Fix & Flips were very popular in the 2000's and provided ample entertainment on numerous tv shows that glorified this incredibly risky business. Most people don't realize this but fix & flips really are quite risky investments compared to the stability of fortune 500 companies and numerous other investment strategies that are not quite as fun. For those of you not yet in the know, a fix and flip is where a person buys a home that requires a lot of work to be done to it and they buy it at deep discounts because of the massive amount of work required. By fixing the property in a short period of time, they then turn around and sell the home in a matter of a few weeks, (hopefully), and turn a profit of whatever the difference is between the total cost and what they sell it for. There are numerous ways to finance fix & flips, or at least there were before the meltdown that occurred in 2008. Before then, credit was relatively easy to get and home prices were going through the roof. Some might say that home flippers had something to do with the out of control home appreciations that occurred. That is not something I am willing to speculate on at this point, but I am sure it would make a great topic in the future.
So, we come to the question, do home flipping strategies actually work. According to the television they really do and work well. A little deeper digging reveals that many people have actually lost their shirt in the real estate market because of such a risky investment. I personally have met two people who lost more than everything they owned in real estate. I have not met anyone who has made it big in real estate. Anecdotally, the odds are not good that I will be very favorable towards fix & flip strategies. For the most part, I really enjoy shows like Flip This House or Flipping Out, but I find their production to somewhat show only the positive side of flipping and not how many people fail using these strategies. I can't tell you how relieved I am when they get to the end of the show and say, “Congratulations, your house is now worth $50k more than what you put into it.” I am a little incredulous that they pulled such a wonderful stunt, but then I turn to myself and remember those are numbers that are just thrown out by a real estate agent and do not reflect what the house actually sells for. Maybe I'm just a little hard on this, but I just have real trouble seeing how a house can be worth so much more after so little time. Personally, I'm used to investments that take several years or at least months to pan out. The idea that I can buy a house and sell it for more in less than two months just doesn't seem really realistic to me. In any case, I am still going to try and figure this out.
One of my favorite websites is DIYnetwork.com. It is a great place to go for home improvement ideas, which would be wonderful if one is lucky enough to be able to afford a house. Home improvement is one of those things that can be enjoyable if you can get the end result you want. Oftentimes it is just better to leave it to the professionals. But then again, if you left everything to the professionals, where would the profit be? In their pocket. Exactly.
Sunday, September 20, 2009
Sunday, September 13, 2009
Breaking the Poverty Cycle
Last week, I expounded upon the difficulty facing the Grand Valley in the form of unmanageable housing prices. During that exposition, I decided it would be good to write an entry about the poverty cycle and the difficulty one can face in trying to break it. Developing economies have been dealing with this problem much more in recent years than developed economies. A developing economy, for those unversed in the jargon, is any nation that cannot sustain a decent standard of living according to the World Bank and the World Health Organization. People in these countries face extreme challenges when it comes to development and securing financing for any kind of activity, the importance of which was enumerated in my blog for the week of August 23rd. So not only do developing countries face credit default risk on an enormous scale compared to developed countries, but also ready to rear its ugly head at any moment is the risk of political instability because of deteriorating economic conditions. Since these economies are well familiarized with what it takes to break the poverty cycle, looking at them for clues is one of the best things to do for poverty in our country as well.
One of the things that development economists notice right away is the lack of profit incentive for many people in impoverished nations. In many cases, poverty comes from a lack of drive in the impoverished spirit to make a better life for oneself and for one's family. Another reason for the lack of profit incentive is usually massive amounts of government corruption so that any significant gains made by business for their profits is quickly eaten away by people who rationalize their bad behavior because of their own poverty-stricken circumstances. Combined with a populace that is indifferent and complacent in the face of such graft, businesspeople cannot help but feel like they need to engage in illegal behavior to make their business successful. Therefore, one of the first ways to get rid of poverty is to put in place and enforce a governance structure that creates incentive for people to produce things that build up society in some way, rather than tear it down. The easiest way to do that is to provide avenues for civic engagement that are not exclusive, but are inclusive. The more people get together with the purpose of solving the problem of poverty in an area, the more likely it is that they will be able to come together with common purpose to collectively solve their problems. Democratic exercises are very helpful for achieving this goal, but are not entirely necessary. In some cases, they can lead to witch hunts that demonize the rich for political ends and that is not very helpful for generating a wealthy society. But on the whole, democratic processes are much more successful at generating wealth in a way that is just and fair for everyone.
