Ending the Balance Sheet Recession Is a Big Task

I mentioned yesterday that I think we're in a balance sheet recession. Further credence, besides that post and the materials linked to in it, comes from the fact that total consumer credit fell during the Great Recession for the first time in the span that such data has been collected:

This graph from the St. Louis Federal Reserve shows consumer credit outstanding. The red line is revolving credit, which includes things like credit cards that are expected to be paid off monthly. The green line is non-revolving credit, which includes debt with specific time periods and payment plans like auto loans (but doesn't include mortgages). The blue line is the two put together.

The blue line only falls twice: very slightly after the savings and loan crisis and then quite a bit during the Great Recession. Non-revolving credit largely only stalled for a bit, while revolving credit plunged. Americans have been working hard at paying down their credit card debt.

The task of ending the balance sheet recession is incredibly big. Here's an idea of the scale.

The website LendingClub.com is a peer-to-peer finance service. People apply to get loans from the site, and it chooses whether or not to approve the loans and what terms to issue loans at. The loans are then funded by users, rather than the site itself. About two-thirds of the borrowers use the money to pay off credit card debt, usually consolidating it into a single loan with a lower interest rate than what credit cards charge. For them it's a way to transform revolving debt into non-revolving debt, which always carries a lower interest rate.

As far as I see it, arrangements like these are great. People with excess cash can make far better returns on it than the interest that savings accounts and CDs pay, while people with high interest debt can lower their rates. Of course there are risks for investors greater than the risks associated with deposit accounts; there has to be for it to pay out higher returns. Still though, both sides of the transaction benefit greatly. The intermediary in the form of the website itself charges lower fees than banks do for similar services because it's just a website. It has no branches or ATMs to maintain. It's a win-win-win for regular people.

As great a deal as this is, and it is growing rapidly, it has lent out just short of $500 million. Using the stats provided at the time of writing, $331.6 million of that went to helping people pay down credit cards. That's a heck of a lot of money. It's also a mere drop in the bucket.

According to the Fed data, the peak of US revolving consumer debt was $972.2 billion in September of 2008. It fell to $798.3 billion in November of 2011, the most recent data point at time of writing. That's a drop of $173.9 billion. As great a deal as Lending Club is, it has contributed towards less than 0.2% of the fall in credit card debt. Its data goes back into 2007 when it started, so not all of that $331.6 million has gone toward people deleveraging since the financial crisis began.

Credit card debt is only a part of the story anyway. Mortgages are still on top, and until housing prices quit falling, there won't be much demand for newly built houses. That's doubly important because construction jobs weigh heavily in the current unemployment mess. Plus, student loans passed up credit cards for the No. 2 spot on the US debt charts.

Lending Club is an ingenious way to help people get out of credit card debt, but it barely registers on the overall scale of the problem. Credit cards themselves take a back seat to mortgages and student loans now in terms of total debt outstanding. As long as Congress is going to hold up progress towards debt relief and real effective jobs programs, it's going to take a lot of ingenious ideas to dig the economy out of the ditch its currently in.

A Balance Sheet Recession

The most compelling explanation to me for the shape of the US economy is economist Richard Koo's "balance sheet recession" idea. If you have the time, I encourage you to read his full paper [PDF] on the topic. Here is an hour-long lecture he has given on the topic. This video embedded here is a quick 10-minute explanation.

Monetary policy is insufficient to solve the current US economic problems, as the real interest rate has been near zero for years now with no dramatic turnaround. The reason, as given by Koo, is simple: providing even the cheapest possible credit won't make a dent when people have no appetite for borrowing whatsoever.

Demand among the citizenry will be depressed as long as the people, on the whole, are deleveraging. Increased saving and debt repayment rates necessarily mean that consumption rates will fall. Koo suggests that governments should run a deficit during times of balance sheet recessions, as a government running a budget surplus is basically doing its equivalent of saving.

This is paradox of thrift territory, and the concept is more compelling here than under normal conditions. Generally, saving doesn't necessarily have to be a bad thing; banks lend out deposits, which then gets those funds back flowing through the economy. Except that, remember in a balance sheet recession that the demand for credit is low. When you have wounded and vulnerable banks (who are facing stricter capital requirements to boot) as we have now, the supply of credit falls too. Declining private sector credit demand and supply would only be made worse by the government running a surplus.

