Archive for June, 2009

Doing the Tango in Washington

Argentina is a gorgeous country.  I’ve always wanted to go but, unfortunately, I have never been there.  During my days of heavy international travel, the furthest south I made it was BrazilA few guys from the office were lucky enough to get the Buenos Aires job.  They came back raving about the food, the architecture, and the tango dance.  

Argentina and United States have a few things in common.  Some of our politicians maintain mistresses there, we both love beef, and we idolize cowboys in popular culture.  Lately however, I’ve become increasingly uncomfortable with one particular parallel between the United States and Argentina.  

Argentina, as almost every other country on the planet, has been hit by the recent economic trouble.  In late 2008, agricultural exports, which are a major source of revenue, dropped significantly.  At the same time, Argentina’s government saw that billions of dollars of its national debt were due to be repaid in 2009.   

Poor Argentina.  Life is just so much more difficult when your monetary unit is not the world reserve currency.  What to do?  What to do? 

“Eureka!”, someone may have shouted in the Casa Rosada (the Argentine version of the White House) as they rushed into President Cristina Fernandez de Kirchner’s office.  

In a garish display of hubris, Argentina’s government announced it would nationalize private pension accounts totaling nearly $30 billion.  That these accounts were held and funded privately apparently mattered not.     

To further insult the citizenry, the move was billed as an effort by the Argentine government to protect the people’s pension accounts from falling asset values.  

We quote President Kirchner from the New York Times: 

“We are making this decision in an international context in which the leading countries in and out of the G-8 are protecting their banks, while we are protecting our retirees and workers,” she said in a televised speech. 

Similar to Social Security in the United States, the pension money taken by the Argentine government has now been put into a “pay as you go” system.  This means the money in the accounts can be spent at the government’s discretion, leaving the account owner with only the promise of future payment.  

Moreover, by taking over the pension funds, the Argentine government now owns a large number of voting shares in a number of companies.  

Wow, two birds with one stone.  

Here in the US, it’s a safe bet that Uncle Sam is watching these events closely.  For Uncle Sam has its own issues with servicing a monumental amount of debt, otherwise known as US Treasuries.  

To really understand the significance of the events swirling around us, we have to understand how important US Treasuries are to American domestic, economic, and foreign policies.  

Very simply, our government spends much more than it collects in tax revenues.  The difference is generally raised by issuing US Treasuries.  We will leave out the discussion of money printing for the time being.  

The biggest buyers of US Treasuries are foreign governments: China, Japan, Russia, South Korea, et al.  

What does this mean exactly? 

It means that our bailout programs, trade imbalances, and even our wars are financed by foreigners.  If the foreigners were to stop lending us money, it would cast serious doubt upon our ability to sustain the aforementioned activities. 

Will the foreign governments keep lending us money?  That depends on their view of credit risk, defined simply as the risk of default by the borrower.  

In determining their credit risk, I imagine some versions of the following questions are being asked in Beijing, Tokyo, and Moscow: 

  1. Is the money being spent on productive projects that will increase the economic output of the US in the future?
  2. Is the money being spent to insulate banks and other well connected entities from the consequences of their management decisions? 

We all know the answers to these questions.  

It’s not hard to see that faith in US Treasuries has waned in recent months.  China, the largest holder of US debt, has quietly purchased a vast amount of gold recently.  It seems the leadership of the People’s Republic wants to diversify their holdings away from US Treasuries.  We quote from the Financial Times: 

China is expected to keep buying gold to diversify its vast foreign reserves after it recently revealed it had been secretively buying bullion.  

Beijing and Shanghai-based gold industry analysts said the country had almost doubled its bullion holdings.  

As an American, I was upset to read that our Treasury Secretary, Timothy Geithner, was openly ridiculed during a speech at Beijing University.  After making a comment that China’s US Treasury holdings are safe, the audience erupted into derisive laughter.  

President Obama and his financial team are in a very tight spot.  They have to back the Treasuries or the whole house of cards comes crashing down.  They must maintain the attractiveness of US Treasuries to foreign buyers.  

So will Washington raise taxes in order to borrow less? 

Probably, but there’s another twist here.  

Raising taxes is a complicated process.  You have to change the IRS Code, train the tax collectors on enforcement and wait for the money to come in.   The money also does not come in at once but arrives in dribs and drabs.  

There is also the small problem of the current economy.  You actually have to wait for someone to do something economically profitable before you can tax it.  This is becoming tougher and tougher to find these days.  

There is another way to obtain money for government coffers.  

If one studies just a little bit of history, you can see a common theme.  From the late Ottoman Empire’s periodic expropriation of assets, to modern Zimbabwe’s farm seizures and Argentina’s recent nationalization of private pensions, there seems to be the same back up plan.    