When looking at how developing countries break the poverty cycle there is a virtuous cycle consisting of three things that benefit the country as a whole and help people within that country break the poverty cycle. These three things are first foreign direct investment, second government fiscal conservatism, and third education and training. Once a country, or for the sake of argument a specific geographic area or people group, identify and acknowledge that they are indeed living in poverty and need to find a way out will soon realize that the quickest way out is to utilize these principles in achieving their goal. There is no quick way to building riches, whether it is for a country or for a person. The people who are in poverty often see others getting ahead while they lag behind. Rather than looking at their own situation and responding to that, there is a kind of keeping up with the Jones' mentality that takes hold where they feel pressure to consume more than they are able. This kind of mentality is quite destructive of the wealth-generating capacity of these individuals.
The first thing that most quickly breaks the poverty cycle is to get help from people and countries that have already done so. Think about it. The first thing that someone who wants to get out of poverty should do is ask for help. Certainly, they need to be shrewd about the people they ask, but for the most part people and nations that learn from others who have done well will be on the path to doing well themselves very soon. Likewise, those who do not learn from others but rather sit in isolation are going to find there is no way to go faster to the bottom of the economic food chain than to stick your head in the sand. Our world is constantly changing and in order to remain competitive, someone has to be open to the possibility that the way they live will not always be sustainable. For some people, taking on a loan is not really that much of a problem because they are so well versed in taking risk that they can handle it. Others may not be so eager to put themselves in that situation because their capacity to escape from it has not been developed yet. Either one is doing the right thing as long as they are making sure that they are going to be successful in their plans.
The next step to breaking the poverty cycle on an individual basis is to live within your means. There is nothing quite so difficult as living within your means in America. In this place where we are constantly barraged with messages to consume and consume, it is difficult and not very popular to create a situation where you want something that you can't have. Unfortunately, our society places a high value on consumption and not enough of an emphasis on production. This has led to many people being overwhelmed with the debt burdens that have been placed on them as a result of this mass encouragement to consume. As stated previously, consumer debt is one of the most frequently abused kinds of debt because there are few instances where it is likely to reap positive rewards. For a short time, the products one can buy with consumer debt are nice to have, but for the most part they cannot be considered assets that increase the bottom line of households. Instead, they create a drag on the income and cause things one buys to cost more than they really do.
The same way that governments take on massive amounts of debt in order to finance their operations, there is nothing that is sure to lead to a poverty-stricken country than to have the government take on more debt than they can chew. Government debt is very much a different animal because of certain institutions that we have in place, but for countries in Africa and Latin America, just ask them how the government debt has improved their lives and you will find that very little of it has in the long-term. Likewise with personal debt, the more one tries to carry the more of a load you have. Ask anyone who has declared bankruptcy how difficult it is to escape from the trap of debt and you will not have any reason to doubt the devastating effects it can have on one's life and reputation. Mesa County has been blessed with a government structure that is very fiscally conservative and allows us to enjoy a greater amount of prosperity than areas faced with mounting debt burdens. One of the reasons why Mesa County and the City of Grand Junction have a low debt load is because many of our civic leaders are also business leaders in the community. While this can be frustrating in some aspects, it is beneficial when trying to get a leader to understand how important keeping a low amount of debt can be. At times our public officials have faced ostracism for proposing projects that take on large amounts of debt, (the latest public building project is proof of that), and despite those factors governance mechanisms within Mesa County are still able to function.
So eventually if you follow all three of these rules, it is possible to break free from the cycle of poverty that grips a significant group of people in this country so famous for its opportunities. I hope this helps some of you out there. For next week's topic, I will be examining why fix & flip real estate strategies work or don't work. I am looking forward to a little research on this one so let me know if you have any good tips. Until then...
One of the things that development economists notice right away is the lack of profit incentive for many people in impoverished nations. In many cases, poverty comes from a lack of drive in the impoverished spirit to make a better life for oneself and for one's family. Another reason for the lack of profit incentive is usually massive amounts of government corruption so that any significant gains made by business for their profits is quickly eaten away by people who rationalize their bad behavior because of their own poverty-stricken circumstances. Combined with a populace that is indifferent and complacent in the face of such graft, businesspeople cannot help but feel like they need to engage in illegal behavior to make their business successful. Therefore, one of the first ways to get rid of poverty is to put in place and enforce a governance structure that creates incentive for people to produce things that build up society in some way, rather than tear it down. The easiest way to do that is to provide avenues for civic engagement that are not exclusive, but are inclusive. The more people get together with the purpose of solving the problem of poverty in an area, the more likely it is that they will be able to come together with common purpose to collectively solve their problems. Democratic exercises are very helpful for achieving this goal, but are not entirely necessary. In some cases, they can lead to witch hunts that demonize the rich for political ends and that is not very helpful for generating a wealthy society. But on the whole, democratic processes are much more successful at generating wealth in a way that is just and fair for everyone.
