Economics

Societies evolve and change.  Technology creates new products and services.  Our economy has transitioned from an industrial society to a technological society, and is now moving into a phase termed knowledge based in less than 50 years.  This pace is an overload on the legal system and various institutions.  As a result, the relationship of elasticity on product and service demand changes, which causes business and governments to rethink policy, methodology, law and how to operate in a new environment as it changes before its eyes.

Elasticity directly impacts price.  In the 1980’s it was not important to have a cell phone or email to conduct business, so these type of products and services’ price movements did not affect demand.  However, in the 21^st century cell phones and email are imperative in order to do business, consequently the elasticity of demand and supply of the products and services has changed.  These products and services’ changes in elasticity of demand and supply create behavioral changes in purchasing, due to price changes and feature functionality, and utility.  Consequently, people must have cell phones and email to for example, gain employment, conduct business, and deal with family issues.  This means a new item of nondiscretionary spending has now entered a family, or businesses mix of products and services that it must have.  As a result, this changes the effect of government policy and spending patterns, hence economic analysis and policy creation.

Now one can see that the new requirements placed on society and business by these changes, leave less money available for normal purchases that have always been required, or part of the family budget that cannot be omitted.  However, the flip side to this is employment gains in the new industries that create these products, or services.  Although, the net employment increase is less than the employment decrease since the recession of 1990-91, due to innovation driving down labor needs and costs at faster pace.  This leads to lower GDP and less national income per capita; society must find ways to deal with this issue.  One might ask is this dilemma and or trade off correctable so as to increase national income or GDP, and per capita income.  The short simple answer is yes.  However, the outcome is dependent on the extent to which the government utilizes what economist call the multiplier principle and its dynamic relationship with the private sector.

Policies must be implemented that focus on employment that results in economies of scale, or reduced cost and increased utility patters.  Consequently, polices that embrace education, infrastructure such as transportation, water, energy, health care and delivery become imperative in this type of secular development phase of a society.  Education has a long payback period that can be from 18 to 30 years; this makes these policies difficult to implement when a country such as the USA is facing large debt.  The appetite is currently.  However, a low appetite for education is the wrong direction because of economies of scale and utility that education provides a society.   In a low interest rate environment these opportunities must not get away from a country in the midst of globalization.    Infrastructure such as transportation, energy and water can bring down the long run average cost curve thereby increasing families discretionary spending. 

These types of investments also increase the amount of leisure time people can have.  Spending on health care technology, disease cures, and delivery methods also reduce the long run average cost curve affecting family’s finances and per capita income.  If the opportunity to seize the low interest rate environment is not seized, then a society will find it too expensive to invest in these areas, leaving the country at a competitive disadvantage as compared to other countries in a globalized economy.  The choice will either increase or decrease the standard of living.

Currently the USA has about $22 trillion in debt, students have $3 plus trillion in debt, and housing mortgages in many geographic locations exceed market value for the home of many families.  In addition, there exists large amounts of auto and credit card debt for the consumer.  Also, the energy sector has accumulated over $3 trillion in debt for recent investment in oil wells over the last 8 years.  When you combine this with the fact that the US government has not properly invested in education, health care and infrastructure, there is a looming disaster and chaos possible from what is known as the debt cycle.  When and as interest rates reach normal levels, equity prices will inevitably fall.  If the US and international political landscape continue in chaotic fashion, the debt levels will be unsustainable and therefore not serviceable.  A large portion of the debt payments will have increased as interest payments.

As a result of the debt, and lack of investment, the possibility of unmanageable debts increases; markets will become tumultuous at best.  In this case the only way for the consumer or family to survive free from experiencing a squeeze is to maintain zero debt levels with a large emergency fund, and employable skills.  This means a paid for house and cars, adequate savings, sustainable income and skills to remain employed will become the only saving grace.  All other families who are not in this situation could be squeezed to the point of no return financially.  The question is how can this be overcome by our government and families?

The first step to a balanced financial situation is education and employable skills.  Make sure at an early age you take care to account for this.  Families that do not have enough money to provide higher education for their children may have to depend on a child working some amount of time while going to school; this can be difficult but it is attainable with family support.  Children may have to live at home longer and attend community colleges first.  Consider scholarships and financial aid.  However, do not take on more debt than your possible career can manage.  The next step is to accumulate an adequate emergency fund.  This can be done by setting aside money each pay check in a savings account or money market account.  For families that do not have this extra cash flow you may need to consider two wage earners, less expenses for cost of living, or more income.  However there are circumstances when none of these items can be achieved.  This is a difficult situation I cannot address in this post.  Next consider paying cash for as much of your lifestyle as you can.

