US Debt musings from an int’l economics kid, turned scrappy tech entrepreneur

A good friend Thomas just posted his analysis of the financial situation, here, on his “View From The Bottom”.  One of his gifts is explaining complicated stuff in plain english, so I took notice.  I had some followup questions that turned into much more than a comment on his post.  But Thomas (and David, and, and), I want to know what you think of this….

As a non-financial guy & someone not well-informed by US perspectives on this stuff…but as someone who spent so much of my university schooling in foreign unis looking at international economics…I am longterm extremely bearish on the US economy.  In all my studies, seemingly every possible longterm economic health indicator made things look really bad for my country (balance of trade, rate of education, sustainable national competitive advantage, and most importantly, debt).  Sure, we have greatest universities, plentiful natural resources, many of the world’s most sophisticated institutions, and are still the world’s largest economy…but everyone already knows this stuff…The stuff that we don’t think about as often…the comparative trends…don’t look good.

US Trade, as % of DGP
US Trade Deficit, as % of DGP

(source for trade deficit chart: NYTimes & Bureau of Economic Analysis).

Take for example, our (Im)Balance of trade, which has been going south for many decades.  It is now massive (we are at -$500 Billion on a ‘good’ year).   The way I understand this is…if this were a company, it would mean “Amount of $ Sales to other Companies” minus “Amount of $ Purchases from Other Companies”, divided by “How Big Domestic Economy Is”.  So with a deficit around 5% of GDP, that’s like a company earning $95 but spending $100 to do it, while all the employees do a lot of trading goods and services among themselves.  But overall, the company is losing $ every year, for many decades.

So…our country chronically buys more than it sells…we buy lots of goods (think oil and plastic toys) and we sell lots of services (think consulting firms), but we buy a lot more oil and hondas than we sell services and fords.

US Annual Balance Of Trade
US Annual Balance Of Trade

(Source for Balance of Trade Chart:  US Census Bureau Dept of Trade Stats)

In a way, this extraordinary “imbalance of trade” since the 60s/70s has no choice but to directly result in mounting debt.  Because our imports so vastly exceed our exports – where does that money come from?   Well, the way I simplify things is that this is where debt comes from.  If we receive WAY more stuff from other countries than we send to them, then someone is lending us that $ (think China & Saudi Arabia), and that means over time, our ability to repay them becomes riskier and riskier, and so our currency becomes less valuable.  Thus, we have to spend more of our currency to buy more of the foreign goods we need, and the cycle reinforces itself.

The crazy thing is that this is commonly available knowledge.  We all know we buy tons of oil and stuff from China.  We all know we have a big national debt.  But somehow, professors in our finest institutions still think that our government is absolutely “good for it”.  Despite us losing $ every single year, our governments bonds are still called the “risk free rate.”  How insane is that?

As an entrepreneur, I’m hard-coded to manically focus on increasing the # of things I can sell and limiting what I have to buy…but our country’s overall position is exactly the opposite.

Plus, maybe I’m old-school, but I’ve always been the type of person that was severely bothered by owing anything to anyone ($4 latte to mortgages)…and I generally consider debt to be a dangerous thing to play with, etc.  So coming from that perspective the US debt situation seems all the more egregious (#s so big that when I look at them, they make me freak out and I don’t want to think about it anymore).

A couple of times in Finance class, I would ask the professor something like “why do we call this the risk-free rate – does that mean there is 0 chance that our country defaults on its debt?”.  Everyone would look at me like I’m from Mars…but if my company had the debt, income, and competitive profile of the US economy, I would be absolutely mortified (like, in the full etymological meaning of the word).  And if our country’s balance sheet was anonymized and we all analyzed it in b.school, we would all say “yeah, this company is totally SOL”.

Seriously, what would an honest rating agency rate our bonds at (if you took away a bunch of zeros and measured it against what we consider to be healthy financial organizations…)?  Would our country receive the same type of ratings that Apple would get right now on its debt?  Hah, no way!  So I sort-of expect a long term, protracted, and painful downward trajectory for our economy.  I don’t like to think like this, but I would have to deceive myself to look at these types of numbers and believe otherwise.

