Risk Analysis

I am frequently asked by analysts and executives to recommend a book that provides practical methods and clear guidance for making risk and uncertainty more transparent, evident, understandable, and manageable in support of complex decisions. The book I turn to most often is Risk Analysis by David Vose (2008). Included with the book is a 90-day license for ModelRisk (Vose) software, which I also recommend and use in private practice. According to the publisher:

Risk Analysis concerns itself with the quantification of risk, the modeling of identified risks and how to make decisions from those models. Quantitative risk analysis (QRA) using Monte Carlo simulation offers a powerful and precise method for dealing with the uncertainty and variability of a problem. By providing the building blocks the author guides the reader through the necessary steps to produce an accurate risk analysis model and offers general and specific techniques to cope with most modeling problems. A wide range of solved problems is used to illustrate these techniques and how they can be used together to solve otherwise complex problems.... Based entirely on proven techniques, this superb guide is designed for those who do computer modeling. Stressing the accuracy of risk modeling rather than the management of risk analysis, it provides excellent guidelines for modeling uncertainty using spreadsheets and Monte Carlo software. Features sufficient probability and statistics theory for readers to be confident of the correctness of the methods and understand when and how the theories can be used.

I use Risk Analysis with my university students, and also in professional development training that I conduct around the world. The book includes scores of graphs, charts, practical exercises and model solutions. Additionally, the book makes frequent reference to ModelRisk, the most powerful spreadsheet-based risk analysis software currently on the market. The help files included with ModelRisk are worth the cost of the book alone. I recommend Risk Analysis by David Vose to anyone seeking to master or just learn more about the art and science of professional risk analysis.

Source: Vose, D (2008), Risk Analysis (3rd edition), John Wiley & Sons.

Well Said...

"Geometry existed before the creation." ~ Plato

A Bust of Plato

Responding to Fiscal Crisis in America

The Congressional Budget Office (CBO) recently published a report in which available responses to the fiscal crisis in America are detailed. Specifically,

If a fiscal crisis occurred in the United States, policy options for responding to it would be limited and unattractive. In particular, the government would need to undertake some combination of three actions: restructuring its debt (that is, seeking to modify the contractual terms of existing obligations); pursuing inflationary monetary policy (that is, increasing the supply of money); and adopting an austerity program of spending cuts and tax increases.

The essence of the CBO's proffered solutions to a fiscal crisis can be summarized as default, monetary expansion, or austerity. In the end, each of these options eventually leads to inflation, albeit with varying degrees of deflation either in advance or along the way. In other words, a period of inflation in America is imminent. I continue to advise the public to get ready...

Source: Federal Debt and the Risk of a Fiscal Crisis (2010, July 27), Congressional Budget Office.

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Using Inflation to Reduce Public Debt and Rout Entitlements

How High Can Inflation Go...?

Repairing Sovereign Indebtedness: Get Ready

Using Inflation to Erode the US Public Debt

Implications of the Financial Crisis

Well Said...

"Affirmation without discipline is the beginning of delusion." ~ Jim Rohn

E James Rohn (1930-2009)

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California Municipal Salaries for Executives

Check out this chart of executive salaries for local, city, and county executives in California. Note too that most government workers in California receive 80% of their last year's salary as an annual pension for life upon retirement (even when retirement is early in life). Who said a career in public service meant not getting rich...

[Click to Expand]

Source: Fletcher, E (2010, July 30), Roseville City Manager's Pay Tops Among Sacramento-Area Local Officials, Sacramento Bee.

Well Said...

"There is no favorable wind for he who knows not where he is heading." ~ Seneca

Reubens' The Death of Seneca (1615)

Public Corruption in America

I just read a shocking report in the Sacramento Bee describing public salary corruption in the city of Bell, Los Angeles County, California:

Bell is one of Los Angeles County's poorest towns. Ten days ago, its residents woke up to learn that its City Council was paying its city manager, Robert Rizzo, nearly $800,000 a year, its police chief $457,000 and its assistant city manager $376,000.... These disclosures came on top of reports that four of the city's five part-time City Council members were making roughly $100,000 a year. All this in a city with a budget of about $15 million annually.... It's a disaster for taxpayers. Because California pensions are based on an employee's single-highest salary, the CalPERS system may have to pay Rizzo, 56, $600,000 annually over his lifetime.

I served my country for over 15 years on active duty in the military, but my service was never intended to defend this kind of public corruption right here on US soil. Reports like this are very discouraging for citizens trying to make their way through this challenging economy. Frankly, I am starting to wonder where the lines of corruption begin and end in America.

