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Imagine, if you will, that our economy is not 300,000,000+ people, but just 300 people… where you pretty much know everybody, and everybody knows you. This exercise converts the huge, imprecise, impersonal, economy into a local, specific, personal economy with all the macro and microeconomic functions still in tact, just on a smaller scale. Reducing the scale of our community makes the impact of events more personal and more immediate. It reduces the logical distance between micro and macro economics, between government and the citizens, between businesses and customers. If unemployment is at 12%, you know the 36 people who are out of work, and if some group of people decide to start or expand a business and hire six people, you can literally see the effect of a reduction of the unemployment rate from 12% to 10%. If taxes go up, you can more readily see both the impact of the loss of spendable income in families in the community and you can see the impact of fiscal and monetary policy on the people of Microville. Additionally, economic phenomena like inflation, money supply and velocity of money are more apparent.

MicrovilleUSA has all the businesses, organizations, government, schools, concerned citizens and aspiring people of a larger nation. It has a financial system with currency and banks, and a government entity (but rather than having many layers of government: City, County, State, Federal; we only have the local MicrovilleUSA government).

To simplify the model even further, initially MicrovilleUSA will be a closed economy/society. If you want to sell stock in a new business, then the stock must be sold to the other 299 residents of MicrovilleUSA. If you want to build a new road, the resources needed to build it will have to come from the people of MicrovilleUSA and the benefit will go to the people of MicrovilleUSA.

Eventually, MicrovilleUSA will become one community in a global economy, MicroWorld, where there are imports/exports, different currencies, conflicting policies, immigration issues… but for today we have just one community, one currency, one government, 300 people (bakers, bankers, burglers, bishops, bee-keepers, baseball players, busybodies and bums) that all live together and form one community…

…Welcome to MicrovilleUSA.

Copyright 2011 – John H. Lundin, PhD

All rights reserved

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…as for the President’s suggestions last evening… I listened carefully and found nothing that will (in my humble opinion) be effective. This criticism is not just with the President’s proposals, it is with *everybody’s* proposals

  • he kept talking about how different government actions would put money back into the peoples pockets (except for the Warren Buffetts of the world)…. and that is not really the problem. Having the money *in* their pockets does not solve the economies problems… it needs to be *spent*, and spent quickly
  • in the economic universe there are a few “laws”… one is the “quantity theory of money” which reads:  M * V = P * Q
    • …or the supply of Money (actual dollars and demand deposits…) times the quickness that the money changes hands (Velocity) [this is the demand side of the monetary equation: let’s say that the money supply is $1,000 and everybody spends their share of it roughly every three days for a velocity of 100 times per year… you now have the purchasing power of $100,000]
    • = the Price of goods and services times the Quantity of  goods and services [this is the supply of dollar denominated stuff available to buy… let’s say we have 50 houses at $2,000 each which equals the $100,000 worth of goods in our little economy… everything is in equilibrium]
    • now comes the crisis and everybody (even rich people and working families) get spooked in a bad or uncertain economy… they postpone buying anything discretionary and those who are in fear of their jobs stop all spending and just hold onto their money… The ‘V’ in the equation drops from 100 to, say, 35… NOW we only have 35 * $1,000 or $35,000 chasing those $100,000 worth of houses, so the price of the same number of houses falls fast and far (that is where we are today… too many houses being chased by too few dollars)… the new equilibrium is $35,000/50 houses = $700/house down from the original $2,000 (ouch!)…

