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 fredom, 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?

As an investor, Warren Buffett has few peers.

As a philanthropist, he is second only to Bill Gates.

As a tax advisor, Mr. Buffett is misguided.

In a letter to the NY Times on Sunday, Mr. Buffett tells of checking with his “mega rich” pals to determine if they, like he,  have benefited from “extraordinary btax breaks” along with “other blessing showered upon us (them) by legislators in Washington who feel compelled to protect us (them).”  Did he really need to ask?  The sycophants in Washington protect Buffett and his “mega rich” pals because they collectively exert an “unfair” influence over elected officials.   Politicians only coddle influential constituents, stop sending them campaign checks and the “blessing and protection” they’ve previously showered would soon dry up.

For a man who has made billions for himself and investors analyzing companies, his half baked solution to the government’s debt and the plight of the poor and middle classes is alarming.  The United States does not have a revenue problem; it has a spending problem.  Until the parasites in Washington acknowledge this and make substantial reductions to expenditures, no amount of additional revenue will suffice.  Simply raising taxes (fair or otherwise) is moronic, they would merely devise other ways to spend it.
Here, are some  suggestions that might actually yield results worthy of discussion.  Note, none of them requires government intervention.

• Create real jobs in America.  Jobs in industries that create lasting value for families and communities rather than exploit “efficiencies” and “float.”  Buffett made the bulk of his money with insurance and financial companies, companies that do not produce anything but simply extract a fee from society.  Perhaps he could use some of those profits to restore meaningful jobs in industries like agriculture and manufacturing (of goods we need, not crap for landfills).
• Encourage the development of a healthy economy rather than a growing one.  An economy where all resources, waste, and costs are accounted and paid by users rather than shouldered by the poor and middle classes.  To quote Liberty Hyde Bailey, “Finance and social morals must coincide.”
• Deal with problems directly.  How often are government programs regarded as efficient and well run?  Why accept the waste?  See it fix it, or see it fund it.  Develop a nationwide network of non profits to replace as many government agencies as possible.

If Mr. Buffett and his buddies are altruistic in their desire to help the country, the time for suggestions to “12 members of Congress” is long past. Now is the time to do something.  Writing letters is easy.  Actions, as they say, are louder than words.

What would you suggest?

The full text of Buffett’s letter is here.

Let me start by stating none of the economic news in the last week concerning the United States is surprising.  A rating downgrade, like jobs or economic growth is a consequence resulting from actions previously taken, not as many appear to suggest, a signal.  The actions of our government and citizenry over the last 5 years in particular and the last 40 in general has for many people been like watching a slow motion train wreck one agonizing second at a time, something to be seen but nearly impossible to stop.  That it took so long for one of the three major agencies to downgrade US debt merely emphasizes the irrelevance of the whole charade that is “credit rating”.

The President’s reaction to the downgrade was, as is typical of bureaucrats, little more than a collection of sound bites lacking in both substance and insight.  In spite of his brevity, I obtained nearly 4 pages of quotes and statements to contemplate.  While most could be classified as atypical political remarks, a few were notable for exhibiting the precise mentality that led to the current financial situation.  For example, at just :49 seconds he offered this verbal stroke of brilliance:

“We didn’t need a rating agency to tell us we need a balanced long term approach to deficit reduction.”

Just like an alcoholic doesn’t need to be told to drink less.  Or at 6:26 he had this bit of sage wisdom:

“There will always be economic factors we can’t control.”

Yea, like all of them.  The assumption that we can control anything is exactly what contributed to many of the problems we face today.  Maybe if we just acknowledged that the economy can’t be controlled, fixed, or stimulated, real progress could be made toward a healthy economy (notice I didn’t state a growing economy, but I’ll have more on this topic soon).  Just :32 seconds prior, at 5:48 President Obama offered up this suggestion:

“We should also help companies that want to repair our roads and bridges and airports so that thousands of construction workers who have been without a job for the last few years can have a paycheck again…”

How does he propose we “help” said companies and construction workers?  How is the government  going to pay for their services?  How do you “tackle deficits” by spending more?  That the government wants to “help” is just another demonstration of how we accumulated such a gargantuan deficit in grave need of reduction.  However, perhaps no other statement he made demonstrated the arrogance and misguided attitude of our government and citizenry as this whopper at 6:47:

“This is the United States of America, no matter what some agency may say, we’ve always been and always will be a AAA country.”

What?  It’s statements like this and “consumer confidence” that have me most concerned.  Are we ever going to actually deal with our problems?  Or, do we merely want to elevate our national self esteem?  The stereotypes of a spoiled rich kid are so fully and completely embodied by this one statement that so succinctly exposes the root of our predicament, I’m forced to consider the possibility that we may have actually deluded ourselves into believing we’re endowed with the right to behave irresponsibly and without accountability, the rest of the world (and subsequent generations of Americans) be damned?
Unless we (politicians AND citizens) stop externalizing the problems we face, accept responsibility for our actions, and make the necessary changes to cultivate a healthy economy, we will likely be remembered as those who squandered the wealth of a nation.
What do you think?