When looking at how developing countries break the poverty cycle there is a virtuous cycle consisting of three things that benefit the country as a whole and help people within that country break the poverty cycle. These three things are first foreign direct investment, second government fiscal conservatism, and third education and training. Once a country, or for the sake of argument a specific geographic area or people group, identify and acknowledge that they are indeed living in poverty and need to find a way out will soon realize that the quickest way out is to utilize these principles in achieving their goal. There is no quick way to building riches, whether it is for a country or for a person. The people who are in poverty often see others getting ahead while they lag behind. Rather than looking at their own situation and responding to that, there is a kind of keeping up with the Jones' mentality that takes hold where they feel pressure to consume more than they are able. This kind of mentality is quite destructive of the wealth-generating capacity of these individuals.
The first thing that most quickly breaks the poverty cycle is to get help from people and countries that have already done so. Think about it. The first thing that someone who wants to get out of poverty should do is ask for help. Certainly, they need to be shrewd about the people they ask, but for the most part people and nations that learn from others who have done well will be on the path to doing well themselves very soon. Likewise, those who do not learn from others but rather sit in isolation are going to find there is no way to go faster to the bottom of the economic food chain than to stick your head in the sand. Our world is constantly changing and in order to remain competitive, someone has to be open to the possibility that the way they live will not always be sustainable. For some people, taking on a loan is not really that much of a problem because they are so well versed in taking risk that they can handle it. Others may not be so eager to put themselves in that situation because their capacity to escape from it has not been developed yet. Either one is doing the right thing as long as they are making sure that they are going to be successful in their plans.
The next step to breaking the poverty cycle on an individual basis is to live within your means. There is nothing quite so difficult as living within your means in America. In this place where we are constantly barraged with messages to consume and consume, it is difficult and not very popular to create a situation where you want something that you can't have. Unfortunately, our society places a high value on consumption and not enough of an emphasis on production. This has led to many people being overwhelmed with the debt burdens that have been placed on them as a result of this mass encouragement to consume. As stated previously, consumer debt is one of the most frequently abused kinds of debt because there are few instances where it is likely to reap positive rewards. For a short time, the products one can buy with consumer debt are nice to have, but for the most part they cannot be considered assets that increase the bottom line of households. Instead, they create a drag on the income and cause things one buys to cost more than they really do.
The same way that governments take on massive amounts of debt in order to finance their operations, there is nothing that is sure to lead to a poverty-stricken country than to have the government take on more debt than they can chew. Government debt is very much a different animal because of certain institutions that we have in place, but for countries in Africa and Latin America, just ask them how the government debt has improved their lives and you will find that very little of it has in the long-term. Likewise with personal debt, the more one tries to carry the more of a load you have. Ask anyone who has declared bankruptcy how difficult it is to escape from the trap of debt and you will not have any reason to doubt the devastating effects it can have on one's life and reputation. Mesa County has been blessed with a government structure that is very fiscally conservative and allows us to enjoy a greater amount of prosperity than areas faced with mounting debt burdens. One of the reasons why Mesa County and the City of Grand Junction have a low debt load is because many of our civic leaders are also business leaders in the community. While this can be frustrating in some aspects, it is beneficial when trying to get a leader to understand how important keeping a low amount of debt can be. At times our public officials have faced ostracism for proposing projects that take on large amounts of debt, (the latest public building project is proof of that), and despite those factors governance mechanisms within Mesa County are still able to function.
So eventually if you follow all three of these rules, it is possible to break free from the cycle of poverty that grips a significant group of people in this country so famous for its opportunities. I hope this helps some of you out there. For next week's topic, I will be examining why fix & flip real estate strategies work or don't work. I am looking forward to a little research on this one so let me know if you have any good tips. Until then...
Sunday, September 6, 2009
Purchasing Power Parity: An Exposition on Grand Valley Real Estate
So some of you may be wondering, why the heck are real estate prices so high in the Grand Valley. A good answer to this seems elusive to even the most dynamite business sleuth. After researching my sources, I have come up with several answers. Not very many of them are what you would expect. In the Grand Valley, we have a strange phenomenon where real estate prices are much higher than the average wage can sustain. The consumer price index listed for Grand Junction in the year 2008 for housing responded with a whopping 103.3. That means that compared to a standard house, Grand Valley residents paid an average of 3.3% more for housing than a standard house in another town. This may not seem like much, but housing as a percentage of household expenses accounts for 1/3 of income. Just think, on a $200k home, that amounts to an average of $6,600 added on to the mortgage. For those of you who scoff at the paltry sum of $6,600 you would do well to remember that for someone making $13 an hour that is a pretty sizable amount. I am impressed that people do as well as they do here. For those who look at the rest of the Consumer Price Index for Mesa County, you will say, but utilities are really cheap for people who live here. While that is true, utilities account for maybe 10% of household expenses, which is not the whopping amount that home prices are. For those interested in CPI ratings for other categories in Mesa County, look on the Grand Junction Economic Partnership website at http://www.gjep.org/grand_junction/col.php.