Koo therefore warns against austerity by governments during balance sheet recessions. After all, governments with their own currencies have more options for dealing with debt than individuals and businesses do (and many of those that don't are causing the Euro debt crisis). The fact that the US, which went with stimulus in 2009, is doing better than European countries that went the austerity route lends credence to this prescription. An economy simply can't grow if everyone from consumers to businesses to the government all pay down debts at the same time.

Koo developed his balance sheet recession idea while studying Japan's problems of the last 20 years, he believes it describes the US in the Great Depressions well, and it seems to fit for the current US as best as I can tell.

Droid RAZR First Impressions

My first review device from Verizon came in yesterday, and it's the Droid RAZR. It's my first Android smartphone, after having used a Blackberry for work and iPod Touches for years. As I understand it, this is not the current flagship Android device, that being the Galaxy Nexus, but it's still supposed to be one of the top-of-the-line devices.

Or, at least it was until the Droid RAZR Maxx launched yesterday. That device is basically the same thing except that instead of having a camera bulge and really thin body, it has a uniform thickness and larger battery. The teaser video for the RAZR Maxx hammers on the battery element, pretty much implying that the RAZR's battery life is unacceptable. Motorola's CEO Sanjay Jha himself proclaimed the RAZR "too thin". Perhaps I'm looking a gift horse in the mouth by even bringing this up, but Moto's CEO said that, not me.

It is remarkably thin, even slightly slimmer than my 3rd gen iPod Touch. The tapered edges on the Touch make them feel about the same thickness in my hand though.

The face-down RAZR is on the right; the iPod is on the left.

For as thin as it is, though, it's not small. It feels like a monster compared to the iPod Touches and Blackberry phones I've had. I have about average sized hands for an adult male, and it's too big for me to fully use in one hand. I can reach the entire screen with my thumb if I grip it completely on the sides, but then it falls out the bottom thanks to gravity and a slick backing. If I grip it more from the bottom with my pinkie underneath to prevent it from falling, I can't reach the top of the screen to bring down the notifications drawer.

The device came with unlimited 4G LTE, which was awfully nice of Verizon to supply. The SpeedTest.net app clocked in at 7.98 Mbps down and 4.47 Mbps up, which blows away my home Internet from Time Warner. That's pretty awesome.

Some of the defaults were a little weird. It has haptic feedback turned on automatically, which makes it vibrate any time you use the four Android buttons or type on the keyboard. I thought everyone decided that wasn't a good idea after the first Blackberry Storm, but I guess not. I had to go to two different places to turn it off entirely. Also, the notification sound was very high by default. That led to me getting woken up at 4:45 am this morning by the sound of this thing shouting "DROID!!" at me to let me know the Motorola skin had an update available. Not cool.

I'm still getting used to Android, and I've barely even touched the market yet. I don't have a complete picture of it just yet. Here are a few more random things before more comprehensive review-like substances come in the future.

• The first time I pressed the dedicated search button, Motorola's home screen skin (process com.motorola.home) crashed. In fact, it reliably crashes when you press the search button while in the app browser. Whoops.
• Bloatware fiesta! Not counting Google's apps, it came preloaded with Amazon Kindle, Blockbuster, Verizon device setup, Flash player, GoToMeeting, Verizon IM, Let's Golf 2, Madden NFL 12, Motoactv, Motoprint, Motorola Music, Netflix, NFL Mobile, Quickoffice, Slacker radio, Social Location, Social Networking, V Cast ringtones, Verizon Video, VideoSurf, VZ Navigator, and Webtop. Toss in the Motorola skin, and that's 23 pieces of software that don't come with stock Android. That I know of, at least. I am not sure about some of the others.
• Only some of the bloatware can be removed. I was able to junk GoToMeeting, Blockbuster and Let's Golf 2, but, no shock here, none of the Verizon or Motorola apps can be uninstalled without rooting the device. Surprisingly, some of the third party apps couldn't be removed either like the Kindle and Slacker apps.
• I miss some of the niceties of iOS, like the rubber banding on scrolling and tapping at the top of the screen to go to the top of a list view.
• Most iOS users when going to Android complain most about the system-wide back button being unpredictable. I've had no such issues so far.
• Call quality is excellent, but I have never had issues with call quality in the many years I've been on Verizon.

