Saturday, October 17, 2009

Public Relations Part I

So it begins...

The other day while reading about how shocking it is that more Americans are not rallying against the return to the status quo that is taking place in the financial industry, an astute observer linked to a video series online called The Century of the Self.

Don't worry the first 10 seconds are a little scrambled as it looks like some one ripped this from a VCR recording. VCR? Well it was a machine that played videotapes, which were very similar to cassette tapes in that you could record on certain types videos from your television. My grandmother vividly remembers watching two or three Nintendo video games instead of Dr Zhivago, but I digress.

So I started watching and then I started note taking and below is what I have garnered from watching two of the four parts (they are each an hour long.)

In the beginning there was Freud. Freud gave his young nephew a copy of his book called "General Introduction to Psychoanalysis" This nephew was Edward Bernays and he worked on the PR effort for the US during the First Great War. One of his key messages that he created was that the US was not restoring old monarchies but bringing democracy to Europe. He attended the peace talks with Woodrow Wilson and emerged with a slogan "Making the World Safe for Democracy." After the war he wondered, and would soon make himself rich upon, whether the same type of propaganda/persuasion employed during the war and peace talks could also be equally applied in peacetime.

In a later in life interview with Mr. Bernays he casually states that the Germans had used the word propaganda and now it was tainted, thus, he coined a new term called public relations. The idea that information is power was certainly very relevant to Mr. Bernays. However, he also knew that the information could be coached in such a way as to elicit the desired response despite what logical conclusion could be drawn from it. This was a key understanding of his uncle's work.

One of his first clients was the American Tobacco Company. His task was to find a way to break the male originated taboo of public smoking for women. As Big Tobacco noted, they lost half the target market due to this social taboo. Bernays turned to AA Brill who told him and ATC that cigarettes represented the male penis and male sexual power. Brill continued, stating they would need a way to connect cigarettes as a way of challenging male power by giving women their own penises.

This is where Bernays makes his money. During the NYC Easter parade, Bernays had female models stash cigarettes on their person and at a designated time to light them up and begin smoking. Then he informed the press that Suffragettes were going to light up cigarettes in public as a protest of voting rights and that the cigarettes were "Torches of Freedom." The symbolic gesture, the phrase, the emotion and the memory all tied together as one in the American psyche. The Torches of Freedom ran in major newspapers and soon the sale of cigarettes began to rise. Women found them socially acceptable and felt that smoking made them more powerful and independent. You read that right, a product, a consumption habit (unhealthy at that), was signaling to other people status and power. Bernays had proven what Freud has insinuated that you can produce irrational behavior in people by fulfilling deeper needs and desires.

This method became Bernays masterstroke that he would employ over and over again for businesses. It was called the tie in and it would be the machine that drove the "engineering of consent." One example is of Cosmopolitan magazine (a customer) and he would place advertisements next to specific articles or interviews, which would be one of his other clients, say an actress. In the pictures of the interview she would be wearing or consuming the product. Then in the next movie she filmed she would also be using the product. These powerful images of an attractive person, leading an attractive life filled with products that everyday citizens could also enjoy marked a new era in consumerism.

In the days before the war products were sold on a basis of practical value. Industry worried that once you had sated people's needs that there would be fewer profits as you would then only be replacing obsolescence. Bernays was now showing a new way for the consumer to buy, to have their desires out shadow their needs. He was changing the focus from the clothing to how the clothing made you feel. Also implicit in this was the idea that consumerism helped the country as well. This is because products could fill the voids of everyday life by appealing to the desires and fears of the masses. By keeping these consumption machines happy, which would also keep them docile. It was now as though products were giving people "feel-good" medicine and thus initiating social control. So instead of using social institutions to control people, you could answer their desires and upon sating the desires, the elite could then go about ruling the country.

Some additional acts Bernays pioneered include: product placement in movies, selling cars as symbols of male sexual power, paying doctors to state a product was healthy or recommended (an apple a day...), having fashion shows at department stores with models.

This became especially relevant once the Bolshevik revolution in Russia. The idea that humans could make rational decisions was being crushed as Moscow and St Petersburg burned. This was not the only piece of evidence. As the Great Depression began and ran its course the new consumer Bernays created died. Then the Second Great War ended and the aftermath including the Holocaust very much convinced those in power that humans are dangerous and needed to be controlled.

