Monday, December 29, 2008

Our Nation: So where do we go from here? Part 3

In my humble opinion, the two most distinctive elements of the United States of America's economy are freedom and entrepreneurialism.

The First Amendment of the U.S. Constitution states, "Congress shall make no law respecting an establishment of religion, or prohibiting the free exercise thereof; or abridging the freedom of speech, or of the press; or the right of the people peaceably to assemble, and to petition the Government for a redress of grievances." What is so striking about this, and quite frankly all of the U.S. Bill of Rights is the negative language. "Congress shall make no law;" or "shall not be infringed" (2nd); or "No Soldier shall" (3rd); all are written to limit or forbid the Federal Government from entering into the lives of its citizenry. This is one of the most profound statements of freedom in the history of politics, society and I will argue, economy.

The Declaration of Independence is more positive in its tone, calling out "We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness."

It is this complete commitment to freedom which beckons millions to our country each year -- from India, from Vietnam, from Korea, from Central and South America. It is this commitment to freedom which inspires so many Americans to pursue their personal visions and start new businesses -- in technology, in medicine, in transportation, in communication, in services.

This second element is the spirit of entrepreneurialism, which beats proudly in the heart of the United States of America. My father was an entrepreneur, and growing up, I saw the passion and conviction he brought to being a founder and owner of a small business. For Jerry Bell, there was no other path. It was his purpose. He was not interested in being part of a larger corporation.

What are the hallmarks of the entrepreneur, regardless of field? I would argue that the entrepreneur is exemplified by four key traits:
  1. A clear vision of the future, many times based upon intuition, for how things should be, but are not that way...yet! Yes, there are observed facts, but the entrepreneur puts them together in a new way, or sees things in a different light. They wish to right the wrongs. They wish to make things more efficient or effective. They see solutions for problems that others do not see.

  2. They have an unique approach to power and authority. In the case of established power structures, they tend to question and rebel. They are the first to call out abuse of authority, and the evils of bureaucracy and politics. When it comes to their own companies, there is no "right way," but entrepreneurs tend to make decisions effortlessly, and eschew structure for speed. They attract people both like them, or better said, who accept them. This is why some famous entrepreneurs are autocrats, and others democrats, but both models can be successful. They are comfortable with power and authority, and pursue it in a way that is natural for them, and they attract people who are drawn to their specific approach.

  3. They embrace risk. This is not to success that they are fool-hardy or do not consider some risks too great to take. Every successful entrepreneur will have a risk/reward analysis. Every one will evaluate the likelihood of success. The different comes in the entrepreneurs ability to ACT! They will move forward when the odds are in their favor...meaning 51% versus 49%. Most people will only move on an idea when they see a 90% chance of success. This is what distinguishes the entrepreneur from the rest of us.

  4. They have the ability to galvanize support for their vision. They can persuade those who fund, and those who execute, and those who purchase the vision. They tend to appreciate diversity of opinion, and can incorporate input without losing the essence of their vision.
Freedom and the spirit of the entrepreneur are indeed the two keys to our nation's past and future success. Now do they also apply to our established corporations? Can they serve as lessons to fix the financial and banking sectors? Can they help the automotive, retail, technololgy sectors? Yes, as an inspiration for new entrants, but can they help reform that which is broken? I believe the answer is yes.

I used to call myself an intrapreneur while working at Ford and Chrysler and Microsoft. The degree to which I was able to effect positive and lasting change, I embodied these four truths. When I failed, and I indeed have had my share, I was not successful because one or more of these four elements were not clear, compelling and well executed:

  1. The vision was too much of a stretch for the existing culture and structure. The new vision was at odds with what people saw as that which made the company successful in the first place. The new vision threatened internal power blocks, and elicited overt and covert hostility by those threatened.

  2. The change was seen as a power play for the benefit of the instigator, and not as a solution for everyone's success.

  3. Large companies have more to lose when they take a risk, and are therefore prone to the "90% certainty" and not the "51% certainty."

  4. The people in large corporations chose them because they were large and "safe." They are not the same as those who "choose" to join a start-up or follow an entrepreneur. With that said, when an intraprenuer or change agent has time, people will "opt in and out" of her or his team.

As I now spend more time with start-ups, I see clearly that they will be the engine of our renewed economy. I also believe that their values can indeed inspire great reform for our nation's "old school" corporations. One reason that there are "break-ups" of companies is so they can unleash this spirit of freedom, innovation and growth. Let's hope that politics does not get in the way!

Tuesday, December 16, 2008

Our Nation: So where do we go from here? Part 2

U.S. Interest rates
Over the next two years, rates will be low by historical standards. This will be bad news for fixed income investors, and good news for borrowing costs. In the 5-10 year time frame, there will be pressure for U.S. interest rates to rise due to the size of the U.S. government budget deficit. In addition, as the economy rebounds (and trust me, it will rebound), then the Federal Reserve will raise interest rates to hold inflation in check.

