Complex Business Models

You are always hearing about Business Models as well as Economic Models. The one common aspect of these are how poorly they are able to predict anything. They seem to work when looking backwards, but not when looking forward. This is because they are based mostly on historical data. I had my first exposure to business models at Stanford University back in about 1962. We had four business teams playing against each other in a complex business game. We all started out with the same resources and only a general description of the market that we were serving. We had access to market information and a few pieces of data on our competitors. We were able to make different business decisions about how we use our resources. Each team submitted their decisions to the computer game administrator and a cycle was calculated and the results given to the individual teams. We also got basic public type market data and we, of course, knew what our own decisions, but not those of our competitors.

We played the game for several hours because back in those day it took a lot of time for the slow computers to make the necessary calculations. The model was both deterministic and probabilistic, so you would not get the same results on every cycle. For reasons of mostly luck, my team came out with the most profit when the game was stopped. The model administrator then asked all the players to see if they had any idea what was in the model and what market changes might have occurred during the play period. We all had very logical ideas that seemed to describe what must have been going on inside the program. When the administrator actually showed us what was in the program and the simple manipulations that he did to the market while we were playing, we could not believe it. All he did was to plug in a "one time" surge in the market size and the model and the actions of the players all seemed to fly out of control. Some hit it right, like my team, but it was actually just luck.

Now this was a simple system, much less complex than our economy and a "one time" event had all kinds of affects on destabilizing the system. The point that I am trying to make is that we really have a poor understanding of the complex economic model that we are involved in. In the case of the real estate bubble, it was a "one time" event that caused what we all thought was stable system go out of control.

Systems as simple as traffic flow on a freeway is little understood. If there was a car accident on the freeway system of LA at 8:00 AM, it would still be having an impact on traffic flow miles away many hours after the accident. It is like dropping a stone into a pond. People feel ripples miles away some time later. Tidal waves move around the world at over 600 mph. Wave action in water is a very simple system yet we still have only a limited understanding of their total impact. This is why I always have very little trust in people who claim they are Economic experts. No one is an expert on the very complex economic systems of the world.

I got my personal "come upping" on complex economic systems back in 1962 at Stanford University, but I know that our business schools still teach Econ 101 using the principles of Keynes which were suggested over 100 years ago and have been accepted as the Gospel ever since. As I have stated in the past, the theory has never been "double blind" tested.

Beware of all people who are too sure about anything to do with economics. Notice the similarity between Politicians, Economists and Preachers.

Energy Basics

If you read on of my earlier Blogs on energy, you might have been left a little confused. You never see anything in the news that really explains energy. There is the feeling among a lot of people that energy can be created by inventiveness alone. They see some kind of parallel between what it took to get to the Moon and back as the same type of thing as inventing a new type of energy. It would be like the light bulb where we seem to have invented light. The problem is that few people really understand energy. You can't invent or create energy. There is just so much in the universe. Further, this energy is sitting at different levels of potential. Now you ask, "what is the thing you call potential?" Well, maybe I need to go back a little and explain some ground rules.

Think of it this way, you have three books. Two are laying on your desk and one is high up on the book shelf. The two laying on your desk are at the same energy potential while the one high up on the shelf is at a higher potential. Now why is the business of "potential" so significant? The key point is that for us to get any value out of energy, we have be able to get the energy out of where ever it is and that is where "potential" come in. When an object is changed from a higher "potential" to a lower "potential", energy is released. Take the book high on the shelf. If the book were to slip off the shelf and fall onto your desk next to the other two books, what happened with respect to energy? The book high on the shelf had more "potential" energy than the two on the desk, but when it came to rest next to the other two books, it had the same "potential" as the other two books. So what happened to the energy between the two states? When the book hit on the desk, it made a loud sound. That took energy to vibrate the air for your ear to hear. If you were to check the temperature of the book that just fell, it would be a little warmer than the other two books. This is energy in the form of heat, much like warming your hands by rubbing them together. Are you with me so far on this?

