Defenestrating Thoughts from the Bivouac

A month ago I wrote about how the recession was resulting in rich men losing their trophy wives, and now I’ve learned that life is also really tough for girls that date investment bankers:

Once it was seen as a blessing in certain circles to have a wealthy, powerful partner who would leave you alone with the credit card while he was busy brokering deals. Now, many Wall Street wives, girlfriends and, increasingly, exes, are living the curse of cutbacks in nanny hours and reservations at Masa or Megu. And that credit card? Canceled.

Fortunately though, these women aren’t just in it for the money, right?

Dawn Spinner Davis, 26, a beauty writer, said the downward-trending graphs began to make sense when the man she married on Nov. 1, a 28-year-old private wealth manager, stopped playing golf, once his passion. One of his best friends told me that my job is now to keep him calm and keep him from dying at the age of 35, Ms. Davis said. ‘It’s not what I signed up for.’

So I guess she signed up for just the “for better” part of “for better or for worse”.

Keep in mind, it’s also bad if you’re the girl on the side:

One such mistress wrote on the blog that when she pouted about not having been taken on a trip lately, her married man explained that with money so tight, his wife had taken to checking up on his accounts.

After reading the article, be sure to check out the blog that a group of these girls started. It’s hilarious.

Ignoring whatever merits these women may have, they seem to be, um, evil. Which, of course, makes them a perfect match for their banker boyfriends and husbands. :-)

We hear “the government has to do something quickly” about the economy quite often these days, because “we can’t do nothing”.

But, no one is stopping to ask an very important question: “Why?”

Yesterday we already tackled the “quickly” falsehood: even though we’re told that quick action is needed, only 20% of the spending in Obama’s stimulus bill is for 2009. The remaining 80% is in 2010 or later.

Now let’s talk about the “government has to do something” part. We’re told that the government has to spend in order to create jobs. But this wrong for a number of reasons, including:

1. The government cannot create money, it can just forcibly redistribute it
2. Private sector spending is more efficient than public sector spending
3. Government interference is prolonging the pain by keeping private money on the sidelines which delays the recovery

The government cannot create money, it can just forcibly redistribute it

The government cannot create money out of nothing. It can either take the money from its citizens via taxes, or print money causing inflation which reduces the spending power of its citizens by an amount exactly equal to the amount printed.

Either way, the government is taking money from its citizens; the difference is whether it is done directly (taxes) or indirectly (inflation). The net result is the same: the government cannot create money nor can it increase aggregate spending. All it can do is redistribute money.

Or in other words, if the government gives one person money, that person may be “stimulated”. But it’s at the expense of another person: the person that paid the taxes. The taxpayer is now unstimulated. The net aggregate effect is zero.

Private sector spending is more efficient than public sector spending

If we want to have spending that creates jobs, it’s better to have that spending coming from the private sector.

But, lots of people will tell you, “the private sector doesn’t have any money”. This is categorically untrue for two reasons.

First, if the private sector had no money, then the government has no money. The only reason government can spend trillions on “stimulus”, because it took it from the private sector in the front place.

Second, the bubble in the bond market indicates that there is tons of money in the private sector.

The reason spending needs to come from the private sector is because government spending is most likely to be a malinvestment.

For one, private spending is generally more efficient than the government spending because people act more carefully when they spend their own money than when they spend other people’s money. A great example of this is the current bailout: there is no oversight on where the money went, the entire plan is built on assumptions they have “considerable uncertainty” about, and a significant amount of money is going to Wall Street executives as bonuses!

Furthermore, government bailouts take money from the productive and give it to the unproductive. A great example of this is the Big 3 automakers. No one would invest their own money in those companies, so the government takes people’s money and gives it to these failing automakers.

Remember how if you give money to stimulate one person, you just unstimulated the person you took money from? The same applies to government job creation. Let’s say that the government takes $50,000 in taxes and creates one pothole filler job. The pothole filler is a very visible effect. But what we don’t see is the job that would have been formed if the $50,000 was spent in the private sector.

