Not So Dismal

Making Economics a Little Easier to Understand

Archive for the ‘The Micro View’ Category

Cheap Macs Aren’t the Point

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Here’s an excellent article from Daring Fireball’s John Gruber on why the “$800 Macbook”, a concept that began as literally one man’s rumor and grew into some sort of backwards conventional wisdom, was not announced at yesterday’s Apple event. One stat in particular that is so telling as to Apple’s philosophy toward their product line: the Mac had 18% of US marketshare, but 31% of revenue share for the industry. Where others are commodities, Macs are not. This makes Apple more protected in a period of economic uncertainty like the one we face today than, say, Dell because with the Mac, it never comes down to price. “PCs” are inferior goods (in the economic sense), but Apple’s most loyal customers are the ones that have nowhere else to turn. The creatives and professionals rely heavily on the type of tools that either only exist or exist in their best forms under OS X, an operating advantage that no other company can have.

[Disclaimer: I own AAPL shares.]

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Written by caseyayers

15 October, 2008 at 3:54 pm

Daily Dismal: West Side’s the Best Side

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Gotta love the Jaguars, right? Although they lost to the Pittsburgh Steelers Sunday night, the stadium atmosphere was electric and reminded many people, including me, why they are season ticket holders in the first place. Here’s an interesting question, though. Look at the pricing graph that Jacksonville used in the pre-season while selling those season tickets:

Duuuuuuuvaaaaallll

Focus on the light-blue on the west side versus the bright-orange on the east side, then take a gander at the prices. Since there’s ten games in a season, those west-side tickets cost $14 per game more on average than those on the east-side of the stadium. What’s up, here?

The sun, that’s what. Those fans on the west side are slightly less likely to get toasted, at least in solar terms, throughout the season. Fans on the east side, alternatively, are looking right into the source of what is often blistering heat early in the season. And at all times, of course, the sun can create a bit of glare, especially with those Sunday, 1PM games that make up the majority of the season. So why aren’t all of the seats on the west-side more expensive? Because those seats are the first ones to really gain any effect, since the sun tends to fall down the southwest corner of the stadium. The sun issue is also why a select number of more affordable club seats are available on the east side, while they all garner the highest price point on the west side.

A few other benefits exist, as well. One could argue it’s a little easier to enter and exit the stadium, traffic-wise, from the west, which points towards downtown. Also, the Jaguars bench is on the west side and most on-field entertainment focuses on the west side. But at the end of the day, it’s all about what SPF fans need to apply early in the season. As a Jags ticket agent once told me, “West side is the best side.”

Written by caseyayers

6 October, 2008 at 7:51 pm

Daily Dismal: Why did Panera Bread Begin Bussing Tables?

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Daily Dismal is a new feature that takes a look at some small facet of daily life and how decisions are made using smart, economic thinking.

The Setup:

Panera Bread, also known as the St. Louis Bread Company in some places, is a popular lunch spot for Yummy.thousands each day at one of their locations throughout the country. Up until recently, one part of
the Panera experience had been to take one’s plates, bowls and silverware up to a little bussing station that included a trash can. Yet recently these stations have disappeared and now a Panera employee will often offer to clear away plates from customers that look like they have finished their meals. Otherwise, customers are expected to just leave their plates and go.

Why the change?

Precious Metals

Certainly it costs money to use the time of an employee to clear away and clean tables. That’s why it’s long been a trend in cafeteria or sandwich-style places to have people clear their own plates: it takes a minimal amount of time on the part of the customer and saves the business the cost of perhaps employing someone purely to bus away plates. However, Panera’s self-bussing design created an issue. Back at the cafeteria, one would simply take their whole tray, trash and all, to a rack of some sort. Panera’s station had people separate their bowls and plates into one bin, silverware into another and their trash into the attached trash can. This led to a rash of accidentally throwing away the silverware with the food remainders. Part of Panera’s draw is that it feels upscale in part because the company uses chilled china and real, honest-to-goodness, metal utensils instead of the cheap plastic ones that break. Not wanting to give up this competitive advantage, but finding themselves constantly ordering replacement forks, knives and spoons, Panera decided there was a more elegant solution. A busser won’t accidentally throw away the utensils, and due to eliminating this cost, the additional expense necessary to employ a person seemed a little smaller. Having someone clear away the customers’ plates also enhanced value and may have raised customers’ perception of Panera as a quality restaurant, as well. At the end of the day, saving silver and pleasing customers turns out to be a better solution than trying to give their patrons bussing duty.

Written by caseyayers

4 October, 2008 at 11:59 am

The Pie is Bigger Than it Looks

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So how do runs on the bank work, anyway? To understand how bank runs create a self-fulfilling prophecy, it’s important to understand how banks keep and loan money.

