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Dec 21, 2008

Fear of Unknown Kills the Global Economy

As an economist, we seek cause and effect, measure the impact from history, and forecast the future. The current recession is unique - preventing proper analysis. That has not stopped 'chicken-little' pundits from forecasting disaster; or brave entrepreneurs from rousing the troops.

What is the problem? What would 'House MD' conclude? 

Identifying the Causes of Economic Pain

Bush f*cked up. That's the conventional wisdom. 

We see the pain.
  • Housing prices have declined. Many are insolvent. 
  • IRA's are melting - personal, business, government pots.
  • Over-leveraged banks, publishers, and auto makers are under water - drowning.
  • Financial markets have tightened - no money available.
These are real problems, but they are the results, not the cause.

Unfortunately, governments attack the wrong problems - pressured by special interest groups. Huge loans prop failing businesses. 

Should we identify the cause first?

Economic Failings

The popular TV show, 'House MD', chronicles the diagnosis of complex diseases. Problems trigger new problems. Unrelated symptoms confuse even the best experts. 

Our problems have been triggered by dependence on scarce oil. Prices rose too quickly, creating economic dislocations. It's chaos. 

Consider if prices had stayed stable. The global economy would continue to grow, real estate values would stay high, over-leveraged properties would be less over leveraged, and other symptomatic problems would not have occurred. Thus, no chaos.

Now that oil prices have declined, shouldn't the problem go away?
  • The stimulus from gasoline savings is $3,000 per household.
  • The food price savings can be another $3,000 per household.
  • The fed no longer fears inflation and has shifted to a low-interest policy.
  • Global governments are pumping trillions to help.
These substantitive actions pump the economy, but don't address the cause.

The jerking that dramatically increased and decreased the oil price has permanently raised the risk discount. High risk increases the discount rate and reduces the value of stocks, properties, and any real asset. 

We see symptoms of the increased risk from:
  • Surveys of consumer sentiment
  • Threats from the Oil Cartel to cut oil supply
  • Daily stock market gyrations
  • Political battles with the wrong agenda
  • Media pundits, more interested in audience ratings
Our fear of the unknown lowers economic values - and sustains the pain that we experience. If we control the fear, steady the ship, economic value improves. The financial meltdown ends. 

What We Need from the Obama Team

How do we solve these problems? It's complex. We can only stay the goals.
  • Eliminate or control dependence on oil.
  • Keep the ship steady. Unfortunately, free speech allows 'chicken-little' pundits to gain headlines.
  • Clear goals for growth.
Americans have always had that strong entrepreneurial vision. Continued innovation improves productivity, growth, and more jobs. Our leadership guides global growth.

We need a plan that points us toward the long-term solution with persistent, consistent, positive leadership.

What do you think?

Fear Kills Businesses, Dead

from TechCrunch by Brian Solis

It’s official. We’re in a recession. Recessions naturally inject fear and panic, which is only heightened by every discussion of market losses, layoffs, bailouts, and somber predictions. We’re only human after all; of course everything affects us personally and emotionally.

Fear is not a catalyst for productivity however.

With valuable advice pouring in from concerned and sympathetic entrepreneurs and proven leaders, businesses are indeed responding quickly to make decisions that equate to a secure and prosperous future—hopefully.

This constructive advice has helped businesses focus and weigh difficult decisions sooner than they might have without it.

However, over time, productive guidance has mutated into a glut of negative forecasts and grim predictions that pillage precious and vital airtime from contributing to the resolution of our financial predicament. Simply said, fear, and the dissemination of distress, slowly erodes hope, vision, and ambition, ultimately killing businesses instead of guiding them.

Fear inspires desperate actions. Hope (combined with clarity and inventiveness galvanizes action and engenders opportunities.

Opportunity vs. Emotion

These are emotionally charged times which only fuel emotionally-driven decisions. Unfortunately, the advice shared from many experts now and in the past is subjected to both literal and open interpretation, and thus guiding or misguiding the next steps of established businesses and emerging startups.

Don’t worry about getting ahead, instead, just survive…Cutting deeper and quicker is the formula to survive. - Sequoia Capital

There’s a distinct difference between mere survival and succeeding in real world business.  Many companies may unwittingly lock themselves in an isolated panic room instead of taking strategic steps to evolve and grow the business opportunity that exists today.

General advice is just that, general. One prevailing set of strategies and recommendations doesn’t apply to all.

In a conversation with veteran CEO and financier Steve Larsen, currently co-founder of Krugle, he advises:

Of course, don’t be stupid. Have enough cash to run your business, but I think the doom and gloom crowd are getting too much airtime. Look for opportunities. Difficult times are when they’ll most likely occur. When we’re at ‘steady state’ and things are normal, good opportunities are much harder to find with GREAT opportunities nearly impossible. It is during periods of tumult and transition when you can spot things that lead to the greatest returns—if you are alert. So be alert.

In every recession, abundant opportunities are inherently rife. To simply believe that this is a generic time to step off of the playing field to warm benches or take a seat in the spectator bleachers in the hopes of emerging once again to readily have a shot at winning the game is illogical. Businesses, and customers, do not stop making decisions—they’re just more discerning during volatile economic climates. But make no mistake, if you choose to stop vying for customer attention, the world will move ahead without you.

This is your time to vault in front of your competition, to earn rapid and sweeping visibility, for a fraction of the time and money that was required to excel during the “good days.”

Your rivals are retreating right now, so what are you going to do about it?

Chinese military strategist Sun Tzu advised in The Art of War:

When weak, feign strength…Attack him [your enemy] where he is unprepared, appear where you are not expected.

Whoever inspires you, remember, tomorrow’s leaders are born, tested, and proven, today. This is your moment.

Development vs. Revenue Generation

As a startup, you are now, officially, on your own. You can’t count on your VCs saving you or some magical offer from Yahoo or Google showing up to bail you out. — Jason Calacanis


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