It all comes back to the fact that energy can not be created, but only transformed. We are fortunate that all forms of energy are "not" at the same "potential" because if they were, it would be impossible to get any energy out to serve us humans. If all the books were on your desk, without some other form of energy, it would be impossible to put one of the books back up on the high shelf. It would be possible, however, to "exchange" one book for another on the shelf and keep the total energy the same. It is like a teeter totter. With equal weight kids on each end, how much energy does it take for each one to go up and down? Almost zero. This is a very round about way of coming back to the point that we are not going to be able to invent or discover and new form of energy. That is a dream.

Here on earth, we only have a few forms of serious energy that is at a high enough "potential" to have any real value. Those are coal, oil, solar and nuclear. Wind is just a mechanical form of solar. If the atmosphere were not unevenly heated by the Sun, we would have no wind. Wind is the atmosphere equalizing the uneven heating affect of the Sun.

There are really only a few things that we can do regarding energy. We can move energy from a higher "potential" to a lower or we can move lower "potential" energy to a high "potential" and thus store energy for use later or in a different form. You can look at these processes as "exo---" means to take energy out and "endo---" meaning to put energy in. Burning oil and coal are "exo--" processes while charging a battery is "endo---". In all these processes, no real energy is created or destroyed. The point that I have finally gotten to is that we need more "endo--" processes with respect to the Earth. How do we get more energy here on Earth? One of the best ones is to take energy from the Sun and make use of it here on Earth.

Now let's look at global warming. I am not going to debate if it is true or not, but if it were, what should we do? It is clear to all that the cause of global warming is due to heat from the Sun. The claim is that the Earth is collecting more heat from the Sun than it is radiating back into space. It is simple as that. All this business about green house gas and such is based on changing the balance between absorption of heat from the Sun and the radiation of heat back into space. Do you follow that?

What if we screw with the balance and the Earth starts radiating "more" heat into space than it gets from the Sun? It could happen and we would all freeze. You know we just had an Ice Age 10,000 years ago. Back to reality. What happens when the Sun shines on a tree? The tree takes the energy from the Sun and with an "endo---" process, converts that energy into wood. The key here is that the wood is not hot. The wood is at room temperature, but it has extra energy that it is hold which is at a higher "potential". Because the energy is at a higher "potential", the wood can be burnt at some point and the stored heat taken out. The point is that growing trees actually cool the Earth by taking the heat energy from the Sun and storing it at room temperature in wood. Isn't that a great concept. Eventually the wood would be converted into both coal and oil. Hey, I think we might be onto something. Think how much hotter the Earth would now be if it were not for trees and plants collecting all the heat from the Sun and storing it in coal and oil.

Have you ever heard any news person explaining how hot the earth would be right now it all the coal and oil were burnt? It has to tell you that in the past, this Earth was a lot hotter than now and it just might be again.

Simple Economics Revisited

Every once in a while there is a point that needs to be revisited and I think that this is just one of those. The way to look at the current real estate melt down is not just from what has been directly lost, but also the loss from the opportunity that we had. Exactly what would we have done with our money and talent had we not been playing the real estate market? The point is that we lost on both ends. to make this point a little clearer, I and going back to an old text that I used to teach from called "Principles of Engineering Economy" by Grant and Ireson from Stanford. It is the basic text that thousands of engineering student used back in the 60's and it is as sound today as it was back then. It is a little too complex for most Political Science majors, so you can see where I am coming from.

Let's take a very simple example where we invest $1.00 each year for 4 years. That is how long the Democrats have controlled the Congress and see what happened. In this example, the investment in the real estate market went down at a rate of just 5% per year while the investments that we should have been making went up at the same 5% per year. Now the big questions is how do the two alternatives compare. How much did we really lose? First the $1.00 per year investment in normal types of business. How dis we do? At the end of 4 years, we would have a total of $4.53 in the bank. Not bad, but many good business people do better than this. Now for the investment in real estate. How did we do? Based on the real estate investment, we end up with only $3.51. That is a difference of $0.77 between the two alternatives. The problem is that we hear from the news media and our politicians that we only lost $0.49 when we actually lost $1.02, or double as much. This is the point that I am trying to make.