Robert Rizzo, former city manager, Bell, California

Source: Leavenworth, S (2010, July 25), For Whom Does the Bell Toll? All State Taxpayers, Sacramento Bee.

Managing Aggregate Economic Demand

Aggregate demand management in macroeconomics means adjusting the level of demand to try to ensure that the economy arrives at full employment equilibrium. If there is a shortfall in demand, such as in a recession (a deflationary gap), then the government will need to reflate the economy. If there is an excess of demand, such as in a boom, then the government will need to deflate the economy.

The problem with the US economy today is weak aggregate demand. When aggregate demand is weak or declining, economists generally advise that both monetary and fiscal policy-makers consider reflationary policies. Reflationary policies to boost the level of economic activity might include:

• Increasing the level of government expenditure
• Cutting taxation (either direct or indirect) to encourage spending
• Cutting interest rates to discourage saving and encourage spending
• Allowing some money supply growth

The first two policies would be considered expansionary fiscal policies, while the second two are expansionary monetary policies. The objective of all the above policies should be to increase aggregate demand and therefore the level of output. The diagram below depicts how aggregate demand results in declining prices and production output:

I maintain that the US should be engaged in monetary expansion and fiscal spending at this crucial time for the economy. The austerity hawks are arrogantly wrong in asserting that less spending will somehow restore aggregate demand and ultimately prosperity for America.

The Good Life Comes in Moments...

Lola the Yorkie-Poo enjoys the view and snoofs [click to enlarge]

Austerity Hawks Are Getting What They Asked For

The risk of inflation continues to haunt monetary policy in the US despite the fact that a bit of inflation could very well be the best medicine for the ailing economy. Keep in mind that inflation (via monetary expansion) tends to erode the value of debt and reduce the real cost of entitlements given that cost of living increases generally lag rising prices. However, the Federal Reserve would be wise to reconsider its priorities given that inflation appears to be collapsing into deflation. For now, the specter of inflation belongs on the "back burner" while the nation contends with the very real convergence of structural unemployment across the country, military commitments overseas, ecological catastrophe in the Gulf of Mexico, immigration concerns along the US-Mexican border, a rising trade deficit caused by the artificially low value of the Chinese Yuan, and the Washington policy-making failures that lead to these crises to begin with. The austerity hawks are getting what they asked for...

John R Talbott: The Real Reason Geithner Is Afraid of Elizabeth Warren

John Talbott's recent editorial expose (2010, The Real Reason Geithner Is Afraid of Elizabeth Warren) regarding his views on the underlying strategy driving current fiscal and monetary policies in the US is instructive for those seeking to better understand what is happening with the economy. Clearly, Federal Reserve chief Ben Bernanke and Treasury Secretary Tim Geithner are being less than transparent in their motives and intentions. In particular, their alleged strategy of rebuilding Wall Street at the expense of Main Street account holders is deflating America.

The times of elites like J P Morgan ruling over the US economy are behind us, and the American people are unlikely to tolerate these kinds of fiscal and monetary tactics and strategies over the long-term. We the people need better transparency from the Federal Reserve and Treasury Secretary in order to understand what is happening to our nation's economy.

Source: Talbott, J R (2010, July 18), The Real Reason Geithner is Afraid of Elizabeth Warren, Huffington Post.

More than 50 Languages

I am pleased to announce that you can now read The Vantage Point in more than 50 languages. Use the Google Translate feature found to the right to choose your language. As always, welcome to my international readers from around the world!

Main Street Depression Imploding America

At this point, I see nothing coming from Washington, Wall Street, or overseas that can avert what is now a Main Street Depression in America. The reality of persistently high unemployment, the unprecedented and expanding number of foreclosures, the rising tide of regional and local bank failures, the dearth of investment capital for small business expansion, and the devastating deflation in home prices across the nation is indisputable. The Main Street Depression of the early 21st century is imploding America at its heart...

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Depressions Past and Present

Unemployed Should Consider Emigration

Main Street USA in Economic Depression

Depressions Past and Present

My previous post entitled Unemployed Should Consider Emigration featured a photograph of today's signage warning the unemployed to keep out and move on. The similarities between the current Main Street depression and the Great Depression are striking...

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Main Street USA in Economic Depression

Main Street USA in Economic Depression

I posit that Main Street USA is now in economic depression. My evidence thereof includes the record pace of regional and local bank failures, the current state of job losses and unemployment, the rising rate of personal bankruptcies, the record number of home foreclosures, and the deflation in home prices across the country. I weep for America...