I’m jaded enough about the longterm outlook, that when stuff like the housing crisis and this pop up, I’m not like “OMG the sky is falling”, I’m more like “well yeah, okay so THIS is how this prolonged downward cycle is playing out right now…that all of these elephant hiccups are just a sign of an inevitable obvious X0 year decline.”

But then again, I’m not a finance expert, I don’t watch the news, and I’m not well-informed about what’s going on this week, or even this month.  What I’m wondering is about the big picture, the three-decade picture, and it is twofold:

(1) when (ya know, I assume this is not an IF) the moment of reckoning comes, how bad of a situation are we in?  Like Argentina 2001 where banks close, lower third falls into seriously awful shape, avg person’s savings catastrophically melted away…?  I guess that maybe splits into two different answers?  The upper quartile of the society will probably have their $ squirreled away in asian banks or whatever and be able to eat, enjoy, and have a safe life…?  Meanwhile, the lower quartile will grow into the lower 3 quartiles and life will be miserable?

In other countries where the bottom falls out, the middle class disappears, things get less safe, people’s savings implode, and things get really really ugly (crime, shortages, etc).  What if this happens to the biggest economy on the planet?  I keep asking myself, are we caught up, freaking out about this particular short-term problem, when the bigger issue is the longterm situation which is much worse than we are all anticipating it will be?  The US has been so wealthy (relatively) for so long that most Americans (including myself), can’t imagine what a really bad outcome looks like.

So does that play out where our insurance programs explode?  A run on the banks?  Or seniors have all of their pensions go poof?  And then discretionary expenditures drop further, and then corps shrink, and investment dries up, and social services shrink, and on and on?   Please tell me I’m not glass-half-emptying this to death?  Is there a bright spot?  Something I don’t understand that makes this all okay?

But really, if this wasn’t the largest economy of all time, the global icon of freedom and national wellbeing, and on and on, wouldn’t we just all say “yeah they’re on the brink of bankruptcy”?  And if so, when a country does go completely bankrupt – this might not even be close to being the kind of relatively lovely place to live that it has been for a century, will it?

And (2) how soon is this happening?  I have been looking at these events…the housing thing, this debt thing, other “woah, what happened??” moments…as “well, yeah, this is one of the kerfuffles that will eventually fit together with all the others over the next 10 years?  30 years? 50 years? that is one of those “well we should have known this would eventually happen”.   One of the handfuls of steps in this inevitable march towards serious catastrophe (ie not a two-year blip, but a way-of-life altering mess).

So I’m curious if you, someone who is actually well informed about what’s going on, agrees with this overall picture?

And really, what I am curious to know more of what you think – how big of a mess do you think the US debt situation is, mid & longterm…Should I trade my $s for yen and move to Canada?

Finally, as all of this is obviously depressing – what would we have to accomplish to change our path?  Do we have what it takes, as a society to course-correct?  We gotta try…

SmartMoney, Fortune, Forbes, etc – Compilation of Reviews

I have some expiring AA miles that I wanted to cash in and found that I could use Points.com to pick up some magazine subscriptions.  While I’m at business school at Stanford GSB, I want to have some quality business / finance / investment magazines that I can use to keep current.

In deciding which ones to purchase, I collected these reviews from the public reviews on Amazon.com.  I hope you find this compilation useful – and there is plenty more like this at Amazon, if you’re interested.

**Please note, I don’t personally know much about the bias, content, or relative quality of any of these magazines.  All of the info below is simply what I collected from the customer reviews done by others.  I hope it’s useful as a collection of others’ opinions, but I certainly don’t have the expertise to make any concrete judgments about any of them myself.** I did, however, buy three of them and I will know more soon 🙂

SmartMoney – Personal Finance, WSJ – 4/5 – http://www.smartmoney.com/
Among the features I look forward to every month:

– Ten Things: a “watch out” list of 10 things that you should know about the different professionals you interact with (your dentist, your accountant, a real estate broker, etc.). Always an eye-opener.
– Stock Screen: Paul Sturm is a knowledgeable, value-oriented journalist who puts together a list each month of 8-10 stocks that make it through a rigid screen of several characteristics. Each month, he features a different screen and he uses a good mix of quantitative characteristics and common sense to generate the list.
– Feature articles that profile common people and the serious personal finance problems they have endured (e.g., collecting on insurance, fighting the IRS, traveling overseas).