If I were to have used larger interest rate percentages, the difference would be much worse. Would you like to see how big the difference would have been had I used 6% for the normal investments and 10% for the investment in the real estate market. For the normal investment after 4 years, you would have $4.63, and for the investment in real estate, you would only have $3.10. Now the difference is $1.53. This is what I am talking about. It is a lot worse than most people think.

Our competitors around the world were making much better investment decisions than we have for the past 4 years so we now have to restart after being down $1.53 and only have $3.10 in the bank while our competitors have $4.63. This is a very big deal. They have 49% more money in the bank to start with than we do. Before we can start going up, we have to first stop going down.

Liberals Are At It Again

Have you heard about the new gas mileage law for trucks that will go into affect in 2014? It seems that "Liberals" are going to save the world, no matter how much will cost. For some reason, they think that all they have to do is to pass a new law and presto, trucks get higher mileage. There is a common thread thru almost all of the "Liberal" ideas. They only look at positive side of their actions without considering any of the negative aspects. I think that I already showed that if we significantly reduce our use of oil, the affect will be to lower the world wide price of oil below what it would have been had we not reduced our usage. We use less than 10% of the world's oil. If we were to reduce our usage by 50% at cost of 150% of the cost of oil, our total energy cost would be 125% of what it would have been had we done nothing. Seems to me that that is a giant step backwards in terms of quality of life here in the USA. But, now look at the impact on the rest of the world where 90% of oil is used. Their cost for oil will go down by at least 1%, so they will save while we pay more. How can that be logical.

It seems that "Liberals" feel that their actions take place in a vacuum such that they have no affect on anything else. We know that is not the case. Notice how they have a totally different position when it comes to "Global" warming. There they claim that almost everything that we do affects "Global Warming". They can not have it both ways. I used this example before about wasting water. What happens when we flush water down the toilet? Is it lost? If flows to the sewage treatment plant where the solids are taken out and the water goes back into rivers and streams or the ocean. The Sun evaporates or distills the water into the air where it comes back down as pure rain or snow. When you melt a molecule of water from a snow flake on your tongue, it just might be the same molecule that you flushed down the toilet some time before.

The point is that we should use energy that is the lowest priced without any consideration of government subsidy. In the case of the new truck mileage law that will go into affect in 2014, we should just let the price of oil determine the decisions of individuals, not the government. If we were to keep government out of it the quality of life here in the USA would be the best while our competitors around the world would have to pay a little more for their oil. Why we want to try to save the world is beyond me.

Try this one from basic physics. "Every action has an equal and opposite reaction".
This is how a jet plane works. Economics is no different.

Energy

Hey, we hear a lot about energy these days, but few really understand energy. Exactly what is energy? One of the best definitions is "heat". In the final analysis, all energy can be turned into "heat". The measure that we use to measure "heat" is the BTU or British Thermal Unit. A BTU is the amount of heat that it take to rase the temperature of one pound of water one degreen f. We can also use the electrical measure, "watt" or kilowatt that we use to measure the amount of electrical power that we use.

When we use ethanol in our cars, many claim that it will help us reduce the amount of oil that we import. First, when you look at ethanol and the amount of "energy" that it takes to grow the corn and turn it into ethanol, you notice that the amount of energy that is in the ethanol is about equal to the amount of energy that went into making the ethanol. We know that a lot of energy went into making the ethanol, so where did the actual energy come from? Hey, how about the Sun? The energy that is in both oil and coal all started out with energy from the Sun. Even hydro electric power is from the Sun when the Sun evaporates water that then comes down as rain. Interesting isn't it?

Think about when we plowed with horses. The energy that the horses used was also from the sun when the horses ate hay or corn. The point is that many people think that we can some how "create" energy by some technical method. Sorry, you don't know what you are talking about. I have heard an add on TV about some new car that makes its own hydrogen gas right on the car and thus gets more mileage. If you know anything about physicis or chemistry, you know that this is impossible. In every case it takes more energy to create a different form of energy than the amount of new energy that you might think you created.