So, you may be wondering, “What does this all mean for me?” Well, I'm really glad you asked that question. This is where the fun part begins. For those of you unfamiliar with economic terminology, I would like to introduce something to your vernacular. The term purchasing power parity means one thing and one thing only. It means the comparison of purchasing power from one geographic area to another. Wherever economics is measured, you can be sure someone keeps track of this. The basic concept goes like this. When I lived in London in 2004, I was pretty astonished at how expensive it was to live there. One of the main reasons that one could reason was that their currency just cost a lot more than US currency. That is only part of the question. Because in the UK they use the British pound, the currency exchange plays a huge role in the value of their currency. The difference comes in the prices that Brits are willing to pay for things compared to what Americans pay. I will use the simplest analogy possible. In America, McDonald's has the value menu. In the UK, McDonald's also has the value menu. The difference is that in America where something costs only a dollar, in the UK it costs one pound. All of a sudden, a $1 double cheeseburger costs me $2 because the exchange rate is 1.9 GBP to 1 USD. Imagine how indignant I was. And to my unfortunate disappointment, all of the currencies in Europe are more expensive than in the US and therefore every trip to McDonald's was a huge luxury.
Now, imagine all of the restaurants do the same thing, all the grocery stores, all the pharmacies, and you begin to get the picture of why purchasing power parity is so important. On the converse, when Americans go to Mexico, they are surprised at how inexpensively they can live down there. And the principles surrounding why are just the same with the exception that it occurs in reverse. Even within the United States, different regions have different price structures and expense requirements. In New York, for example, their real estate is even pricier than it is in Grand Junction. I know. It is hard to believe, but just go with me on this. The simple reason is supply and demand, but the more complex answer is purchasing power parity. And that explains why a turkey sandwich will cost you ten dollars in Manhattan and five dollars at the Palisade Cafe. Same principle, different scale. So what's the point. Well, I started out with the intention of explaining to you what purchasing power parity is and how it affects our lives. In Grand Junction, unfortunately, we are not blessed with inexpensive housing, but we are blessed with small utility bills.
Another reason we are not blessed with inexpensive housing is also a combination of several other factors. Primarily those being, the Grand Valley is not exactly close to a port or other method of inexpensive transportation. We have the railroad, which is much desired by industry, but in order to attract more business to the Grand Valley, it would be really great if we had a port. Unfortunately, being landlocked is part of the fate of Grand Junction. Another reason is the relative lack of land that is able to be developed. Compared to a place like Denver, that metropolis of massive urban sprawl, the Grand Valley is a small place that does not have much room to grow because of our continual squeezing between the Bookcliffs to the North, the Mesa to the East, and the Monument to the South. While we have not reached densities consistent with Vail, or property prices consistent with Aspen, our combination of scarcity and desirability make our land worth more than say land in rural Missouri. In any case, the point is, each place has a combination of factors that make certain industries and commodities worth more in those places, and ours happens to be land.
Yet another reason for high home prices is the boom-bust cycle that Mesa County experiences as a result of normal business cycle activity. Mesa County contains several natural gas deposits or at least is close enough to them to benefit and that contributes even more to the business cycle extremes we see. When times are good, home prices get pushed higher. The difference this time has been that people who experienced the last housing bubble in the Grand Valley took advantage and bought foreclosed homes for rentals and investments. In the mid-2000's those people reaped the rewards if they cashed in at the proper time. And thus, as a result, many home prices now are out of reach of the average wage earner in the Grand Valley due to the boom-bust cycle that this area experiences regularly. After reading a little more from a book about the history of the Grand Valley, titled George Crawford's Attic, I found that this cycle has been happening over and over again from the time this area was first settled. The pioneer spirit lives on is another way to put it. Always looking for that next gold nugget that will bring prosperity to the area is common.
If you haven't read it yet, George Crawford's Attic by D. A. Brockett is a great book for getting familiar with the development and introduction of people to the Grand Valley area. In it you will find out that land development has been one of the drivers of the local economy since its inception. In particular, mineral wealth has played a significant role in the development of this area, whether those minerals are gold or whether they are natural gas. You will also find out that agriculture has played a huge role in providing economic development for the area. One of the great things about living in Colorado is all the locally grown produce available in the grocery stores and at farmer's markets. In economic development terms, all of those export products provide the best way to create jobs and promote growth. In addition, agricultural production also means this area is allowed to be a little bit more independent of economic factors affecting other places because while not all of our food is raised here, much of it could be.
