Time for a change

What now?

Over the last 3 years I’ve been devising a method to facilitate investing at the local level in ways that are simple,  legal, and beneficial to all involved (investors, the businesses receiving the investment, and the communities in which they reside).  This endeavor poses significant challenges and it’s success is by no means assured.  However, the thought of looking back and wondering what might have been compelled me to make a difficult decision.

In order to accomplish this, I had to resign as a financial advisor.

I’ve come as far as I can with planning, now it’s time for action.  Time to take a risk and see if I can create change where I see a need.

Until I’m ready to officially launch, I’ll be helping the local economy through my efforts at Workshed, where I’m able to directly apply my skills, knowledge, and experience to help businesses connect with customers.

Stay tuned, it should be an interesting experience.

The Stock Market – Explained

The Stock Market – Explained

Stock Exchange PhotoMany discussions have been devoted to the question of “what is the stock market” and/ or its variant “how does it work?”  Rather than rehash what others have said, I’ll attempt to reframe the question in a way that I believe is more relevant and then provide something of an answer.  The purpose of the exercise being to stimulate thought and conversation, as well as to get it off my chest.  I’m interested in hearing what others think on the topic, so, please add your perspective to the comments.

As I examined various methods for evaluating the utility of the stock market, I wanted to address it in a way that was most relevant.  Asking the right question is critical to receiving applicable information (good journalists and attorneys are adept at this skill) and it struck me that while exploring the mechanisms of the stock market might be interesting, a better question might be something more direct.

Is the stock market the ideal way for most people to invest?

Admittedly, at present  it’s something of a moot point in that there are very few options outside of the stock market to legally, cost effectively invest, especially retirement funds, but I believe it’s worth exploring.  Sure, there are other ways of creating wealth, such as business and real estate, but in reality all are all variations on the same theme: the growth of cash flow and assets.  A business sells a product or service to generate profit while real estate relies on rental and lease income. For the sake of brevity,  I’ll limit this discussion to the stock market.

Interestingly, the original concept of the stock market (exchange) is that business ownership could be reliably bought and sold, without the shenanigans of auctioneers.  As with many things, the original function has been fundamentally altered over time by regulation, technology, and unintended consequences. What was originally conceived as a practical way to transfer the ownership interest of business ventures has been burdened with things like derivatives, program trading, massive concentrations of capital, and onerous regulation.  The result is a system where, practically speaking, all money must flow through Wall Street.

For some the “industrialization” of investing might be a beneficial thing (I’m thinking primarily of the people at Goldman Sachs and their contemporaries), but for the rest of us it’s been a different story.  Diversity is almost universally accepted as a prudent investing practice by nearly everyone with an opinion on the subject and yet we are presented a homogenous pool of investment choices.  I am regularly amused (dismayed?) at the investment “options” of most company retirement plans.  Typically they consist of a domestic bond fund or two, a few US equity funds, and maybe if the company offering the plan is really progressive an international equity fund or something really crazy like a real estate fund.  Tragically, this sort of “diversification” falls well short of the intended purpose (non correlation of returns and risk if you are curious), even for the few investors who actually utilize all the available funds (remember 2008?).    It reminds me of Henry Ford’s famous quote,

Any customer can have a car painted any colour he wants so long as it is black.

This lack of genuine diversity is only one defect exposing the shortcomings of the stock market.  Aside from the obvious presence of suboptimal investment returns, there are more insidious repercussions impacting  the economy on both a local and national scale.   As of their April 2013 report, the Bureau of Labor Statistics listed the number of unemployed at 11.7 million. If a portion of the capital locked up in the traditional stock market were made available for local investment, I wonder how many unemployed people could start productive businesses?  According to Small Business Administration, small businesses (those with less than 500 employees) accounted for 64% of net new jobs, yet the 2 primary sources of financing for small businesses are owner investment and bank credit.   I may be the exception, but I’m not aware of many banks lending to unemployed people…or as Bob Hope once observed,

A bank is a place that will lend you money if you can prove that you don’t need it.

Downtown BendIt’s been estimated that, in the last 100 years, the recirculation rate of money in America has fallen from 25-30 to less than 10.  This phenomenon is present in cities and towns across the nation stripped of their “community” by globalization.  The butcher, the baker, and the candlestick maker are symbolic  contributors to the local ecosystem, symbiotically producing and consuming.  When citizens shop at national chains, selling imported products, they (we) act like parasites, draining communities of essential financial resources.

The solution I propose is a mechanism that would allow people to invest efficiently in businesses connected through geographic proximity or aligned values.  The profit generated by these ventures, both by businesses and the investors, would then be available to recirculate throughout the community, thus strengthening the economic ecosystem by providing stable employment, additional investment opportunities, and resilience against macroeconomic problems.