The other thing that you hear is that we need to save energy, no matter what it costs. If you look at this on a bigger scale, you will find that the more we spend and work to save energy, the lower the cost for energy will be for people outside the USA. Think about this. If we cut our energy usage by 50% at a cost of 150% for the more expensive energy that we switched too like ethanol or wind, it would lower the world wide cost of energy. Who would win by all this? China and everyone who sat by watching our stupidity, would save money on their energy. Any savings that we make by stupid decisions will be canceled out by lower world wide prices that we will not be able to take advantage of.

Interesting isn't it?

Why Do We Need Our Small Towns?

I compiled a short list of important people who came from small towns in the USA. Take a look at the list and think about the impact of these people and see if you can come up with a similar list of people who came from cities of greater than 500,000 where most of the people in the USA now live. The list is no particular order.

(1) Jeff Williams, an astronaut from Winter, Wi that only has a population of 344.

(2) Jim Leonhard, Jet football defensive back from Tony, Wi that only has a population of 729.

(3) Audie Murphy, most decorated soldier during WWII from Kingston, Tx only has a population of 140.

(4) Richard Bong, shot down more enemy airplanes than any USA pilot in history from Polar, Wi that only has a population of 995.

(5) John Bradley, who helps hold the famous American flag on Iwo Jima was from Antigo, Wi with a population of 7,647.

(6) Walter Chrysler, who founded the Chrysler auto company was born in Ellis, Ks with a population of 1952.

(7) Omar Bradley, who was a famous general during WWII was born in Clark, Mo with a population of 7,180.

(8) Dwight Eisenhower, who we all know was born in Denision, Tx with a population of 24127.

(9) Bill Clinton, you know who he is was born in Hope, Ar with a population of 10,383.

(10) Bob Dole, you know him too was born in Russell, Ks with a population of 4,184.

Now that you look over my list of 10 famous people and where they came from, you have to ask why our major population areas have not produced a similar percentage of famous and important people. There are groups that have seemed to have survived in our urban areas, but that has not been the case for many groups. Crime and poverty are serious problems in our urban areas and our public schools have been doing very poorly compared to the smaller rural cities. I have my ideas on why this is the case, but I ask you to look at the facts and make your own conclusions about the cause and outlook for the USA.

Food for thought.

Wasting Energy

We hear a lot about how we are wasting energy, but when I took high school physics, we were told that you, "could not distroy energy, that you could only transform it". If this is the case, why don't we hear more about energy being "transformed" and less about "wasting"? Everyone who has ever graduated from high school knows that E=MC**2 and that matter and energy are the same thing, but in different forms.

Let's take a simple example. We know that the engine in our car only converts about 30% of the burnt fuel into power to drive the car. To some, that means 70% of the fuel goes to waste. Now if we know that energy can not be distroyed, then where does the 70% of the heat from the fuel go? How about "Global Warming"? The heat that is claimed to be lost actually goes to heat up the air. You don't hear any green people talking this 70%.

Now let's look at the 30% of the heat that helped to move the car along. If the car started off from a stop on level ground and was driven 100 miles and ended up at the same elevation or in the same exact spot, what happened to the energy? The car is at the same elevation, so there is no extra energy stored in the car. The motor and the wheels on the car have all returned to their starting temperature, so there is no energy from this in the car either. So what happened? To move the car thru the air there was friction that resulted in heating the air slightly as the car moved thru the air. It is like rubbing your hands together to get them warm. As the tires flexed, they generated heat from the 30% of energy produced by the motor and thhis went into heat that heated the air. We are talking about serious "Global Warming" here.

