An Economic Primer by a Non-Economist

The news today is dominated by economic data, which seems to always be bad. When the colored graphs in the newspapers and websites always point down, that usually is not a good sign. The only up pointing graphs seem to be an increasing amount of bad stuff (unemployment, foreclosures, etc.).

With economics on the front pages, I thought it could be helpful to understand economic terms that are now so casually used without definition or explanation. If you were a political science major like I was, some definition and guidance could be essential. So here is what I have come to understand about common economic terms.

Toxic assets. This is a difficult one. How can something that is an asset be toxic? It appears to me that this is a case where an investment banker declares an obtuse financial instrument that normal people (including high paid executives evidently) cannot understand an ‘asset,’ sells it to someone else, who then implodes, and the guy who sold it gets a bonus.

Negative growth. How can growth be negative? This is another oxymoron. It is as though politicians and economists fear using the word 'down,' so they call it 'anti-up.' This is a phrase created to avoid saying more pejorative terms like we’re all going down the drain.

Infrastructure. Governments spending money on infrastructure is very popular across the world. Governments everywhere are going into debt to fund infrastructure projects. Since you will have to pay for it, you should know just what is ‘infrastructure?’ It is anything the Government wants to spend money on (house insulation, college scholarships, tanks, etc.).

Global Recession. When a politician blames the ‘Global Recession’ for everything that goes wrong and for an inability to balance the budget, he/she is saying “Don’t blame me; it’s the other guy’s fault.” In that sense, a global recession is how my soon to be ex-wife viewed our marriage.

Economic Stimulus. This goes hand in hand with Global Recession. The phrase means politicians can spend money that they do not have because there is a Global Recession. The worse the Global Recession appears, the more money politicos are allowed to spend. When you hear one of them conjuring up memories of the Great Depression, be prepared for truly massive spending.

Liquidity Crisis. When banks don’t make loans necessary to sustain business, it leads lots of people to drink; hence a liquidity crisis.

Mark to Market. This is a strange accounting technique used to force companies (like banks) to write down assets that are otherwise performing just fine. By writing down assets, banks no longer have appropriate reserves or balance sheet capacity to make new loans, which causes borrowers to default and requires even more mark downs in an unending downward spiral. I think the concept was invented based on a guy named Mark, who went to market but lost his money gambling while he was supposed to be buying groceries.

Retention Bonus. This phrase was made famous by AIG recently, who paid traders in London retention bonuses after they lost a trillion dollars. Unlike a performance bonus, a retention bonus is earned by going to work every day and doing your job. I suspect the unions were caught by surprise when they read about AIG. They must all be asking themselves, “Why didn’t I think of that?” I can see the new bargaining position – no major salary increases just big retention bonuses for everyone.

Softening Conditions. I never realized conditions could be ‘soft’ like toilet paper. This is a polite way of saying things are going from bad to worse or we are about to be flushed.

Promising. This adjective can apply to investments, economic conditions, or even your social life. Generally it means past performance is pathetic but things are unlikely to get worse.

Productivity. This is an economic term that measures how much stuff is produced per worker. When productivity is rising, it means each worker is producing more stuff; and it generally leads to rising employment levels. When productivity is declining, it usually means people aren’t buying as much and you still have lots of workers who aren’t producing so much. Declining productivity is a precursor to rising unemployment as companies fire unneeded workers. Similarly, when a politician produces a lot of words that do not accomplish anything, it is political productivity. As long as their productivity remains high, politicians are unlikely to lose their jobs.

Default. This word has two different meanings. It can mean the norm or the condition achieved when no other direction is given as in the default position. However, if you read this word in the business section in the newspaper in Australia, it means ‘stuffed’ as in the company is stuffed because of too much debt and too few banks.

Economic Cycle. Things that go up eventually go down and vice versa. Think of a bicycle tire that rotates as you peddle. Any point on the tire rotates to the top and then to the bottom. The economy is similar; in recessions economic activity declines and in periods of growth or expansion, activity increases. So where are we in the economic cycle today? Think of a flat tire.