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Unemployed Should Consider Emigration

Depressions Past and Present

Unemployed Should Consider Emigration

Let's face it, as far as the Federal government is concerned, jobs for Main Street is no different than jobs for Eskimoes. Our nation has been turning its back on significant segments of the population since its founding, and the newest career casualties will come from those who are seeking to make a living on Main Street instead of off Wall Street or Washington. Up to 35 million people across the US will experience personal unemployment during 2010. Yet, neither the Democrats nor Republicans have any real intentions of creating jobs directly, because both parties know they have no means of doing so.

The unemployment situation in Amercia will no doubt persist through the end of the decade and perhaps longer. Those unemployed who have exhausted their 99 weeks of unemployment checks should probably begin to evaluate emigration to other countries with their families in search of work. The irony is that as more and more unemployed leave the US, the unemployment burden will subside and prosperity for the remaining population with jobs will be accelerated. In the mean time, it's time for the unemployed to face the facts and reality that the nation cannot help them, but does nevertheless wish them the best...

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Financial Reform Grounded in Details

Note that the final version of the Dodd-Frank Act that is now on the President's desk contains more pages of text than all previous legislation in the history of banking reform. By comparison, the Federal Reserve Act of 1913 contained 31 pages, while the Dodd-Frank legislation contains 848 pages. See for yourself...

Federal Reserve Act (1913) - 31 pages.

Glass-Steagall Act (1933) – 37 pages.

Gramm-Leach-Bliley Act (1999) – 145 pages.

Sarbanes-Oxley Act (2002) – 66 pages.

Dodd-Frank Wall Street Reform and Consumer Protection Act (2010) - 848 pages.

Austerity Affects Butter and Guns

Given that austerity planning has come into vogue in the US Congress, new issues are certain to emerge that will influence how austerity measures might be implemented nationally. Of course, imposing austerity upon a nation implies cuts in government spending and increases in taxes. However, if the American people are to endure deep cuts in public spending, then certain long-held budgeting assumptions may require adjustments. Said another way, if the US economy is so bad that the government must impose austerity measures upon its citizens, then the time has also come to discuss bringing our troops home and cutting the defense budget as well.

Austerity affects butter and guns…

Global Military Spending 2009 [click to enlarge]

What About the Default Option…?

The US has but three methods for restoring economic growth: austerity measures (as in spending cuts and tax increases), monetary expansion (as in “printing money”), or default (as in not paying back on the various bills, notes, and bonds issued by the US Treasury). The national debate regarding the merits of both austerity measures and monetary expansion is well underway in the public domain. However, the default option has still to be fully considered as an alternative to austerity or monetary expansion.

To start the discussion, consider the following advantages of defaulting on the national debt:

1. The people would enjoy a $13 trillion dollar windfall from principal reduction in the national debt that would never be paid back.
2. The people would enjoy a windfall from the $400 billion dollars a year in interest payments that would no longer be required.
3. The “banksters” would have to abandon their looting operations in Washington, DC and return to regional and local limited purpose banking in order to compete for new investments in small businesses and Main Street.
4. The government would lose its ability to borrow in the future due to zero creditworthiness and would therefore have to end deficit spending and henceforth, balance the budget.
5. Mega-banks would likely split up and reorganize into regional and local service operations in order to redirect their marketing and lending activities toward small businesses on Main Street.
6. The government would have to lay off most of the Federal workforce due to lack of money – these workers would become available to join Main Street investment activities lead by small businesses.
7. The trade deficit would be solved because foreign manufacturers would cease exporting to the US as the world would no longer accept US treasury paper as payment for goods and services. 
8. The Federal Reserve would be bankrupted and closed permanently.
9. Washington politicians would have to redirect their concerns away form Federal issues and toward regional, state, and local politics in order to stay current and involved in the reemergence of small businesses and Main Street politics.
10. Small business on Main Street would be back in business as the centerpiece of American enterprise, employment growth, capital formation, and production of goods and services.

A default on the national debt by the US is an option separate from monetary expansion and austerity measures. I encourage the public to at least consider the default option more fully as part of its discourse on methods and possible courses of action for economic recovery.

Comments welcome below...

The Capitalist System According to Banksters

I wanted to share this poster originally printed in 1911 with aspiring banksters. Anyone seeking to enter the bankster profession will find the contents philosophically instructive -- good luck!

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On Being a Woman in Post-Modern Society

This post compliments my previous entitled, On Being a Man in Post-Modern Society:

On Being a Man in Post-Modern Society

While I appreciate and acknowledge that posting the chart below may be politically incorrect, the economist in me feels duty-bound to make the post regardless.

