The Fourteenth Banker Blog

July 14, 2010

Follow up Post – Small Business Lending – Misallocation of Resources

Filed under: Running Commentary — thefourteenthbanker @ 6:23 AM

From Hussman’s weekly letter:

Question. Why do workers in developing nations earn a fraction of the wages American workers earn? While protective and regulatory factors such as trade barriers, unionization, and differences in labor laws have some effect, the main reason is fairly simple. U.S. workers are, on average, more productive than their counterparts in developing countries. While the gap between U.S. and foreign wages can make open trade seem very risky, it is simply not true that opening trade with developing nations must result in a convergence of wages. The large difference in relative wages is in fact a competitive outcome when there are large differences in worker productivity across countries.

The main source of this difference in productivity is that U.S. workers have a substantially larger stock of productive capital per worker, as well as generally higher levels of educational attainment, which is a form of human capital. This relative abundance of physical and educational capital has been a driver of U.S. prosperity for generations. Neither advantage in capital, however, is intrinsic to American workers, and it will be impossible to prevent a long-term convergence of U.S. wages toward those of developing countries unless the U.S. efficiently allocates its resources to productive investment and educational quality. This is where our policy makers are failing us.

There is little question that we have, for more than a decade, squandered our productive resources in the pursuit of bubbles. Almost unbelievably, real private gross domestic investment is lower today than it was 12 years ago, and much of the gross domestic investment that we have made in the interim has been destroyed in mispriced speculative activity such as residential construction and commercial real estate development.

Until we get back to allocating resources to productive use, there will not be lasting general prosperity nor perhaps general adequacy of resources for basic needs.


  1. The last line says it all. And until we recognize that Wall St. began 30 years ago or more, shifting from a source of investment capital to build businesses, and into a full-fledged casino, we will never turn the tide. After the birth of the IRA, when we were led like sheep to the slaughter into the “self-directed investor” BS, we were still told the fairy tale that when we bought stocks we were “building America”! Rubbish! All we were doing was providing more chips in the huge poker game where the deck was firmly stacked against us. Actually, it was stacked against us twice – once when we “invested” our money, thinking we were building jobs for ourselves and our fellow citizens, when we were actually gambling, and again when the pit bosses “loaned” our money to the cowboys who would gut our jobs base by moving much of it off-shore, while they got fat fees for doing the deals. The days when corporations had 5 and 10 year plans became a rush to meet Wall St. expectations quarter to quarter, and God help the share price if you didn’t show a steady increase in profits.
    I have very little hope that this will turn around in my lifetime, sad to say.

    Comment by Sandi — July 14, 2010 @ 1:36 PM | Reply

  2. The last line sure does say it all. The Earnings Per Share grift fully supplanted dividends in stock valuation by the seventies. Back then, the company I worked for went partially public. The CFO had a predetermined growth chart of earnings per share. We were all told that EPS will be say not less than $1.20.2 nor more than $1.20.4 for the year . During the year end closing, the Controller would appear at my door and tell me they needed to pick up or lose X to conform to the CFO’s orders. That I delivered. That I had to sell to the tax partner on the audit. Of course all I was doing was messing with deferred taxes which I considered to be a capital reserve. I was even more dubious about the so called tax provision. I detested the idea that my creativity was entombed into a spurious non current ” liability”. My contribution was the ultra fine tuning after the general accountants did their cooking. This was a company whose prime product was one of the most amazing cash generators of all time. The other components lost a great deal of money. In those years, my main worry, by far, was the Accumulated Earnings Tax.

    The roots of cooked books go very deep. Very deep. The Edwardian Era in finance never ceases to amaze me and the 1900-1914 era was the culmination of Guilded Age financing scams. “Watered Stock” was childs play on simplistic beliefs in comparison to today’s grifts. The more you close out flexibility in one area , the more you open up opportunity elsewhere. Acccounting is a very high art and so long as finance relys on pseudo scientific accounting concepts, grits will get ever more creative.

    Simplifying the complex guarantees fraud because by definition saying some thing difficult is easy is deception. We cannot get around this problem except to operate finance simpler.

    Comment by Jerry J — July 14, 2010 @ 5:28 PM | Reply

  3. There is another aspect to economic fraud that begats horrible misallocation of resources. Intermixed in the systemic dishonesty, if it be that, is what might be called personal dishonesty. Leadership that is dishonest to themselves. The inability to look for facts long before theories or simple critical self deception as a very bad habit. For a long time in finance, I heard daily blathering where the position was taken that decisions are based on the aggregates… err statistics… to the point it was clear to me that most people discussing finance thought the aggregate generated the individual transaction. That applying an aggregate result strategy guaranteed the nature of the individual result. ( When the underling grunts roll their eyes and grunt ” Yuppie Games”.)

    Today Professor Ferdinand E Banks, of Uppsala, a very prominent energy economist, has a piece on titled ” Some Economics of the Great Coal Game” The piece is almost self explanatory in regard to leadership personal self deception . He discusses the down and dirty about the realities of coal growth for energy purposes.

    Professor Banks is very crusty. I own and have studied his various textbooks about energy economics. His view ishort and sweet. My own short and sweet is the fact of existence that the world will burn and use every fossil fuel to keep civilizations going no matter the ecological effects, proven , unproven, or otherwise so long as present populations exist and continue to grow.

    Finance personal self deceptions based on belief systems, sheer survival personally, or organizationally will trump down and dirty fact gathering.

    Banks gets really down and dirty.

    By the way , 321 energy is great site for finding daily energy news.

    Comment by Jerry J — July 15, 2010 @ 8:20 PM | Reply

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