Permanent Portfolio Blinders

[TBV]

TBV,

Entrepreneurs can definitely succed in recessions, but we're talking about the broad economy here... about putting millions of people back to work and repairing balance sheets.

A solid, solid portion of this is going to be done with existing businesses... existing factories... existing ideas.

Letting demand collapse and giving tax cuts to producers isn't going to send a flood of entrepreneurs into creating new ideas and hiring millions of people as a result.  You'll see this somewhere, yes, but 1) this activity may well have happened equally or even better in an economy running at full capacity (the 90's were hardly a time of no entreprenurial ventures and great ideas) and 2) will not make up for the overall shrinking of aggregate demand.

These anecdotal stories about entrepreneurs in recessions sparking demand for new products based off great ideas and hiring a lot of unemployed people are certainly fun to hear, but the math just doesn't work.  Entrepreneurs have ideas and access to capital in good economies, too.  In fact, a world of low demand and closing factories is probably a lot more scary to 95% of entrepreneurs than encouraging.

How does your perspective square with the fact the most new employment comes from small business and start-ups?

[doodle]

Moda,

I believe that we do need a contraction in demand. This debt fueled consumption in the United States cannot be propped up forever. Anyone who has traveled around the world...even in Europe...it is very clear how our living standards and expectations in this country have gotten out of whack with the economic realities of what we are able to produce.

In other words, we have been consuming much more than we have been creating for some time now. This natural flow should be deflationary; however, as I have said the government is trying to prop up this consumption bubble.

I believe we have a structural employment issue in this country where too many people are employed in industries that catered to consumptive expenditures. We have too few employed and trained in areas of the economy that invest in capital infrastructure.

We need to put Americans back to work making and building things. We need Americans picking our food, converting buildings to improved energy efficiency standards, and doing a lot of the dirty jobs that we have farmed out for so long.

[moda0306]

TBV,

Entrepreneurs can definitely succed in recessions, but we're talking about the broad economy here... about putting millions of people back to work and repairing balance sheets.

A solid, solid portion of this is going to be done with existing businesses... existing factories... existing ideas.

Letting demand collapse and giving tax cuts to producers isn't going to send a flood of entrepreneurs into creating new ideas and hiring millions of people as a result.  You'll see this somewhere, yes, but 1) this activity may well have happened equally or even better in an economy running at full capacity (the 90's were hardly a time of no entreprenurial ventures and great ideas) and 2) will not make up for the overall shrinking of aggregate demand.

These anecdotal stories about entrepreneurs in recessions sparking demand for new products based off great ideas and hiring a lot of unemployed people are certainly fun to hear, but the math just doesn't work.  Entrepreneurs have ideas and access to capital in good economies, too.  In fact, a world of low demand and closing factories is probably a lot more scary to 95% of entrepreneurs than encouraging.

How does your perspective square with the fact the most new employment comes from small business and start-ups?

I don't know to what degree that's true, but you still have larger macroeconomic issues driving the game.  And there needs to be a division between "small business" and "startups."  If "small businesses" drive job growth, that doesn't mean these aren't established, running businesses that require aggregate demand before they'll hire.

[doodle]

Maybe peak oil would be the best thing for the unemployment problem. With oil...one man can do the work of ten. Without oil...we have to hire the ten back.

According to Wikipedia: In 1870, 70-80 percent of the US population was employed in agriculture. As of 2008, approximately 2-3 percent of the population is directly employed in agriculture. Mechanized agriculture has made food cheaper...but now employs far fewer people.

Yes, our "standard of living" (if you judge that by material items) would decline, but maybe our happiness and overall societal health and well being would increase.

The problem with a highly industrialized society is that there isn't a demand for workers anymore. It is often more profitable for entrepreneurs to have machines doing the work, or at least greatly assisting in the work.

This is one of the big questions that our system hasn't addressed yet...what do we do with all the workers??

[MediumTex]

Maybe peak oil would be the best thing for the unemployment problem. With oil...one man can do the work of ten. Without oil...we have to hire the ten back.