We hope our people in Washington do not succumb to such temptations but there is certainly no shortage of people giving our leaders bad advice.  

Teresa Ghilarducci, the Irene and Bernard L. Schwartz professor for economic policy analysis at the New School for Social Research in New York, testified before Congress recently.  Professor Ghilarducci suggested removing the tax benefits of the 401k and creating a government run retirement system.

The results of such a plan would be devastating.  The money would be spent and down the road we will be talking about how the government retirement system is underfunded.   

There is a logical alternative to all of this.  Of course, anything logical is beyond the contemplation of our two major political parties.    

Why we won’t cut spending, reduce our military commitments abroad, and invest in capital goods at home will go down in history as one of the great mysteries of our era.  

Have a great weekend, 


Michael Bechara, CPA

Managing Director

Granite Consulting Group Inc.


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Workers Unite!

One of the features of our “Twilight Zone” economy is the sheer volume of events that can be commented on. 

I’ve seen much discussion over the past few weeks on the new ownership structure of Chrysler and GM.  The Federal Government has taken large stakes in each of the automakers and that has received a lot of attention.  

The government angle is an easy one to comment on.  Almost too easy.  

What I find so darkly amusing (if you’re into gallows humor) is that after all the twisting and turning, the unions ended up owning 39% of GM and 55% of Chrysler.  

Almost everyone I know has a good union story.  From the guy on the assembly line who does the other worker’s tax returns (while he is on the clock) to tales of people not showing up for work for weeks because of some minor injury.  

But what’s the big deal?  There are many other large institutions that hold shares in companies.  Why wouldn’t the union want to see GM and Chrysler be successful?  Don’t their jobs depend on it? 

All true…all true.  But for some reason we have a nagging suspicion that large organizations that aren’t profit driven sometimes don’t act in their own self interest, let alone the interests of the business. 

Businesses that are run by governments or by workers have a severe disadvantage, mainly that they do not put the profit motive first.  The union is mainly concerned with job and wage preservation.  The government has a multitude of interests that are driven by many factors, including lobbying, appeasing voters in certain areas, etc.  Profit is simply not on the top of their lists.  

Business owners who desire to make a profit must anticipate and fulfill consumer demand.  There are a number of decisions that are made in choosing how to accomplish this goal.  These business decisions are ultimately evaluated on the income statement.  The collective decisions made by business owners either result in profits or losses. 

Without the profit motive, there is simply no hope that rational economic decisions will be made.  Government and unions have different motivations and while profit may sometimes be one of them, as we mention above, it typically is not the primary concern of these entities.  

In addition, business owners typically have what we call “skin in the game.”  This means they stand to lose the money they invested in the enterprise if it fails.  Although the unions also have skin in the game (their jobs) they have a tragic record of not realizing this until it’s too late…and the government?    Well, unfortunately they play with our skins in the game (more gallows humor).  

A simple example may help us illustrate the point.  

Imagine a new company called Perfect Motors with a union ownership of 30% and government ownership of 50%.  Otto, the union boss, represents the workers on the Board of Directors and Floyd, the political hack, has been appointed by the President to represent the government on the Board.  

A lonely Chief Financial Officer has the unenviable job of presenting the results to the Board. 

June 17th 2009 Board Meeting 

CFO:  Our costs per vehicle are too high compared to our competitors.  We are losing money on each vehicle.  Our labor costs are the highest in the industry and we have 25% more workers than we really need.  We need to cut labor costs! 

Otto: No big deal.  What we need to do is reduce the number of options and colors we offer in our vehicles.  It’s just too expensive to maintain all the materials and it takes too much time to configure the vehicles on the assembly line. 

 CFO: But our customers will have fewer choices and our labor costs will still be too…..

 Floyd: (pausing his cell phone) We can’t have any layoffs in this economy!  The unemployment rate just hit 9%.  It’s politically unacceptable. 

 Floyd: (returning to his cell phone) Yes, that right Senator, its right across the bridge in Virginia…the name is Madame….

 June 17th 2010 Board Meeting

 CFO:  We’ve cut the number of vehicle options and paint colors.  Now all we offer is purple cars with no air conditioning.  Some costs were saved, but we’re still losing money on each vehicle, and even worse, we are now losing market share! 

Floyd: (Rolling his eyes) I can’t believe how dumb you businesspeople are!  You’re losing market share because you aren’t building green vehicles.  I mean everyone knows green vehicles are cool and that new reality show star is driving one!  Besides the President promised in his State of Union address that we would have more of these on the road….. 

CFO: (interrupting)  But our market research shows that people are not that interested in green vehicles and they would retail for twice as much as a reg….. 

Otto: (interrupting) Look you two, I don’t really care what comes off that assembly line as long as we’re getting paid, but if you wanna cut costs then buy cheaper materials.   