Waiting for Hamish

The palm fronds were horizontal in the wind; the rain was so thick and descending so fast the harbor and surrounding islands were no longer visible, hidden behind the curtain of cloud and water. The wind was loud, making its own angry noise as it blew with a ferocity I had not before encountered.

We looked out our glass encased rental home, built to showcase the stunning views in every direction during normal times. Perched on the top of the steep hill, the house did not offer the magnificent views today; instead standing alone and unprotected against the unimpeded wind.

A category 5 cyclone (aka hurricane), the most powerful of storms, marched steadily toward our island retreat. We recalled other Category 5 storms like Andrew in Florida, and the damage that resulted. Katrina was only a Cat 3; and New Orleans has yet to recover.

It was not supposed to be this way: a reunion of friends from the U.S. on an island off Australia’s northeastern coast; an idyllic setting for snorkeling, unspoiled beaches, and visits to The Great Barrier Reef. It was to be a respite from the pressures of work and home.

Three guys who have experienced great success yet are struggling late in life with terrible economic and business conditions and difficulties at home. Three genuinely nice guys who have known each other for 25 years during long careers in the U.S. and are well respected and liked planned this sojourn, our first together despite knowing each other for so long.

Gene organized the trip. A senior partner at one of New York’s most prestigious law firms, Gene is overseeing a staff of transaction hardened attorneys in a market were there are few transactions. He struggles with a long term marriage which offers increasing volatility and uncertainty. Two of his adult children accompanied him for a trip of bonding and mutual support.

Glenn flew up with his wife, Mary, from Melbourne. Glenn and I worked together in New York at a public company (Glenn as CEO and me as President); after I left Glenn sold the company to a big Australian company, that later became insolvent when the credit markets collapsed. Glenn became CEO of the combined company and has worked day and night to salvage the company from liquidation. This was his time to relax for a few days and reconnect with his wife.

I am CEO of an Australian company in Sydney after a long career in the U.S. Now, however, I too am struggling with too much corporate debt in a debt-starved marketplace and too little income in a deteriorating property market. To add to my difficulties, my wife of 30 years has filed for divorce in the U.S. and seems determined to pursue aggressive and expensive legal remedies to insure a comfortable lifestyle for her and not much for me. The three of us needed this break from the daily pressures of life; we looked forward to it with much anticipation; it was to be our R&R and an opportunity to recharge our physical and mental batteries.

Yet, now we stood in the path of one of the most powerful storms ever to cruise the Australian coastline. There was no place to hide; no bridge to cross to safety; no planes or boats leading away from the storm’s path. As we looked out from our glass enclosure, we waited for Hamish to come.

We did all the preparatory things you are supposed to do when a storm approaches. We filled the bathtubs and various containers with water in anticipation of losing power and water. We secured flashlights, matches, and candles. We bought extra food and drink (including several six-packs of beer) at the grocery store; placed outdoor furniture in the pool so pieces would not become airborne missiles, and moved away movable objects from inside windows. We located safer spaces to hide and discussed how to communicate and where to go if the behemoth hit at night.

Our only transportation on the mountaintop was a buggy (aka golf cart). Amidst the driving rain, the buggy stopped working. This was surely an omen; even the buggy feared to venture out. We borrowed a buggy from the neighbor for trips to town.

The Aussies in town seemed eerily calm and unconcerned. “No worries, mate,” was a common response to questions of pending destruction. “When is the storm projected to hit here, I asked the woman at the news stand?” “Tomorrow” she replied, with an air of indifference. “No worries, if the police want you to evacuate, they will stop by and tell you.” “But where do we evacuate to?” “The police will know; maybe the conference center.”

I realized all of the local residents who exuded such self confidence were 25 years old or younger. I guess the older residents left town when they could. The last cyclone to hit the islands was 10 years ago, and most of the people we met were not here then.

We drove the buggy to town and stopped first at the tour office where we had made snorkeling reservations the previous day. The girl in the office at the time lacked concern that the storm would affect the next day’s outing; that was yesterday. Today the office was locked up, windows taped, and a hurried sign posted “No tours until further notice.”