In many ways, the story of the past 62 years has been about the realities of being a man in our emerging post-modern society...

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The Rhetoric of Depression...

"There will be no interruption of our permanent prosperity." ~ Myron E Forbes, President, Pierce Arrow Motor Car Company, January 12, 1928

"I have no fear of another comparable decline." ~ Arthur W Loasby, President, Equitable Trust Company, quoted in NY Times, October 25, 1929

"In most of the cities and towns of this country, this Wall Street panic will have no effect." ~ Paul Block, President, Block newspaper chain, editorial, November 15, 1929

"I cannot help but raise a dissenting voice to statements that we are living in a fool's paradise, and that prosperity in this country must necessarily diminish and recede in the near future." ~ E H H Simmons, President, NY Stock Exchange, January 12, 1928

"Buying of sound, seasoned issues now will not be regretted." ~ E A Pearce market letter quoted in the NY Herald Tribune, October 30, 1929

"...despite its severity, we believe that the slump in stock prices will prove an intermediate movement and not the precursor of a business depression..." ~ Harvard Economic Society, November 2, 1929

"For six years American business has been diverting a substantial part of its attention, its energies and its resources on the speculative game... Now that irrelevant, alien and hazardous adventure is over." ~ Business Week, November 2, 1929

"This crash is not going to have much effect on business." ~ Arthur Reynolds, Chairman, Continental Illinois Bank of Chicago, October 24, 1929

"For the immediate future, at least, the outlook (stocks) is bright." ~ Irving Fisher, leading US economist, early 1930

"Financial storm definitely passed..." ~ Bernard Baruch, cablegram to Winston Churchill, November 15, 1929

"The end of the decline of the Stock Market will probably not be long, only a few more days at most." ~ Irving Fisher, Professor of Economics at Yale University, November 14, 1929

"Hysteria has now disappeared from Wall Street..." ~ The Times of London, November 2, 1929

"... a serious depression seems improbable..." ~ Harvard Economic Society, November 10, 1929

"Gentleman, you have come sixty days too late. The depression is over." ~ Pres Herbert Hoover, responding to a delegation requesting a public works program to help speed the recovery, June 1930

"This is the time to buy stocks." ~ R W McNeel, market analyst, NY Herald Tribune, October 30, 1929

"There may be a recession in stock prices, but not anything in the nature of a crash." ~ Irving Fisher, leading US economist, NY Times, September 5, 1929

"There is nothing in the situation to be disturbed about..." ~ Andrew Mellon, Secretary of the Treasury, February 1930

"I think the bloom is off the rose, but there is no doom and gloom." ~ Alan Nevin, Chief Economist, California Building Industry Association.

"While the crash only took place six months ago, I am convinced we have now passed through the worst ~~ and with continued unity of effort we shall rapidly recover." ~ Pres Herbert Hoover, May 1, 1930

"[1930 will be] a splendid employment year." ~ US Dept of Labor, New Year's Forecast, December 1929

"The former great periods of prosperity in America averaged eleven years. On this basis we now have three more years to go before the tailspin." ~ Stuart Chase, American economist and author, NY Herald Tribune, November 1, 1929

"The spring of 1930 marks the end of a period of grave concern... American business is steadily coming back to a normal level of prosperity." ~ Julius Barnes, head of Hoover's National Business Survey Conference, March 16, 1930

"All safe deposit boxes in banks or financial institutions have been sealed... and may only be opened in the presence of an agent of the IRS." ~ Pres Franklin D Roosevelt, 1933

"Buying of sound, seasoned issues now will not be regretted..." ~ E A Pearce market letter quoted in the NY Herald Tribune, October 30, 1929

US Trails Developed World in Jobs Recovery

The US is trailing the developed world in jobs recovery as the charts below illustrate:

For now, the US is enduring the longest period of lingering unemployment since the Great Depression. I weep for those Americans who have lost their jobs and livelihoods since the economic crisis hit in 2007...

Source: Whitehouse, M (2010, July 10), Debt, Bank Troubles Leave US Trailing in Job Growth, WSJ.com.

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Lingering Job Losses Worst Since World War II

Prosperity is Just Around the Corner...

As the Great Depression took hold of the US in 1929, Republican Pres Herbert Hoover comforted the nation by predicting that "prosperity was just around the corner..." In reality, the US GDP dropped throughout Hoover's presidency, and economic growth was not restored until after Hoover left office in 1933. The GDP growth rates during Hoover's presidency (1929-1933) were frightful.

