Ring Out the Old

My favorite song for the new year is “Ding Ding, Ding Dong” by George Harrison. The first line is the old saying, “Ring out the old, ring in the new.” New year’s day points mainly toward the future, but as part of that transition, it’s worth taking a moment to look back at the old year in order to leave behind some of the things that don’t belong in the new year.

On such a busy day, you can’t take much time for that, so here are three quick things you can do to start to separate yourself from some of the less favorable aspects of the old year:

1. Pick out one article of clothing you wore in the old year that you would never want to wear again, and throw it away.
2. Think of some of the bad advice you got and ignored in the old year, and feel thankful for having disregarded it.
3. If you’ve been keeping a long list of things to do, and it hasn’t changed much in the last month of two, cross off half the things on the list, to represent the idea of making room for the new adventures of the new year.

Happy new year!

A Scalable Economy

Imagine if Blogger had been created with a limit of 500 blogs. By the time I had heard about Blogger, all the blogs would have been taken, and you wouldn’t be reading this today.

Of course, Blogger was not created with any such limit. That’s because, at least in terms of design, it’s not much harder to have 10 million blogs than it is to have 500. As long as you’ve gone to all the trouble it takes to make a blog engine, why not go the one extra step of making sure it will work with any number of blogs?

The importance of scalability is a given in computer system design. You want your system to keep working if your needs expand. Thirty years ago, software was created with arbitrary limitations — like a payroll system that would let you pay only 100 employees, or a gasoline pump that couldn’t charge a price higher than 99.9¢ a gallon. It didn’t take long before people started to say, “Let’s get the software that doesn’t have those limits.”

Scalability is also a part of any good business plan. You might plan a new car wash so that it covers its operating expenses with 10 customers a day. At the same time, you would plan a way to move things faster so that everything keeps working when there are 500 customers in a day, but keeping everything simple enough that it is still profitable on days when there are only 100 customers. You don’t know exactly how much business you’ll have every day, so you want to design a business that works over a pretty wide range. And most businesses are planned this way, so that the volume of business can go up and down by 5 percent or more from year to year without any huge adjustments.

This year, the U.S. economy has declined by about 2 to 5 percent, depending on what measures you look at. So why is such a small decline such a trauma for the economy? If so many parts of the economy are scalable, why can’t the economy as a whole be more scalable?

Actually, it could be. A recession isn’t such a terrible thing for most of us. It’s mainly painful for the people who lose their jobs, and those who try to enter the job market. When jobs are hard to find, we don’t have much help to offer except to say, “Keep looking. Something will turn up.”

There are institutional effects that make unemployment go up sharply in a recession. Employee health benefits are one of them. Health benefits are a good thing for those who have them, but to employers, they are an expense that occurs in proportion to the number of people they employ. This prompts employers, when money is tight, to reduce the number of employees as much as they think they can.

Unemployment benefits and various other laws about employment discourage employers from hiring in times of uncertainty. These laws make it very expensive for employers to hire workers for a short time. Employers usually won’t do much hiring in a recession unless they are really sure they need workers for the long run. This is one of the main reasons why unemployment remains high even after a recession is over. Businesses often wait a year or two to be sure the recession is really over before they start hiring again.

The government could take much of the strain off the job market by hiring workers in large numbers when large numbers of workers are available. Rules about government hiring make it impractical for the government to hire workers directly on short notice, but the government can get much of the same effect by accelerating planned construction and research projects — doing the same work it was going to do anyway, but doing it faster because more workers are available. Some of the people in Washington are trying to put together this kind of plan for the next two years.

It would be easier, of course, if the government were to save a little bit of money for this purpose. Instead, we came into this recession with the federal government already on the brink of bankruptcy as a result of an astonishing rate of deficit spending during the previous five years. The deficits were largely produced by the Republican tax cuts for the investor class. The tax cuts were supposed to make the economy grow. They did not do that, but they did help to set up the crash we are now experiencing.

The point is, a scalable economy is not an impossibility. Most areas of the economy scale just fine, and with better management of the economy, it could expand and contract with less friction and stress than what we are experiencing now. We take it for granted, because of our past experience, that a recession is a painful time, but it doesn’t have to be that way, and at some point in the future, it won’t work that way anymore.

Why Time Management Doesn’t Work

Yesterday I wrote about the idea of constraints. A constraint is something that stops you from getting more done. Many people manage their own work poorly because they are paying attention to just one constraint, which usually is not the one that is actually stopping them.

This is why time management systems don’t work for most people. If you use a time management system, it organizes your work as if it had only one constraint, time. This is not such a good idea. Time is never your only constraint. It is possible for time to be your primary constraint, but that is an exceedingly unfortunate circumstance to be in.

Think about this. Time can be your primary constraint in life only when your work is so demanding that your desires, energy, creative thoughts, health, knowledge, connections, and all other resources are essentially irrelevant to what you are doing. This can happen only with the most rote, plodding, unrelenting work. If your life is this dismal in character for more than two or three days at a time, then you are better off changing your life around than trying to manage it the way it is.

If time were your primary constraint, you would not be reading this — or anything else, for that matter. You would just be working away at whatever your work was, late into the night until you fell asleep. Therefore, if you are managing your work based on the constraint of time, you are managing to a secondary constraint while overlooking several constraints that are more important.

I bring this up today because I know many people are thinking of going out to an office supply store to buy time-management calendar pages for the new year. If you never got time management to work for you before, but you think you ought to try it one more time, I have a better idea to suggest.

For the average, ordinary modern person, the overarching constraint in life is not time at all, but clutter. As I put it in my new book Fear of Nothing, clutter is the reason you don’t have time. I’m talking about the possessions that you aren’t using and shouldn’t be saving because you won’t be using them anytime soon. We tend to save clutter because it seems valuable, but it is more costly and less valuable than it seems. Instead of making a new investment in a time management protocol that never worked for you in the past, try taking away one percent of your possessions, the things that seem least likely to contribute to your life in the coming year. Fill up a garbage can with things that just get in your way. You’ll feel lighter. Life will seem simpler. Do it again the next week. If you’re like most people, you can keep at it all year long. You’ll be amazed at how much simpler and nicer life becomes.

And your to-do list? Write it on any scrap of paper, and throw it away at the end of the day. If you keep a to-do list much longer than that, it just becomes part of the clutter, part of what makes your life difficult. I talk about this whole process in detail in Fear of Nothing, but you don’t need to read a book to simplify your life. Just start chipping away at the clutter.