      Velocity of Money and Employment

      parallel graphs of velocity and employment

    • What the stimulus programs have done so far is add to the Money supply, have done *nothing* to improve the Velocity, little to the Price of housing, and nothing to the Quantity of houses (which nobody is building, so it is actually decreasing)… so now the supply of Money is $1250 times 35 = ?? * 45… so now the price of a house is $972… we are in a classic deflationary spiral (why buy a house today when it will be less expensive in 2 months?) [computers have been in this deflationary spiral because the power and features keep improving even if the price remains the same… like getting a bigger house for the same money if you just wait a few months]… *and* both the methods created by the stimulus are inherently “inflationary” [not bad if you can control it]… and they still don’t fix the problem
      • with lots more Money in the economy, if the Velocity comes back, then the economy quickly becomes overheated (too much money chasing the same amount of goods) and the problem with too much money is that you cannot take the money *out* of the economy nearly as easily as you put it *into* the economy [you have to sell bonds… only now there is a substantial inflation premium]
      • and all these “shovel ready infrastructure repair projects” do not increase the actual ‘output’ of the country so even though there are more people with more money, they are still chasing the same number of houses as before  (it is the same effect if you give everybody a 10% raise without any increase in output, now everything costs (surprisingly) 10% more… only here, with our government, that 10% ‘raise’ does not go to you, rather it extends unemployment or refinishes a bridge, so, surprise, if you have the same pay, your pay now buys 10% *less*…
    • two alternatives to really fix the economy:
      • you need to entice everybody with money in their pockets to spend it NOW, not later… in the retail business this is called a ‘sale’ and there needs to be real value associated with the ‘buy it now’ value proposition. Recently, I made one policy/economic suggestion where everybody could fully depreciate anything bought in 2011 and 2012 in the year that it was purchased (just like expensing your car or business building)… Here is the link to that suggestion
      • Something like this will increase the velocity, spend some of the money that is ‘sitting on the sidelines,’ reward successful businesses, hopefully get some additional people hired *and* add some output to the economy (more cars, houses…) so that when Velocity does increase, the economy will already have some additional Q in the economy to keep prices somewhat in check… something like   $1200 * 90 = ?? * 55 … now houses have risen back to $1963 each, prices are on the rise, Velocity is almost back to where it was (some of us think that it never will go back to where it was), the housing market is growing and stable…
  • …but nothing mentioned last night addresses velocity, and unless (perish the thought) we have an event like WWII, we will have the same lethargic non-recovery that the US had during the entire *decade* of the 1930s…
  • The only person in government that fully understands this is our Fed Chairman, and he does not seem to be saying much…
  • Net, net, I don’t like anybody’s proposals right now.
  • Can your mind wrap itself around the ‘quantity theory of money?’  This *will* be on the test!!

What did you think of all the proposals?  J

The way I have envisioned displaying device capability of the different “use case” areas (mobility, productivity, gaming, audio/video, networking, processing…) and “application case” compatibilities (for specific environments like Microsoft online services (Office 365 or DymanicsCRM), SAP…) is on a ‘radar chart‘ so that a device and a user pattern can be established to match the functionality of the device with the needs of the user. Here is an example from Wikipedia:

Example of a Radar or Star Diagram

A Radar diagram shows multiple variables on different scales

I am yet to establish what the scales would be (because they would have to both be fixed to show improvements over time, and be scalable so the device pattern does not grow increasingly larger over time with improvements in device capability. The way that is commonly used is with log scales, but log scales greatly decrease the visual impact of patterns on a radar chart… Right now I am inclined to just have a fixed scale and worry about the improvement issue over time at a later date…

Anyway, the ability to map ‘use cases’ and manipulate the order of the variables (put them in priority order) is a powerful, graphical tool (snapshot) for an organization to ‘see’ the difference between devices (like the example of laptops and tablets for productivity functions), and to match the device functionality to a user profile. I think this would be very helpful for organizations to both assess the viability of different platforms *and* to justify specific solutions for support (one of the greatest challenges in today’s organization is to limit the number and diversity of the devices that are supported)…

I am quite sure that the visual impact of radar charts for the difference in ‘use cases’ between between platforms (‘what is the best platform for our users?’ …smartphone, tablet, notebook, netbook…) would be excellent for general technology publication… and that charting the functionality for ‘application cases’ would be an excellent tool for specific organizations with the need to select devices from among the many alternatives within one specific platform (‘what are the best tablets for my IT environment?’).

What do you think?  J

Someone in my past suggested that there were two types of people:

  1. those people who, when their neighbor gets a fancy new car, dedicate themselves to working harder to buy an even fancier new car [the old addage of “keeping up with the Joneses”], and
  2. those people, when their neighbor gets a fancy new car, quip “I hope your garage burns down.”
     It is this second group that troubles me.
     In my lifetime there have been a number of incidents where a mob has reverted to wholesale destruction of property: Detroit during the 60’s, LA after the Rodney King beating, and now London.
     What makes someone think that destroying someone else’s property is any solution worth considering? If they could just channel that energy//rage into something constructive. As it stands now, it is just a domestic form of terrorism. How is it any different than the bombings that happen almost daily in the middle east?
     It seems that some people would be content to burn their way back to the middle ages… or maybe even the stone ages…
     As in the line from the operetta “Mikado,” maybe we should “let the punishment fit the crime,” and have those anarchists spend their sentence cobbling their existence from a burned out building. And as they complete a harvest or a building that they are proud of… make them burn it down.
     Anger and hate should have consequences. We, as a community, should demand that our citizens be the ‘constructive’ type, not the ‘destructive’ type. Let’s build not burn.