CFO: But green cars won’t be price competitive, our labor costs are still too high and if we use cheap materials then what about quality prob….. 

Otto and Floyd: (simultaneously): SHUT UP! 

June 17th 2011 Meeting 

CFO: (voice quivering):  We’ve started production of the green vehicles using current technology and it’s even more costly than we projected to make them.  We also started using cheaper materials and our quality problems have gone through the roof.   

In addition, we’re still losing money on every vehicle we make, customer dissatisfaction is at an all time high and our market share is dangerously low.   

Otto: (sighing) What do they teach you guys in college anyway?  We’re spending a fortune on marketing activities like advertisements, promotions, etc.  Demand is far too difficult to forecast anyway, those stupid customers never know what they want! 

We’ll decrease production to make the cars scarce, that way we won’t have to spend on advertising and promotions.  People will be begging us just to have the chance to get a car.   

In fact, we can just have people sign up in advance for a car and then we’ll build it… when we get around to it.

 Floyd: Great idea Otto and you know what…we can even have them pay in advance for the vehicle and that will solve our cash flow problems! 

CFO: (dazed and bewildered)  But we will be totally and completely uncompetitive.  We will have lousy quality, a long wait, no choices, high prices…… 

Otto and Floyd: (simultaneously) SO WHAT! 

CFO: (beginning to come unhinged) You idiots….people will just buy imported cars and then we’re finish…..

Floyd: (hanging up his cell phone) The President just outlawed imported cars by executive order.   

Some may think this story farfetched.  They must be walking around muttering, “This Bechara guy is out of his mind, this stuff just doesn’t happen.” 

Oh boy.  

You see, my wife grew up overseas.  In her childhood days the cold war was in full swing and the communist/socialist countries really believed that their system was better than ours.  

My father-in-law wanted a car so he (you guessed it) put his name on the waiting list for one.  He paid a large deposit up front and year after year faithfully made payments on a car he didn’t even have.  

Many nights my father-in-law would take my wife and her brother by the hand and go for a walk to get ice cream.  Stories would be told about how life would be so much different after the car arrived.  

“I will take you to school in the car one day a week”, he promised.  “Of course your friends can come for a ride!”, he said smiling.  

He was supposed to receive the car in 4 years but the date kept getting pushed back.  At first the delays were taken in stride with comments like, “It’s understandable, the country is in a monumental struggle against the forces of repression!” 

As the years went by, his attitude changed from understanding to outright derision.  He paid for the car in full and still it did not arrive.  Finally after 20 years of waiting the letter arrived.  The car could be picked up.  

My father-in-law happily went to pick up the vehicle.  The apparatchik behind the counter asked him how he would like to make payment.  “Payment?”  “For what?”  “I paid already”,  he exploded.  

The government representative calmly informed him he would have to pay a fee of 24 times the sum of the payments he had made over the years to receive the car.  Struggling to restrain himself, my father-in-law asked why.  

Using a bizarre and inverse definition of the time value of money, the man replied that the money my father in law had paid in the past was worth less than today’s money and hence he would have to pay up.  

Crushed, my father in law walked out of the building leaving the letter announcing that his car was ready lying on the counter. 

It’s too bad Otto and Floyd weren’t there.  They would have been beaming with pride. 


Have a great weekend,


Michael Bechara, CPA

Managing Director

Granite Consulting Group Inc.




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Blood on the Highway


“When I was a boy of 14, my father was so ignorant I could hardly stand to have the old man around. But when I got to be 21, I was astonished at how much the old man had learned in seven years” – Mark Twain


No one wants their kids to pick up bad habits or do foolish things. Using drugs, drunk driving and skipping school seldom have positive outcomes associated with them.


Of course parents, having zero credibility with their children on matters of wisdom, constantly are on the lookout for innovative ways to save their children from themselves.


A method that has been consistently employed over the years with some effect has been to demonstrate clearly, either with a speaker or through a film, the devastating effects of the undesirable behavior.


We all remember the high school Driver’s Education films designed to scare us into driving responsibly. With names like “Blood on the Highway” the films were designed to show in graphic detail the consequences of driving recklessly or under the influence. Read the rest of this entry »


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Yo Adrian!

Consider your origin; you were not born to live like brutes, but to follow virtue and knowledge.” – Dante Alighieri Italian poet 1265 – 1321AD


This week we thought we would have a little drama. We thought we would test our powers of allegory by spinning a parable of a boxing champion.


Like any good morality tale, this one starts with a young Champion full of raw talent, his rise to power and stardom, the rejection of what got him there and the inevitable fall.


We warn you that there is a piece missing to this story. It’s the final part of the tale; the redemption. This is the part of the story we all hope for, but in this case it’s the part of the story that has not yet been played out.

Read the rest of this entry »


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