Innovation Is Key

Sunday's edition of the Sarasota Herald features an article titled, "Tough Times for Tamiami Trail Businesses" which chronicles how local businesses are struggling in the current economic downturn. Much of people's attitude towards their own individual economic situation is formulated by first hand experiences. Seeing the salon where they used to get their hair cut close or the store where they bought someone last year's Christmas gift is liquidated has a significant effect on people's psyche. However, failure does not have to become a certainty. Sometimes a little innovation can spark success.

Such is the case with Modern Beauty salon. Located in North Port, the epicenter of the Sarasota real estate implosion, this salon has defied the crumbling local economy by diversifying. Owner Stella Derby added more value to her establishment by dividing up her salon and adding a contract post office. The strategy of adding the post office to draw more people to the salon appears to be working with the salon adding two to three new clients a week. While the innovation to add a post office to a beauty salon is fairly rudimentary. This sort of forward thinking is going to be the key to getting the U.S. economy on the move once again.

Don't Look Now

Because there is a very real chance that the money in your monopoly game may end up being worth more than the money in your bank account. Yesterday's article in The Financial Times titled "China calls for new reserve currency" reports on a recent proposal by the head of the Chinese central bank to replace the dollar as the world's dominant currency with a new reserve currency that would be administered by the International Monetary Fund. Zhou Xiaochuan, governor of the People’s Bank of China, posted his opinion on the bank's website. In his post Zhou states, "The outbreak of the [current] crisis and its spillover to the entire world reflected the inherent vulnerabilities and systemic risks in the existing international monetary system." Because of the risk, Zhou goes on to assert the need to find a more stable system that does not rely on the currency of a country with a significant amount of debt.

The move to a new reserve currency would be a worst case scenario for the value of the dollar. If this were to happen not only would China not buy our new debt but they would instead look to dump their current dollar holdings. Couple this liquidation with the efforts of The Federal Reserve buying more than $1 trillion of U.S. government-backed IOUs last week along with the increasing amount of spending by the U.S. government; it is difficult to imagine how the U.S. can avoid high inflation perhaps even hyper-inflation. This scenario has the potential to make the value of the dollar on par with monopoly money.

How Long Until We Get There?

On Saturday The New York Times published an article titled "Has the Economy Hit Bottom Yet?" In the article various economists describe possible scenarios that could signal the end of the current economic downturn. The contributors to the article discuss how various changes in stocks, homes prices and consumer spending could indicate that the bottom is in. One analyst cites demand for copper as a sign of a recovery while another mentions a flattening in the saving rate. It is interesting that none of them mentions employment.

Without a decline in the number of people unemployed, it would seem difficult to hit a bottom. Rising unemployment spreads paranoia about the future for both the people that have lost their jobs but also for those who continue to have work but see their friends and family losing their jobs. This uncertainty is what has fueled many people to stop shopping at the mall and instead increase their saving. Without more jobs this economy will have a long way to go to get to a bottom.

You Know It's Bad When...

You know it's bad when even the repo man is having a hard time making it. The recent The Wall Street Journal titled, "The Recession's Gotten So Bad, Even the Repo Man's Singing the Blues" chronicles the trials and tribulations of Tony Cooper, the owner of Professional Auto Recovery LLC. Over the years abundant and easy credit helped Cooper grow his business. It was easy for people with marginal credit to get loans. If those same people got behind on their car loans they would simply walk away from their car because they were confident some other sub-prime car lender would give them a loan for another car.

While the number of car repos have increased in the past year, vehicle financing is down by 32%. This seems to suggest a dramatic shift in the car buying habits. This trend is in part a result of a tight credit market but also a reflection on how the economic downturn has incentivized people to not go further into debt for a car. With rising unemployment, it is difficult to see what could break this trend. Given the decline in auto loans, it might be a good time for Mr. Cooper to park his tow trucks and open an auto repair center.

In China We Trust

On Friday, Ian Bremmer, president of Eurasia Group, was interviewed by Alexis Glick for a segment titled "Government Shaping Economic Future?" on Fox’s Money for Breakfast. Bremmer points out several ways that government policies both abroad and in the U.S. will have a direct impact on the U.S. economic reality in the very near future. One of the most troubling topics that Bremmer and Glick discuss is the possibility that China will shift their investment strategy away from buying U.S. Treasuries and toward their own domestic investments.

If China does adopt this strategy, the implication for the U.S. economy will be marked. According to Bremmer, the U.S. will have to "turn on the printing presses." Unfortunately, much of the recent U.S. government spending is predicated on both the Chinese continued purchase of U.S. Treasuries and the U.S. economy recovering in 18-24 months. If either one of these predictions fail to materialize, then high inflation will likely follow. Our reliance on countries like China is increasingly forcing the U.S. into what Bremmer calls a "secondary role" where "the days where the United States had the political and economic leverage to get the rest of the world behind it are behind us." Short of an economic rebound the likes we have never seen before, it would appear we better hope that China buys our debt.

Deal or No Deal?

In Sunday's Times Online, the British Prime Minister, Gordon Brown, makes the argument that the way out of the current financial crisis is with a global new deal. Brown argues that the U.S. and Britain should parlay their common interests and shared histories to help spread the notion of globalization around the world. Central to many of the Prime Minister's ideas, is the belief that governments must initiate the necessary changes in order for there to be an economic recovery.

It is this reliance on government over the private sector in Brown's proposition that makes his reasoning so flawed. It is capitalism not government control has done more to end poverty and advance freedom around the globe. Brown claims to understand, "the American spirit of enterprise and national purpose" but he doesn't have a clue. His assertions should be firmly rejected by the Obama administration. Simply put; no deal!

When Risk Outweighs Reward

In reviewing this week's announcement of the revised GDP numbers for the fourth quarter, the data pertaining to the decrease in investment in equipment and software was quite striking. The Wall Street Journal article "Economy in Worst Fall Since '82," outlines the details of the revised GDP numbers which were released by the Commerce Department on Friday. Overall the new data reflects a 6.2% fall in GDP rather than the earlier fourth quarter estimate of a decline of 3.8%. This increased decline in fourth quarter GDP indicates that the U.S. economy is in a much more turbulent situation then earlier estimated.

But the rapid decline in portion of GDP relating to investment in equipment and software seems to be the most striking. When a business ceases to purchase such items in spite of the fact that long term saving might result, it is clear that they are uncertain of the future business environment. Bradley Aldrich, the president of the engineering firm, Forcier Aldrich & Associates Inc. sums up his unwillingness to purchase software that would potentially enhance his firm in stating, "It makes sense to do it, but with the economy the way it is right now we're reluctant to make the investment." When the reward of a business investment appears to be fraught with risk, a falling GDP will continue follow.