We drove to the Italian Restaurant we planned to have dinner that night. “Only accepting dinner reservations before 6:30 pm” the manager said; the restaurant was closing early so employees could look for safety before Hamish came calling.

Hamish appeared to be slowing down according to reports we picked up in town. That was both good and bad news. At least it would not hit until the following day when we could react in daylight, but it also met the potential for more damage and a longer encounter with the unwanted visitor. The projected path continued to point at our island.

The news was sporadic; even the Australian television news did not give much coverage; no news people on islands holding on and trying to avoid being blown over in the gale force winds; no camera coverage of damage on islands already hit; no scary stories of past natural calamities. Either the Aussie public didn’t care or the media was not as reckless as their American cousins.

That night the wind blew in waves from hard to ferociously hard. The gusts drowned out the sounds of crashing waves on the beaches below and rain from above. But the house held without noticeable breaks.

In the morning, we received some good news. According to my Blackberry internet browser, the storm seemed to be moving slightly east toward open ocean. We all took turns squinting at the miniature picture of the cyclone’s path on the small Blackberry screen. Yes, we all agreed, even those of us with questionable eyesight, there was movement off course. We seemed no longer destined for the 280 k/hour winds at the eye of the storm.

Finally some news on the limited selection of television stations on this island. Hamish was indeed moving away from the coast; high winds and rain would continue for most of the day but Hamilton Island was no longer directly in the path. We drove around the island later as the rain abated; there were few others about but we did meet a woman who told us the island was under curfew and many of the residents had been evacuated to the conference center and were not yet allowed to leave. Later, they opened the doors and everyone was outside looking at the limited storm damage and wondering what the big deal was. By the next morning, the stores were open and we were packing to leave the island paradise to be experienced some future trip.

Once again, the Aussie attitude of “No worries Mate,” came out like the winner, although I fear the day when people do not take threats seriously. And for Gene, Glenn, and myself, we finished our long island weekend without once worrying about banks, or debts, or even issues at home. And Gene and his children bonded; and Glenn and Mary shared an unforgettable experience together.

What's the Rush?

Today I walked to the pharmacy during lunch. I was not in a hurry; my next meeting was not for an hour and the drugstore was close to my office. As I approached the traffic signal, the pedestrian light turned to flashing red. This is the universal symbol to run quickly to beat the dreaded steady red hand. So I was in no rush but I ran; it would be unthinkable to waste a minute waiting for my turn to cross the street. Others ran too; and I bet they were not in a hurry either. What is it that causes us to rush when we are not hurried?

For some reason, it just seems intolerable to have to wait at a red traffic signal. I could be doing more productive things like going somewhere. But to be stalled seems wasteful. Everyone needs something to do, especially Type A personalities like myself. Doing nothing drives me nuts.

Maybe that is why traffic signals have push buttons for pedestrians. We can push the button repeatedly and take satisfaction when the light changes. I don’t know about Sydney, but the City of New York disconnected the push buttons years ago but did not tell anyone. It seems computerized traffic management programs and push buttons are not compatible. But New York officials were smart enough to know people waiting at traffic signals need something to do, especially something that they think causes change to occur. So they left the buttons, and New Yorkers push and push and claim satisfaction when the light changes.

I think the only people who do not rush are older tourists. I know they are old, because the walk slowly; I know they are tourists because they are not in a rush. Old people on holiday cannot rush because they have too much time to go places they don’t know how to get to. Everyone else is in a hurry whether they are in a hurry or not.

People driving cars are in a rush too, but they are fined for rushing. In the U.S., drivers used to accelerate when the traffic light turned yellow to avoid waiting at a red light. Then some entrepreneur had an epiphany and convinced cities to install cameras at traffic signals. Now if you speed up, you receive a fine in the mail. This has become a big moneymaker for cities. What cities need to do and have completely failed so far is to equip drivers with push buttons like pedestrians. The time would pass more quickly if drivers had buttons to push to seemingly make the lights change. Maybe we could start a rumor that it takes three drivers to push at once; that would keep everyone stopped at a traffic light occupied.