, will have to be consumed making interest payments on our dept, and were is the tipping point when we have to increase deficit spending just to pay the debt interest.

It’s just mind boggling to me, and I don’t claim to be able to understand it all, and I suspect most people and commentators can’t either which is why everyone seems to try to boil the problems down to some common denominator that probably misses the big picture. Is this just another negative blip in our history (which is what we want it to be), or will it be the perfect storm, the 500 year flood that will alter our way of life forever. I have no idea, but it does seem to suggest a Black Swan when you see something like this:

I had seen this scary fed borrowing graph highlighted here a few days ago, and now someone has made a movie (above) out of it that demonstrates how the current economic situation is an order of power higher in scale than anything we’ve ever seen before. What does it mean when the Fed borrows more money in one month than in the previous 70 years? I have no idea, but you get a gut feeling that it can’t be good. Those huge borrowing numbers over the last 14 months are purportedly funds drawn by banks and financial institution at the Fed’s open discount window under the emergency rules that allow them to use assets of questionable value and quality as collateral for Federal Reserve loans, and that money is being drawn to keep up the government required capital ratios up to par at thousands of financial institutions as they have to write down the value of commercial paper assets that have gone bad. Since lending is still stalled, I can only assume that this money is currently sitting on Bank balance sheets waiting for better times. What happens if the government decides to nationalize the banks? – something to me that has implications far more reaching than just trying to stabilize the economy. Do these people really know what they are doing, or are they doing things because they simply have no other choice?

And here again, I have no answers. Where do these trillions of new dollars come from? Do they borrow it? Do they print it? What happens if that new money gets turned loose on the economy in general? Will people’s habits change? Will they start saving more than they spend? Will this lead to a period of terrible deflation like in Japan during the nineties? Or will all this new money lead to a period of hyper inflation that will devalue the US dollar and deflate the US debt, and along with it destroy the net worth of every asset holding household in America? The latter seems to be the only way the government can deal with it’s massive debt long term, as there seems to be no chance what so ever that debt will ever be paid off, and just making the interest payments will become the biggest budgetary challenge in coming years. How will entitlement programs possibly be able to remain solvent in the near future? How will business owners like me have any opportunity to continue to create value under such conditions?

As you can see, I have no answers to these questions. Maybe some of you guys and gals out there who are a lot smarter than me can give me some reassurance that my concerns about our economic future as a nation are – well – unfounded?

On the Anime front, Funimation's parent Navarre will release Q4 earnings on February 6th. If anyone is interested in sitting in on Cary Deacon's conference call, there is info here. I'm keeping my fingers crossed that Funi will report relatively strong numbers.

Note: No political commentary or political finger pointing in your comments please. That would be subject of an entirely different conversation.

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