SmartMoney is frequently compared to Money magazine, but Money is often more narrowly focused on investing and it sometimes dumbs down its articles. I also read BusinessWeek, Forbes and Fortune regularly. While they all have their place, none provides the depth and common sense focus of SmartMoney when it comes to personal finance. I have photocopied and saved countless articles and I sometimes refer to them years later. … my advice is to get a subscription now – it’s definitely worth it.

Smart Money is a solid magazine about business and finance and I have been reading it on and off again for the past five years. This magazine is a little bit big business and a little bit personal finance, combining together the features of a business magazine with that of an investment publication.

One of the main things I like about Smart Money is the fact that it includes so many different articles each month. There are only a few regular departments in this magazine. The majority of the pages include featured articles and short articles that change from month to month. These articles can cover a wide range of topics from ways to cut your electric bill to the latest regulations in the insurance industry.

Smart Money is an intelligent magazine and its articles are often a little more advanced than those of other financial publications. They don’t reach a level that is too advanced to make them incapable of understanding, and that is good. But they are certainly intended for the savvier investor who already knows the ropes and wants some more specific, intermediate to advanced advice on personal finance and corporate happenings.

has some intermediate technical analysis, covers a great range of financial issues including new stock pics (performance of which which they track over time), mutual funds, financial managers/discount and full service broker comparisons, bonds, tax and retirement issues, travel, just the right amount (minimal) of tech product reviews, and a monthly car review/comparison.

I appreciate the focus on bargain hunting, both in stocks and the other areas mentioned above. These guys are not stock pumpers, but value seekers!

I like this magazine because it has a lot of short, concise and easy to read articles. I am no financial genius but I do like to read about what is going on

Forbes – Conservative Concise – 3/5 – http://www.forbes.com/
Cancelled my subscription (mostly due to the fact that I got utterly tired of their absurd right-wing slant)
I always look most forward to receiving my next issue of Forbes. Why? Several reasons:

– The articles are generally shorter and more “to the point” than Fortune. Forbes is also not as beholden as BusinessWeek is to cover the hot news stories.
– This magazine is the best of the three for discovering new investment ideas and it is generally more investor focused than either Fortune or BW.
– The editorials throughout the magazine are usually thought-provoking and I guarantee you will develop your own favorite columnists whom you will look forward to reading in each issue
– Forbes has a politically conservative and pro-business slant (with Steve Forbes as Editor-in-Chief, that should be no surprise).
– Forbes offers two supplemental issues, which are quarterly. Forbes ASAP is entirely focused on technology and many articles are actually thought pieces written by influential executives, investors, and technology visionaries. Forbes FYI features lighter articles which are thematically aimed at the upper class. You will probably find some of the stories (and the ads) irrelevant to your life (we’re not all millionaires yet, are we?). But it’s an amusing magazine and it’s a good break for me from the stream of more business-oriented stuff I read.

If you like CNN, you might as well stick with Fortune. But if you are more of a Fox News viewer, then you’ll like Forbes much better.

If you are sensative about your politics then this magazine will have a profound effect upon you. Liberal? You’ll hate it – and miss its more subtle and profound insights into raw capitalism. Conservative? You’ll love it – and miss its more subtle and profound insights into raw capitalism.

Forbes must be read with an open mind. It is unabashedly capitalist, boldly conservative, and stunningly pro-business. But it’s editorial arguments (the various editorals are its best feature) are always intelligently written and very effectively made. Regardless of your personal views you will find the opinions compelling. This magazine will make you think and, as a result, you’ll get more than your money’s worth from your subscription.