Tracking the Wrong Constraint

I took advantage of this morning’s surprising warm weather to do some work outside. When I started, I knew I wouldn’t spend the whole day at it, but I didn’t know exactly what would stop me. Would my arms and shoulders get tired first? Or would my lower back or lower legs get sore from all the lifting and carrying? Would I get called away by something more pressing — or more interesting? Or would the weather turn rainy and send me indoors?

Any possibility like this is considered a constraint. It’s something that limits how much you can produce in an area of work. Yet in the end, it is just one constraint that stops you first. If you know what that constraint is, you can manage your work accordingly and get more done.

This morning, for example, if I knew I had just two hours before the rain would hit, I could move more quickly and get more done in the short time I had. But my guess was that my back would be the constraint that would stop me, so I took extra time to lift carefully to protect my back. If I had thought I might get bored, I could have introduced more variety into the way I was working.

What actually stopped me was not any of the things I had considered. I stopped because my toes were starting to hint at blisters and bruises from the effort of carrying heavy objects up and down hills. It came as a surprise that my toes were the limiting factor for my work. If I had expected to go as far as my legs and back could go, I would have been disappointed by having to stop sooner because of my toes.

We rarely know, when we first get into something new, what constraint is going to stop us first. Much of the disappointment people run across in their work comes when they guessed wrong about the constraints they were facing. Usually people focus on just one obvious constraint, and don’t even think to look for other constraints that may be more important. They’re tracking the wrong constraint from the beginning, and then they’re frustrated when they get stopped sooner than they expected. If you take the attitude that you will find out what your constraints are, you can get past this initial disappointment and manage your work better in the long run.

The Credit Card Fallacy

Every boom and bust cycle is based on a fallacy, a simple gimmicky idea that seems reasonable at the time but is ridiculed in retrospect. In the recent mania that hit its peak in 2005 before starting to fall apart piece by piece, people (and especially major banks) were falling all over themselves to try to “own” as much consumer credit as they could. This was focused especially on consumer discretionary items — credit card purchases such as electronics, clothes, exercise equipment, and vacations. The real estate bubble didn’t level off until after consumers got in credit card trouble. The bankruptcy reform that made it virtually impossible for consumers to go bankrupt made lenders more overconfident than they already were. After that, it didn’t take much for the top-heavy credit card pile to topple.

In my opinion, it was the May 2008 stimulus payments that finally caused the credit market to break. The sudden load of extra U.S. government debt squeezed the credit market at the same time that manufacturers and retailers were overextending to try to catch the stimulus wave that never quite reached them. The Wall Street bailout in the fall and the Fed rate cuts were just further blows to an economy that was already reeling. But none of these panicky reactions should be blamed for causing the financial crisis.

Similarly, we may have made too much of the mortgage rate adjustments, medical expenses, and divorces that were the triggering events for home foreclosures. The real cause, in many cases, was credit card debt.

For more than half a century it was thought that consumers had to continually consume more to keep the economy operating. I do not believe that was ever really necessary, but in any case, that strategy seems to have run its course.

Black Friday V

U.S. retailers have to be excused if they want to promote today’s shopping as another Black Friday sale — as a few have been doing all month long. After all, Black Friday was the one bright spot this season, and today is Friday and a day after a major holiday. What retailer wouldn’t want one last chance to get into the black for the year?

Yet realistically, this year’s bargain-weary shoppers will not be energized enough to rescue a bleak holiday season at retail. In a normal year, a 4 percent increase in retail revenue from the prior year is considered a disappointment; a 2 percent increase is a disaster. The bar this year was set lower, with most retailers planning for about a 2 percent increase. The latest estimates of a 2 to 5 percent decline are still considered a disaster. Many retail analysis didn’t believe a year-over-year decline was possible.

Credit is not as much an issue as it might seem. Many consumers have seen banks reduce their credit limits by more than half this year, yet most aren’t thinking about credit limits when they go shopping today. Instead, the question is, “Is this purchase really necessary?” And when it isn’t, the price reductions have relatively little effect. A sure sign of caution: luxury goods, which were previously thought to be recession-proof, are taking the hardest hit at retail. Sales are down about 25 percent, or about as much as automobiles.

To retailers, though, the most chilling thing they are overhearing today is the line, “I have already finished my Christmas shopping for next year.” If that kind of practical thinking becomes a regular part of shopping, much of the retail sector may be in trouble. Retail was headed for a shakeout even before the recession hit, with hundreds of shopping malls barely limping along, and perennial cash trouble at many of the discount chains. Now some observers are predicting the biggest reshaping of U.S. retail ever during the first half of 2009.

You Don’t Have to Wait to Be Happy

For today, Christmas Day, I want to point you to a Tony Robbins video, a “Christmas card” where he explains why, especially now, “You don’t have to wait, to be happy, till all your problems are gone.” Take a look at:

Problems…and Happiness

Merry Christmas!

Anticipation

Today is Christmas Eve, a day when people everywhere are waiting to see what Santa Claus will bring them tonight. Here, this morning, I’m waiting for the delivery of the first truckload of my new book Fear of Nothing. First, though, I have to wait for the weather to warm up one more degree so the overnight ice can melt.

When something big is coming, it is important not to fall into the pattern of just waiting for it. It doesn’t take long for a state of anticipation to turn into waiting and worrying, a state that doesn’t feel nearly so good. The key to feeling good about anticipation is preparation. This is obvious enough on Christmas Eve — I never heard of anyone being completely ready for Christmas — but even when you think you’re completely ready for a big event, there is always something you can do to be more ready.

When you just sit and wait, life grinds to a halt. Life is about action, so keep taking action today even if the big holiday is tomorrow. You can have a happier holiday, and a happier day before.

Staying Positive

“How do you stay positive when the entire world around you is negative and wanting to bring you down?”

It’s a highly relevant question at a time when the news every day brings more information about companies in trouble and an economy under stress.

The question was posed by John Assaraf of OneCoach, and while he has a more detailed and involved answer, explaining how to create prosperity in a recession by using the unique opportunities that the situation has to offer, I’ll try to give you the short answer.

The first step is to recognize that negativity is not the entire world around you, even though it might seem to be. If all the news is bad, that’s really just the news media you’re looking at — and not even the entire news media at that. If I look around here as I’m writing this, I see the sun shining and the ice melting outside, cookies baking in the oven, and e-mail messages from people who want to hear from me. That’s all good news.