Since you can’t see the job that wasn’t created, the negative consequence of the government action is invisible and thus forgotten. Plus when you factor in that government spending is inefficient due to bureaucracy, the invisible consequence is even greater. Obama’s original stimulus plan needed $250,000 to “create” a single job! The private sector could produce many more jobs for $250,000.

Government interference is prolonging the pain by keeping private money on the sidelines which prevents the recovery

At the root of it, the government interference is delaying a recovery. There is plenty of money out there, but it’s waiting on the sidelines until assets are priced properly.

The government’s is taxing the prudent and propping up failed institutions. That’s survival of the weakest, which is not what we need.

We need to clear up the bad debt and liabilities in the system. That means we need to allow the liquidation of debt to occur. The prudent will buy up assets with value and build a new foundation for new businesses to replace the failed ones. When the government props up bad companies, it prevents new healthy businesses from forming.

This does mean there will be a lot of pain in the short term. But there’s no way prevent the pain, we’re already in a big mess. We can either take the pain now and rebuild, or we can delay the inevitable and make it worse.

Lots of people have been saying, “but no one wants to buy some of these assets”. Well, if no one wants to buy them that’s a very strong signal: there’s no value in the asset.

Lastly, let’s consider the idea that lots of government spending will fix our problems. The past 8 years under Bush we’ve seen record spending, and where are we now? If massive spending and pork-laden handouts under Bush got us in this mess, how is massive spending and pork-laden handouts under Obama going to be any different?

So what should we do?

It’s rather simple. The government needs to balance the budget immediately; debt got us into this mess, we need to get out of debt to get out of the mess. Ending our current wars and bringing all our troops home will go a long way in balancing the budget. Plus, why do we have 40,000 troops in Germany anyway?

We could also use some across the board tax cuts. The tax cuts will return money to American families who can spent it on things they need, as opposed to it being used as bonuses for Wall St executives.

I found this great site called Read the Stimulus, which has the tagline of:

$850 Billion, 1588 pages, and counting…somebody needs to read it!

1588 pages! This bill was released 5 days ago. Even if your full-time job was to read the bill (8 hours/day) and you read over the weekend, you’d need to read 40 pages an hour to read the whole thing. There’s no way that our politicians read this thing.

They are about to spend $850,000,000,000! It would be nice to have some oversight here. I bet there are lots and lots of wasteful things in this bill.

For example, if you look at page 147 of the House version of the bill, you’ll see the following:

1 (4) not less than $335,000,000 shall be used as

2 an additional amount to carry out domestic HIV/

3 AIDS, viral hepatitis, sexually-transmitted diseases,

4 and tuberculosis prevention programs, as jointly de-

5 termined by the Secretary and the Director;

$355 million on STD prevention in a economic stimulus plan? Regardless of the merits of government STD education, this sort of spending does not belong in a economic stimulus plan; how exactly does it create jobs?

To put a bit of perspective to this number: you could employ almost 9000 new teachers for this money.

But here’s the most interesting part. Washington is telling us that they must act soon before it’s too late. But it turns out that only 20% of the bill is for spending in 2009. The rest comes in 2010 and later.

So what’s the rush? Why not just pass the 20% that will be spent this year now? Then you can slow down and take the time to read about the rest of the spending.

It seems to me that Washington is creating a false sense of urgency to pass another pork-laden, wasteful, spending bill. Which is the very last thing we need as our country plunges deeper into recession.

My blog’s admin dashboard is telling me that this will be Post #300! Seems like Post #100 was a long time ago.

I thought I should do something fun to mark the milestone and decided that I would replace the existing “South Park Vijay” picture and try to get a nice “Simpsons Vijay” picture (I used Simpsonize Me).

Unfortunately, the results weren’t that good; the character doesn’t really look like me: the hair is the wrong color and style, the glasses are the wrong shape, etc.

So South Park Vijay will continue to grace this blog, until a better cartoon equivalent is found.