A closer look at National Socialism was enlightening. Here were normal every day citizens wielded as a weapon by the leadership. The messages were spun in a way to channel the feelings of the masses. Analysts would look at the situation noting that libidinal forces were repressed in deference to the leadership, but it created violence. This violence was then directed outside the group. Even though this behavior should be considered irrational the social norms instituted by the Nazis outweighed what an earnest human being might deem correct.

Later, during a controlled experiment in which 29 participants were actors, 30 people would have to decide which of two lines shown were longer. At first the actors would choose the correct one and of course the experimentee would as well. Then after about 10 different sets, the actors would choose the shorter line. The lone real person, would hesitate, take longer to decide, may at first fight it, but eventually succumb and choose the shorter line to achieve group consensus.

More during the next post, stay tuned.

Thursday, October 15, 2009

jupiter and the infinite beyond

Nice shot from Mars of Earth & Moon and also Jupiter and some moons in the same frame.

H/T Gizmodo

Wednesday, October 14, 2009

AD & AS: 1st AD then AS and finally in concert

1st of a three part series. 1st we consider the AD & AS model. Then the AD curve is explored in depth. Then the AS curve is explored in depth. Finally, we use them in concert to explain the economy.

More models... this one is different from the rest. When we view this chart we can see the equilibrium between price and output. That is to say, the AS curve represents the total quantity of goods and services firms are willing to provide at each point along the price level continuum. The AD line shows how much people, businesses, the government and foreigners would wish to buy at each price point. The equilibrium clears this market. As I said this is different from a microview graph because there cannot be a substitution to another good, this is the economy on a whole. So if ice cream prices rises one cannot just substitute frozen yogurt.

The AD curve slopes downward. Consider the equation

Y = C + I + G + NX

So that each factor will affect how much output is created by an economy. We can consider C + G together because both are consumption expenditures the only difference is one is for the public and the other is the government. Say for instance that the entire economy only make ice cream. You make two dollars and the government taxes you a dollar. The cost of ice cream is a dollar. So that you and the government can each have one cone. If the price of ice cream were to fall to 25 cents you would still have your dollar but now you could purchase 4 ice cream cones. So when the price level falls you have more purchasing power, as does the government. Now in a real economy the price level dropping will entice you to consume more, in our hypothetical economy you might tire of more ice cream quickly or develop diabetes and thus an aversion to sweets. The converse is true, when the price level rises, the value of the dollar falls which will reduce your wealth, consumption and the quantity of goods and services demanded.

Here we can see the chart of price level. As the price level drops from P1 to P2 the quantity of goods and services increases from Q1 to Q2.

The price level will also affect interest rates and thus investment. The effect is because imagine you are a household from above in the ice cream economy. Maybe you desire to only purchase one cone of Ice cream a year, thus the drop in price of ice cream from a dollar to 25 cents frees up 75 cents. Since more ice cream wouldn't give you any more marginal satisfaction you instead lend out your 75 cents. You might put it in a certificate of deposit, buy a bond or place it in a savings account with the bank. These three choices are all the same you would be lending the money out or giving the money to a bank to lend out for you. This, in aggregate, will drive interest rates lower. This then has a secondary effect in which because the interest rate is lowered more firms and households will borrow to purchase assets, plants & equipment for businesses and cars & houses for households. Again price level rising would have the opposite effect of raising the interest rate (less deposits), reducing investment and spending.

Since the interest rate is lowered by the mechanisms described above this will cause investors to seek higher returns from abroad. As these investors buy foreign currency to purchase investments in yuan, euros and Australian dollars this will increase the supply of US dollars in the exchange market. The increase supply will drive down the exchange rate against this basket of currencies. Since the dollar will now purchase less foreign currency than it follows that the US dollar will buy less foreign goods as well. As a corollary this will make US goods less expensive compared to comparable goods delivered by foreign countries, so net exports will increase. This will increase the demand for US goods and services. In reverse, a higher price level increase the interest rate, the dollar increases in value and the appreciated dollar will lower net exports (increase imports and decrease exports) which decreases the demand for US goods and services.

These are three reasons why the AD curve slopes downward but it can shift too.

We can also look at the variables C, I, G and NX to show why the AD curve would shift.

C - Consumption - consumption patterns could change. For instance, household wealth could fall because of a falling stock market and housing prices falling more in line with what a rental market could support. This would cause consumers as a whole to demand less services and goods at any price level, thus shifting the curve leftward.