Anytime we take any form of stored energy, like coal or oil and release that energy, it has to go someplace and that is normally into "Global Warming". Clapping your hands together contributes to "Global Warming". With all this global warming, why has the Earth not burnt up by now? Hot things in the presents of cooler things tend to transfer their heat to these cooler objects. Stand next to a cold glass window or stone wall and tell me what it feels like on your side that is facing the cooler window or wall? You feel cooler on the side because in the random exchange of energy between the two bodies, the cooler object is giving up less energy than the warmer object. Now that is what happens to the earth. The side that is facing away form the Sun looses heat while the side facing the Sun gains heat or energy. That is what keeps the earth from over heating. Does this mean that Global Warming is a hoax? To a large degree, it does. As the Earth gets warmer, the rate of heat loss to space increases. We all must know this because we know that you can save energy in your home by turning down the theromstat and turning it up will cause your heating bill to go up. Isn't this exactly the same with Global Warming?

Next time you hear some brain dead Greenie talking about Global Warming or wasting energy, ask him or her if energy can be distroyed or truly wasted away?

Bank of America & Las Vegas

I'm sure that you saw on the news that good old Bank of America was going to drop interest rates on their home loans in Las Vegas down to 4.5%. The news presented this as Bank of America being the "good guy". My take on this is a lot different. I opened my first bank account with Bank of America in 1942, so we go way back. Just a week ago, I walked on the same spot where the very first Bank of America stood. It is now on the north end of First Street in San Jose, California, but back when Bank of America started, the town was named Alviso. It was the steam boat stop at the South end of San Francisco Bay about 25 miles north of San Jose.

To understand what the "fox" Bank of America is trying to do, you first have to have a basic understanding of home financing in the USA. The FHA and all the other alphabet soup agencies of our government are in the home mortgage business. They exist to make it easier for marginally qualified people to buy homes. Over the years after all qualified and marginally qualified people owned homes, the only people left were those who were not qualified. Our government then lowered the standards so that even unqualified people could buy homes. Now how does Bank of America fit into this? BofA is the loan origination agent for the government. They do the paper work for the loan and then hand it over to the government. As loose as the government is in accepting loans from BofA, they will not accept 2nd or 3rd mortgages. Nor will they accept interest only or sub prime loans. Banks like BofA made interest only and sub prime loans during the home price run up period and are now left holding them. Some were insured by AIG who tried to get a piece of the action away from the government, but did not have deep enough pockets. You know what happened to AIG.

Every time BofA made a loan, they booked a profit and the agent got a bonus. At first, you might think that BofA was stupid for doing what they did. How could they ever come out on making interest only or sub prime loans? Here is the punch line. Home prices were going up at a rate far higher than the interest rates so if they made an interest only loan on a home, in a few years the home would be worth 10% or 20% more than they had loaned out on the home. It was like the home owner had made a 20% or more down payment. BofA was secure. At the end of some period, the interest only loan would come due and the home owner would refinance to a standard loan and BofA would pass the loan on to the government. Everyone wins. In the case of sub prime loans, the home owner was letting some of the interest "ride" and would pay it back to the bank when he refinanced in the future. As long as home prices went up, the shell game worked.

To make matters worse, many home owners saw their home equity growing as the price of their home went up. This was money just sitting there waiting to be spent, so many took out 2nd mortgages or "home equity" loans and spent the money. They felt rich and spent the money like there was no tomorrow. I know people who have gone back to this well several times and you know where they are now. Who made these "home equity" loans? BofA and companies like Countrywide. It took Countrywide down, but BofA also have a lot of these types on loans on their books and can't get rid of them.

This is where this 4.5% deal for Las Vegas comes in. BofA is not holding many standard loans, they have passed these on to the government. What BofA is holding are mostly interest only, sub prime and 2nd and 3rd mortgages. The only smart way out of these is to convert them to standard loans and then pass them off to the government. Us tay payers. The government still has the low loan standards that will allow an unqualified person to take out a loan and BofA is counting on us tax payers taking over much of their bad loan portfolio if they can get the people of Las Vegas to refinance to this low special rate. Since BofA has access to money from the central bank at zero interest they can pull this off.