Two Great Anti-Tracking Browser Extensions

Internet companies that make money from ads (like Google and Facebook) track their users' habits on their own sites. I suppose that's fine, as they have to get some value from customers considering they don't charge anything, but they go a lot farther than that. They, and other companies, track you as you go around the Internet outside of their own properties.

I don't like that fact, and you shouldn't either. Firefox, IE 9, Safari, and Chrome (via this) have anti-tracking features in their preference panes, but we're not yet at a point where they can be fully trusted. It's not about shoddy implementation, but rather that we can't be sure that shady online marketers are paying heed. That's why I'm highlighting two browser extensions that prevent you from being tracked.

The simplest one of the two is Disconnect. It was actually started by an ex-Google employee who understands how tracking works. It prevents tracking by Google, Facebook, Twitter, Digg, and Yahoo!, and it's available for Firefox, Safari, and Chrome.

The more powerful one is Ghostery, which is available for IE, Firefox, Safari, Chrome, Opera and iOS. It keeps a list of known tracking technologies in the same way that an ad blocker or virus scan keeps lists. It alerts you to how many of these things are on sites that you visit, and it has the ability to block you from being tracked by them on most browsers.

For example on the Huffington Post home page, Disconnect blocks three kinds of tracking and Ghostery blocks eight. On the New York Times, Disconnect blocks three and Ghostery blocks five. On CNet, Disconnect blocks five and Ghostery blocks a whopping 12.

There are a lot of companies out there trying to track your Internet usage without your knowledge or permission. Don't let them.

Apple's Smash Hit Quarter Is a Sign of the Times

It's important to remember that Apple's big quarter was a holiday quarter and that it's the company's annual spike.

That said:

All I can say is wow. The smart guys like Horace Dediu had the numbers in the right ball park, but still, it's astonishing to see them spelled out in the cold light of reality.

The company sold a shade about 69.37 million computers in that quarter alone. Only 5.3 million of them carry the Macintosh branding, but iPhones (every smartphone, really), iPod Touches, and iPads are all computing devices. Apple sold a shade under 70 million of them in three months. The company sold more iPads than HP sold laptops and desktops, for crying out loud.

Another wow moment was when Tim Cook announced that tablets overtook desktop PCs in the US. I know desktops have been in decline for a while, but tablets basically weren't a thing before January 2010. In less than two years, this new form factor overtook the trusty old desktop computer for a quarter. That's crazy! I'm sure that desktops will overtake tablets again for a couple of quarters without all the extra holiday purchases, but it will be a temporary shift.

Apple has reason to trumpet the fact that tablets passed up desktops, as the iPad is far and away the market leader there. The Kindle Fire will probably make a decent dent if the next revision is better, and Windows 8 tablets probably will too depending on how the counting is done. For now though, "iPad" is synonymous with "tablet computing" in the same way that "iPod" was for digital music players.

Big changes are afoot. Yes, this was just a holiday quarter where iDevices made for popular gifts. However, look at the company's cash trend line. It's right where you expect it to be for exponential growth. Each year, Apple sells more iPhones than all the previous years of iPhone sales combined. The iPad is selling better now than the iPhone did at the same point of its life cycle.

This wasn't a fluke. The company's growth over the past few years was not a fluke. Apple is disrupting lots of technologies right now, and vertically integrated firms have an advantage when it comes to innovation. As long as the company remains unafraid to disrupt itself, the streak can continue.

The overarching trend in consumer computing right now is towards light, mobile, and user friendly devices. The world can pry the keyboard and mouse out of my cold, dead fingers, but the number of people who are with me on that is shrinking.

What Will Disrupt Chinese Manufacturing

The New York Times' big article on why the iPhone is not made in America is a great example of why US manufacturing is losing its lead on manufacturing in Asia. The line that stuck out to me the most was:

“[Foxconn] could hire 3,000 people overnight,” said Jennifer Rigoni, who was Apple’s worldwide supply demand manager until 2010, but declined to discuss specifics of her work. “What U.S. plant can find 3,000 people overnight and convince them to live in dorms?”

A US firm can't find 3,000 people overnight because the US population is so much lower than China's is. But beyond that, Rigoni sounds like she's saying with a straight face that factory workers living in dorms is a reasonable norm. That sounds unbelievable to my American ears.