I - Investment - if firms become pessimistic about future business conditions this will cause them collectively to invest less in plant and equipment. This also would shift the AD curve leftward. The government does have two tools in which to affect businesses' collective decision, it can employ fiscal or monetary stimulus. On the fiscal side it could lower taxes, of course in the current situation lowering taxes will not do as much because businesses will be employing NOLs (net operating losses) over the next few years and thus their tax burden will be less or zero anyways thus negating the positive effect this might have. The other tool is monetary policy, the Federal Reserve can increase the money supply thus lowering the rate of interest, which will encourage households and firms to invest, thus shifting the curve to the right combating the leftward shift of the gloomy outlook.

G - Government - any shift in purchasing plans of the US government will shift the curve. If the government decides to spend less this will shift the curve leftward, if it decides to spend more it will shift the curve rightward. There are two ways the government can spend, it can either lower taxes while keeping it spending the same running a deficit. Or it can keep taxes the same and spend more, both have the same effect. Unfortunately, Republicans only like the former and Democrats only the latter even though while in office both do the same, that is run deficits.

NX - Net Exports - NX is tricky because it has two variables affecting: the desire of the rest of the world to purchase US goods and also people and firms moving their wealth into and out of the US economy. On the first if China grows at 10% this year, all things else being equal, it will import more goods from the US. This will cause NX to shift outward. Because of this people and firms may sell their US dollar assets and use US dollars to purchase Yuan. This will depress the US dollar and cause NX to shift outward even further. However, should a recession occur in China the reverse would occur, the NX curve would shift inward because of less demand and the flight of capital from China to the US would strengthen the US dollar making imports less expensive and shifting the AD curve further inward.

Next we consider AS.

Sunday, October 11, 2009

Economic Survey October 2009

I considered digging my Businessweek out of the trash for an easy layup of a post, but instead I wanted to look at a survey of some current economic data points.

1st I saw this at Calculated Risk earlier this week. I highly, highly recommend his blog. He does some analysis but he always has good data and charts for the periodic economic reports that various government agencies generate each month. This is the JOLTS survey.

from Calculated Risk
What's important to note here is how the graph works with the blue line and the green & red bars being the most important. The green and red make up the loss of jobs. The green is persons who have quit and the red is the layoffs. The blue is the amount of hires. Obviously when the blue line is above the green and red column the economy is adding jobs.

When I read the chart it is telling me the turnover in the economy is slowing. Both hiring and loss of labor is slowing down and there is also structural unemployment as workers switch from housing and finance related careers to healthcare and government roles. People are not leaving their jobs for new opportunities, it seems as everyone is hunkered down. This is especially bad for young people who are trying to enter the workplace with their new degree (Bachelors and Masters) in hand. As the turnover falls people are not advancing upwards creating new entry level jobs. Some anecdotal evidence is here, and here.

The yellow line represents job openings. Obviously more data points would be helpful, this survey was only begun in 2000 but job openings at its lowest level does not portend well for the economy.

Second on my economic survey is the trade data. Again Calculated Risk did the heavy lifting with the charts.

1st We look at it on an absolute level. The drop in trade is breathtaking. However, the economy has also grown in the past 15 so we should look at this data in real terms as well. I should probably do this myself but I am lazy and will just tell you that it isn't any worse than it was in 2002 in "real" terms as a percentage of GDP. Here is a chart I found after a minute of Googling.

Here is my updated chart from the BEA.

So it reaches about 5% and has now contracted back and expected to do so in the near term. However, the near term means about 5 years. Here is what happened this month.

via Calculated Risk
You should enlarge the chart to get a good feel for it. Here Calculated Risk has shown the deficit in goods/services with oil removed, oil by itself and then the total. So even though the data point is improved overall (blue line) it was because oil was cheaper in this month. We actually imported more goods/services. [The removal of oil is because of this line of thinking: oil will be whatever it has to be because it the lubricant of the economy, so we should remove it to see what the underlying consumer is actually doing.]

Maybe a few brown shoots but I still don't see the green shoots.

Currently my trading model has longs in equities emerging and domestic, real estate US and ROW, bonds both emerging and domestic, gold. Shorts are in commodities and managed futures. However, I expect that this stance will not last very far into the new year.