Your point cuts both ways.

Internationally, human slavery didn't start to really disappear until the large scale discovery of fossil fuels, first in the form of coal, and then in the form of oil and natural gas.

People imagine that this ugly chapter in human history went away due to our increasing enlightenment, but the truth may be more a matter of economics.

What does that process look like when you run it in reverse?

[TBV]

Moda:

First: Here are the facts about small business.  http://www.sba.gov/advocacy/7495/8420

Second: Aggregate demand is not all there is to consider.  The regulatory environment is very important too.  Can you tell me what the tax structure will be in a few years, or EPA regulations, or whatever kind of political payback Washington might inflict on a hapless investor?  No.  So why would anyone risk scarce capital when the costs are unknown?  Consider how Boeing is being treated by the government as opposed to GE.  And the former is trying to create American jobs while the latter is trying to export them!!

[doodle]

You raise a good point MT.

Taking my oil scenario out of the picture...what do you do with all of the workers? Human intellect and ability generally conform to a bell curve. Before the economy had plenty of jobs for people on the left side of the bell curve. Currently, these jobs are being replaced by machines or farmed out to overseas workers.

Not everyone is going to be a Bill Gates or Steve Jobs. What do we do with majority of people who aren't? What happens to the workers in a post industrial capitalist society?

[KevinW]

I gotta say I agree with Gumby and Liz L. that these threads are getting tiresome.  We seem to be stuck in an infinite loop:

1) doodle voices concerns and asks pointed questions
2) other posters type out thoughtful responses and pose follow up questions
3) doodle ignores them and goes back to step 1)

I guess I come to an "investing discussion forum" expecting more of a two-way discussion about investing.  I think I'll be ignoring the rest of these threads unless, at a minimum, this question is answered:

But what is your motive of having these conversations? It doesn't seem to be about investment strategy. You've dismissed practically everything we've said to you. What's the point?

[TBV]

You raise a good point MT.

Taking my oil scenario out of the picture...what do you do with all of the workers? Human intellect and ability generally conform to a bell curve. Before the economy had plenty of jobs for people on the left side of the bell curve. Currently, these jobs are being replaced by machines or farmed out to overseas workers.

Not everyone is going to be a Bill Gates or Steve Jobs. What do we do with majority of people who aren't? What happens to the workers in a post industrial capitalist society?

This seems to be a recycled idea from 200 years ago.  Wasn't the industrial revolution supposed to be the big threat to jobs?  Now the industrial era has become the good old days?  How odd.

[Lone Wolf]

The problem with a highly industrialized society is that there isn't a demand for workers anymore. It is often more profitable for entrepreneurs to have machines doing the work, or at least greatly assisting in the work.

This is one of the big questions that our system hasn't addressed yet...what do we do with all the workers??

I don't see the problem here.

The purpose of work isn't simply to have a job.  It's to provide goods and services that earn you money.  You can then use that money to buy things that you like and desire more.  Engaging in trade in this way lets us raise our standard of living.  (And not a little bit, either.  This represents a huge difference.)

I like having enough food to eat.  I like having the option of working in a safe, white collar job.  I like being able to choose to engage in leisure if I simply decide that I can make do with less "stuff".  I like that children survive childhood much more often than "the good old days".

When you watched "The Jetsons" did you think to yourself:

• "AWESOME!!!" or
• "Think of all the jobs this society has destroyed.  Poor George Jetson only works three hours per day.  He will never catch tuberculosis or worry that his family might starve.  He must be so miserable."

Second: Aggregate demand is not all there is to consider.  The regulatory environment is very important too.  Can you tell me what the tax structure will be in a few years, or EPA regulations, or whatever kind of political payback Washington might inflict on a hapless investor?  No.  So why would anyone risk scarce capital when the costs are unknown?  Consider how Boeing is being treated by the government as opposed to GE.  And the former is trying to create American jobs while the latter is trying to export them!!