Could someone please write the “Elmo-ize me” app? That would rock.

At first I thought this was joke, but apparently NASDAQ has introduced an index that consists of all the companies that are getting bailout money:

The index enables investors to track the performance of U.S.-listed securities that are participating in U.S. government sponsored relief programs such as the Troubled Asset Relief Program (TARP) or other direct government investments. The NASDAQ OMX Government Relief Index is the latest index launched by NASDAQ OMX Index Group and underscores its commitment to designing and calculating relevant world-class indexes.

…

“We believe the NASDAQ OMX Government Relief Index will be useful in helping investors evaluate the government’s investments and the impact of the relief plan on the economy during this period of historical significance.” (Source)

Actually this isn’t a bad idea. Using this index, we can track the money the government took from us and invested. After all, all those politicians told us that we’d probably turn a profit on this.

The index started with a value of $1000 in 3 weeks ago. Let’s use Yahoo Finance to check on our investment: hmm… it looks like it closed at $658.03.

So in 3 weeks, we’ve lost over 35%. Perhaps I was wrong about the government being stupid and inefficient. After all, it took two awarding winning investors a whole year to lose that much money.

To speed things up, we should consider skipping the middleman and just dump the money in a big hole.

Crissy and I use Fidelity for most of our banking and investment needs. But after reading this this email they sent me today, I’m tempted to find a new broker:

Dear Vijay Bangaru,

Fidelity Contrafund and Fidelity Low-Priced Stock Fund have recently reopened to new investors. This presents an opportunity to invest in two funds run by managers with decades of experience in all kinds of markets, and backed by one of the largest investment research platforms in the world.

Fidelity Contrafund (FCNTX), Fidelity’s largest equity fund, is a highly rated fund that seeks growth opportunities in any type of market size, segment, or sector. The fund is run by Will Danoff, named Morningstar’s 2007 Domestic Stock Fund Manager of the Year. He has more than 22 years of investment management experience, and has run Contrafund since 1990.

Fidelity Low-Priced Stock Fund (FLPSX) is a highly rated small- to mid-cap fund that invests in growth or value stocks priced at $35 or less at the time of investment. The fund is run by Joel Tillinghast, named MarketWatch’s Stockpicker of the Decade in November 2007, and Morningstar’s Domestic-Stock Fund Manager of the Year in 2002. He has more than 20 years of investment management experience, and has run the fund since its inception in 1989.

The recent market activity has resulted in some negative mutual fund performance. Please click on each fund’s name to learn more about how these two funds have performed and their latest ranking information.

…

“Recent market activity has resulted in negative mutual fund performance”? You think?

The Contrafund (which I used to hold 2 years ago) is run by Morningstar’s 2007 Domestic Stock Manager. In 2008, his fund lost 37.16%, while the S&P 500 lost 37%. So not only did he lose nearly 40% of his investors money, he lost more than a simple index fund would have.

And he’s considered the best?

The Low-Priced Stock Fund is run by the MarketWatch’s Stock Picker of the Decade in 2007. In 2008, his fund is down 36.17% while the Russell 2000 is only down 33.79%.

Obviously these funds did much better then their comparable index funds in the long run, but it’s still pretty funny that these guys won huge awards in 2007 and then got destroyed in 2008.

I guess it’s like the Sports Illustrated Cover Jinx, but for Wall Street types.

I couldn’t sleep last night and was thinking more about Slumdog Millionaire and poverty. In yesterday’s post, I mentioned that India has only had its independence for just over 60 years, and the work to build an economy and lift all the poor in India out of poverty was really just picking up steam.

But I missed an important point. While India hasn’t been under oppressive imperial control for 60 years, its only had real economic freedom for the past 20 years or so:

For an entire generation from the 1950s until the 1980s, India followed socialist-inspired policies. The economy was shackled by extensive regulation, protectionism, and public ownership, leading to pervasive corruption and slow growth. Since 1991, the nation has moved towards a market-based system (source).

