Friday, October 10, 2008

A Confused Biochemist's Theory about the Economy

So I'm as puzzled as anyone else as to why suddenly everything is worth less today than a month ago, and why suddenly no one can be trusted with money or credit. But I have some ideas, mostly tied to aspects of the economy that I've always thought were irrational, or at least unsustainable.

For what it's worth, I'm thinking we may be seeing the end of a certain style of thinking on Wall Street. The current huge correction we're seeing is on the order of a philosophical shift, and I'm thinking an old broken philosophy needs to be left behind. That old philosophy would be the idea that for a company to be valuable, for its stock to go up, not only must it be profitable but it must be increasing in profitability. That is, the idea that a linearly growing company isn't growing enough but all companies should grow exponentially in order to succeed/drive values up. And that is simply not sustainable in the long run. People intent on making money placed a lot of bets that come down to that one assumption, and borrowed money to keep placing bets because their philosophy told them it must be true. And we Americans have been working harder and harder to make our companies grow exponentially because if we don't someone else will. We think "The Secret" is that we haven't thought positively enough or put in enough hours. And we're finding out we are inadequate to the task.

If we have to correct from an assumption of exponential growth back to linear growth, it's going to be very painful for people who've assumed the former. Especially for those with retirement accounts that are built on the idea that the stock market will always go up, given a long enough period. That has been true for America for the past 50 years, but I'm not sure it will always be true, especially if the stock growth is based on unsustainable trends and a bad assumption of permanent exponential growth. Look at Japan -- stock markets don't always go up if you wait even 20 years.

I just hope the credit crisis will not be so bad that it forces students to stay away from college because they can't get loans -- that's my personal stake in this! Of course I have a suspicion that we in the college business can respond by making tuition growth more normal. Well, we'll have to respond that way if things keep going like this, and you know, that's another correction that will bring a long-term trend back to sustainable levels. Tuition rising faster than inflation is not right, and we've got to bring that exponential growth down.

Growing is fine. But having to grow upon growing or you don't survive? That's wrong.

Part of this comes from a very insightful (and even Disney-related) blog post by Phil Vischer, creator of Veggie Tales. He posted this in July, back when oil was $140 a barrel and the Dow was 14,000, and I still think about it now several months later:

We have to help each other more now, more than ever. I see a lot of silver linings, but that's also because there's a lot of clouds. In the Bible the clouds are a sign of God's presence. Let's see how that works out -- because God often has things to say we may not want to hear.


Eric said...
This comment has been removed by the author.
Eric said...

Somehow I magically posted "er" as my previous comment ;)

What I meant to post was that I hope this is what my employer is trying to do in its current cutbacks in headcount. We're looking towards an IPO down the road, but I've always hoped that wasn't our end all, be all for functioning. There's nothing wrong with being a successful, self-sustaining private business!