The banks don't want to foreclose on anyone and the government is even less inclined. The only reason the banks are foreclosing is the same reason we put bank robbers in jail. It is not to eliminate bank robbing, it is to discourage bank robbing. BofA is trying to discourage defaulting by foreclosing on a few. Right now the government stands to loose about a trillion dollars on the loans they now hold. If BofA and others are successful in what they are trying to do, us tax payers will be on the hook for a lot more than a trillion.

Remember that I told you so.

Agnecy

This not a very good sounding title, but I think you will see that it is important. When you took business law in high school or college, you studied the laws of "Agency". If you think it thru, you will conclude that companies like "Country Wide" and other companies who made real estate loans were not actually making the loans, but acting as "Agents" for someone else. The fact that the loans were not made with Country Wide or banks money should show you that they were only acting as agents. We know that at least 85% of all home loans are held or insured by the government. An individual can't go directly to the government for a home loan. They have to go thru a loan company or a bank who just act as agents for the government. Like any agent, their boss, the government, sets the rules that they must follow. In this case the rules handed down by the government were that the banks and loan companies could and should write up loans for people who had no down payment and no verified means to pay back the loans. Our government bought these loans form the banks and loan companies and the banks and loan companies made a small profit on each loan when it was handed over to the government. I know individuals who have set themselves up as loan companies and wrote up the paperwork for real estate loans according the rules handed down to them from our government. Once they had a "block" of loans written up, they went to the government and sold or handed them over to the government. All the loan company had to do was to have enough money to initiate the loans and hold them until they had a "block". The government did not want to have to deal in small buck loans, they only wanted to deal in multimillion dollar transactions. Efficiency.

There were some real estate loan officers in some of these loan companies who thought that the loans might go bad and did not want to initiate them even though they knew they could hand them off to the government and no one would have any "recourse" to them. They found that by not making the loans, their kids could not buy shoes. Seems their competitor banks were cooperating with the government and making all the loan origination money. In order to provide shoes for his kids, the loan officer followed the instructions from the government and made the loans.

Now why am I seeming to be going around in circles? Because the banks and loan companies were just "agents" for the government. Notice that only about 85% of all home loans are held by the government. Why not all? The bank can make more money if they hold the loans rather than handing them over to the government, but they only want to hold the best loans. We know that most people are current on their loans. Why wouldn't you expect that any smart bank or loan company would pass his worst loans over the the government, if they know that the government will accept them. The banks and loan companies did not break any rules. They played by the rules handed down by the government.

As you can see, it is not the banks or the loan companies who were the cause of the real estate melt down, it was government policy. Estimates are that the government will lose an additional trillion dollars on the loans that they now hold. It is not over and it is not the fault of the banks. It was government policy in Washington DC that was the problem and nothing so far has addressed the problem. It is still out there. Wake up.

Real Simple Economics

Have you been waiting for a "Real Simple" explanation of how economics works. We have heard about Harry Truman who wanted an economist with only one arm. The reason was that every time he got advise from an economist, they always said, "one the other hand". Truman wanted a simple straight answer to his questions. Here is my take on "Real Simple Economics".

Next time you go out and buy something, check out where it was made and ask yourself, "why is this item not made here in the USA or in my state?" You will notice that most things other than food and fuel are made somewhere else. I looked at the bottom of my coffee cup and found that it was made in China. Next, I asked myself why was it not made here? There were several reason why the cup was not made here. The most significant was that the labor cost if it were made here would have been more the the entire cost of the cup made in China. No amount of tooling or volume, if the cup were made here, would would allow us to make the cup for the same price as the cup made in China. The only thing that would allow us to compete would be to lower our hourly pay rates. I visited this point before, but most of us Americans are not worth what we are being paid. Given that simple fact, most of us can not afford the homes we live in or the cars that we drive. We have been living a chain letter or ponzi scheme that is soon going to come to an end. Until we can make a coffee cup that most of the world wants to buy from us, we have not faced up to our basic economic problem.