Banks don’t keep all of their deposits on tap. Rather, only a portion of these are kept around at any time. Under normal circumstances, this is fine, because it’s very unlikely that everyone will suddenly ask for their money at the same time. Therefore, just keeping a small percentage on hand is enough for the daily traffic at any branch. Why don’t they keep all of the money on tap at any particular moment? That question strikes to the heart of how banks stay in business at all.

Keeping just a portion of the money on hand, a practice known as having a fractional reserve system, means that the bank can use most of their funds to make loans to other people, to businesses, and to other banks. This also leads to an expansion of money behind the scenes. The Federal Reserve sets the reserve requirement; we’ll say it’s 10% for this example:

You deposit $1,000 at your bank. The bank is required to keep $100 of that on hand as its reserve, but is free to loan out the other $900. So they do: your bank also issues credit cards, and I walk into Home Depot with their card to purchase a washer and drier that cost $1,400 together. I put $900 on my card, which means that Home Depot will receive this money. However, the store offers a special no-interest deal for the remaining $500. They can afford to lend this credit, ironically, in part because of the other $900 that I just gave them. Home Depot only uses part of that money, though, and also takes out a loan at a favorable rate to help cover the financing. They do this by drawing on someone else’s savings.

Confused yet? That’s what makes the current situation difficult to understand: everybody owes everybody else somehow, and it all started with just a few green pictures of Ben Franklin.

An economist would tell you that a 10% reserve requirement on $1,000 means there’s actually $10,000 out there. The math is simple: either divide $1,000 by 10%, or carry it out all the way. Everyone has to hold onto 10%, meaning $1,000 creates a new loan of $900, and then another of $810, and then another of $729, and so on until the difference is negligible. But this isn’t really how it works. As in the example, sometimes money “sticks” before it has reached its terminal point. Home Depot pockets the majority of the cash from that $900 I put on my credit card. When that happened, the possibility of that money being loaned out again quickly to somebody else decreases significantly.

So that’s the first cause of the current “liquidity” crunch: money gets stuck along the way. In a period of uncertainty like today, this money leaves the economy and goes underneath a mattress somewhere. But this money has been taken out of the system somewhere halfway through. The real trouble starts when the money is taken out from the origin point: your checking or savings account.

Bank runs happen because people are afraid that they won’t be able to get their money back. This could be due to fears over national security, the global economy, or just poor management of a local bank. In any case, a mad rush of withdrawals can quickly wipe out a bank’s “current liquidity”, otherwise known as the 10% they kept on hand from your savings and those of everyone else. And when this happens, the bank quickly becomes broke. They have to tap into money they’d otherwise use to make loans in order to meet withdrawal requests and, piece by piece, have to take apart all of the different, longer-term instruments like bonds or mortgages that they owned as they keep running out of cash.

Welcome to the current situation. The reason why so many mortgages, and we’ll talk about how they’re wrapped up in packages some other time, appear to be worthless now is because a couple banks that were particularly reckless had to dump out of them for pennies on the dollar just so that they could have a little more cash on hand. The mark-to-market rules I keep harping on means that other banks have to pretend like their securities are just as worthless as those sold at firesale, making it appear like they took huge losses when in fact they have plenty of cash left.

The prophecy is fulfilled when people become worried about these banks’ health and withdraw all of their money. Since our economy is based on a monetary system that boils down to little more than keeping tabs on a scoreboard, when the lifeblood of the system is taken out the whole thing breaks quickly. That’s what we’re seeing now.

Written by caseyayers

2 October, 2008 at 7:47 pm

Wesbury on Mark-to-Market

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Brian Wesbury, chief economist for FTPortfolios, has a tendency to be about twenty miles ahead of the curve and has an enviable gift when it comes to explaining complex issues in a relatively easy to understand fashion.  When you’ve seen me refer to relaxing mark to market requirements for some of the housing securities out there, this is what I mean:

Here’s something you won’t believe: Fannie Mae and Freddie Mac have not drawn a dime from the Treasury’s $200 billion facility that was created to bail them out. It was the use of mark-to-market accounting that allowed Treasury to declare them bankrupt. On a cash flow basis, they were solvent.

Mark-to-market accounting causes so much mayhem because it forces financial firms to treat all potential losses as if they were cash losses. Even if the firm does not sell at the excessively low price, and even if the net present value of current cash flows of these assets is above the market price, the firm must run the loss through its capital account. If the loss is large enough, then the firm can find itself in violation of capital requirements. This, in turn, makes it vulnerable to closure, nationalization or forced sale.