There is always good news, so whenever the world seems to be all bad news, it’s the result of the way you’re focusing on it. And part of the way you’re focusing is worry. In other words, the news can’t be all bad unless your throwing in some things that haven’t actually happened yet, and might not happen at all.

The best way I know to consistently stay positive when much of the news you’re hearing is disappointing is to focus regularly on what you can do to make things better, or on what I like to call opportunities — because anything you can do that will improve your situation is really a kind of opportunity. When I start to get off track in my thinking, I use this question (from my brand-new book Fear of Nothing) to return my focus to what I can do:

What can I do today to put myself in a stronger state at the end of the day?

I always find plenty of answers to this question, and even if the things I think of seem small and unimportant at the time, doing a few of them gets me going in the right direction again.

On days when the world seems to be spinning in the wrong direction, it’s really just happening in your thoughts, and you can change your thoughts by changing your focus. And this is especially important to remember in a time when there seems to be more bad news than usual. When the latest headline is negative, you can still stay positive.

Who’s Going Out of Business?

A blog post three weeks ago suggested a strategy for buying all Christmas gifts at going-out-of-business sales. But doing that might be more common that people realize. Many merchants are discounting so heavily in the week leading up to Christmas that people are starting to speculate that some of them might also be closing, or at risk of going bankrupt, after the holiday season is over.

Department stores that locked in their winter merchandise in August have little choice but to cut prices to try to move the merchandise out. But other stores are cutting prices just as heavily. Are they just trying to keep up, or are they secretly preparing to close?

Steep discounts have managed to increase foot traffic in U.S. stores above the levels of last week, but not to the levels of a year ago. And the foot traffic is not translating into strong sales. Shoppers seem relaxed this weekend, according to reports, indicating that they may be more curious about the sales than needing to buy more to finish their Christmas shopping.

Reports from the United Kingdom indicate a similarly chilly retail scene. In most other countries, though, the retail picture is not quite so gloomy.

If more than a few retail chains go under in January, it will increase the pressure on malls and shopping centers, some of which are already on thin ice. General Growth Properties, one of the largest mall owners in the United States, is trying to sell several of its premier properties, including Harborplace in Baltimore, as part of an effort to stave off bankruptcy. General Growth Properties has until February 12 to raise $900 million or find new financing for its operations.

Malls already embarrassed by the number of store vacancies will probably see a record level of vacancies by June, as more stores close and relatively few stores open. Some malls will probably have to close. But it’s hard to guess at this point what will happen. Some of the stores ringing up the most sales this month could be among those that close next month.

5 Ways to Have a Merry Christmas

Today is Humbug Day, a day set aside for people to gripe about Christmas (well, among other things). The fact that such a day is needed shows that there is an aspect of trying too hard to “do” Christmas, instead of merely celebrating it as a holiday.

Much of the stress that surrounds Christmas comes from the pressure, mostly self-imposed, to conform to one particular way of celebrating the holiday. Yet there are lots of good ways to celebrate a holiday like Christmas, and you make it less stressful by picking a strategy that naturally fits your situation. These are just some of the Christmas scenarios you might look forward to:

• Thanksgiving II. Just repeat the last big holiday, with turkey, stuffing, and mashed potatoes. Only this time, no shopping.
• Around the world in one night. A flurry of hectic activity with an intensity that you could never pull off at any other time of year.
• Peace on Earth. A quiet day away from all the noise and pressure of everyday life.
• All I want for Christmas. The perfect day to fully appreciate all the nice presents you just got. For example, you have to at least get to level 3 in that new video game.
• If they could see me now. Finally, a few free hours to work uninterrupted on that big project you’ve been dying to do all year long.

Every situation has its own unique opportunities, and that principle is as true on Christmas as it is at any other time. Have a merry Christmas!

Twitpay Promises a Simpler Way to Pay

A new payment service just getting started on the Twitter message service is Twitpay, which uses text messages to send money from one person to another. It’s not really meant for online purchases, but for more casual exchanges of money. At least for now, Twitpay doesn’t have a way for you to take money out, though you can spend it at Amazon, and you may be able to give it to charity. And payments through Twitpay can be seen by the whole world, which isn’t typically the way businesses like to operate.

Nevertheless, the limitations of Twitpay let it operate with a low cost structure that more traditional forms of payment, such as credit card gateways, won’t be able to duplicate. Twitpay will charge 5¢ per payment, which is noticeably less than the typical credit card fee around 27¢ for a $1 payment. So far, just a few users have been experimenting with Twitpay, and it’s not clear whether any actual money is involved. But at the rate things evolve on the Internet, by New Year’s Day, people may have figured out what Twitpay is good for.

When Citi Doesn’t Like You

I’m a member of the satiric Christmas rock band Bah & the Humbugs. We have written way more Christmas songs than any sensible band ever would. One of them, “When Santa Doesn’t Like You,” written by Gayden Wren and Paul Nordquist, describes the various pranks you might suffer if you get on the wrong side of Santa Claus. I forget exactly what they are. You might get Jell-o in your Christmas stocking, or something like that. The moral of the song, I guess, is something about not being naughty.

As bad as it might be if Santa doesn’t like you, it’s even worse if you hold a Citi card and Citi decides it doesn’t like you. It can change the interest rate on your credit card to a default rate, which is typically something like 28.99 percent.

How can Citi change your interest rate just because its opinion of you changes? It’s an obscure provision in the credit card terms that in the industry is known as “universal default.” This provision says that if you are ever late with a payment on anything, the bank can instantly change your interest rate to a much higher rate, the penalty rate, or default rate as it’s usually known. This provision is more draconian than it sounds — because the fine print says Citi can apply this provision in its sole discretion, which basically means its opinion. You don’t even have to owe any money to anyone to get the default rate. If Citi thinks you owe money to someone and should have paid it by now, it can change your interest rate. If Citi hears a rumor about you and decides it might be true, it can change your interest rate.

There is no moral to this story. There is nothing you can do to ensure that you won’t have to pay the default rate except not to have a card that comes with this provision.

As far as I know, Citi was the first large bank to come out with the universal default provision, and many other banks followed. I had to cancel most of my credit cards. I don’t know why I wasn’t hearing that everyone was canceling their cards — but I know I wasn’t the only one who thought it was wrong that a bank could change my interest just on a whim.