You could pick any item that you want and do this same kind of analysis and the conclusion would be the same. Do it with a hat or a shoe and you will see the problem that we are in. Now if I were to take you to China, you would find that people there have a totally different situation. Most things they buy are made right there in China.

If you have done any serious travelling around the world, you will notice how few items that you see were imported from the USA. The fact is that most of the things that we make are not competitive around the world and it is getting worse. Europe did one thing that we could do to make their locally made products more competitive and that was to shift much of their taxes over to a "Value Added Tax". Here, we have done just the opposite by burying much of our tax into the products made here while products made out side the USA do not carry these same taxes. Why do we hear so little about a "Value Added Tax"? It is because our politicians are stupid or us voters are? Either way, we lose.

Good luck on checking out why things we make are not competitive.

Sir Issac Newton & Economics

How many of your recall the story about Sir Issac Newton sitting under and Apple tree and having an Apple fall on his head? From this story, he apparently discovered the fundamental laws of physics. Recall, "a body at rest will remain at rest unless a force is applied to move it" or "a body in motion will remain in motion in a streight line unless a force is applied to change its course" or "force equals mass times acceleration". These are all fundamental principles or laws that Obama and his boys can't change. Now just how do these laws apply to Economics? Glad you asked.

Have you ever been sitting in a bus next to another bus and felt like your bus was backing up when the bus next to you drove away? I am sure you have. When you were flying in an airplane at 300 or 400 mph, did it feel like you were just sitting still? Did you have any sence that you were moving? How about the feel of speed from the Earth flying through space at thousands of miles per hour? Did you feel like you were going to fly off? No and that is due to the basic laws of physics. You can't feel speed, only acceleration. Now this brings me to Economics. If you look at recent economic history, you will see a period where real estate prices were going up at a very steady pace. Many people "made" a lot of money during this period by buying low and selling high, but did they really "make" any money? Did they create or add to the value? It was a zero sum game with some players walking away with other peoples money. You ask, whose money, because you did not lose any money. That is the rub. You did not lose any money at the time because the money your friend ended up with is by way of credit that was taken out in your name as a tax payer and you or your kids will have to pay it back. Notice, the application of the "no free lunch rule".

Now back to Newton. The point is that during this real estate price run up, you were being carried along similar to being in a boat on a moving river. You were being moved, but you had no sence of movement. That is Newton's first law of motion. You can tell if you are moving or not. If you were on a train next to another train, and one was moving, you would not be able to tell which train was moving or in what direction. When you use you animal sensus to made observations about economics it is possible to come up with some very strange ideas about what was or is happening. I like to visit Keynes and his ideas about economics. He developed his theory about 100 years ago on data that was even older. It was a simple concept so it was easy to teach in Econ 101 and for that reason it is still around today. Notice that Keynes did not use any advanced math to formulate his ideas. If he had done that he would have gone over the heads of 99% of the Economic students. He had to keep it simple. Using the methods of Keynes looking backwards, he would have concluded that his big red rooster caused the Sun to rise because he heard the red rooster crow about an hour before the Sun came up each day. In the case of the rooster, he died one day and the Sun still came up. The same can not be said about Keynes theory since it has never been double blind tested. Isn't that interesting?

Back to Newton. Now we know that, "a body at rest will remain at rest unless a force is applied to move it". If our economy is not adding any new jobs, we could conclude it is at rest and could remain at rest until a force came along to move it and once moving, it would continue to move unless a force were appliced to stop it. Now it is getting interesting. What do you think are these big forces? Taxes and profit. Taxes slow or stop movement while profit positivly acclerated it. Back to the zero sum game in real estate. See what profit did? People were making a profit out of the price run up and that profit created the acceleration that continued to increase the speed of the cycle until something had to burst. Trade unions create a form of tax on business similar to the mob demanding protection money. Now what do taxes do to economic productivity? They slow it and can kill it.
I think that you can see how Newton's laws apply to economics and the difficulty us human have recognizing them.