Some of these policies included:

• Extreme bureaucracy and regulation.
• Unemployment and underemployment, arising in part from protectionist policies pursued till 1991 that prevented high foreign investment.
• Lack of property rights.
• Over-reliance on agriculture. There is a surplus of labor in agriculture. Farmers are a large vote bank and use their votes to resist reallocation of land for higher-income industrial projects (source).

It should be clear what these policies do. The extreme bureaucracy is a huge barrier to entry and protectionist, which prevents bad companies from being replaced by new, better companies. The lack of property rights prevents crucial investments in technology and infrastructure which in turn stagnates the economy. Voting blocks that vote in their own selfish interests cause misallocation of capital and resources.

All together, these policies completely halted economic growth, innovation, but most importantly, it precluded economic mobility: if you were born poor, you’d die poor. And if you were born rich, you’d die rich.

Not surprisingly, when reform lead to economic freedom, poverty numbers decreased dramatically. In India real per capita GDP doubled from 1980 to 2000 while poverty rates dropped from 51% to 26% from 1978 to 1999 (source).

Similar success stories can be found in Botswana, Chile, Ireland, and Estonia.

Economic freedom is essential to having a strong economy. As America and the world considers more “stimulus packages”  in response to the government created recession, we have to stop and consider the effect this will have on our economic freedom and whether we will be inadvertently making the problem worse.

Crissy, Amma, Daddy and I went to see Slumdog Millionaire today. I liked the movie, but it left me with an uneasy feeling. If you haven’t seen the movie here’s a short synopsis (some minor spoilers):

Slumdog Millionaire is the story of Jamal Malik, an 18 year-old orphan from the slums of Mumbai, who is about to experience the biggest day of his life. With the whole nation watching, he is just one question away from winning a staggering 20 million rupees on India’s “Who Wants To Be A Millionaire?”

But when the show breaks for the night, police arrest him on suspicion of cheating; how could a street kid know so much? Desperate to prove his innocence, Jamal tells the story of his life in the slum where he and his brother grew up, of their adventures together on the road, of vicious encounters with local gangs, and of Latika, the girl he loved and lost. Each chapter of his story reveals the key to the answer to one of the game show’s questions.

Each chapter of Jamal’s increasingly layered story reveals where he learned the answers to the show’s seemingly impossible quizzes. But one question remains a mystery: what is this young man with no apparent desire for riches really doing on the game show?

When the new day dawns and Jamal returns to answer the final question, the Inspector and sixty million viewers are about to find out (source).

The movie very realistically depicted the life and plight of the people that live in the slums in India (click the link and read the entire story):

For in Mumbai, as well as in other major Indian cities, hundreds of young children have had their arms and legs chopped off; scores of others have been blinded. The gangs also pour acid on to the children’s bodies, leaving them with suppurating wounds.

Their suffering comes down to one thing: money. In a country of 1.2 billion people, where the gulf between rich and poor is vast, there are an estimated 300,000 child beggars.

By no means all are mutilated by the beggar mafia, but those with the worst injuries do make the most money, up to £10 a day for deformed children, a fortune in a country where millions survive on just a tenth of that.

Not that Aamir and Dalbeer saw any of their earnings. After being crippled and put to work on the streets, the children are forced to hand over the cash to gang masters each evening. And if they don’t hit their targets, they are beaten and tortured.

Perhaps unsurprisingly, almost all of these child beggars, whether mutilated or not, are addicted to solvents, alcohol and charras (powerful Afghan hashish, often laced with opium), which are supplied by the gang masters to keep the children under control.

I think my uneasiness with Slumdog Millionaire stems from the fact that for most of the people that see this movie, this is the only impression of India they will have.

Obviously, the poverty and horrible crimes in the slums do exist. No one is going to deny that. But there’s much more to India (or any country for that matter). What if you showed the movie Jesus Camp to someone who knew nothing about America? It obviously is not a representative sample. The same applies to this movie.