Even the U.S. government has finally decided it was wrong. Federal regulators voted yesterday on some long-overdue new rules for credit cards. AP calls them “sweeping.” That is perhaps an exaggeration, but they do rein in some of the most flagrant abuses by banks, including universal default. When the new rules take effect, if Citi decides it doesn’t like you, it will have to get your permission to change your interest rate.

Of course, if you’re ever a day late with a payment, you’re on your own. A bank can change your interest rate if you’re ever late on any payment to it, even if you’re late because of something it did wrong. The best bet is still to pay off credit cards early and often.

Before the Year Is Over

Usually I tell people to approach life one day at a time, but today would be a good day to take a look at the year as a whole. What has happened in 2008? What has changed since the beginning of the year? What surprises have there been? How are those new year’s resolutions coming along?

Some people wait till New Year’s Eve to remember what their new year’s resolutions were. It feels much better to think about them now, and to look over the year as it’s shaping up, while there is still time to do something about it. In two weekends, with very busy weeks in between, it might seem like there is no time left to fix your year, but if you’re aware of where you’re trying to go, there could be a few moments that could make a difference for you.

A year is a very long time when you think about it in all its lively detail. You could never really plan a whole year in advance. But it’s possible to admire a whole year as it’s going on around you, especially a year as momentous as this one has been. Take a minute today to see how it’s going. Then check again on New Year’s Eve. And don’t be surprised if the checkpoint you take today changes the direction of your year just enough to turn it into something different in the end.

The Fed’s New Goose Egg

I didn’t think they would do it. But they did. The Fed effectively cut the Fed Funds rate to zero. And it sounds like they plan to keep it there for a couple of years.

The Fed Funds rate is just a benchmark, so it doesn’t mean you can go borrow money for 0 percent interest. But almost. More importantly, it means your bank will pay you 0 percent interest on your savings account. Or something very close to that.

What does 0 percent interest mean? Imagine that you’re on a baseball team. You’ve been playing for two or three hours, and you look up at the scoreboard in the ninth inning, and it says your team has 0 runs. That’s what they call a goose egg — and that’s about what it feels like when you’ve been keeping money in your savings account all year and your bank says it’s paying you 0 dollars in interest.

Believe it or not, that’s the point. The idea of interest rate cuts is to get people to stop saving money. The theory is, if saving money doesn’t pay, you’ll spend more of your money, and get the economy moving again.

That is such a crazy idea it just might work. But in this case? I don’t think so. Lots of consumers are flat broke already, and others are close, and no one seems to think that this is a good time to spend till you’re broke. Worse, many consumers have no money of their own — they’re in debt, and paying not 0 percent interest, but something close to 20 percent interest.

This divergence in interest rates is the result of the Reagan Revolution, which took most of the money out of the hands of consumers and gave it to a new investor class. I’m afraid it’s true: billionaires have more money than all the rest of us combined. Billionaires have little reason to borrow money, no matter what the interest rate is. When billionaires do borrow money, it’s some kind of game that has basically nothing to do with the workings of the economy. And most of the rest of us don’t qualify to borrow much money. Which means the government doesn’t really control the money supply anymore — or much of anything about the economy.

That’s how we can have near-zero interest rates.

Zero percent interest is not just about scaring savers out of the bank and into the going-out-of-business sale at Linens-N-Things. The Fed may also be hoping to spark hyperinflation, the kind of persistent high inflation that scares people into buying. Inflation is on the way whether the Fed has anything to say about it or not, but scaring people into buying? Scared consumers this year are trying to pay off all their debts, and rightly so. Scare them more, and they may just do it faster.

The super-low interest rates are supposed to be good for the economy, but no one can make the case that they are good for banks. If banks, no longer able to pay even a semblance of a fair interest rate on savings, lose their depositors, the heart of the banking system will be gone. The Fed could be raising interest rates to 2 percent or so to try to stabilize the economy, but I suppose that is too much to ask. The U.S. economy has taken one blow after another from policymakers this year. I suppose it will have to absorb this one as well.

Brain Genes and Body Fat

BBC News tells of two studies that found seven genes that were statistically linked to body fat levels. These genes seem to be mainly active in the brain, leading some of the researchers to suggest that obesity is mostly the result of the way the brain works.

In one hypothesis, hunger impulses originate mostly in the brain, and are only slightly influenced by metabolic events. This could be true, at least for some people, based on the evidence so far. If it is, it suggests a possible weight loss strategy would be to learn to partially ignore feelings of hunger.

This is something most people do in one way or another. Most of us don’t tend to eat late at night, for example, based on the idea that breakfast is soon enough.

For two years, I’ve been suggesting the habit of not eating during the 11 hours between 8 p.m. and 7 a.m. This is more to keep enzymes in balance than to lose weight, but I’ve heard from people who say it has helped them lose weight. Some experts say it is better to extend this to 12 or even 14 hours every night by having an early supper. Another strategy, recommended as a way to maintain an alkaline pH, is not to eat any solid food in the morning (sometimes the suggestion is juice from wheat grass for breakfast).

A similar strategy would be to limit the places where you eat. You might decide you’re not going to eat (or drink soda) at your desk anymore.

All these approaches are ways of creating a habit of eating at some times and avoiding food at other times. If the hypothesis that the brain is creating excessive hunger impulses is correct, any of these ought to be a way to lose weight.

Arctic Ice Holding On

Arctic ice extent grew normally this fall, according to reports from the NSIDC, staying about one week ahead of last year’s ice growth. It gives reason to hope that the record ice losses of 2007 were slightly ahead of the curve. That is not to say that the Arctic ice cap could come back, or that it is melting as slowly as the consensus of scientists suggests. But the ice surely will not disappear in the next five years, as a few scientists had started to imagine. We may have to wait another two or three years before the trans-Arctic shipping lanes become commercially important, and another 10 to 20 years before the first adventurer navigates a sailing ship to the North Pole.

What we have seen is that Arctic ice is just barely holding on. It stays nearly the same in years of quiet Arctic weather. But when spring or summer brings unusually warm or stormy weather to the Arctic Ocean, the sea ice can decline by 10 percent. To predict the future of Arctic ice, you would have to predict these weather events. At this point, we can only observe them.