Personally, I believe that the interest difference between AAA and AA+… is due to Congress’ malfeasance. I suggest we take the difference out of their pay for as long as it takes [let’s see… $100 billion / (535 Congressmen/women * $200K/year) = 935 years]… that means we will have a volunteer congress til almost the 31st century… Maybe we should ‘clawback’ their pensions too… that’s a good start. Let’s let them feel the pain resulting from their fiddling.

Posturing and rhetoric no longer have a place at the legislative budget negotiations. The time has come where our representatives’ personal pain of no agreement needs to be greater than their pain of pissing some people off.

I suggest jail time, say 30 days in stripes for all of our representatives, including the President, for ‘economic malfeasance’ or, more generally ‘legislative malfeasance’ if there is no agreement by 11:59pm Sunday, July 24th, 90 days if no agreement by the end of the 26th, 180 days for failure by the 27th… you get my drift… Let them spend their campaign and vacation time behind bars for the next few years hobnobbing with people who cannot vote (felons). They wanted this job, let them perform or face hard time. The message needs to be “find a timely agreement or go to prison.” There is a point where brinkmanship is distinctly unpatriotic. Now is that point.

The question is how to trigger such a painful measure to get to a solution, and for what reasons. I would suggest that there needs to be some judgement about what would constitute a critical legislative event and a critical timetable. Federal Government has known for months about the debt ceiling and about August 2, 2011. I would suggest that the Federal Reserve could select the topic and trigger the countdown. Another option would be that the President could initiate the action, and a third option would be the Judicial Branch could arbitrate the solution. We have ‘checks a balances…’ let’s use them.

As much as there are pockets of representatives holding specific ideological perspectives, everybody needs to be ‘encouraged’ to come to the middle. I profess some rather unpopular opinions about government and its role, but there are times when all ideology must take a back seat to the welfare of the whole… the greater good. This ‘back seat’ is called compromise. Not moving toward the middle is a legislative form of blackmail… and right now there is no place for this legislative blackmail.

There is precedent for this kind of action. In the working world, if Labor and Management cannot come to an agreement where a strike would cripple the Nation, then the President can call for a “90 day cooling off period.” Well, this suggestion places those 90 days for cooling off be *after* the crisis solution, not before. We need the belligerents at the negotiating table, working toward a solution. We need the clock to be their worst enemy… more than a block of ‘no compromise’ caucus members. We need cooperation to have a chance to prevail over our adversarial form of government.

Our legislative process has succeeded in finding solutions to difficult issues in the past, but it has also failed (slavery comes to mind… and more recently both immigration and energy policy). I want to take ‘failure’ off the table.

I am reminded of a old business saying: “The beatings will continue until moral improves…” OK, you suggest something better to ‘get to Yes’ on difficult legislation.

Citizens, it is time to let the belligerents know that there is one thing worse than compromise… and that is not to compromise… and to that end we will lock your sorry ass up with real criminals if you do not get the message. What is it about ‘come to an agreement in a timely manner’ that you don’t understand?

The Debt Ceiling resolution is being poorly handled… If the public would just demand a ‘conclave’ (yep, like the Catholic Church does to select a new Pope), the Country would have a solution to our budget crisis in hours! Lock them in an un-airconditioned closet with no rest rooms, a couple of cots and feed them old dry sandwiches and water. Instruct them that they will be released only when they slide a bill with all their signatures at the bottom that can be presented to both House and Senate. Give them their freedom til an affirmative vote is taken and the President signs the damn thing… If that doesn’t happen, then lock them up again and continue the process til they get it right. I’m guessing that if the sandwiches don’t get to them, the lack of press attention will.

I like this ‘conclave’ idea for two reasons:

  1. It keeps all the players from talking to the press while the negotiations are in process
  2. It forces all the players to stop talking to their constituencies and start the process of compromise
One of my favorite questions in the political realm is: ‘How can you tell when a politician is lying? …His/Her lips are moving.’  This ‘conclave’ concept would keep the press and the constituents from hearing what those politicians are actually saying during the actual ‘sausage making’ process… after all, that is the way the Senate used to conduct business for our Country’s first two hundred years. Now we have an open Senate that gets nothing done. Yes, it is transparent, but I would rather have an opaque and silent process while my representatives are working toward a compromise that will get us past this crisis and this logjam… Heck, it might even set a precedent for getting past other big issues where our elected legislators spend more time with the press than actually addressing the issue. Boy, am I sick of that. Let’s just lock them in a closet.