These points are huge.  Would you be more or less reluctant to start a business with this Atlas Shrugged-style cronyism springing up everywhere you look?

[MediumTex]

Not everyone is going to be a Bill Gates or Steve Jobs. What do we do with majority of people who aren't? What happens to the workers in a post industrial capitalist society?

You've seen The Matrix, right?  

Have you noticed that almost every person you see in public has his/her face in some kind of electronic device.  What are these people looking into?  They are looking into their own future. 

Here is how Beck put it:

Consultants revoke their souls
With unanimous vote
Portions of the proceeds
Go to chain store victims
With remodeled kitchens

and

Autopilot drivers
Riding out in the ice age
Infidels swallowed in a vanishing point
Ammunition souls shooting
Holes in the ozone
A widow's tears
Washing a soldier's bone
Sterilized egos, delirium sequels
Punctured by the arrows
Of American eagles
Robots teach you
All the rules to delete you
Backspace my brain
My equilibrium goes

[Gumby]

I gotta say I agree with Gumby and Liz L. that these threads are getting tiresome.  We seem to be stuck in an infinite loop:

1) doodle voices concerns and asks pointed questions
2) other posters type out thoughtful responses and pose follow up questions
3) doodle ignores them and goes back to step 1)

I guess I come to an "investing discussion forum" expecting more of a two-way discussion about investing.  I think I'll be ignoring the rest of these threads unless, at a minimum, this question is answered:

But what is your motive of having these conversations? It doesn't seem to be about investment strategy. You've dismissed practically everything we've said to you. What's the point?

Exactly. It's trolling. Doodle has no interest in talking about investments at this point. Tolls are destructive to forums and should be dealt with. Now Doodle is egging Moda on again. It's got to stop.

[moda0306]

The regulatory environment is something to consider, as is the tax environment, and we can look at individual businesses if we want but that doesn't tell us about the broader economy, so let's just assume that there's one, giant producer of all things called Monopocorp.

They may not like taxes and regulation, but that's simply because they make less money as a result. It doesn't, at this point, really affect their investing decisions.  Unless they are running near full capacity, overall, they're not going to expand.

Now, since this is a big company, it has various sectors.  Due to more microeconomic changes in what is demanded in the economy, and one particularly entreprenurial group called the "Tech Department" (as opposed to the real estate department, which is getting hammered).  Monopocorp might choose to hire people in the Tech Department, and they may make great products, but that doesn't mean that "business" is good overall as they fired WAY more people from the Real Estate department the last few years than they hired in the Tech Department.  To tighten things up a bit... yes, Monopocorp is probably more concerned with Tech Regulation & Taxes than Real Estate, because that's where they're trying to grow and move resources to, but there's hardly enough demand in that area to make that a great overall concern of the company... it's just higher demand than the RE Dept... their main concern is still aggregate demand.

Loosening regulations & taxes is simply going to mean more dollars in their pocket on the bottom line.  They've already moved resources from the RE Dept to the Tech dept, so there's no need for additional capitalization.  They'll just save their dollars in a FDIC insured account earning .5% until they see enough aggregate demand to net-invest.  So until the Tech Dept is growing faster than the RE Dept is contracting, Monopocorp won't reinvest profits to grow the firm.

I'm not saying perpetual growth is possible, but simply the idea that supply-side tax-cuts are going to result in jobs while spending won't, is false.

[doodle]

KevinW,

I have answered LizL's question and I will answer Gumby's although I'm not sure if it was rhetorical or not.

But what is your motive of having these conversations? It doesn't seem to be about investment strategy. You've dismissed practically everything we've said to you. What's the point?

My motive for having these conversations is to try bounce my ideas and views off of the people here. Contrary to what you may assume, I have read all of the articles that have been posted by opposing viewpoints and have tried as best I can to understand what is in them. This is a complex time we are going through and I probably think about it to much....hence my prior mental masturbation comment.

I'm sure that people would be happy to engage you in a thread of your own creation, and as is often the case they tend to go off on tangents.