The Economy Slipping on the Ice

Friday’s ice storm caused the worst power outage in New Hampshire’s history and problems in at least 6 surrounding states. When more than a million buildings are without power for more than a day, it’s enough of an event to cause a blip in the national economic statistics. Down: electricity, motor fuel, heating, work, shopping, television, deliveries. Up: utility poles, wire, windows, salt, cellular phone usage — small things by comparison.

The storm affected more than 1 percent of the U.S. population and will slow many people down for more than one tenth of the month of December, so it is probably enough to take 0.1 percent out of the already low GDP, payroll, retail, and consumer spending numbers for the month. It seems like a tiny change, but it’s almost enough to negate a normal month of economic growth.

It’s not just statistics — the reduction in economic activity from an unusual event such as this month’s ice storm, the earlier California fires, or even the Olympics TV coverage in August, does tend to have recessionary effect on the economy. It takes away a little of the economy’s momentum, as if the economy slipped for a moment on the ice. Usually these blips are small enough to even out before anyone notices. In a month like this, though, with the economy already losing momentum, events like Friday’s northeast ice storm add to the economic slowdown.

The Biggest Sale in the History of Automobiles

“How long can GM really hold out?” That’s a question on people’s minds this weekend, especially around Detroit. And I doubt anyone, even inside the accounting department at GM, actually knows the answer. The White House seems less confident by the day when it considers the prospects for a Detroit bailout, and by this afternoon it had been reduced to looking for options. Probably some kind of financial support will come through, but nothing close to the $120 billion General Motors probably needs to finance its turnaround.

At the risk of sounding glib, it seems to me that what GM needs, and perhaps Chrysler and Ford too, is an emergency cash-raising sale. The trouble with that is that the appearance of desperation could drive many potential buyers away. But I think there are two gimmicks in the current situation that automakers could use to convince consumers that this is an especially good time to buy a car.

The first is the possible need for the automakers to qualify for the loans they might be getting from the Treasury. Automakers can use this to suggest to consumers that they are forced to liquidate their excess inventory to qualify for the special loans they are getting. The second is the possibility that the automakers’ financial arms might get some liquidity support from the Wall Street bailout fund. Automakers can use that possibility to suggest that, thanks to the government help they’re getting, new low-interest-rate financing is easier to get than before.

This works best if the automakers actually do get at least a token amount of this kind of financial support from Washington. On the other hand, the automakers may be able to mount the biggest sale in the history of automobiles even if there isn’t any money coming from Washington. The news on the subject is so confusing that no one can say for sure whether the money is or isn’t on the way. And if there is advertising money in it, the television news people can make the bailout seem real whether anything is happening or not.

I don’t really know how well an inventory reduction sale would work right now, but I know all automakers have at least a little extra inventory right now, and the size of GM’s extra inventory is positively frightening. If they can find a way to sell off some of that quickly, it could give them five or ten more weeks to figure out what to do next.

This Week in Bank Failures

The State of Illinois said Monday it was preparing to cut its ties with Bank of America. The governor offered a tangential connection to a labor dispute as a reason, or perhaps an excuse. Then in rapid succession, the governor was indicted for trying to auction off the state’s vacant Senate seat (held until a month ago by President-elect Barack Obama) and the bank announced a plan to lay off 35,000 workers. It will be a busy weekend for conspiracy theorists trying to tie all this together.

Almost every commercial bank will have some kind of exposure to the auto industry, but do some have a large lending exposure that they’ve been hiding? That’s a question people are asking after last night, when it became clear that the Detroit bailout had become too complex to pass. General Motors and Chrysler have hinted at possible bankruptcies around the first week of January, and the failure of either could shut down enough parts suppliers to stop auto production at factories around the world for a couple of months while the problems are sorted out. That’s a scenario that could lead to the failure of lenders who were foolish enough to bet big on the U.S. auto industry. The problems in Detroit have been well known for at least three years, though, so you would think no bank would stake its future on the survival of the industry in its current form.

Yet another Georgia bank failed tonight. Haven Trust of Duluth, Georgia, was shut down. Its deposits and four offices were transferred to BB&T, a large regional bank. In addition to acquiring all of the $515 million in deposits, BB&T is acquiring $55 million of the bank’s assets. The FDIC expects to lose $200 million disposing of the other assets. All lines of credit at the failed bank have been frozen.

BB&T plans to continue to operate the four Haven Trust offices, which are in the Atlanta metro area. The new branches will add to BB&T’s already strong presence in the area.

Like the other failed Georgia banks, Haven Trust had a lopsided real estate exposure. Almost half of its loan portfolio consisted of real estate development loans. So far this year 5 Georgia banks have failed, along with 5 in California, 1 in Michigan, and 3 in Nevada, all states particularly hard hit by the real estate downturn. Another 6 banks in other states have failed this year.

That count includes a smaller bank in Texas that also failed tonight. Sanderson State Bank had $28 million in deposits. The Pecos County State Bank is acquiring the deposits and one tenth of Sanderson State Bank’s assets. It will decide later whether to acquire Sanderson State Bank’s office. The Pecos County State Bank is based in Fort Stockton, Texas, 65 miles north of Sanderson — not far away at all by the standards of west Texas. The FDIC’s cost for this bank closure is estimated at $12 million.

Striking It Rich vs. Financial Strength

It’s the American dream. Striking it rich. A flood of money big enough to wipe away all your financial troubles.

The possibility of striking it rich inspires people to take risks and try out new ideas. Yet this strike-it-rich mentality is often in conflict with what people really want, which is financial strength. You can see this in the stories of people who do strike it rich. They win the lottery, get into the NFL, star in a movie, or get signed to a major record label. Many of them make a considerable fortune, then lose it all in just a few years. It’s because as they were obsessing about striking it rich, they lost sight of the goal of financial strength.

The same thing happens with a few big companies and many midsized ones. Already rich, they keep trying to strike it rich, and this approach eventually gets them into trouble. The strike-it-rich strategy doesn’t quite work after you are already rich. For someone like me, coming into $5 million after years of hard work would be a compelling reward for my efforts. It would make me feel that all the hard work was worth it. But for a company that is already worth $50 billion, an extra $5 million could almost go unnoticed. They can literally make a fortune and not realize it has happened. For a company that big, there is no sense of reward in striking it rich.

There is no particular reward for striking it rich after you are already rich, but the risks are still there. And the risks, at that point, really aren’t worth it.