Wesbury’s suggestion could be implemented by the Securities and Exchange Commission very quickly and would do a lot more to settle the markets than writing a check with its basis in freshly-minted debt.  Full article can be found here.

Written by caseyayers

1 October, 2008 at 1:43 pm

On the Subject of Texas Tea

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Originally posted in April of 2006, this piece hopefully still provides some useful information today.

Let’s do a little rundown on gas prices and the like. Not only might it be educational for everyone involved, but it’s indirectly helping me feel prepared for my Economics exam later today.

So Why are Gas Prices so High?

There are several reasons for this.

  • Worldwide Demand is Increasing
    For a while, the United States has been far and away the largest consumer of oil. That- perhaps odious- record is on its way out the door. India and China, the world’s two fastest growing economies (ours being the bronze medal winner by any fair standard) have spurred a massive demand for oil in that part of the world that was not once there. Think of China for a minute. When you picture the Chinese people in the city, how do you see them getting around? In the past, the answer has always been bicycles, right? No longer. Regardless of the social oppression weighed on its people by the Chinese government, China’s people have gotten financially more wealthy in the past decade, to the point where luxuries like automobiles are becoming an imminent reality for millions. The same goes for India. That’s just a minor example, though. Think of all the factories in India and China, and imagine what they run on: oil. And oil isn’t just for energy. It is refined or used in producing lubricants of all sorts- from the things that make machines work all the way down to Vaseline- as well as CDs, carpeting, and a million other things. Simply put, as the whole world wants more stuff- China and India in particular- the price of oil will continue to rise.

  • Refinery Capacity is too Low
    Another contributing factor is the fact that we have a very limited number of ways to turn that black stuff out of the ground into car-friendly gasoline. To do so requires heavy refining, as well as mixing the oil with any number of chemicals for efficiency or environmental reasons. Here’s the problem: we haven’t built a new refinery capable of making gasoline since the 1970s. It’s pretty absurd to think that demand for oil hasn’t risen in the last forty years. It’s even more absurd that supply has been bottlenecked by these old refineries.

    So why haven’t we built any new refineries?

    The environmental types would have you believe that the Earth’s imminent demise is only one more oil refinery away from happening. Of course that notion in itself is absurd, but let’s take a more common sense approach to the situation: if we haven’t built any of these refineries since the 1970s, they must be pretty broken-down and dirty places, right? Of course. The pollution levels are very high from these facilities. Common sense tells me that decades of research would allow us to make a far cleaner-burning refinery today, one that would actually help the environment in comparison with what is running now. So let’s say, just for simple math, that a refinery built this very moment would only release half as much pollution to make the same amount of gas as one of the old refineries does. Great! Let’s build twenty of them. As we turn the new refineries online, we simply turn the old ones off. Same amount of pollution, double the capacity. Using the same reasoning, we could build, say, fifteen of the new refineries. That would actually lower the pollution levels from refineries by 25%, while still raising capacity by 50%.

    You said other things make the gas expensive as well. These chemicals?

    Yep. Ethanol’s a prime candidate for discussion. A lot of people look at Ethanol and see the great “ANSWER” to oil. Ethanol is made from corn, switchgrass, agricultural waste and many other types of plants. The process to create ethanol is very similar to making beer. In fact, Coors has an ethanol plant in Colorado, believe it or not. Ethanol burns cleaner than gasoline (though not much) and is theoretically unlimited. After all, if it comes from corn, we can simply grow more corn when we need more gas, right?

    Not so fast.

    First of all, ethanol is very expensive to make. The only reason it is surviving on the market at all right now is because the federal government has given billions of dollars in subsidies to farmers and ethanol producers to lower the price to the point that it can begin to compete with gasoline in some areas. Secondly, we can’t make enough. The idea of simply growing more corn sounds great at first, but the problem is scarcity. Just like there’s a limited amount of oil in the ground, there’s a limited amount of ground. It would take somewhere around three times ALL the arable land in the United States to grow the corn required to keep up with demand for ethanol if it replaced oil entirely. Lastly- and here’s the kicker- a large amount of oil is used to make ethanol. Think of the tractor that the farmer uses when tending to the corn, the machine that husks it, the truck that drives it to the refinery, the power plant that keeps the refinery going, the truck that takes the ethanol to the distribution center, et cetera. The sad fact of the matter is it takes almost a gallon of oil to make a gallon of ethanol, and ethanol is no more efficient when used later on. All that is happening is we’re paying for the oil twice over with ethanol- once for the oil needed to make it and again for the ethanol itself.

    But aren’t the oil companies taking massive profits on gas sales?