Forbes has some problems:
1. each issue features yet more conservative opinions promoting trickle down theory. If you want to read articles written by Steve Forbes complaining about having to pay taxes, this is for you!
2. after the Steve Forbes commentary, you find yet another billionaire or celebrity salary ranking. If you like to brown nose rich people, this is for you!

Fortune – Liberal Executive Profiles – 4/5 – http://www.exitocoastal.net/fortune.html
What does Fortune bring to the table that still makes it so vital? Several things:
– The most in-depth feature stories among the three magazines. They are thoroughly researched and Fortune works hard to interpret the facts and draw conclusions, as opposed to just aggregating and reporting information.
– More than either of the other two, Fortune will profile prominent executives, giving you a unique window into their philosophy and how they rose to prominence.
– The investing section near the back is always decent and there’s a reasonably good focus on technology, both devices and companies.

Why is it my least favorite?
– Fortune clearly has a liberal bias, with frequent articles on employee rights, racial or gender-oriented issues, philanthropic causes such as AIDS, and the general plight of the poor, the elderly, or working mothers. Nothing wrong with that, and some of these articles are eye-opening. But I mainly read business magazines with an eye toward investing, so these types of articles fall outside that scope.
– Yeah, there are too many ads and special advertising sections. It is a necessary part of the world of magazines (or else you’d be paying triple the price for a subscription). But it’s still annoying.

Although they seem to be substitutes for each other, Fortune, Forbes, and BusinessWeek each provide something different enough that I see the value in subscribing to all three (and I have been doing so for a decade). If you’re looking to go beyond the weekly headlines and want business-oriented articles that don’t always have an investment angle, then Fortune seems to be the best bet.

There is some good reading to be found here from time to time, with Fortune writers presenting some good articles on a diverse range of topics from taxation, to employee benefits, to political regulation of business. But in other ways, Fortune’s primary focus makes it the type of magazine that few can relate. Most of what you read in Fortune is aimed at CEO’s and other high- ranking corporate officers. Articles that discuss how a CEO successfully contained costs and helped increase shareholder value make for some ok reading, but they are not the type of articles that most readers can relate to.

Fortune is very much a corporate publication, and while it does present a few articles on personal finance, it would be better if it contained more. Also, it would be nice if there was a more personal dimension to this magazine. Along with more articles on personal finance and investing, I would like it better if it included stories of actual families illustrating what they have done to achieve their personal goals.

Fortune is like the fashion magzine in the business world, and Businessweek is more news centric. Fortune always has at least 5 or 6 very interesting featured articles about people, companies, or the economy.They are always insigtful, personal (as if the writer is talking to a friend), well researched, and perfectly structured. These long essays is the core of Fortune, but the rest of the magzine, columes, personal finances and so on, aren’t as good. 50% of the magazine seems to be ads, and the contents are not as tightly connected together in a clear manner as the Economist or Businessweek. That’s why I think it’s like a fashion magzine.

Money – Personal Finance Info For Beginners – 3/5
I subscribe to several financial magazines, of which “Money” is one. I think that “Money” is an excellent publication for neophyte investors, as it does provide generally sound information and advice. It is very good at explaining terminology in plain English, which is to be applauded, but investors with more knowledge of investments and financial planning would probably be better off with another magazine, like “Kiplinger’s”, for instance.

“Money” covers primarily investments in mutual funds, bonds, and stocks, although real estate and retirement planning are also dealt with regularly. I like the investment index feature in the back of the issue: it is honestly the only part of the magazine I routinely use anymore, although I do skim the articles, and read one or two per issue. My chief complaint with the magazine is how formulaic the articles are. It seems like every month there is an article called “The Best Places To Put Your Money Now”, for instance. Timeliness is a good thing, but the magazine endorses long term investing (as do I) so the last thing I want to be doing is thinking about where to move my money to this month.

