About the Economy

Economists are highly trained and well-educated.  However, economic theory is just that – theory.  For the most part it is an attempt to apply formulas to data in order to predict results.  As we all know, if human commerce could be reduced to an intractable mathematical formula then it would be child’s play to make a fortune on Wall Street.  Simply put, there are too many variables in the economy to lend itself to such pronouncements.  No matter how much data is assembled, it still takes the subjective workings of a human mind to interpret the data, and very few if any people have the knowledge, experience and brains to make the right call. 

To me what went wrong with the economy is best understood by analogy.  When credit dried up, that is equivalent to an automobile losing oil.  The parts no longer work in harmony.  If you keep driving, the engine will blow up.  Adding to this, the housing bubble is like major gasoline refineries suddenly discovering that their huge storage tanks have faulty valves.  By reading the valves, they thought they had 100,000 gallons in the tank.  Upon closer inspection, the valve was faulty and the tank only contained 10,000 gallons.  Then on the highway all of the motorists also had faulty fuel guages. They thought they had more than half a tank.  As the car sputters to a stop, they realize they are out of gas.

So the government decides to start handing out gas and oil.  They pump the refiners tanks with more gas (the bank bailout) and deliver extra gas and oil to the gas stations (the states receiving stimulus funds).  The government even pulls up and hands out gas and oil to some stranded motorists.

Problem solved?  Not quite.  We still need to repair and replace all those faulty valves and guages (regulatory reform).  Then will people start driving, heading for their destinations and making it there?  That depends.  People are worried.  Will I get stranded without gas again?  How far will this tankful of gas the government gave me take me?  Should I turn around, shorten my trip, change my destination?

This is the human factor that cannot be controlled nor reduced to a formula.  A complex economy is the result of hundreds of thousands of individual decisions.  As those decisions are made then over time the traffic flow can be examined and some conclusions can be drawn.  No one quite frankly knows or can predict what the traffic patterns will become.  It might revert back to normal levels (recovery), it might come back on some roads and not others (recession) or although unlikely the vehicles could just pull off the road and stop (depression).

Maybe what this economic crisis has taught us is that if we are going to drive a car we need to become somewhat of a mechanic ourselves.  We need to be able to sense when the gas guage just has to be wrong.  We need to watch the temperature so we know when we are low on oil. We need to carry some extra gas on long trips so we aren’t stranded if the tank goes empty. 

In other words, we need to educate ourselves about how to use our labor and our assets to produce value.  That quite simply is what the economy is all about – producing value.  A stock that was “worth” $100 and has now dropped to $1 has lost what?  Value.  Think about what is valuable to you and invest in that. In the words of the analogy, don’t make unnecessary trips in your car.  Plan for where you need to go and take reasonable steps to get there anticipating that unexpected things will happen. 

Yes, the economy will recover.  The trick is to have buses for those who have abandoned their cars.  You may even have to pick up a hitchhiker here and there.  

Happy motoring!