Some people essentially pretend they are not already rich, and keep trying to strike it rich, I guess as a way to make life interesting. A better approach is to recognize and appreciate your success and focus on building your financial strength. And in fact, you do not need to wait until you are successful to do this. If you focus on the financial strength you already have and look for ways to add to it, you can get rich just as surely as if you strike it rich. And if you get rich this way, you are more likely to hold on to your money, because you are already focused on the goal of financial strength.

The Big 3 Cash Burn

Imagine that you own a house in a cold place at a cold time of year, such as Washington, D.C., in the middle of December. Now imagine that all the windows in the house are broken, so that it is costing you an extra $100 a day to heat the house.

You wouldn’t say, “Oh, all the holidays are coming up. I’ll wait till the end of January to fix the windows.” As long as the windows are broken, you would be burning through $100 a day without doing anything, and in financial terms, that’s a disaster. You wouldn’t go to the family dinner in this situation. Instead, you would ask all your family members, “Please come over to my house and help me fix my broken windows.”

One of the unfortunate effects of the dot-com boom of 1999 is that it persuaded people that “cash burn” was a normal, acceptable part of business life. It really isn’t any better than the phrase suggests. I have never seen anyone shoveling dollar bills into a furnace and burning them up. That would be insane. Yet businesses do equivalent things and treat them as if it is perfectly normal.

And this is why the Detroit Bailout will probably not pass Congress in its current form. The Big 3 automakers are burning through not $100 a day, but around $200 million. Their cash burn might be more than $100 a day per worker. This is in an industry where many workers are paid around $100 a day. It’s a situation that they ought to be treating like a disaster, and working overtime to correct as fast as they can.

But the bailout legislation currently being considered essentially pays the Big 3 to procrastinate, to put off the fixes they need until late in January. By then, between them, they might have lost another $10 billion. And when we say “lost,” it’s not just an accounting word. It really means “lost,” as in, “no chance of ever getting it back.”

The bailout should require immediate restructuring as a precondition. It should require Detroit to treat its situation as the emergency it is. After all, no bailout from Washington could ever be large enough to save the U.S. auto industry. The only thing that can save the industry is restructuring, so that it is spending its money on the right things. If the companies postpone this restructuring because they are getting government money, that decreases their chances of surviving in the longer term. It will be hard to find 50 senators who would vote for that.

Life After TurboTax

Bloggers are outraged at the fee increases in TurboTax, the most popular U.S. tax preparation software. The 2008 edition of the software was released a few days ago with additional fees that users find shocking. The most shocking, apparently: the software company now charges an extra $10 “filing fee” to let you print out your tax return.

I have just one thing to say to people who find the new fees that go with TurboTax intrusive and annoying: You really don’t need TurboTax at all. It doesn’t actually do anything to make paying taxes easier. Tax forms are just forms. You can download them free, fill them out on your computer in many cases, or in pen, and mail them in. Tax software doesn’t do any of the difficult work for you — it’s just supposed to make the process less aggravating by guiding you through it. But how good does it really feel to have a computer, controlled by a powerful business corporation, telling you what to do for three or four evenings in March? If you find the hidden fees in TurboTax aggravating, the aggravation you feel takes away the only advantage TurboTax has. So just don’t use the software at all. These links will get you started with your free downloads:

Internal Revenue Service Forms and Publications (federal tax forms)

Federation of Tax Administrators State Tax Forms (links to state tax authorities)

Radio Decline Continues

You might imagine that people would listen to the radio more during a recession. Instead, the decline in U.S. radio is continuing.

The number of people listening to the radio isn’t going down. Most people listen to the radio at least a few minutes every week, and the listener count is going up, almost keeping up with population growth. But people are spending less time listening. Total listener hours are down 4 percent from a year ago, continuing a decade-long decline.

Radio stations cut back their advertising minutes by as much as a third in the last two years to try to attract more listeners, but it only slowed the decline. In the meantime, advertisers are cutting back. Radio advertising revenue is down 10 percent from last year and the industry expects it to fall another 10 percent in 2009. That forecast may be wishful thinking, though. These are some of the factors acting for and against radio in the coming year:

For:

• Fewer new cars and fewer car radios being replaced by digital music players.
• HD radio, a new technology making radio sound better.
• The digital television transition which will leave some TV viewers without TV reception.

Against:

• The satellite radio consolidation killed off half of the satellite radio channels a few weeks ago, likely leading to a net loss of subscribers.
• The economy, as advertisers are forced to cut back more.
• The financial crisis, as the strongest radio advertisers are in the financial sector.
• Demoralized pundits amid a political shift that is draining listeners from political talk radio.
• Bankruptcies that could occur among the financially squeezed radio broadcasters and advertisers.

It might sound trite, but the only answer for radio is cost-cutting. Nearly half of the people in radio are there to sell advertising. As revenue declines, the productivity of that side of the business will have to improve.

Problems at Bally Total Fitness

Last night I learned that Bally Total Fitness, a health club of which I am a member, is bankrupt again. Last year’s bankruptcy reorganization, it seems, just made things worse. The future of the location I go to, and the rest of the chain, is uncertain at this point. The bankruptcy court is allowing it to continue to operate for this week at least.

Bally was the top fitness club in the world when I joined it. If I had to guess at what brought it down based on what I’ve seen of it, it would be the emphasis it started to put on personal trainers about 6 years ago.

It’s easy to see why Bally might put such an emphasis on personal trainers. If customers start paying an hourly rate to get fit, it adds up much, much faster than the yearly membership fee. It must have seemed like a terrific profit opportunity. Most members, of course, could not afford the fees of a personal trainer, but if just a tenth of members would sign up for personal training, those fees could bring in more revenue than the membership fees. Yet personal training really doesn’t go together with the basic concept of community that defines a fitness club. The most egregious clash had to do with exercise classes. The club was so keen on getting people to pay for its personal trainers that it canceled most of its classes and suggested that people sign up for personal training instead. That was when things started to spiral downward.

Nearly half of the members had joined in order to attend the classes. Yet aerobic dance, to take just the most familiar example, is hard to do. It is hard to learn, it takes a high level of energy and concentration to do, and it is not always easy to get yourself off the sofa and over to the club for the class. When there was only one aerobic dance segment a week, not even a whole class, but a half-hour segment of a one-hour class, and 50 students were packed into an exercise room that only really holds 35 for an activity as energetic as aerobic dance, it made the aerobic dance not only hard to schedule but somewhat dangerous to do. People don’t join a health club for the chance to get injured.