World's Biggest Oil Spill

You may have read my Blog on the big oil spill in the Gulf. Most people seem to claim that it was the biggest oil spill in American history. Like most of what you read in the news paper, it just might not be the truth or at least the whole truth. The fact is that the biggest oil spill in history occured back on March 14th, 1910. You want to know where? Between the cities of Taft and Maricopa. Most of you have never heard of these two towns. I worked in the oil fields around Taft and actually lived in Taft at the Standard Oil bunch house at Camp 11C for the summer.

You can check this all out by going on the Web, but here are a few facts. The well was being dug with a cable tool, not like the rotary that they use today. The mud that they were using was not heavey enough to hold back the high pressure of the field. The well flowed free for 18 months and lost a total of about 387 million gallons of oil. The oil ran for miles around the well, but in the end, they were able to reclaim almost 50%. There is still a hole about 150 feet deep where the well head was and it is all covered with hard black oil.

My point is that the next time you hear some news cast about oil, think twice. With the Gulf oil spill, the so call experts are still trying to find out where all the oil went. Recall my Blog right after the event? I told you that the Gulf oil spill would turn out not to be such a big deal and it wasn't. I guess this should make you think twice when ever you hear some self appointed expert making predictions about anything. They did not predict the housing bubble bursting or the dot-com bubble. You have to ask why not?

Community Organizer

During the last election, we all heard the name "Community Organizer", but how many of us really thought much about exactly what a "Community Organizer" is or does? I just drove across the USA and had time to think about this a little. Here are some of my thoughts on the subject.

First, let's take a look at the first word, "Community". As I see it, a "Community" is some kind of grouping of people. As we all know there are all kinds of groupings and most people are members of more than one "Community". Generally, the name "Community" is reserved from smaller more local groups. Of all the possible groups of people, those that stands out as being the most anti American are those based on race. For over 300 years, this country has tried to treat all people equal regardless of race, so "Communities" based on race work against a very basic principle of the USA. This might sound like a strange start, but the "Community" that Obama worked to develop was a racial group. For any group or "Community" to exist, there has to be somekind of purpose. Now what was the purpose of this group or "Community" that Obama was promoting? What Obama wanted was special rights for his "Community". The way that I see it we have our rights as individuals not groups or "Communities". When you are born, you are an individual and not part of a special "Community". AS I have said in the past, we don't seed groups or "communities" to jail when they commit voter fraud, we send individuals to jail. Rights go with responsibility and responsibility goes with accountability. If you start with accountability, like jail, and work backwards rights can only be had by individuals.

Now the "Organization". Why do individuals need to be "Organized" to have their rights recognized? Wait, they don't want their rights recognized, they want special rights or rights that you and I don't have as individuals. That does not sound fair on the face of it and it is not. What I have seen when special rights are granted to groups or "Communities", these groups and "Communities" distrort the rights of us as individuals. Take trade unions as an example. The patern for them has been to extort from smaller companies rights or benifits not granted or earned. They get something for being part of the "Community" that they did not have to earn by merit. You have to ask, why does any group have to be organized? All of our legal rights are defined in the law and a documented system to maintain them, so what is this special group or "Community" for? Special rights, that is what. Just a point, take the recent realestate mess. "Community Organizers" like Obama were the ones who caused our government to require that banks make low interest loans to people in Obama's "Community" who everyone knew could not pay them back. Sounds like special rights to me. Us tax payers even insured these worthless loans and are now left holding the bag.

We have a system to pick our President and once chosen, we expect that individual to represent "all" of us, even if almost half did not vote for him. This is our tradition. Now Obama has made it clear from the start that he does not represent all Americans. He has stated that he plans to take the earned wealth from many hard working individuals who did not vote for him and give it to those who did. It seems to me that this is the mind set of any person who would present themselves as a "Community Organizer". He still sees himself in the role of a "Community Organizer" and not as the President of all the people of the USA. If before this last election, we would have looked more closely at exactly what a "Community Organizer" was and what their purpose and objectives were, we who have been able to see that a President like Obama would be very distructive for our country and would create social problems where there were none and lay the ground work for problems well into the future. Am I right or wrong?