But, if this thread doesn't appeal to you, then I would urge you just not to read it. If people stop responding to me I will get the picture.

[Gumby]

But, if this thread doesn't appeal to you, then I would urge you just not to read it. If people stop responding to me I will get the picture.

Doodle, I don't know if your comments appeal to anyone. We were all trying to help you, but you don't seem interested in getting any help. My sense is you'd be happier at another forum where it's acceptable to rant about government policies.

[moda0306]

Let me clarify to LW and TBV and doodle that I'm not saying taxes and regulations are necessarily moral and efficient, but simply that as a strong believer that most of our existing small-to-mid and even many large businesses are important institutions in the US and have very severe short-term considerations (ie, demand!) that overcome any long-term considerations... and that to tell people with no job (Wally Worker) that giving a tax-cut to Peter Producer is going to give them a job and cutting Wally Worker's benefits is also necessary for job growth is a complete lie, IMO.  You can tell him it's not the government's job to help him or tax Peter... but don't tell him that Peter's tax-cut will go right back into expanding the business.  It won't.

Some businesses might be hiring, but others are firinng just as fast.  This isn't because they think taxes will be to high in the future or that regulations are too tough (though they might not like that idea)... it's because demand is too low.

The best businesses will still perform the best when demand is reasonable to fulfill capacity as when it is low.  It's these short-run considerations that I feel Austrians don't grasp.  They look at everything in this theoretical long-term scope... and that's fine... but when the content of the short-term CHANGES the long-term game, then it really changes everything.

A lack of demand is discouraging to business... period.  Regulations and taxes are only considerations AFTER you have enough people walking through the doors of your store.  Should the government pick the industries that win and lose?  Of course not.  Should they give the economy the money supply necessary to stay productive?  That's worth considering.

[doodle]

Gumby,

I don't know why you feel it necessary to personally attack me. Your last five posts have been directed at my character in an insulting fashion. I'm afraid that by responding to you directly, we are going to get banned because you seem intent on escalating this.

What did Mark Twain say: Never argue with a fool, onlookers may not be able to tell the difference.

If I am such a fool then don't engage me. As I said, I might be dumb but eventually I will get the picture.

I have nothing personal against you. I appreciate the strong counter arguments you have provided. I have read all of them. Maybe I am too dense to understand them. Maybe I am just a "left side of the bell curve" guy trying to compete in a "right side of the bell curve" forum. I have acknowledged that the future is unclear. What more do you want me to do?

And stop calling me a troll please. I am not trying to ruin this forum.

[MediumTex]

Imagine we are all sitting in a room talking with one another.

Decorum please.

Doodle, I would just ask you not to continue repeating the same things.  I think you have described your concerns in great detail about the unfortunate state of the world and our country today.  Please be specific about why you think that the PP is not well-positioned for the challenges that appear to be on the horizon because to me we are in the kind of environment where the PP would be expected to perform best.

Let's just move the discussion forward.

[moda0306]

doodle,

I disagree with Gumby's vehimence, but you simply seem to be dodging or ignoring a lot of the points we try to make and move onto, "but we're just so f*ked there's no way out of it" without considering the mechanics of how the economy would get to the point that you insist it will... whether economic disaster will come as a result of default, mass deleveraging (good for treasuries) or a malinvestment malaise (decent for treasuries).  These are all bad, but different, possible outcomes... the last two MUCH more likely than the first.

We try to come at it from every which way, and rarely do you acknowledge a point that has  substance and try to build the discussion from there... you simply come back in with your hyperinflation wrecking ball and utterly ignore the fact that we're trying to build a set of facts, observations, historical contexts and likelihoods.

That's what's frustrating.  I know you don't intend to frustrate us, but I feel we're just back at square one with every discussion we have about our world economy.

I've enjoyed the discussions your concerns have brought to the table.

[moda0306]

doodle,

I'd ask you this... did you feel this way in 2007 about our debt/economy?  Maybe somewhat less so?... but I'm willing to bet you still thought we were headed down this path to some degree.