In its bankruptcy filing, Bally says it lost money this year because of declining memberships. With members leaving one by one, and few new members signing up, there weren’t so many people to try to sell the personal trainer concept to. I don’t really know what has been going on across the whole chain, but from what I could see, it seems as if Bally killed off the core of its business by trying to add an extra profit center that really didn’t fit.

Bally accelerated its decline by sharply raising membership fees at the same time it was cutting services and its trainers were edging its regular members out the door. From what I am reading in blogs, the Bally Total Fitness brand is pretty well shot. “I am so glad I am not going to Bally anymore” seems to be the gist of the sentiment out there, which means that the top brand in the field, a place that people were excited to go to five or ten years ago, has fallen pretty far.

Bally management seems willing to give up the brand by selling the entire chain to someone who would rebrand it, and perhaps that is the best approach at this point. When you’re in your second bankruptcy in two years, the bankruptcy judge needs to see a commitment to change. If Bally could be turned around in its current form, it would have to be based on a commitment to a level of service. The strategy of continually raising prices while cutting services until there is almost nothing left doesn’t make customers feel good about paying for another year. But it is possible to change that by making a commitment to a level of service that customers can accept.

E-Mail Bankruptcy

Do a blog search for bankruptcy, and most of the stories you will find will have to do with e-mail bankruptcy. This colorful term doesn’t mean what it meant just three years ago. Then, it would probably refer to abandoning an e-mail account because you were receiving too many irrelevant e-mail messages. Now it refers to erasing your e-mail inbox because you have more legitimate e-mail messages that you can realistically read. (read the rest in the Fear of Nothing blog)

This Week in Bank Failures

How much is it costing to keep the banks afloat? As Steve Randy Waldman pointed out this week, it’s hard to make a direct comparison between the present bailout and past government spending because much of the bailout is in the form of guarantees. No one can say exactly how much the Treasury and Fed will ultimately have to pay on the guarantees they’ve made. Theoretically it could be anywhere between 0 percent and 100 percent. The government’s own estimates are blatantly lowballing, with public statements implying they may end up paying 2 to 5 percent. I would say 40 to 50 percent seems more likely, and the percent could be higher than that if bankers are taking advantage of the government, or in the unlikely event of a depression. One way or another, the government will end up paying most of the money it has committed, so it makes sense to compare on those terms, and that’s what BoingBoing offered, with the suggestion that the 2008 bailout is more than the combined cost of the Louisiana Purchase, the New Deal, the Vietnam War, and 6 other major government projects. VoltageCreative promptly offered this graphic of the comparison:

Click graphic to enlarge

Mass layoffs returned to the news this week, along with grim retail statistics that suggest that more than a few national retailers will go bankrupt and close stores after the holiday season is over. The retail troubles especially are bad news for banks. Store closings can leave real estate developers without the money to pay their mortgages — a problem that has led to almost half of the bank failures this year.

The declining price of gasoline is, in a roundabout way, another concern for the banking system. Banks get about 1 percent of gasoline sales in transaction fees. With gasoline prices falling by half in the last five months, the amount of money coming into the banking system for gasoline transactions has fallen, adding to the other blows to bank revenue.

Tonight, First Georgia Community Bank of Jackson, Georgia, was shut down. First Georgia Community Bank had four offices in Georgia and total deposits a month ago of $200 million. It had been in business for 10 years. Like the other banks that failed in Georgia this year, its failure was linked to a heavy reliance on real estate construction lending. By October of this year, it had stopped receiving payments on a third of its loans. Its deposits and a few of its assets were acquired by United Bank of Zebulon, Georgia. United Bank is a somewhat larger bank, with $550 million in deposits. The FDIC expects this failure to cost it around $72 million.

The Situation Economy

For nearly half a century, the situation comedy was the most popular kind of entertainment on television. From the late 1950s till the late 1990s, three generations of Americans were hypnotized by this peculiar genre of video fiction in which nothing ever really changes from one week to the next. As I wrote last week, watching situation comedies night after night has left people in a “situation comedy trance” in which they expect the same rules to apply in real life. This is the main reason people are so skeptical of the possibility of change in their own lives and the world around them. People see change happening but still believe that somehow things will go back to the way they were before.

To people in a situation comedy trance, there is no such thing as taking responsibility for change. How can you manage change when significant lasting change is impossible? Instead, people in a situation comedy trance tend to take reckless chances, not believing that there are any real consequences. At the same time, they tend to ignore chances to solve problems once and for all, not believing that any significant problem can ever really be solved.

Some of President George Bush’s most distressing failures seem to be the result of situation comedy thinking. It seems likely that:

• For seven years he went to great lengths to discredit global warming because he did not believe that climates could ever really change.
• He embarked on the disastrous occupation of Iraq, and the equally disastrous deficit spending that went with it, because he did not believe there would be any real consequences.
• He wound down all energy conservation programs when he took office because he really believed that it was impossible to get people to change their lifestyles.
• He failed to react to the slow-motion collapse of the world economy for nearly three years, with warning signs for two years before that, because he did not believe the economy could go down without coming right back up again.
• He tolerated and participated in the general lawlessness and corruption of his administration because he did not believe he could get into any real trouble.

And it is not just Bush. Virtually everyone who has had a job managing the U.S. economy in the last four decades has suffered from the same kind of situation comedy thinking. As a result, there has been little progress in the U.S. economy during that time. The best we have done is stabilize the economy — taking action to prevent changes — in order to allow a slow rate of economic growth to take place. That was the simplistic approach to the economy that we got from Bill Clinton and Alan Greenspan — keep things under control, and we’ll get a little bit of growth. It is very clearly the wrong approach in theory, yet it would hardly be fair to criticize Clinton and Greenspan when their results were so much better than the results of those who preceded and followed them.

In the “situation economy” real progress is impossible. Real wages stay about the same. Real economic growth is barely faster than the growth of the work force. Reputable economists have put forth theories that purport to explain why sustained unemployment rates below 6 percent are impossible and why productivity growth will rarely exceed 3 percent.

Yet the situation economy is a state of mind. Our choices are not really between the Clinton approach of stability and slow growth and the Bush formula of turmoil and stagnation. Things could really change. Conventional economic theory holds that 10 percent annual economic growth, or the kind of productivity improvement that would allow us to work three days a week instead of five, is impossible. But in reality, those kinds of things are possible. We hold ourselves back by viewing the economy in situation comedy terms. To move forward again, all we have to do is turn off the TV in our minds.