Ironically, Hoover rejected monetary expansion in favor of fiscal austerity, which only seemed to worsen America's economic troubles throughout his presidency. Franklin D Roosevelt, a Democrat and author of the "new deal" for America would be elected to four straight terms as US President starting in 1933. Following Roosevelt's death in 1945, Harry S Truman, another Democrat, would go on to occupy the Oval Office until 1953.

America's New Landed Gentry...?

Government workers in the US earn significantly more in wages and benefits than their contemporaries in the private sector. Additionally, the career risks of government employment are widely viewed as none. Consider the following:

Here is my question: Are government workers the new "landed gentry" of America?

Mr and Mrs Andrews (1748-49) by Thomas Gainsborough

Comments welcome...

Proud to be an American

Best wishes to everyone, and especially those serving our nation in uniform around the world...

Blogging for Gold

Kent Thune of The Financial Philosopher offers this assessment of bloggers:

With well over 100 million blogs on the Internet today, the statistical likelihood of earning big money writing in a blog is not much better than playing the lottery. There are, however, millions of people who enjoy creating blogs and are quite confident (or delusional, depending upon the particular case) that their writing and marketing skills, combined with incredible luck and timing will enable them to strike it rich. These are the gold diggers.

Indeed, we bloggers are digging for gold…

Source: Thune, K (2010, June 30), Dig for Gold, Sell Shovels (or Neither)? The Financial Philosopher.

US Private Services Bolster Overall Exports

The chart below supplements my last at US Private Service Exports on the Rise. Clearly, US private service exports have bolstered other exports of goods and services since the economic crisis began in 2007.

While exports of private services represent only a small fraction of the total US GDP, those working in the private service sector might take comfort in these findings.

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Percentage Employed in US Continues Slide

According to the Bureau of Labor Statistics (BLS), the number of people with jobs in the US continued to slide as a percentage of the civilian noninstitutional population through June 2010. Many economists believe that reporting the number employed as a percentage of the civilian population provides a more accurate description of the current state of employment than conjecturing the number of "unemployed" in a given population. Since 2000, employment in the US has declined from 64.4% to 59.5% as a percentage of the civilian noninstitutional population.

The BLS defines the civilian noninstitutional population and employment as follows:

The civilian noninstitutional population consists of persons 16 years of age and older residing in the 50 States and the District of Columbia who are not inmates of institutions (for example, penal and mental facilities and homes for the aged) and who are not on active duty in the Armed Forces.

Employment consists of all persons who, during the reference week (the calendar week including the twelfth day of the month), (a) did any work at all (at least 1 hour) as paid employees, worked in their own business or profession or on their own farm, or worked 15 hours or more as unpaid workers in an enterprise operated by a member of the family, or (b) were not working but had jobs or businesses from which they were temporarily absent because of vacation, illness, bad weather, childcare problems, maternity or paternity leave, labor-management dispute, job training, or other family or personal reasons, whether or not they were paid for the time off or were seeking other jobs.

Source: Bureau of Labor Statistics

A Simple Way to Export Private Business Services

Follow the link below to learn about a simple way to export private business services starting right now...

For the record, I credit PayPal with successfully extending my private business practice (http://www.mckibbinusa.com/) into a global service offering. Good luck to all of my entrepreneurial colleagues around the world!

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US Private Services Bolster Overall Exports

US Private Service Exports on the Rise

The chart below extracts US exports of private services from transportation, government, and other service exports. Private services include business, professional and technical services, insurance services, and financial services. According to the Bureau of Economic Analysis (BEA), US private service exports are weathering the ongoing economic crisis with ease and are now on the rise.

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US Service Exports Exhibit Resilience

US exports of services other than transportation are exhibiting remarkable resilience to the effects of the economic crisis as shown below.

While most of the economic news coming out of the US these days remains gloomy, service exports excluding transportation appear to be a bright spot.

Self-Employed

I stand and listen, head bowed,
to my inner complaint.
Persons passing by think
I am searching for a lost coin.
You’re fired, I yell inside
after an especially bad episode.
I’m letting you go without notice
or terminal pay. You just lost
another chance to make good.
But then I watch myself standing at the exit,
depressed and about to leave,
and wave myself back in wearily,
for who else could I get in my place
to do the job in dark, airless conditions?

~ David Ignatow for Harvey Shapiro

David Ignatow (1914-1997)

The Entrepreneurial Obsession

Here's a short eBook that is worth reading for those seeking a path of their own...

Follow the link below for your free download...

Download