So, that leaves us with one final question. How does one afford a house in an area where housing is so expensive? That is an answer that is different for everyone, but the simplest way is to share a house with someone else. Habitat for Humanity is a great resource, especially for people in this area. Many people have used the Grand Valley Housing Authority and other great resources as well. A market driven solution would be to produce more houses that people can afford, otherwise known as low-income housing. Some problems with that solution is the attraction of low value housing increases crime and other factors that make life more expensive for the people who live in that area. A nice complement to low-income housing would be tightened lending standards for those homes. That would be a nice counterbalance to make sure that the people who then move into those housing units take care of them and contribute to the productivity of society. Unfortunately, low income people generally have credit difficulties in addition to their other financial problems and so it creates this vicious cycle from which they have a lot of difficulty breaking. I think breaking the poverty cycle would be a great next topic, so we will save that for next week.
So, you may be wondering, “What does this all mean for me?” Well, I'm really glad you asked that question. This is where the fun part begins. For those of you unfamiliar with economic terminology, I would like to introduce something to your vernacular. The term purchasing power parity means one thing and one thing only. It means the comparison of purchasing power from one geographic area to another. Wherever economics is measured, you can be sure someone keeps track of this. The basic concept goes like this. When I lived in London in 2004, I was pretty astonished at how expensive it was to live there. One of the main reasons that one could reason was that their currency just cost a lot more than US currency. That is only part of the question. Because in the UK they use the British pound, the currency exchange plays a huge role in the value of their currency. The difference comes in the prices that Brits are willing to pay for things compared to what Americans pay. I will use the simplest analogy possible. In America, McDonald's has the value menu. In the UK, McDonald's also has the value menu. The difference is that in America where something costs only a dollar, in the UK it costs one pound. All of a sudden, a $1 double cheeseburger costs me $2 because the exchange rate is 1.9 GBP to 1 USD. Imagine how indignant I was. And to my unfortunate disappointment, all of the currencies in Europe are more expensive than in the US and therefore every trip to McDonald's was a huge luxury.
Now, imagine all of the restaurants do the same thing, all the grocery stores, all the pharmacies, and you begin to get the picture of why purchasing power parity is so important. On the converse, when Americans go to Mexico, they are surprised at how inexpensively they can live down there. And the principles surrounding why are just the same with the exception that it occurs in reverse. Even within the United States, different regions have different price structures and expense requirements. In New York, for example, their real estate is even pricier than it is in Grand Junction. I know. It is hard to believe, but just go with me on this. The simple reason is supply and demand, but the more complex answer is purchasing power parity. And that explains why a turkey sandwich will cost you ten dollars in Manhattan and five dollars at the Palisade Cafe. Same principle, different scale. So what's the point. Well, I started out with the intention of explaining to you what purchasing power parity is and how it affects our lives. In Grand Junction, unfortunately, we are not blessed with inexpensive housing, but we are blessed with small utility bills.
Another reason we are not blessed with inexpensive housing is also a combination of several other factors. Primarily those being, the Grand Valley is not exactly close to a port or other method of inexpensive transportation. We have the railroad, which is much desired by industry, but in order to attract more business to the Grand Valley, it would be really great if we had a port. Unfortunately, being landlocked is part of the fate of Grand Junction. Another reason is the relative lack of land that is able to be developed. Compared to a place like Denver, that metropolis of massive urban sprawl, the Grand Valley is a small place that does not have much room to grow because of our continual squeezing between the Bookcliffs to the North, the Mesa to the East, and the Monument to the South. While we have not reached densities consistent with Vail, or property prices consistent with Aspen, our combination of scarcity and desirability make our land worth more than say land in rural Missouri. In any case, the point is, each place has a combination of factors that make certain industries and commodities worth more in those places, and ours happens to be land.
Yet another reason for high home prices is the boom-bust cycle that Mesa County experiences as a result of normal business cycle activity. Mesa County contains several natural gas deposits or at least is close enough to them to benefit and that contributes even more to the business cycle extremes we see. When times are good, home prices get pushed higher. The difference this time has been that people who experienced the last housing bubble in the Grand Valley took advantage and bought foreclosed homes for rentals and investments. In the mid-2000's those people reaped the rewards if they cashed in at the proper time. And thus, as a result, many home prices now are out of reach of the average wage earner in the Grand Valley due to the boom-bust cycle that this area experiences regularly. After reading a little more from a book about the history of the Grand Valley, titled George Crawford's Attic, I found that this cycle has been happening over and over again from the time this area was first settled. The pioneer spirit lives on is another way to put it. Always looking for that next gold nugget that will bring prosperity to the area is common.