What do you think?

The Real Meaning of Economic Development

On Saturday,  I spent the afternoon at a Washougal City Council workshop intended to revisit the cities economic development plan, with a specific emphasis on the downtown core.  The following post is a summary of my thoughts over the last few days.  There is more to come, and this is not intended as a comprehensive answer, but more of an invitation to discuss how  a city develops it’s sense of communal identity and the part citizens play in the process.

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Redefining Economic Health

This post started with a seemingly simple question.  Is it possible for an economy to be healthy without growing?

As a starting point, it is important to understand the method presently used for determining our nations economic health.  For 7 decades, we have used Gross Domestic Product (GDP) growth as the primary indicator of health, the rationale being expansion is necessary and thus preferable.  But what, exactly, is GDP measuring?  Simply put, GDP is a mathematical formula, standardized by Simon Kuznets, to calculate the market value of every product and service created in a country over a given period of time.  It’s analagous to measuring your annual household income but ignoring every other aspect; such as expenses, debt, and assets.  It is a measurement that as Robert Kennedy stated “measures everything in short, except that which makes life worth while.”  Interestingly it was also Kuznets who warned “the welfare of a nation can scarcely be inferred from a measure of national income.”

In addition to his work on measuring GDP, Simon Kuznets also proved that John Maynard Keynes’ income assumptions give inaccurate predictions over longer (meaningful) spans of time.  Keynes, not insignificantly,  is the economist whose assumptions form the basis of America’s prevailing economic policy, the essence of which is to use government credit (money printed or borrowed) to artificially stimulate demand in order to increase supply in an attempt to avoid recession.  The result of this erroneous strategy is inflation.  Inflation being that covert consumer of wealth, steadily deteriorating the value of money.  It is why bread and food and houses cost many times what they did for our grandparents.  What is perhaps most disturbing is that the debasement of our currency (knowingly or otherwise) is routinely advocated by politicians and citizens alike who claim to value our democracy but fail to comprehend the consequences of such actions.  Keynes himself wrote in The Economic Consequences of the Peace:

“Lenin is said to have declared that the best way to destroy the Capitalist System was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.”

To summarize: we have a flawed economic indicator as the basis for inaccurate assumptions used to craft an economic policy that results in destruction of our economic system.

Clearly, an economic policy with an insatiable need for growth does not result in an improved quality of life and once a certain level of economic development is achieved there appears to be a point of diminishing returns which, once passed, further inflation becomes detrimental to personal freedom and happiness.  In addition to the destructive financial effects of achieving our misplaced objectives, we’ve also managed to incur a national debt that probably can’t be repaid honestly, disconnect people from place, strip the land of resources, increased the frequency and magnitude of economic cycles, and the outsourcing of entire industries.   Is it reasonable to conclude that infinite GDP growth is not the optimum way of achieving fiscal health or individual liberty and the habit of measuring it should be abandoned?

One response to the economic malaise has been an international movement to improve the method by which economic health is measured.  The report, “Mis-Measuring Our Lives” by Stiglitz, Sen, and Fitoussi is perhaps the first concerted effort to, as they assert, “align better the metrics of well-being with what actually contributes to the quality of life.” In it, they provide specific recommendations aimed at shifting focus from the measurement of production to individual well being.  It also reveals what I believe to be a primary impediment to recovery, namely, that we are focused on the wrong goals.  If the main idea is to promote “life, liberty, and the pursuit of happiness,” shouldn’t we follow the adage that what gets measured gets improved and start monitoring actions and policy targeting that end?  This point is reinforced by the trio’s conclusion that “in the quest to increase GDP, we may end up with a society in which the citizens are worse off.”

The good news is that we (the citizens) have influence over the economy.  By consciously screening what we buy, where we shop, where and how we work, as well as the representatives we elect, we can regain the economic freedom, prosperity, and liberty our Founding Fathers intended.  While the news is good, the application is not easy.  The discipline to voluntarily (not through regulation or coercion) reduce our consumption of gadgets from China, food from South America, and oil from the Middle East, may be more than most people are willing to undertake.   It is through our own self imposed limits and the cultivation of local economies and community that we’ll be able reclaim the freedoms, both economic and civil, that we once experienced.

The takeaway: We should focus on and measure what we want to achieve: individual freedom and opportunity, rather than fixating on failed economic theory.  In a future post I’ll discuss how present policies have contributed to the very social and economic difficulties they were intended to overcome.

What are your suggestions for improving the health of our communities and country?