Give every business and individual the ability to depreciate every capital asset purchased 100% for the rest of calendar 2011 and 2012…

That is it…

Before you just blow me off as some crank, have a quick listen:

  • One of the big issues is getting the ‘velocity of money’ back up (or in the press: how to pry businesses’ and individuals’ tightly wrapped fingers from around the trillions of $$ in cash that they have sitting on their balance sheets). This tempts them to make purchases now especially if they have lots of profits they can write down.
  • This is not a give away… if you take all your depreciation on, let’s say, a car… then next year you *don’t* get to take the normal 20% you would normally take, because it is already fully depreciated… So, the IRS loses the revenue in 2011 but makes it back starting in 2012 for the appreciable life of the asset. Eventually, the IRS will become whole.
  • This will cause a surge in demand for assets which are, arguably, the best in breed. Will this surge be uniform across all products? No, why would you want it to be? It will reward those products that are meritorious in their segments.
  • This surge in demand will spark companies to increase supply… to rethink their projections and employ people to the point fleshing out their ‘slack’ (read: factories that have more capacity)… thus creating more goods. I really like this because our governments’ programs are working on projects that have little or no ‘output’ which is inherently inflationary (more dollars chasing the same amount of goods)… [Ask me why this is such a good idea]
  • Increases in supply will put our manufacturers into a better profit position enabling them to make more business expansion decisions (read: more productive jobs), be more aggressive on pricing, and be rewarded for creative and innovative products.
  • Increased demand will hopefully put upward pressure on pricing (including the housing market) especially if employment increases.
  • Increases in asset demand and supply will have a strong secondary effect on the services markets.
Sooooo, let’s look at the stakeholders for an example. Let’s pick one that is a major contributor to our economy: automotive (I know something about automotive):
  • Vehicle Manufacturers: They would be ecstatic. They are currently spending about $4,000 per vehicle in incentives to help move cars off of dealers’ lots. Volume would increase. Inventories would decrease.
  • Automotive Dealers: More customers… what is not to like?
  • Fleet purchasers: For companies that are profitable, it gives me the option of marking down their profits by the added depreciation.
  • Individual purchasers: pay less tax this year… but more next year and the year after… it may be something I want to do… or not.
  • Banks: should love the new auto loans that are coming from healthy buyers
I have been tossing this idea around for about 2-3 years, thinking that I would eventually discover some fatal flaw. Well, I have found none on my own [this is where you help me…]. The best pair of issues that I can think of are:
  • It rewards the better products and more profitable companies and people (in economic terms: it is asymmetrical). But I really like that. It will show the economy what works and reward products are the best and what job related skills are really needed. We live in a meritocracy and meritocracies reward those who perform… it also expands the parts of our economy that are successful. If we build a better car at Ford or Chevy then those will be the ones that capture the greatest benefit. If not. then people will buy Hondas of Toyotas …that are made here in the US by US labor. How bad is that?
  • It is hard to model and forecast the impact. How many additional cars will Ford and Chevy and Honda and Toyota schedule for production? Which particular models will be most popular? How will they get their suppliers on board with more, say, tires? How many taxpayers will take advantage of the increased depreciation option? How much less revenue will the IRS receive? I do not know of one economist that has a model to estimate the impact short of an uneducated guess. [you econometricians please let me know if you *do* have a model… won’t you?]
But neither of these reasons is sufficient to derail the concept of boosting demand in a soft economy by deferring taxes. The balance sheet of the US Treasury (read: the US taxpayer) changes $0 over the life of the asset, if somebody flips the asset, then they pay tax on 100% of the sale price… Where is the hole in this policy? Most of all, I like this because it is a Demand-Pull policy rather than a Supply-Push policy. Right now our economy is acting strangely like a string and is not doing well being pushed… We, the taxpayers and citizens of these United States, need a ‘real’ reason to release the trillions of $$ that have come out of our economy and push ‘velocity’ back to where it will support a healthier economy. MV=PQ to my economic buddies…. ©Copyright John H. Lundin, PhD, 2011 — All rights reserved

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