If you haven't read it yet, George Crawford's Attic by D. A. Brockett is a great book for getting familiar with the development and introduction of people to the Grand Valley area. In it you will find out that land development has been one of the drivers of the local economy since its inception. In particular, mineral wealth has played a significant role in the development of this area, whether those minerals are gold or whether they are natural gas. You will also find out that agriculture has played a huge role in providing economic development for the area. One of the great things about living in Colorado is all the locally grown produce available in the grocery stores and at farmer's markets. In economic development terms, all of those export products provide the best way to create jobs and promote growth. In addition, agricultural production also means this area is allowed to be a little bit more independent of economic factors affecting other places because while not all of our food is raised here, much of it could be.
So, that leaves us with one final question. How does one afford a house in an area where housing is so expensive? That is an answer that is different for everyone, but the simplest way is to share a house with someone else. Habitat for Humanity is a great resource, especially for people in this area. Many people have used the Grand Valley Housing Authority and other great resources as well. A market driven solution would be to produce more houses that people can afford, otherwise known as low-income housing. Some problems with that solution is the attraction of low value housing increases crime and other factors that make life more expensive for the people who live in that area. A nice complement to low-income housing would be tightened lending standards for those homes. That would be a nice counterbalance to make sure that the people who then move into those housing units take care of them and contribute to the productivity of society. Unfortunately, low income people generally have credit difficulties in addition to their other financial problems and so it creates this vicious cycle from which they have a lot of difficulty breaking. I think breaking the poverty cycle would be a great next topic, so we will save that for next week.
Sunday, August 30, 2009
Banking Woes
The banking system has experienced some of the greatest difficulties in the current recession. This is primarily due to lax lending standards that have created a so-called perfect storm of credit and securities risk. After reading about some of the loan losses and industry problems on the website of the Federal government at this web address, http://www2.fdic.gov/qbp/2009mar/qbpall.html, I have no recourse but to analyze the data for any kind of clues as to what is going on. In 2004, many banks were in the process of creating massive amounts of goodwill for their companies. Goodwill, for those of you who are unaware is any intangible asset that creates value to the firm, such as location, product superiority, or managerial effectiveness. Now, as I remember it, 2004 was the year where home prices in the Grand Valley really started to accelerate. It was a great time for everyone. Oil & gas was booming, people were buying houses and everyone was happy. Cut to 2009, the oil & gas industry has backed off, leaving many people with homes to sell and jobs to replace. Unfortunately this has created the effect of leaving many other people not directly associated with the oil & gas industry with homes to sell and jobs to replace. One of the beautiful parts of capitalism is how quickly capital can be applied to solve problems. On the other hand, one of the trade-offs of this is that capital can move too quickly to certain problems and can in fact be wasted as a result of not putting long-term interests on par with short-term interests. And that is where our current predicament leaves us. The problem with the Grand Valley, and the rest of the country in general, is that capital has been so liquid and transferable that certain interests have been left holding the bag as it were when the debt collector comes.
This brings up an interesting discussion of what is the appropriate level of liquidity for the current system that we have in place. In general, I would say that the amount of liquidity that we had from 2002-2005 was not preferable, but neither is the current state in 2009. With capital frozen as a result of many loans being unable to be made because of tightened lending standards, it is incredibly difficult and will remain to be so for the American economy until such time as those who have money feel comfortable lending it out again. It is not necessarily a fear of loss that is gripping the banking system like a bad case of lockjaw, but a fear of the unknown that is truly the bigger issue. Without knowing how big and how deep the recession is going to be, bankers are unable or unwilling to risk more precious capital chasing after too few opportunities that have a chance of success. For those with few liabilities right now, you should be commended for your foresight in seeing that capital would soon be hard to come by. In the current environment, having a great balance sheet consists in having few liabilities and enough capital to continue making moves in your business. I would liken the current economic environment to a person who's just had a cardiac arrest and is recovering from being brought back to life. Getting blood flowing again is critical to getting better and it is a slow process until the blockages are removed and the heart starts pumping again.
So one may be wondering, how did we get into this mess. The simple answer is enough people borrowed for things that did not pan out that we dug ourselves a really big hole and now we have to dig our way out. A great chart for how we got into this mess can be found at http://data.newyorkfed.org/creditconditions but I digress. Debt is like that. It is really easy to get into it and very hard to get out. From a national perspective, our debt has always been something of a mystery. Prior to the removal of the gold standard during the Nixon administration in this country our money was guaranteed to be good by the reserves of gold that we had accumulated. Now our currency is a “floating” currency. That means the currency operates on the same market principles that any other commodity operates under, with the main exception being there is only one legal producer of this commodity and that is the Federal Reserve Bank. So since we have a floating currency and a ballooning national deficit, how does that impact Mesa County? Well, in a macroeconomic sense, we will be paying back those dollars that we borrow as a nation with our future earnings and because we have a floating currency it is imperative that we collectively solve the problem of exploding deficits in the household and the government. In Mesa County, it could mean that income taxes may rise or government services may decline. It could mean programs are eliminated in other places that the Federal Government has more of a grip. It could mean nothing. One thing is for certain. Spending, whether it is by the government or by households, is something that will continue. This is a good thing for several reasons, but mostly because spending is spending, whether it is by households or the government. As long as the dollars are chasing projects that better society in some way, we will continue on our path to progress and prosperity.