(hint: click to enlarge)

There will likely be supply shortages for products manufactured (or partially manufactured) in Japan and while this will be an inconvenience the bigger concerns are what Japan decides to do with it’s investments in the United States and the consequences of the nuclear situation.   It’s not hard to imagine a scenario where the Japanese government reduces it’s foreign investments as a way of partially funding the massive cost of rebuilding.  Even if they make a graceful (systematic and measured) exit the reduced demand for treasuries would result in increased borrowing costs for the US.  With the amount of debt our country carries this additional interest expense would be immense and with our own economic challenges lingering (and on the horizon) repayment without dollar dilution and inflation is optimistic at best.  The primary argument against this occurring is the amount of exports from Japan to the US and what they would do with the surplus dollars if not buying US treasury bonds.  While this certainly sounds plausible, it may be another case of past experience not necessarily applying to the current (trade) situation.

Over the last decade, exports to the US have fallen by ~$51 billion annually despite a $217 billion increase in overall exports.  ”Our” economy now accounts for just 15% of Japan’s exports.  Over that same time period China became a major importer of Japanese goods accounting for 19.4% of total exports, up from a mere 7.7% in 2001.  China has become the lynch pin of global trade and yet the US only accounts for 5.8% of their exports (at least directly, these numbers to not account for items sent from China to other countries that ultimately make their way to the US).

The nuclear situation is by no means finished and may end up being a far bigger challenge than any economic “inconvenience” we’ll likely face…but I’ll save that for another post.  I’m still ruminating on the investment possibilities and economic ramifications of the situation as it is (and continues to develop) but it’s clear that we (in the US) are more subject to the decisions of politicians in Japan and China than we realize.

Bloomberg is the source of the export numbers, view the full detail here.

To me the term craftsman is not merely a adjective to describe someone in a blue collar trade, but a mindset that can apply to any task or profession.  It speaks to a level of quality and an attention to detail that many people choose not to exhibit.  A term reserved for those demonstrating an elegance for how things get accomplished, who take pride in the finished product and their efforts.  I like to think of myself as a craftsman…but I’ll leave that for others to decide for themselves.

Below is the text of the Josh’s Craftsman’s Creed and the full post can be found:  here.  Josh’s thoughts, coaching, and blog can be found at:  www.PersonalMBA.com

The Craftsman’s Creed

I am a craftsman. I am dedicated to perfecting the art and science of my craft, which I have chosen freely.

I am constantly, relentlessly searching for ways to improve my craft. I am dedicated to learning from the masters who have preceded me in every way I am able.

I create valuable things that other people want or need. I generously offer my work as a gift when it is wise, but my purpose is to help those who value my work enough to pay for what I have to offer. No one has an unlimited claim on my craft, knowledge, or the fruits of my effort. I work for people who value and support me.

I honestly promote what I have to offer, consistently and to the limit of my capabilities. I make no apologies for promoting my craft. I am proud of my work, and it is my duty and responsibility to reach people who may benefit from my craft. I can help them no other way.

I do my best to ensure that every single person who trusts me with their time, attention, or money is happy with their investment. If they are not, I will do whatever is in my power to do right by them without delay.

Skills are a craftsman’s credentials. I care more about a person’s character, what they know, and what they can do than where they grew up, where they went to school, or how many letters they have after their name. I choose to work with other craftsmen: people who are skilled, not simply schooled.

I respect other craftsmen, and I generously assist them however I’m able. I have no respect for the fool who searches for a way to enjoy the fruits of labor without effort, or the scoundrel who seeks to enrich himself by deluding others. Value, not wealth or fame, is the true measure of every craftsman.

I take good care of myself. My mind and body are the tools I use to advance my craft, so I take care of them. Rest and recovery are essential to my life: a worn-down tool is of no use at all.

I never stop pushing my limits. I am constantly testing and experimenting with new ways to expand my capabilities. It is my way of life.

I refuse to waste precious time and energy on trivial matters, trivial problems, and trivial people. I choose to focus only on the most important of demands: those that help me advance my craft or take care of the people who depend on me.

The world is an uncertain place, which I can not fully predict or control. Regardless, I will do everything in my power to prepare for every challenge and weather every storm. Nothing in this world is powerful enough to stop me from continuing to practice my craft.

Anything that I can do to improve my craft, I will do. This will keep me busy until the end of my days: a challenge I gladly accept. I am a craftsman, and always shall be.