Another thing to remember is that India has only had its independence for just barely over 60 years. The British left the country in horrible shape, including instigating a series of wars and the Partition of India:

Partition was accompanied by one of the largest and most rapid population transfers in history, with 17.9 million people leaving their homes. Of these, only 14.5 million arrived, suggesting that 3.4 million went ‘missing’ (source).

The movie served as a poignant reminder of the idea of access as a solution to poverty which I wrote about a couple months ago:

Which forces you to think about one of the greatest challenges of humanity today: how do we close the gap between the haves and have-nots?

How is it even possible that such poverty exists alongside such wealth? How can a child  be without housing, education, health care, or any measure of security for their entire childhood?

…

I feel that the world would function best as a meritocracy, but this necessitates that we have equality of opportunity… the problem isn’t intelligence, it’s access to the system.

…

I was once told that those of us born with opportunities will ultimately be judged based on how we used those opportunities to better the world.

The same ideas apply to the people in the Mumbai slums as well. Unlike Western nations, India doesn’t hide its poverty. As an example, think about how shocked people were when confronted with the plight of the inner-city slums of New Orleans during Hurricane Katrina.

In India, however, the extremely wealthy live next door to the extremely poor. When we went to India last summer, Crissy was shocked by this dichotomy, whether is was the marble-faced mansions of the rich next to the straw huts, the modern office buildings with manicured gardens next to the shanty towns, or the wealthy women draped in gold shopping on the street while starving children in rags beg nearby.

The unfortunate fact that the mafia takes all the money the kids get through begging precludes some of the obvious efforts to fix the poverty. If you give the kids money, chances are that it will be taken from them.

As the average person can do very little to fix the endemic corruption in the Indian government, the best way to help is to do charitable works to break the circle of poverty. Recently there has been a massive increase in domestic and expat contributions in the form of schools and orphanages.

It will take a while to fix these problems, but we are off to a promising start.

Just a few days into his Presidency, Obama has attacked a sovereign country killing eighteen people. US missiles fired from Predator drones are suspected to have killed “at least five foreign militants” in Pakistan.

Strangely the AP article doesn’t explain who the other 13 people killed were. If the other 13 aren’t “militants”, they are probably innocent civilians. The Times Online (a UK paper) mentions at “at least 15 people” were killed including 7 “foreigners” and 3 children. Who were the other 5?

This is disturbing for a number of reasons. First of all, the media doesn’t think it’s important to mention how many innocents died. War is a horrible thing and the consequences of it need to be exposed to everyone.

Second, Obama has violated the sovereignty of a nation by attacking its civilians and murdering innocents in total disregard for international law. This is the same exact thing that Bush did. Where’s the change? Obama’s administration has no comment.

Third, Obama doesn’t seem to understand Blowback, which, according to the CIA, was the motive for September 11:

Blowback is a term used in espionage to describe the unintended consequences of covert operations. From the outside, blowback typically appears random and without cause, because the public is unaware of the secret operations that provoked it.

By killing innocent people he doesn’t know and knows nothing about, he may have killed “at least five foreign militants” but by killing 10 innocents, how many terrorists did he create?

If you’re not familiar with this idea, concern this: what would the reaction in American be if a Russian missile launched from Russian-occupied Mexico destroyed a few homes in Texas killing some “suspected CIA operatives” and their families including their wives and children?

Obama is just continuing Bush’s policies. The only change is that instead of Iraq, it’s in Pakistan.

A close Cinciripini family friend, Gene Speichinger, passed away a couple of days ago. He had a pretty incredible life, including a dozen years of rural community development in Peru:

In spending 12 years working with the Quechua Indians of the highlands in southern Peru, Gene worked on the construction of schools, roads, wells, electrical and mechanical installations, bridges, and management of a 5,500-acre cooperative farming project, and was director and pastor of a the Catholic church in Capachica. In this time, he became fluent in Spanish and the native language, Quechua.

There’s a visitation on Sunday and the funeral on Monday, both in Columbia, Missouri, at the Our Lady of Lourdes Catholic Church.