Technological advances, from the light bulb and telephone, to the car and airplane, to the transistor and internet, are discontinuities from life as previously known. So are penicillin, the C-section, Lipitor and MRI’s. So are innovations like the corporate org chart, capital and expense accounting, the experience curve, and consumer marketing. All these innovations constitute the infrastructure of wealth and longevity.
Within the general trend of increased global wealth and longevity are periods of decidedly negative impact as well. The Black Death of 1348 wiped out half of Europe, the 1918 influenza epidemic killed 30 million people, and World War II reduced the earth’s population by 2.5%. Mao and Stalin also killed tens of millions of their people. There have periods of economic death as well. The 75 years of the USSR’s existence comes to mind, and of course the Great Crash, when the Dow Jones Industrials went from 299 to 41, and a quarter of America went unemployed. We would note that few of these negative discontinuities were foreseen (heck, the New York Times may still think that the USSR was a model of economic success!).
We really don’t know what is going to happen in the future, in part because the West is fat, dumb and happy, and has been so for a very long time now, at least since World War II. So we do not know what will happen when the West, and other parts of the world, experience the inevitable and severe stresses associated with the massive discontinuities that inevitably happen from time to time. The West has been super lucky in that the post-WWII discontinuities have almost all been on the positive side so far. It would be a mistake to blithely extrapolate that endlessly into the future.
Economics & Finance
Inventory
I was walking through a mall recently when I saw a sign that used to be quite common but is now rather rare. They were closing the store to take “inventory” overnight, and the store was scheduled to re-open in the morning.
As an accountant, the word “inventory” immediately perks me up. Way back when I started in accounting, computers were in use for a variety of purposes, such as plant accounting and financial reporting, but they hadn’t really penetrated inventory at retail. Why? Because computing power was expensive, and they didn’t have a solid methodology for tracking individual items (i.e. the bar code sticker and reader).
Sub-Prime Time
Before this is through, nearly everyone on the planet will have expressed an opinion on the sub-prime mortgage crisis. It’s a little late, but I thought I should get mine in. Here are some points about the issue that I don’t think have been given much discussion.
Mortgage-backed derivatives are not new. Some 20 years ago, FNMA introduced the REMIC (Real Estate Mortgage Investment Conduit). These were pools of mortgages that were split into various tranches or classes of maturity and quality, which were then sold separately, similar to the way today’s collateralized debt obligations (CDOs) are sold.
There were some important differences between this first generation and its descendants. I would like to point out some of the differences, since they may highlight the reasons behind the collapse.
Die Leiden des nicht mehr ganz so jungen Bernanke*
The American economy may or may not experience a recession in the near future, but either way nobody can tell me that this is the face of a happy man.
* The German title is in reference to this book. Old Ben could sure use some of that Sturm und Drang spirit right now.
Consulting (and a bit of politics)
Over at LITGM we all have political beliefs but we generally don’t talk about politics unless we have something unique to say because, well, it’s already “done to death” elsewhere. With Mitt Romney, however, I do have an insight.
The Wall Street Journal recently described Romney as “a 60 year old uber-management consultant” who also has an investment management background. Unlike the detailed machinations of politics, management consulting and investment banking is something that I know stone-cold.
And while Mr. Romney was caught flat-footed that his well funded and organized campaign was beaten by Mike Huckabee in the state of Iowa, I could have told you this right away. Why?
BECAUSE EVERYONE HATES CONSULTANTS