Wednesday, October 05, 2005

U.S. Economy is red hot and better managed than the Japanese?

Stratfor - stands for Strategic Forecasting. They are very good in analysing geo-political events. However, today, they decide to wear an eonomist's hat and cheerlead the U.S. economy on. Their basic premise is that U.S. GDP is growing at 3% for the last few qtrs, therefore, economy is strong in spite of "bearish" media saying otherwise. I would have written a whole book just to counter this argument, but this post will deal the main points that Stratfor pointed as being U.S. strongest traits and why U.S. economy is so "resilient".

1) Capital is allocated on the basis of economic efficiency, not political perogatives. Asian capital allocation is extremely politicized with a lot of loans to companies that linked to the staes.

I don't disagree to the poor allocation of Asian capital, however, I take issues that U.S. is doing a better job. The recent highway bills are full of porks with $billions that are thrown toward projects that lead to nowhere. Secondly, how is U.S. capital allocated correctly when Fed micromanages interest rates to fuel the greatest asset bubbles of all time. There is even a running joke that Fed is throwing out free money out of its helicopter -- hence helicopter money!

2)Stratfor also speculates that heavy use of technology is the right allocation of capital.

Cheap money has been thrown everywhere and returns have been crushed! We had the tech bubble to begin with and that bubble is still being unwound as far as I'm concerned. And many people do not realize is that with increased productivity from technology, it actually leads to higher unemployment in the intermediate term! The economy may eventually adjusts but it may take a whole new generation to retrain and retool to the new economy. I'm not against the use of technologies but simply saying that heavy use of tech is the right capital allocation is wrong. This point has become so blatantly obvious that everyone is doing it. Why is there's not enough capital allocated to environmental causes for example or build better schools and a education system? On top of that, many tech jobs are outsourced overseas nowadays -- with U.S. middle class dwindling, how could that be the right allocation strategy?

3)The last claim is the most outrageous: U.S. practices Darwinism, bad companies are allowed to die unlike European or Japanese companies!!!

What!!! U.S. has this law called Chapter 11. It's a magic trick for unsuccessful companies to wipe the slate clean and do over. Some companies have been doing it for over 3-4 times and they are still doing it (think Airlines). Bad companies are not allowed to die, they simply reemerge with no debt - hence the industry do not lose capacity, rather every time some one is in trouble, they'll get a stronger competitor in the end. WorldCom, NTL and airlines which I mentioned are just a few examples.

Stratfor should stick with analysing Iraqi and Iranian threats, that's what they are good at! Don't destroy your reputation by sticking your toes into hot lava!


Blogger Barry Ritholtz said...

I saw that Stratfor piece today, and actually laughed out loud. Thanks for the reposte (Also, the Dell piece is very good)


1:15 PM  

Post a Comment

<< Home