Loud Thoughts

Cross posted

You have everything planned. Strategy is brilliant, wheels are turning, projects are in motion, future is unrolling. You feel good and can almost taste success. Unexpectedly, something big happened: two big buildings collapsed, a hurricane wreaked havoc, an earthquake shook a romote place, something called sub-prime is disturbing the US financial institutes. The event has no direct effect on what you are doing, but everyone is talking about it. Should you change your course or stand firm to ride out the storm? Since there is no data to support either decision, it is essentially a gut call, wrenchingly.

Guts are quite a rare commodity these days.

The question is whether the event has fundamentally changed the course of the world, or it is merely a ripple to be forgotten.
Sequoia advised their portfolio companies to change. In fact, to jump immediately.

If the event altered the landscape. Companies that reacted quickly also recovered quicker. Companies that tried to ride it out experienced painful cut-backs and frequently never recovered. There are many examples. Studious readers have already listed both columns. The million dollar question is, “How soon will this economy recover?”

You know Sequoia’s answer by now, “Not soon enough for you to just do nothing.”

What happens when you pump money into a society?

A society’s productivity (real GDP) grows slowly. Over time, the prodoctivity accumulated into wealth. Part of the wealth is liquid: money in various forms. Money serves to convert one form of wealth (oil, gold) to another (cars, clothes). Wealth itself fuels productivity (called capital then) and generated more wealth.

There is a flaw in this system. The government prints currency, a main form of money, that does not associate with real wealth directly. When the government pumps money into the society, the total wealth of the society remains the same. This surely brings on inflation, but with a delayed effect. In the interim, people think they have more wealth and upgrade their lifestyle. When the reality arrives, they would have consumed too much, depleted their previously accumulated wealth, and ended up poorer than before.

Sub-prime crisis is exactly that. Those easy loans essentially pumped money into the system in the form of credits. Give that to a consumption based society like the USA, it ended up with the whole nation much poorer than before: they consumed way too much than they should have.

There are only two real solutions: infuse wealth from outside of the society, like China, or work to make up the deficit, like Japan is trying to. The US is a highly productive society. It can re-generate the wealth. But before that, the society simply must deal with the fact that they are now not so wealthy. The lifestyle of the rich must stop.

Paulson, Bush, Congress, Obama, and McCain all knew that these $700 billions is just pumping more money. It delays the harsh reality by faking the wealth the society does not have.

Wall Street is full of smart investors. They knew the money is temporary and fragile. They will do what they do best: invest by putting the money on secure and promising projects. But look around. Oil comes from mid-east. Manufactured goods are made in China. IT services were off-shored to India. What’s left in the US to invest?

The bail-out will not heal the US economy; it only gives the addict a quick fix. They money will quickly flow out of the country. It is a big soft landing pad that serves only politicians and short-sighted citizens.