Debt cycles are caused by investment cycles.  Debt cycles become unmanageable when overinvestment has reached a point where revenues are not sufficient enough to service the debt.  When debt is not serviceable, financial institutions become vulnerable to runs on deposit, and insolvency which leads to further losses in financial institution confidence by the people.  This is a dangerous scenario we saw in 1998 and 2008.  Through Federal Reserve tools, and fiscal policy, depressions were avoided in these years.  However a society will reach a point when it can no longer kick the can down the road.  At this point the society cannot finance health, infrastructure and education because no one is willing to buy its debt if not serviceable, such as in a high interest rate environment.  When faced with the choice of austerity or nonpayment of debt what happens?  Either a taxpayer bailout, or a depression followed by a society that falls to a lower level of standard of living.

A solid answer is public and private sector investment in education, health and infrastructure.  Investments in these three areas have long payback periods.  However, the return on these investments is extremely large even though in the moment one cannot seem to justify the investment given the debt level.  If society fails to take advantage of the low interest rate environment, then given the debt and economic life cycle age of the global economy the outcome will be disastrous at best.  Investment in education, health and infrastructure provides immense economies of scale and returns for society that are very difficult to measure, but certainly the answer to all that ills.

Perfect Competition: Many buyers and many sellers, perfect information access is imperative to this market type, price determined by supply and demand with perfect information.

Monopolistic Competition: A few sellers and many buyers. As a result, price is usually set by the owners of the Monopoly. There is some price competition but price collusion is more plausible in this market type.

Monopoly: One seller and many buyers. The seller sets the price in this market as well as its impact on the socioeconomic environment.

Oligopoly: Few sellers and many buyers, typically has a cartel which employs forms of price collusion, typically on the production side of the market equation.

These markets develop in all societies in a capitalistic system. As a result of the market type, governmental regulation is usually considered, legislated and enacted in order to provide what society deems as an acceptable set of rules that govern socioeconomic impact. When government’s partnership with companies in these four markets, or (any combination thereof) is disrupted, then market turmoil manifests itself. Market turmoil is the result of the private sector (companies), the public sector, and the demand for a given product or service that has become out of balance. An out of balance situation in this context is one in which confidence is broken, money is concentrated in too few hands, and institutions have difficulty functioning and providing reserves for demand on money due to law not keeping pace with socioeconomic change.

When the partnership between government, the private sector (companies), and the people become out of balance the reality is that the legislative process comes to a halt. The legislative process is reactionary by definition. In order to maintain balance a society must reduce the risk of legislative latency. This is the crux of depressions and recessions.

The idea of negative interest rates in the United States has always been a nonstarter. However, many countries are currently instituting such policies. What this means is a depositor would have to pay the bank money to keep its money in the bank. This is not good for society or banks. The very notion of negative interest rates makes the banking business model unpalatable because the banking business model attracts customers because they pay you interest, and they should.

If the Federal Reserve adopts negative interest rates, then the policy would intensify the current technological movement towards a cash less society even quicker. This means many traditional banks could go out of business. People would then be wisest to payoff mortgages and pre pay bills. At the present time of economic development in the world, we have an oversupply of many things due to over investment which in turn creates over capacity and deflation. This is what causes, and has caused asset bubbles and their popping.

Many demographic subsets of society rely on interest from banks as investment as well as a safe place to keep a lot of money. The lack of banking institutions will create more virtual money mechanisms, increased fraud, turmoil and upheaval leading to a lack of further confidence in the economy and institutions; this type of governmental institution intrusion will disrupt the natural flow and corrective forces of the market. As a result, this could actually bring about the great depression all over again to the likes of the 1930’s. This type of depression was avoided mostly by Ben Bernanke’s policies. However, that does not mean those policies were good for the country. What is clear is that Mr. Bernanke had no other choice; unless he chose depression. Ultimately this may be our only choice if no other knowledge integration is considered. I hope it does not happen.

Societies go through cycles of under and over supply. Speculation drives over supply due to greed, or perceptions that a lot of money can be made. Once the supply/demand equation becomes unbalanced, the more mature the economic cycle and systems in place, the greater the chance for disruption. Our country has vacillated from asset bubble to asset bubble in many sectors of the economy since 1999. The Federal Reserve has attempted to temper this pattern; however, it cannot do so forever.