    Nope. You know that “obscene” profit of thirty-something billion dollars ExxonMobil made last year? Congressmen and Senators are calling that a travesty, unpatriotic, blah, blah, blah. Sure, I’d love to have $30+ billion dollars laying around, but the fact is that ExxonMobil and other such oil companies aren’t simply sitting on that money or filling swimming pools with $100 bills. In the last five years, Exxon has invested over $74 billion dollars in new oil finds. The fact is it is really expensive to start up a new oil pipeline or off-shore drilling platform, much less to find the stuff in the first place or turn it into usable gas. The fact of the matter is that every time Exxon simply GUESSES where oil might be, it takes over ten million dollars just to poke the hole in the ground to check. Even worse is the fact that we aren’t letting them actually go to where we know the oil is, like off of the west coast of Florida or that small patch of hell in Alaska.

    Here’s another point- the typical margin for gasoline sales is maybe 10% for oil companies. That means when you pull up to the BP or Shell down the street, even at three bucks a gallon, they’re only pocketing maybe 30¢ per gallon. Here’s the dirty little secret- the government, between federal, state and local, collects over fifty cents per gallon. That means that the government- remember, the ones calling the oil company profits obscene- are actually pocketing almost 70% more than they are. The government would claim that that money is needed to build roads. Without getting into a usage argument, I’ll agree with that, but say that the oil companies need their profits just the same to be able to invest in finding other oil supplies around the globe to make sure we don’t run out.

    But isn’t oil bad for the environment?

    Sure. I won’t argue that point. I get angry every time I see one of those dump trucks outside of UNF spew a tower of black smoke out of the top. However, what is the answer, exactly?

    Well, for those of you environmentally inclined, you should welcome the rise in prices wholeheartedly. The fact of the matter is that $3 a gallon is just about where hybrid cars begin to pay for themselves in gas savings. Hybrids obviously use less oil and are all much less polluting than standard vehicles. But are they the answer? No. Remember when I said that China and India are starting to drive? The fact is the number of cars on the roads of the world is increasing at such a rate that even if the entire country switched to hybrids this very moment, within ten years our oil consumption would be right back to where we are today.

    So what do we do to fix this once and for all? First of all, we need to start getting rid of our power plants that run on oil and coal. We replace them with nuclear power, as well as photovoltaic solar plants when the technology is ripe enough in ten to twenty years.

    Wait, isn’t nuclear power a scary thing that will end us all?

    I dunno. How about we ask Peter Moore, the founder of GreenPeace? The fact is that nuclear power is incredibly safe now, especially with advances in the technology made in the last twenty years. You know, the twenty years in which we haven’t built any nuclear power plants. Do you think the French, perhaps, are environmentally attuned? I do too; they produce almost all of their power through nuclear technology.

    So you were saying about how to stop using so much oil?

    Yes. Don’t interrupt me.

    Sorry.

    Right then. So the first step, as I said, is to get rid of those power plants. They take up a huge amount of oil and coal and release a lot of pollutants. Now what about our automobiles? I’ve already explained why ethanol is not an answer in any way, shape or form. So what’s the golden goose? Hydrogen. By 2009, the first hydrogen-based cars will begin rolling off of the lines from makers like GM. Running on a relatively simple chemical reaction, the only emission from the system is water. Cool, huh? Well, the only problem is they currently have the tendency to explode. Once GM and the others get the technology down, though, it has the power to truly make gasoline obsolete.

    So where can I fill up with hydrogen? I only remember seeing 87, 89, and 93 octane at the pumps last week…

    Good point. It’s a chicken-and-egg scenario, isn’t it? There’s no cars that use hydrogen, so why build the (very expensive) pumps? At the same time, why build cars that people can’t use?

    You’ll love the answer to this one.

    You know those record profits the “oil” companies are making? Companies like Shell are reinvesting a piece of those in promoting hydrogen technologies as well. Think about it from their perspective- they know oil’s days are numbered, so to remain a viable company, they have to lead the way to the future. So for each obscene billion dollars of extra profit, the “oil”- perhaps “energy” is a better term- companies are reinvesting that not only in finding new oil, but also in developing oil’s replacement. It’s all rather elegant, hm?

    That’s all very nice, but I’m tired of paying so much right now. What’s the deal?

    Well, I’m sorry. The fact is that if you’re not willing to pay the price, the Chinese and others are. Oil demand has risen with no subsequent rise in supply. The solution? Get mad. Start making people aware of the fact that we can’t even make any more gas than we are right now. Understand the fact that the government is taking a far larger piece of profit out of every gallon than the oil companies are. Thwart any legislation against “windfall profits” that are being used to develop cheaper and safer energy sources. And, sorry folks, just drive a little less.

  • Written by caseyayers

    25 April, 2006 at 11:34 pm