Beginning investors: this is an excellent magazine for you, and I say that without reservation. Overall though, “Money” is not bad, but if you are already fairly knowledgeable about financial management you can do much better.
Money is a decent magazine. I subscribed to it for a year and learned some interesting things. It is good for beginning finance, but I also believe it can be a little dangerous. See my pros and cons.

Pros:
1. Good at outlining sound, traditional, general financial advice from issue to issue. Nearly every issue covers basic information on 401(k)’s, IRAs, home ownership, education, etc. They do an especially good job at providing narrative to help explain some of the more technical issues. Instead of writing a technical treatise on 401(k)’s, for example, they will instead describe the experiences of actual families with different needs and problems. This is probably Money’s greatest strength, even if the stories can sometimes be a little sappy.
2. They do a good job outlining major new trends in investing, taxes, etc. with a healthy dose of buyer beware.

Cons:
1. I believe mass market magazines are a HORRIBLE place to find stock tips. Please be very, very careful when reading their stock tips. I could write an essay here, but I hope that financial neophytes take all Money’s stock advice with a heavy ladle of salt. I don’t think Money is doing anything unscrupulous, I just think a monthly magazine is a poor forum for this kind of information.
2. I wish they would stay out of the consumer product reviews. I would rather read a couple more articles on finances than wade through a special section on automobiles, electronics, etc. Money should be about money. Sure, making good purchasing decisions is a part of a healthy financial lifestyle, but I personally believe their reviews sections are very thin and are just there to get people to buy the magazine off the newstand. No one should use Money, for example, to figure out which car to buy. I hope they don’t.

Harvard Business Review – 4.8/5
HBR transcends the purely academic and provides concrete advice on a wide range of critical areas, including leadership, strategy, management, decision making, delegation, organizational behavior, and communications. While the articles often address management theory, they always address the real-world practice of management. HBR is written for practitioners. The writing style is clear, concise, and compelling – just what busy execs need. If you are too busy or don’t know if you are interested in a full article, each article is summarized at the end. And no, you don’t need an MBA to understand the articles and take action.

Yes, a HBR subscription is expensive compared to other periodicals, but HBR is worth every penny. Set yourself above the competition and read the HBR.

I will go through the typical set-up of each issue: The front page contains a table of content, which is handy when you are looking for a particular article. There is an introduction by the editor. There is a Forethought-section is “a survey of ideas, trends, people, and practices on the business horizon.” It reports on research and studies that are currently ongoing, not just at Harvard Business School. There is a Harvard Business Review case study followed by advice from experts in the field on that particular case study. There is an autobiographical articles based on experiences from (typically) a business leader under the title First Person. This is followed by an article called ‘HBR at Large’ on issues that are not necessarily related to management issues. This section is followed by at least four new articles on management issues. Most articles are based on research by academics in fields ranging from human resource management, accounting to strategy and technology. Most of these articles present materials that later form the foundation for books. At the end of each Harvard Business Review, there is a short summary of each article. There is an article based on experiences at various organizations, which are described in ‘Best Practice’. There is an article for the manager’s ‘Tool Kit’. Finally, there is at least one proper book review. This book review is normally by someone related in the field, so there is some good critics on that particular book.

HBR is the most intelligently written executive-grade business magazine available. Forbes and Fortune would be the next runners up, but way in the distance. It takes a mag directed to people with chief positions and the aspiring chiefs to have an executive summary at the end of every magazine!

The September 2006 issue before me is not as tightly themed as some, yet its diverse offering is as rich as ever. Articles include

* Ten Ways to Create Shareholder Value
* Rethinking Political Correctness
* With Friends Like These: The Art of Managing Complementors
* How to Keep A Players Productive
* Curveball: Strategies to Fool the Competition

Then there are the regular departments:

* HBR Case Study: Indispensable
* Managing Yourself: the Decision to Trust
* Tool Kit: The New Science of Sales Force Productivity
* Best Practice: When Your Contract Manufacturer Becomes Your Competitor

Each month’s articles are treated to an executive summary at the back of the Review.

HBR gives its readers a mix of sociological, economic, psychological, and statistical takes on business at a level that can reasonably be called authoritative.