Everything described about Foxconn's setup sounds like a company town, a concept this country did away with decades ago. The US has been there and done that, and it's not likely ever to go back. I would be shocked if that concept remains viable indefinitely in China. Rising wages are already making China less of a low-cost production center, and as things improve for workers there, the company towns will go away.

That's the slow way that China's manufacturing will get disrupted though. It will almost certainly out-produce the US at some point thanks to it having nearly four times the population and therefore more capacity. It won't always be what it is today though, especially if/when the government quits keeping the currency artificially low.

However, there is a way that its manufacturing edge could get disrupted a lot more quickly, and that's with 3D printing. Primarily the technology is right now associated with rapid prototyping, but eventually it will get cost effective enough to use it to make many products on industrial scales. Injection molding is probably the first thing that would die off in that scenario.

As this TED Talk goes over, 3D printing can be used for anything from cheap, plastic pens up to high precision engine parts and medical implants. Imagine a situation where a company sets up 3D printing labs throughout the country, all pumping out different companies' products as demand rises and falls for them. A company that designs low sales volume products might never have to have inventory again, as its wares could be 3D printed nearby as customers ask.

We're a long way from that utopia, but we don't have to get to that utopia to cause serious disruption in global manufacturing. The rise of cheap Asian manufacturing came up quickly over the last 20 years, but it could drastically decline almost as quickly when 3D printing rises to its potential.

High Speed Rail Could Kill Some Airlines

One recurring theme of the Obama administration is the idea that the US should build a high speed rail network.

From a short term perspective, it could be a good thing. Building such a network would help revive the construction sector and do all sorts of other kinds of Keynes-approved economic stimulative activities. The catch is that after it has been built, it would need to actually be useful. While other potential transportation projects like roads and bridges have only periodic large maintenance costs, railways have daily costs in the people who conduct the trains and work at railway stations (and train maintenance, and a number of other things).

The problem with a high speed rail network connecting the major cities of the country is that it has limited usefulness as a replacement for cars. American cities as we know them today were built with cars in mind. Some of the major metropolises have good enough public transportation to get around reasonably, but the number of cities with truly useful public transit is small. Medium and small cities often have no public transit at all, and if they do, it's a bus system with questionable punctuality. In other words, cars are still a necessity there.

A lot of people would have to rent cars to get around after getting off of the train. If that use case sounds familiar, it's because it rhymes with something else we already do. A lot of people rent cars to get around after getting off of a plane.

Rather than take cars off of roads, a high speed rail network would likely take people out of airplanes. It's already about impossible to make money on air travel; imagine how difficult it would be if a lot of people suddenly started taking the train instead.

Obviously, areas of Europe and Asia have high speed rail and airlines too, so it's not impossible to have both. However those areas also developed differently than the post-WWII US did. The core assumption of the last 70 or so years in American urban development is that just about everyone has a car.

If the high speed trains are a part of a larger initiative to restructure American cities, they can be useful. Otherwise they'll either go underused, costing the government lots of money annually, or, if successful, initiate another wave of airline bankruptcies. Either way, I don't expect them to take too many cars off the roads.

How Get Rid of Your Pennies

I'm all for getting rid of the penny. It's time of usefulness has come and gone, and this video makes a pretty concise and compelling case for it.

The only problem I have with this video is that it contends that Coinstar machines are the only machines that accept pennies. Not true. In fact, the other machines that accept pennies are typically found in the same place that Coinstar machines themselves are.

Self checkout machines at grocery stores are common where I live, and among grocery chains that I am familiar with (just about all that operate in the southeast), only Publix does not have them. The self-checkout machines do, in fact, accept pennies. They also allow you to pay partially in cash and partially with a card, meaning that you can actually use pennies by dumping a few in the machine before swiping your debit or credit card per normal.

Of course, doing this fails the time test that the video mentions. It's almost certainly not worth your time while you wait for the self checkout machine to digest a large amount of pennies, especially since some will be rejected and will have to be submitted twice. I certainly wouldn't do something like this during prime time at the store either, as you will inconvenience people behind you in line.

However, the self checkout is the best place to spend your pennies. You don't lose a percent of them like with the Coinstar machine, and you actually do use them and keep them in circulation. It might not be the best use of your time, but if you maximized the value of every second of your time, you wouldn't be surfing blogs like this anyway.

Periodically filling your local self checkout machine with pennies is the best alternative of a lot of bad ones until the most useless of coins finally does go away for good.