Silent Archimedes

Posts Tagged ‘collapse’

A Letter to America

Posted by silentarchimedes on November 3, 2008

Dear Fellow Americans,

The land of the free and the home of the brave...

The land of the free and the home of the brave...

Tomorrow is one of the most important days in recent American history. It is a day that will affect the short term prospects of America and the standing of America in the world for the next century. The events and actions of the past eight years have accelerated the damaging path the country has embarked on for the past thirty years. The irresponsible actions have left America crippled economically, politically, morally and psychologically. Both parties have been hijacked by the special interests of corporations, ideological groups and personal interests. The values in which America was founded on have been distorted. The decision made by America tomorrow will go a long way in determining if we continue this egregious path of self-destruction.

The debt at the national, local and consumer levels are not only due to the actions of the past eight years. The decision by the Supreme Court in 1978 (Marquette National Bank of Minneapolis vs. First of Omaha Service Corp.) to deregulate interest rate caps at the state level was the precursor to the inundation of credit cards and the mortgaging of personal futures for the present. Although Reaganomics has been credited with bringing the country out of the vitriolic stagflation of the late 1970s, it has had a long term effect that has eaten away at the fiscal responsibility of the federal government. At the core of Reaganomics was reducing tax rates by reducing government spending which in turn was achieved by reducing costs associated with regulation and social programs. However,  unexpected costs from the burgeoning Cold War resulted in large trade and federal budget deficits. In order to cover such deficits, the government began borrowing heavily both domestically and abroad. This decision to mortgage the future of the country for the present instilled a belief that debt is good, even to other countries, such as China, Japan and India. America became a borrower nation instead of a loaner nation, which it had been for decades during its prominence.

The deregulation of these two critical issues are the main causes of the current economic problems. It instilled bad habits at all levels of society. Although quality of life continued to increase the past thirty years, it was mostly at the cost of the future. Both politicians and individuals began feeling entitled to such luxuries and expected it to last forever. However, as analyzed by Pulitzer Prize winner Jared Diamond (Collapse: How Societies Choose to Fail or Succeed), it is this infectious mindset that causes great societies to fail. This country is at that critical juncture. Do we reinstate the values, sacrifices and hard work that made this country great or do we continue down this destructive path?

In addition to the present economic and ideological problems that endanger the quality of life of America, there are many massive elephants in the near future that can derail any sense of comfort in the nation. A fundamental restructuring of social programs like Social Security, Medicare and Medicaid is required in the next one or two presidencies before the effects of the baby boomer population cripple the flow of aid from the system. The high quality of life has left Americans lazy, fat and indifferent, and the medical costs associated with treating related diseases and health issues threaten to destroy the already broken health-care system. The super-highway system that supported the rise of American power is also the bane of the country’s dependence on foreign oil and its lavish automobile lifestyle. Furthermore, the infrastructure of America is crumbling and poses a danger to the lifeblood of a large country like America. A massive government infrastructure initiative is required within the next twenty years. The only question will be where does all the money come from? As globalization continues to redistribute the wealth and power of the world, the education system and America’s ability to compete are also being tested. American children  continue to fall behind other countries at all levels of education, from middle school to college to graduate school. This country has been able to sustain its technological competitiveness partly through the immigration of top-level students from countries such as China and India. However, the current backlash on immigration coupled with the increasing prestige of other countries’ higher education systems, begs the question of how America will sustain its technological edge? Corporations and special interest groups as super-humans continue to eat away at the fabric of America. Their selfish narrow-minded view of profit and ideology permeate all levels of society, from individuals to the government. Ideology has especially polarized the country into two hardened stances, secularity versus ideology. The effects of this has left the country fearful and suspicious of each other. Finally, the effects of the internet and other entertainment-related technologies cannot be understated. Although they have created luxuries beyond anyone’s belief and increased the free flow of information, they have also created a schizophrenic society of 24 hour media frenzy and questionable freedoms of morality. The neutrality of journalism and the mental well-being  of society are at stake. Coupled with the constraints of global warming and moral responsibility, the above problems must be faced responsibly.

These problems will definitely be difficult to face and resolve. Most of these have been simmering for years, but have been effectively ignored. However, what has always made America great has been its ability to come together as a country and sacrifice for the greater good of the country and the world. The sacrifices by this country during the Civil War and World War II for the greater good cannot be forgotten. Although society was simpler and less polarized then, the country must come together once again to face the unprecedented wave of issues that threaten to send America down the road of self-destruction.

Tomorrow begins that choice. Tomorrow the country decides which path to take, one of sacrifice for the greater good or one of continued wantonness. Tomorrow begins the day where America can begin reinstating the values that made this country so great. A country of uniqueness not found anywhere else in the world. A melting pot that protects individual rights and helps others at times of need. A constitution so strong that the thought of a revolution is unfathomable. The land of opportunity and openness. A land of thousands of parks and natural resources. The separation of church and state and the freedom of religion. The land of the best medical care and higher education system. A land of tolerance and hope. And the land of the free and the home of the brave…

Whomever you vote for tomorrow, please think openly and clearly. Without any bias of age, race, religion, and fear, think who will be better for America. Who will lead America towards a path of redemption and strength. A path that requires sacrifice but cherishes American freedoms. A candidate that realizes that what America needs now is a problem solver with pragmatism and humility, and not one fixated on idealism, intolerance and fear mongering. Look closely at your choice, and know that when you go home afterwards, there will be a better America tomorrow. A better America for yourself and your family, and also for its great citizens of today and tomorrow.

