Tag Archives: economy

Old modes of production die with the depression…

A few weeks ago I blogged about how I thought land line phones and cable TV would be among the first items to go as people cut budgets. In contrast Cell phones and internet would be among the last (can you imagine trying to find a job without an internet connection?)

Well I forgot to mention that newspapers would be the other obvious target… why spend to get a newspaper when you can get the content online for less or for free?

So I was probably rash in saying that traditional telephone companies (are there any left?) and cable companies would be among the first to feel the pinch. It is going to be newspaper companies. The end is going to come fast and furious. It won’t be pretty.

For my American friends there is already talk about how much trouble the New York Times is in. Indeed, as one industry observer points out, the NYT may not survive past MAY – although by drawing down on its credit and selling assets (like the Boston Red Sox’s) it can survive until 2010.

Here in Canada the situation is bleaker. CanWest, which owns the National Post as well as newspapers in most of the country’s major markets (such as the Vancouver Sun, here in my home town), has reported Q1 losses and its stock continues to free fall. Having lost 92% of its value in the last year it may no longer be able to meet its debt servicing requirements. It turns out that buying more newspapers is not the solution for newspaper companies. A bigger broken business model doesn’t, at some point, transform into a working business model.

The old modes of production are in trouble. Today it’s print, but TV/video better not assume the same pressures won’t be confronting them in the near future.

The Next Economy – Why the wrong Stimulus today could fail us tomorrow

After reading The Great Crash it is hard to not feel that we are the cusp of another economic depression – the parallels between today and 1929 or almost eeire. Much like the last crash, a whole slew of business models, technologies and ways of thinking are simply going to become obsolete (or at least, not-profitable).

For example, I was talking to an American friend whose partner had been laid off by a bank and they were talking about what expenses they were going to try to eliminate. High on the list? Their land line and cable television. Low on the list? Cell phones and their high speed internet. This may finally be the beginning of the end for the old copper wire – this will accelerate a trend begun about a decade ago in which households have no fixed phone line. Indeed, Reuters is reporting that:

In the first half of 2008, 17.5 percent of households were wireless only, up from 13.6 percent a full year earlier…

…Service providers such as Verizon Communications, AT&T Inc, Qwest Communications International and others have seen a steep increase in customers cutting the cord on their home phones.

Qwest said recently that the trend was exacerbated by the weak economy as some customers were disconnecting home phones to save money.

It makes sense. Why keep a land line when you can just use your cell, or even Skype for free when you are at home?

What this means is that connectivity has never been more important to people – not just for social, but also for professional reasons. Can anyone imagine a professional, creative classer or service sector employee, under the age of 35 looking, for a job without an internet connection? Impossible. The simple fact is that a robust telecommunications network – specifically, access to the internet – is today what an electrical, phone or road network was in the 1930’s. That means, if you want to help invest for the economy of tomorrow, help bring the costs of accessing the internet today – and make sure everyone can get access.

At the moment, one reason why costs are high is because providers have agreed to build their networks out, even to “unprofitable” parts of the country. If the government provided – or helped to provide – such access internet access could be rendered cheaper and service could be improved.

My biggest fear is that here in Canada and the in United States the call for a “new” New Deal with result in a stimulus package that looks a lot like the new deal of the 1930’s – with big infrastructure projects receiving the bulk of the money. The fact is, unlike in the 1930’s new roads aren’t going to generate the same returns over the next 50 years like they did back then – there will be marginal returns at best and negative returns at worst. What we need to identify the infrastructure that is going to guide the next economy, not the last one.

And be afraid, because one thing is almost certain, the next economy almost certainly doesn’t include an auto sector of even remotely the same size or structure. (Think how much ZIP car reduces the need for cars.)

The Crash: The beginning of the end…

The response to the post on complexity theory and the financial crises has been very positive. Been recieving lots of positive feedback, thank you to any who have written or commented.

Several people, including Steven Johnson, the author of Emergence, posted a link to this great piece “The Economy Does not Compute” that I encourage everyone to read.

Dave D. emailed me with this fascinating story from the New York Times that arguably pinpoints the moment the incentives in the market were shifted that started us down the road to the present crises. Entitled Fannie Mae Eases Credit To Aid Mortgage Lending the piece is dated September 30th, 1999. This excerpt below really summarizes the underlying logic and benefits for initiating the change as well as predicts the ultimate catastrophe that it would unleash (remember, written in 1999):

”Fannie Mae has expanded home ownership for millions of families in the 1990’s by reducing down payment requirements,” said Franklin D. Raines, Fannie Mae’s chairman and chief executive officer. ”Yet there remain too many borrowers whose credit is just a notch below what our underwriting has required who have been relegated to paying significantly higher mortgage rates in the so-called subprime market.”

Demographic information on these borrowers is sketchy. But at least one study indicates that 18 percent of the loans in the subprime market went to black borrowers, compared to 5 per cent of loans in the conventional loan market.

In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980’s.

”From the perspective of many people, including me, this is another thrift industry growing up around us,” said Peter Wallison a resident fellow at the American Enterprise Institute. ”If they fail, the government will have to step up and bail them out the way it stepped up and bailed out the thrift industry.”

The article shows us the challenges around blaming any one individual – except possibly Blll Clinton – as once the incentives for embracing a higher risk group were altered it vastly increased the chance that more and more people would cater to them and expose themselves to that risk.

The other fascinating thing about this piece is how the web is now getting to be old enough that it is becoming a fantastic tool for historians. Think of how much richer our history is going to be when critical documents like this one are both more accessible and easier to locate.

Free inter-provincial trade

Jake McEwan published this op-ed in today’s Toronto Star today. Inspired by a recently released Economist Intelligence Unit report his central point is that “while (canada) joined NAFTA and reduced some international barriers to trade, we have done little domestically to create an internal, national marketplace.

It is indeed disturbing that in certain sectors it is easier to trade with the US then within Canada. Not to mention that it is a sad commentary on federal and provincial leadership.

[tags]canadian politics, economy, trade, provinces, action canada[/tags]