Unless the law has changed since it was put in place, Mesa County would benefit from an increased savings rate because banking institutions are required or at least the were required the last time I checked to make loans within the community out of which those deposits are based. Here we get into the finer points of Keynesian and Classical economics, but I think that savings generally benefit a community because they increase the amount of loanable funds from a bank. The lack of a saving strategy may be great for the week that you get paid, but if anyone is going to have enough capital to start a new business or fund the building of a new home and on and on, then somebody is going to have to save or somebody is going to have to lend or both. And as long as laws are in place that link a banking institution to the communities they serve, a positive savings rate will always benefit the community. Therefore, if Mesa County as a community can increase its savings rate, banking institutions here will have more money to lend, credit will begin flowing again, and business will continue.
This brings up an interesting discussion of what is the appropriate level of liquidity for the current system that we have in place. In general, I would say that the amount of liquidity that we had from 2002-2005 was not preferable, but neither is the current state in 2009. With capital frozen as a result of many loans being unable to be made because of tightened lending standards, it is incredibly difficult and will remain to be so for the American economy until such time as those who have money feel comfortable lending it out again. It is not necessarily a fear of loss that is gripping the banking system like a bad case of lockjaw, but a fear of the unknown that is truly the bigger issue. Without knowing how big and how deep the recession is going to be, bankers are unable or unwilling to risk more precious capital chasing after too few opportunities that have a chance of success. For those with few liabilities right now, you should be commended for your foresight in seeing that capital would soon be hard to come by. In the current environment, having a great balance sheet consists in having few liabilities and enough capital to continue making moves in your business. I would liken the current economic environment to a person who's just had a cardiac arrest and is recovering from being brought back to life. Getting blood flowing again is critical to getting better and it is a slow process until the blockages are removed and the heart starts pumping again.
So one may be wondering, how did we get into this mess. The simple answer is enough people borrowed for things that did not pan out that we dug ourselves a really big hole and now we have to dig our way out. A great chart for how we got into this mess can be found at http://data.newyorkfed.org/creditconditions but I digress. Debt is like that. It is really easy to get into it and very hard to get out. From a national perspective, our debt has always been something of a mystery. Prior to the removal of the gold standard during the Nixon administration in this country our money was guaranteed to be good by the reserves of gold that we had accumulated. Now our currency is a “floating” currency. That means the currency operates on the same market principles that any other commodity operates under, with the main exception being there is only one legal producer of this commodity and that is the Federal Reserve Bank. So since we have a floating currency and a ballooning national deficit, how does that impact Mesa County? Well, in a macroeconomic sense, we will be paying back those dollars that we borrow as a nation with our future earnings and because we have a floating currency it is imperative that we collectively solve the problem of exploding deficits in the household and the government. In Mesa County, it could mean that income taxes may rise or government services may decline. It could mean programs are eliminated in other places that the Federal Government has more of a grip. It could mean nothing. One thing is for certain. Spending, whether it is by the government or by households, is something that will continue. This is a good thing for several reasons, but mostly because spending is spending, whether it is by households or the government. As long as the dollars are chasing projects that better society in some way, we will continue on our path to progress and prosperity.
Unless the law has changed since it was put in place, Mesa County would benefit from an increased savings rate because banking institutions are required or at least the were required the last time I checked to make loans within the community out of which those deposits are based. Here we get into the finer points of Keynesian and Classical economics, but I think that savings generally benefit a community because they increase the amount of loanable funds from a bank. The lack of a saving strategy may be great for the week that you get paid, but if anyone is going to have enough capital to start a new business or fund the building of a new home and on and on, then somebody is going to have to save or somebody is going to have to lend or both. And as long as laws are in place that link a banking institution to the communities they serve, a positive savings rate will always benefit the community. Therefore, if Mesa County as a community can increase its savings rate, banking institutions here will have more money to lend, credit will begin flowing again, and business will continue.