America’s tomorrow begins now…

Thank you.

Silent Archimedes


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Diversify investments you must! Or AIG you will become…

Posted by silentarchimedes on September 17, 2008

American International Group, Inc.

American International Group, Inc.

The fall of AIG (American International Group, Inc.) will be studied in economics classes for many many years to come. It is such a precipitous fall that it’s another one of those corporate stories where employees and investors alike get blindsided. However, as with most of these corporate tragedies, there are always warning signs leading up to the collapse. When the federal goverment announced yesterday they were bailing out AIG by infusing $85 billion to take control of 79.9% of it, it marked the biggest victim in the latest credit/mortgage/insurance crisis. Since AIG is the biggest insurance company in America, it had some of the most exposure to credit and financial services. This should have been a warning sign when other icons like Bear Stearns collapsed. As a matter of fact, when the bailout by J.P. Morgan was announced on March 24, 2008, AIG actually rose over $1. It did drop a few dollars in the next few days but because the entire market was down. This shows how little investors know about the financial details of a corporation. Here is the AIG chart:

AIG's quick fall from over $50 to $2

AIG Daily Chart - the quick collapse from $50 to $1

Ever since I started investing out of college during the peak of the dot com era, all the advice kept saying was to diversify your investments. To invest in very stable and safe companies that provided stable returns to balance the riskier investments. They suggested to invest in General Electric (GE), and Proctor and Gamble (PG), Philip Morris (PM), and, yup, AIG. As we know, GE has also had its troubles since Jeff Immelt took over for the legendary Jack Welch as CEO. But the collapse of AIG has to be one of the most shocking ever. Just look at AIG’s performance since 1985:

AIG Stock Chart - 1985 to current

AIG Stock Chart - 1985 to current

However, the point of diversifying is well taken. It just shows that not any one company is immune to troubles at a macro and micro level. That such stable entitites as AIG and GE can also hit walls. That you have to do your research and do it well. That even if you do do your research there is still risk. The fall of AIG also reminds us of two other great corporate tragedies, Lucent Technologies (LU, and now ALU), and Enron. Although AIG’s troubles have more to do with macro-issues such as the financial industry and the world credit crunch, an implosion as I’d like to call it, Lucent’s and Enron’s were more of a micro-level collapse, an explosion as I’d like to call it. Lucent’s collapse had more to do with management’s inability to sustain sales in a tech bubble and using ill-advised methods, such as loans to companies with no prospects of profit, to its own customers. Enron’s collapse was similar in that management used devious and sleight of hand tricks to show improving sales, even when analysts began doubting them.

Lucent chart before buyout by Alcatel

Lucent chart before buyout by Alcatel - From high of $80 in 1999 to under $1

The collapse of Enron

The collapse of Enron

The fed bailout of AIG is ironic. One can argue that the AIG troubles are the fault of the Feds to begin with. This whole mortgage and credit crunch crisis can be laid at the foot of Alan Greenspan and the dollar making Fed machine. When the dot com burst and 9/11 occurred, the U.S. went into a recession. The most historically logical thing to do would have been to just let the economy play itself out. The craziness of the dot com bubble was not correctly monitored by the Feds, else people would not have lost all their fortunes to paper money. So if the Feds did not get involved during greedy times, why get involved during recessionary times? It was very poor management. So instead of letting the recession play itself out, the Greenspan Feds simply pumped more and more dollars into the economy and dramatically decreased the regulations required for access to credit. The huge amount of extra credit in the economy created the housing bubble which burst and the credit crunch ensued. What will be interesting is what Ben Bernanke and the Feds do now. Does he bail out the economy again at the expense of our future or does he play tough and do the right thing? So far, the Bernanke Feds have given mixed signals. They’ve been trying to play a slightly tougher hand than Greenspan, by saying no more bailouts. But saying and doing are two different things. Since then they have bailed out Freddie Mac, Fannie Mae, and now AIG. All three, way too big to let fail. Although they decided to leave interest rates alone this week, we will see how much moxie they have when the markets keep falling while inflation keeps rising. Additionally, it appears that the annual summer correction of gold and oil is over. It will be interesting to see what happens as we head into winter.

So what is the moral of this story? Yes, one must diversify its investments. However, do not just diversify in specific corporations and industries. Also diversify into mutual funds, bonds, and CDs. Diversify in non-dollar investments, like gold, silver, other commodities, and currencies. The economic times of America will be very very unpredictable in the next ten to twenty years as globalization plays itself out. America will either remain alone at the top of the economic ladder, or new leaders such as the rising East, like China and India, become competing economic behemoths. Be in position to capitalize on this. Read books about it. For suggestions click on the Economics category to the left of my blog. I have been reading economic books like crazy lately and writing reviews on them. Let me know if you have any questions , suggestions or comments.

Happy investing!

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