Can you test your mock-portfolio during the 2008 timeframe and tell me if you have the stomach for the losses you would have incurred?

This isn't to insult your ideal portfolio so much as what I see as an important hypothetical gut-check so you know what you're dealing with.

[Gumby]

My apologies to Doodle for the attacks. It's just that I've noticed that we've been repeating the same exact conversations over and over again since April, and we've put a lot of time in them, trying to help Doodle out. Now, I'm not so sure he really wants any help. It just seems like we're going in circles. It's excruciating.

So, I'm sorry Doodle. But, as MT said, let's keep these discussions to the PP instead of government policies. We've already covered that too many times.

[Lone Wolf]

A lack of demand is discouraging to business... period.  Regulations and taxes are only considerations AFTER you have enough people walking through the doors of your store.  Should the government pick the industries that win and lose?  Of course not.  Should they give the economy the money supply necessary to stay productive?  That's worth considering.

If Keynes and Hayek couldn't resolve this question via time-traveling rap duel, it's unlikely to get resolved.

I'm a recovered Keynesian myself so I'd have once been sympathetic to this argument.  But the question is demand... for what?  For construction?  If we've overbuilt, a correction requires falling wages and\or employment in the construction sector to free up workers for other sectors of the economy.

The government can attempt to fight this process, but it doesn't actually have any money of its own.  Anything it spends has to first be taxed from the productive bit of the economy or borrowed on the back of some future taxpayer (and in the process gobbling up credit that is now unavailable for real businesses.)

We've spent and spent and it has been a disaster.  The only Keynesian answer left is to spend even more.  It's helpful that we can still borrow at low interest rates but I see it as unwise to get ourselves into situations whereif interest rates were to rise we're only left with very painful options.

[doodle]

This thread  has travelled through so many tangents that I don't know what the "main idea" here is anymore.

Doing my daily read through the financial websites I came across this guy making a decent argument for the gold standard vs. the "phd standard"

He looks like Bill Nye the Science guy and he wears a bow tie like my investment hero Jim Rogers so both of those should lend creedence to his ideas.  Worth a listen:

http://www.bloomberg.com/video/72621750/

[moda0306]

Doodle,

Just trying to help...

Take a look at this link... Doodle,

Just trying to help...

Take a look at this link... it shows a pretty good layout of what a bunch of the funds that make up your "ideal portfolio" would have done in 2008.

http://www.google.com/finance?chdnp=1&c ... =0&fct=big

It looks like much of the 55% of your portfolio consisting of commodities & stocks would be down in 2008 calendar year between -20% and -60%, with gold being your only savior in that group.

Meanwhile, your 5 year ladder (I used 3-7 year treasury fund... which probably performed better than a 5 year ladder would) is up 10.5%.

I didn't look into the 5% in forreign currencies, but they probably lost some, too.

Overall, doodle, assume reasonable sub-allocations, I doubt you could have escaped 2008 with less than a -25% loss.

[doodle]

I echo your sentiments below exactly Lone Wolf....which is why I am starting to see some of the benefits to the gold standard. It seems like this standard tempers wild growth in credit during boom times which theoretically is supposed to lead to smaller sharper recessions with quick recoveries. I am wondering why centralized Soviet economic planning was seen as ridiculous, yet doing the same type of thing with centralizing decisions regarding money supply and interest rates seems so wise today?

If we've overbuilt, a correction requires falling wages and\or employment in the construction sector to free up workers for other sectors of the economy.

The government can attempt to fight this process, but it doesn't actually have any money of its own.  Anything it spends has to first be taxed from the productive bit of the economy or borrowed on the back of some future taxpayer (and in the process gobbling up credit that is now unavailable for real businesses.)

We've spent and spent and it has been a disaster.  The only Keynesian answer left is to spend even more.  It's helpful that we can still borrow at low interest rates but I see it as unwise to get ourselves into situations whereif interest rates were to rise we're only left with very painful options.