Sunday, August 23, 2009
Declines in Home Prices
Unless you've been living under a rock for the past two years, you will have noticed a certain trend that has many people in an uproar. That would be declining home prices. Home prices skyrocketed all throughout the early 2000's as a result of government policies of easy credit. This has led to a great bubble in the market for homes that put homes out of reach for those who responsibly said no to owning a home during that time. And finally, as with all bubbles, the bubble burst and now those with a good credit rating and a little cash for a down payment are in excellent shape to cash in on one of the greatest deals to happen in the past decade.
The government again is trying to manipulate the market in order to rebound from a slump in economic activity. Now in certain cases, government manipulation of the market is looked down upon, but to be fair the government has a vested interest in ensuring the continued prosperity of its people. The best way to do that is a debate that has raged for centuries. I will not attempt to comment on that at this time, but for the purposes of this article, I merely want to point out that a similar catastrophic event happened in our not too recent past that affected the market significantly. In the days following 9/11, economic activity slowed as a result of fear and a lack of confidence in investments around the world. As time went by, the government took steps to remedy the situation in addition to steps that investors took as well. The point I'm trying to drive here is that economic slumps and economic highs occur all the time. It's just a matter of being at the right place at the right time, with the right resources to be able to capitalize on what is happening right now.
The government again is trying to manipulate the market in order to rebound from a slump in economic activity. Now in certain cases, government manipulation of the market is looked down upon, but to be fair the government has a vested interest in ensuring the continued prosperity of its people. The best way to do that is a debate that has raged for centuries. I will not attempt to comment on that at this time, but for the purposes of this article, I merely want to point out that a similar catastrophic event happened in our not too recent past that affected the market significantly. In the days following 9/11, economic activity slowed as a result of fear and a lack of confidence in investments around the world. As time went by, the government took steps to remedy the situation in addition to steps that investors took as well. The point I'm trying to drive here is that economic slumps and economic highs occur all the time. It's just a matter of being at the right place at the right time, with the right resources to be able to capitalize on what is happening right now.
Friday, August 21, 2009
Welcome to the Grand Valley Economic Report
This blog is my economic reporting vehicle for the Grand Valley area. The Grand Valley consists of Grand Junction, Palisade, Fruita, Clifton, Mack, Loma, and Whitewater. All of these places and the neighborhoods that surround them are in Western Colorado. This blog is primarily designed for people who are business oriented and have an eye for business in the Grand Valley area.
I am primarily interested in writing this blog to put to good use my education that I received from Regis University in Political Economy. Unfortunately, many people do not understand what political economy is or why they would ever want to study it. The simple answer to that question is another question. Do you like seeing what other people do not? If you answered that question as a yes, then political economy is something that you would enjoy studying. The reason why is because political economy allows one to pick up on trends, deals, businesses, and pretty much anything of interest in any economy in the world from a unique perspective that no one else has. As the recipient of an award for economics from my university, I can attest that economics is more than just crunching numbers and getting the right answer. It also takes a certain element of interpretation to know what the numbers mean. In other words, it teaches one to become an investor. More than that political economy teaches one to be a citizen. All too often those who focus only on business and money become the kind of person that Ebeneezer Scrooge would look up to. Unfortunately, in life, as we find out from A Christmas Carol, the more people one alienates the less rich their life becomes.
In any case, this is also going to be a fun way for me to be an analyst of business news in the Grand Valley. I hope to provide meaningful content to a variety of different people from a variety of different sources about business developments in the Grand Valley. Fortunately for me, I get to have a lot of fun while doing it.
So I hope you like my blog and I hope you get something out of it. Remember to always be looking for new opportunities. It's only a matter of time before the right one comes your way.
I am primarily interested in writing this blog to put to good use my education that I received from Regis University in Political Economy. Unfortunately, many people do not understand what political economy is or why they would ever want to study it. The simple answer to that question is another question. Do you like seeing what other people do not? If you answered that question as a yes, then political economy is something that you would enjoy studying. The reason why is because political economy allows one to pick up on trends, deals, businesses, and pretty much anything of interest in any economy in the world from a unique perspective that no one else has. As the recipient of an award for economics from my university, I can attest that economics is more than just crunching numbers and getting the right answer. It also takes a certain element of interpretation to know what the numbers mean. In other words, it teaches one to become an investor. More than that political economy teaches one to be a citizen. All too often those who focus only on business and money become the kind of person that Ebeneezer Scrooge would look up to. Unfortunately, in life, as we find out from A Christmas Carol, the more people one alienates the less rich their life becomes.
In any case, this is also going to be a fun way for me to be an analyst of business news in the Grand Valley. I hope to provide meaningful content to a variety of different people from a variety of different sources about business developments in the Grand Valley. Fortunately for me, I get to have a lot of fun while doing it.
So I hope you like my blog and I hope you get something out of it. Remember to always be looking for new opportunities. It's only a matter of time before the right one comes your way.
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