So when the government spends more than it collects in taxes, who pays the difference? Today, the shortfall caused by taxes collected being less than government expenditures, has been funded by foreign government purchase of Treasury bonds of various durations. Indeed, of all of the "savings" in the world, the U.S. consumes 85% of it to finance its borrowing. Mind you, the shortfall could be funded by US citizens buying government bonds, and if investors become more risk averse over the next two decades, this may occur. But even if that happens, the U.S. government needs foreign purchase of bonds.

Quick aside: if private pensions invested more in U.S. Treasuries, safeguarding retirement contributions, we could solve two problems at once.

So let's examine this question of foreign ownership of U.S. Treasuries, and consider whether they will continue to buy them as they are today.

As in most things, there are two sides to this argument -- those who think foreign governments will not continue to buy U.S. Treasury Bonds, and those who think they will. I fall in the latter camp, but let's examine the former.

Some financial and economic observers say that foreign governments will stop supporting the U.S. government's issuance of debt. They argue that diversification theory promotes holding non-U.S. debt. They argue that the lower interest rates that are being offered are not sufficient (hence mid- to long-term interest rates should rise). They also suggest that foreign governments may "blackmail" the U.S. and threaten to stop purchases unless the U.S. does what they want geopolitically (say withdraw troops from Iraq).

On the other side, there is an argument that the "savings" in the rest of the world are driven by the sales of goods and services to the U.S. by its trading partners. For example, ask yourself, "where would China sell their goods if not to the U.S.?" The same is true for everyone. Yes, the U.S. is the 2nd largest producer of oil, but it still imports from Canada, Mexico and Venezuela (and a little bit from the Middle East, maybe 15% of the total). So the question becomes, "why would our trading partners harm their single largest customer?" The answer is, they will not. This is why the blackmail argument is spurious. Let me make certain that this point is clear -- the world builds and sells products which are sold in the USA. Without question, they sell the most profitable (e.g. highest margin) in the USA. The profit they reap from their sales of goods and services can either be repatriated (which causes an increase in both their money supply and inflation) or they can keep the profit in dollars. The way that do it is through the purchase of Treasury Bonds. If they stop buying them, they hurt their biggest customer, AND they run the risk of hyper-inflation at home.

Also supporting the argument that foreign investment will continue is the simple fact that the the U.S. government is without question the safest place to invest. Please review below all the reasons I articulated in Part 1 that make this true. The ability of the government to tax and collect; the ability to maintain law & order; and the raw assets available as collateral; all support the credit-worthy nature of the U.S.A. Where would you trust your money in lieu of the U.S.? Russia, China, India, Brazil? All have political risk. The UK, France, Germany? All have significantly lower levels of assets and a smaller tax base. Unlike our developed friends, the United States has the ability to grow. The economy is huge, but can still grow 2-3% because our population is growing; because we have space for new citizens; because we invest in education, research and development (especially with venture capital start-ups).

So will interest rates rise? Yes, they will, but more in response to the very low rates we have now. There will be pressure to fund the federal deficit, but remember, the Clinton Administration ran a surplus on the back of the Reagan/Bush/Clinton economic expansion after the last major recession (Carter). This too is possible in the next two decades.

The U.S. Dollar
Should the average citizen care whether the dollar buys more or less units of another currency? Probably not. Most Americans do not travel extensively abroad. Moreover, the travel industry is very competitive, and deals are always available. With that said, there are several reasons why the U.S. Dollar will fall over the next decade.

1. There will be higher relative growth rates in other parts of the world. In Europe, there is still considerable growth to be unlocked by the continuing elimination of national trade and competitive barriers. There will never be a "United States of Europe," but it is clear that there will be 2-3 Euro champions in each industry as opposed to the historical "national" champions (think banking, energy, aer0space & defense, consumer durables, autos, consumer perishables, fashion). Moving beyond Europe, the BRIC nations will grow faster than the U.S. in the future.

Word of caution -- the $ amount of growth that the U.S. will generate on a $13 trillion base at 2.5% growth is $325 billion per year!!! Notwithstanding, the dollar will still fall due to relative changes.

2. A lower dollar makes U.S. exports more competitive, and makes imports more expensive. This is a check upon the trade deficit. A weak dollar is one reason why oil rose so fast so far. It is denominated in dollars! Same is true of gold and other commodities. The dollar's weakness explained 20%+ of the rise in commodities in 2008.

3. The most important reason the dollar will fall from today's level, however, is that it makes the debt paid in the future cost less than paying it today. This has been a specific Bush Administration policy, and quite frankly, a good one.

To summarize, the interest rate is not the reason foregin governments buy U.S. Treasuries. They do it to maintain balance of payments for international trade and to support their biggest market. Domestic interest rates will rise but will do so for domestic economic and inflation reasons, but not to attract buyers of U.S. Treasuries. And finally, the U.S. dollar will fall again for global macroeconomic reasons, and it is not a bad thing for our nation.