One Business Plan, Two Bailout Plans

Congressional leaders asked the Big Three automakers to show business plans so that Congress could cconsider a Detroit Bailout. Those plans were due today. It appears only one of the Big Three complied.

Ford submitted a plan showing how it could retool and deliver next-generation cars in about three years. It would need to borrow some money in the event that the failure of one of its Detroit competitors took down several of its parts suppliers, but there was a chance that it could finance its transition from its own revenue.

General Motors’ and Chrysler’s plans called for them to wait out the economic slowdown until consumers came back to buy essentially the same products the two companies are having trouble selling now. Those aren’t business plans. They are not about a realistic chance to make a profit. They are bailout plans. They are strictly about the money the companies can get from the government.

A recession that has seen around 10 percent of American workers lose their jobs so far this year (not all at the same time, fortunately) does not explain a 40 percent decline in car sales. Perhaps half of the decline can be tied to the recession. The other half can only be blamed on the products or the way they are sold. In this case, I have to believe the products are the problem. Now that all- and mostly-electric cars are actually being driven, and seem to work just fine, why would a consumer want to take a big risk on a car that runs on a legacy power system?

People pay the premium prices for new cars partly for the prestige, but where is the prestige in a “new” car that runs on old technology? It’s obvious that a significant segment of drivers are holding out for the chance to buy a new-generation car. And why not? For decades, Detroit has been telling us to buy cars that make us look smart. If buying a new car in 2008 means committing to the purchase of 1,000 gallons of gasoline per year every year until at least 2017 (imagine what gasoline prices might be by then!) how are we supposed to make that look smart?

Sales go up and go down in every business. Real business leaders plan for that. GM’s CEO said yesterday that the recent decline in auto sales was beyond anything anyone could imagine. That lack of imagination is the real source of the problems at GM, which until a few weeks ago had planned only for single-digit yearly increases in sales as if there were no other possibilities.

As wrenching as it would be to see GM and perhaps Chrysler unable to restart their factories after they shut down for the Christmas break, it would be irresponsible to entrust them with many billions of dollars just so they can delay that day until March or April. What would make more sense for the country would be to hold on to that money and use it to restart some of the parts makers that may hit financial trouble in a bankruptcy of GM or Chrysler, so that the industry can keep going. If we spend all that money now, there is a risk that the entire U.S. auto industry could be forced to shut down before summer. That is a scenario that can be avoided.

Recession Confirmed

Last December 5, I saw a change in consumer behavior. Christmas shoppers suddenly regretted spending so much and started to buy gift certificates for people who were left on their lists. After Christmas, shoppers who received the gift certificates skipped the sales and saved the gift certificates to spend on necessities.

The National Bureau of Economic Research (NBER), the most authoritative source on the ups and downs of the U.S. economy, has now confirmed that a recession began last December.

The current recession has already lasted longer than most. Prior to this one, only two recessions in the period since the Great Depression have lasted 12 months or longer. The energy crisis recession of 1973–1975 and the Reagan Recession of 1981–1982 each lasted 16 months from peak to trough, as measured by NBER. The current recession would have to hit bottom in March to avoid running longer, and that’s an outcome that looks unlikely when viewed from where we are now.

Marking the economic peak a year ago suggests that the current recession was not caused primarily by the real estate decline, as many have supposed, but by rising energy and food prices.

Propaganda Hospitals Prepare to Close

The flurry of hospital layoffs and closings this year is likely to accelerate next month after President George Bush leaves office.

One of the cornerstones of the Bush presidency has been to convert health care spending to propaganda spending. This strategy of the Bush White House first came to light in 2001 when new rules prohibited AIDS education efforts, especially in Africa, from mentioning condoms as a way to limit the spread of HIV. But the White House rules for health care as propaganda also affect federal funding that goes to hospitals in the United States. How big is this propaganda money? Analysts expect as many as 1,000 hospitals across the United States to collapse next year when this special funding is withdrawn.

The assumption is that new president Barack Obama, who has never been a fan of propaganda, will return all the propaganda money to health care. This move will benefit hospitals whose focus is health care, but will pull the rug out from under those institutions for whom health care is a front for propaganda.

The era of lavish spending in the U.S. health care system was coming to a close in any case. The system is under pressure from:

• newly health-conscious consumers losing interest in drugs and surgery
• health care professionals rebelling against the many layers of paperwork
• steady improvements in workplace, product, and highway safety, resulting in fewer injuries
• declines in cigarette smoking, beer, and hard liquor, along with improvements in food quality, resulting in fewer illnesses
• the big pharmaceutical companies’ shift of emphasis from research to marketing
• profit-minded middlemen, especially insurers
• cutbacks in consumer discretionary spending because of the economy

Many hospitals that have seen their business fall off have been able to keep going with federal money tied, in one way or another, to propaganda about sexual abstinence. These “propaganda hospitals” still provide real medical care, but the conflict of interest, when an institution depends on propaganda for essential funding, could only hurt the quality of care.

The Roman Catholic Church is likely to be hit hardest by the loss of the Bush propaganda money. The church is focusing on the Freedom of Choice Act, a bill expected to pass Congress in January and be signed by Obama as soon as he takes office, which would eliminate all the special funding that Catholic hospitals have been getting for not performing abortions.

The Roman Catholic Church takes its hospital funding so seriously that it has warned that anyone voting for the Freedom of Choice Act would be automatically excommunicated — formally kicked out of the church. It has also issued scattered statements suggesting that anyone who voted for Obama, as most U.S. Catholics who voted did, had committed a “grave sin” because of Obama’s opinions on health care funding.

Yet even without the Freedom of Choice Act, no one could expect the special funding that propaganda hospitals received under the Bush administration to continue. The Catholic bishops who have suggested that all 614 Catholic hospitals will close their doors are surely exaggerating, yet it is probably true that large numbers of hospitals will close. Already hospital closings are in the headlines almost every week. At least half of the 6,000 hospitals in the United States will have to close in the next 25 years because of declining demand and improvements in productivity. If several hundred or even a thousand propaganda hospitals close next year, it would be an inconvenience for the customers of those hospitals, but a benefit for the health care system as a whole. It would take some of the pressure off the more sincere parts of the health care system and allow the system to adjust more gracefully to changing market forces in the years ahead.