Monday, December 15, 2008

Our Nation: So where do we go from here? Part 1

I wanted to write optimistically about our nation's democracy and capitalism. But before I address what I see in the next 3-5 years, I should start with my underlying assumption, and why I believe it to be true:.

The United States of America is an incredibly unique social, economic and political construction, and it is the best the world has ever known. Not perfect, but perpetually driven towards auto-improvement.

Natural Resources: which other country has the vast amounts of natural resources, in quantity and diversity, as the United States? None.

The USA has 30% of the world's natural gas, 22% of its coal, 8% of its oil, copper 15%, Gold 15%, Silver 13%, Aluminium 17%, Magnesium 29%...

Go to to see the entire data set.

Human Resources: which country has the size, scale and scope of the US education system? None.

The USA has 4,140 colleges and universities with 17,500,000 undergraduate and graduate students? No other country comes close by any measurement.

Economy: which country has the size, scope, freedom and investment of the USA? None

The United States has a GNP/capita of $46,000. While there are some countries mathematically above it, the only statistically significant difference is Luxembourg, Kuwait, Norway and Brunei (all $59,000/person and above). The United States represents 25.4% of the World's Gross National Product. At $13.8 trillion, it is 3.2 times larger than Japan (#2) and 4 times larger than Germany and China (#3 and #4).

See the World Bank data at:

Population: What nation is more ethnically diverse than the United States? None.

For Darwin fans, that means the law of natural selection is working in our favor. We also know that we are becoming increasingly diverse. See:

If you exclude refugees, the United States has the largest number and percent of population from legal and illegal immigrants. But the key here is that people WANT to come to the United States to be free! Freedom of religion, of speech, of political expression, of opportunity. People come to be safe, get jobs and educate and raise their children.

Arts, Science and Culture: By any measurement, the United States has more diveristy, opportunity, funding and excellence of the arts & sciences.

That's enough for now. I will return with some thoughts about what is next.

Post script: My son, Jon, asked me what nation was the greatest. My answer is the USA

US Autos: whichever way we go, let's get this right

A sound plan from Tom Epley's Bold Exec Blog. I agree with this 10 point plan. Worth reading...

Sunday, December 14, 2008

The search for happiness Part 1

Perhaps it is a consequence of middle age, but more and more of my friends are pondering the meaning of life. To be fair, the terrible economy is also a causal factor, as far too many of my friends have lost jobs or fear losing them shortly.

I have friends who are atheists. I have friends who are agnostic. I have friends who are both committed and causal Christians, Jews, Hindus and Muslims. I find, however, that the questions are very much the same. What is the purpose to my life? Am I loved? Do I love others? Does my life matter? Can I be happy?

Today, I was reminded of words of wisdom from Mother Teresa. As we approach the second most important Christian holiday, Christmas, we find that one of the key lessons from Advent is the discovery and pursuit of JOY. First and foremost, I should clarify that joy is not pleasure. Pleasure is sensory-based. Joy is spiritual.

Due to the fact that I graduated from Kenyon, and majored in the history of ideas or philosophy, most of my friends tend to have a bias towards intellectual exploration of happiness and the meaning of life. I find a large number of people depressed. They have an emptiness in their lives. And interestingly, the more they focus upon themselves the harder it is for them to be happy. The more they look inward, the farther they seem to be from getting to an answer.

Mother Teresa had some thoughts on this. She said that JOY should be understood as Jesus, Others, Yourself. Mother Teresa said that by reading, reflecting and implementing the Word as revealed by Jesus, people would find happiness. She also said that when one is in doubt, or sad, or troubled, then focus upon helping Others. It was this act of self-denial and focus upon giving support and care and love to Others that makes everyone more Christ-like. Now comes the interesting part -- like nature, God does abhors a vacuum. When you give of yourself to Others, then God fills the void left behind, and You feel happier. You feel content. You lose the feelings of disappointment and loss and sadness.

Wednesday, December 10, 2008

Big 3 Part 3 -- Closing in on the finish line

As we get closer to an agreement for supporting General Motors, Chrysler and Ford, I continue to press for structural reforms.

What concerns me is the lack of discussion around several issues:

1. Rationalization of brands and dealer networks: whoever becomes the Car Czar will rue the error of not being granted sweeping powers to supersede state franchise laws. GM had to pay millions to dealers when they retired Oldsmobile. This cannot be the case going forward. Furthermore, continued consolidation of GM, Chrysler and Ford dealer networks is required -- and speed and low cost is the key.

2. We need to incentivize consumers to "Buy American." I am perplexed by the failure to address this requirement. It should be a hallmark of the Obama-Biden stimulus program. I favor tax credits, like those for hybrid vehicles.

3. There are two meta-goals above this issue. President-elect Obama should use the U.S. auto industry crisis as a "laboratory" for fixing Medicaid/Medicare and Social Security. We must move to a defined contribution plan for retirement. We must get people to pay fair value for medical services. Insurance should be for catostrophic accidents and illnesses. We need to have a cost associated with not taking care of oneself (smoking, over weight, lacking exercise, etc.).