WHAT IS A LIQUIDITY CRISIS?

WHAT IS A LIQUIDITY CRISIS?

by Frank Givens

What is a liquidity crisis? First of all, I don’t think all this up. It is an accumulation of ideas that have come my way. This particular subject is well documented in financial and economic journals. A liquidity crisis is a period of de-leveraging. It is when money and credit are in short supply.

Institutions like banks and investment companies (mutual funds) dump stocks wholesale to satisfy withdrawals. It is a time when fear grips business and industry. “Liquidity” is the capacity to turn assets into cash, or the assets in a portfolio that have the capacity to be converted to cash. Cash itself (i.e. money) is “The” liquid asset. Cash becomes king!

Debt of course eats liquidity. Borrowers can be characterized in three ways. There are those who can pay their debts from income. There are those who rely upon increasing values to satisfy debts. There are those who rely upon rolling debt and lower interest rates to satisfy debts.

These are the kind of economic times that our folks warned us would come. They may not have been familiar with the terminology, but price rations the available resources. Price is the fulcrum between supply and demand. In this present phase of the economic cycle, demand is fueled by liquidity, not speculation.

I’ve been reading a classic in economics, Manias, Panics, and Crashes by Charles Kindleberger. Our current situation falls into a well worn pattern that Kindleberger terms a “hardy perennial”. (It also demonstrates, in my opinion, that social engineering does not cure the evils of capitalism).

The cycle goes something like this: Profit is the incentive that fuels/creates economic expansion. In the pursuit of profit, we become dissatisfied with “small gains.” Increasing prices entice investment. Speculation leads away from rational behavior. Making money never seemed easier. A follow the leader process develops. Banks make riskier investments in this more optimistic climate. Easy credit fuels the fire of speculation. Everyone wants a piece of the action.

Individuals and business ignore evidence that it would prefer not to think about. Consciousness is repressed (modern economists call it cognitive-dissonance). Eventually this mania gives way to reality. A “displacement” like a surge in oil prices changes expectations. The cycle continues and the party always comes to an end! Good times give way to panic and then the markets crash! We have a liquidity crisis. Those who can pay their debts are separated from those who can’t. Asset values slide to equilibrium, often overcorrecting. And the process starts over!

The risk today is that fiat money (bailouts) will distort incentives to produce. But that is in the future and is a whole other economic story.

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Frank Givens, CPA, is a partner in the firm F.O. Givens & Co. in Senatobia, Miss. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Frank can be reached at 662-562-6721.

Environmental Economics

Environmental Economics

by Frank Givens

Rotary International has some great programs. If you don’t know about them, look on the website at Rotary.org and when you find something you are interested seek out a local Rotarian. He or she will be glad to help. Here are the three big ones. Most common is the Rotary Exchange program where a young person (ages 14 to 18) can attend high school in another country. Another is the Ambassadorial Scholarship for undergraduate and graduate students to study in another country. A third is called GSE (Group Study Exchange) and is a cultural and vocational exchange for those ages 25 to 40 in the early stages of their careers.

A few years ago, I had the good fortune of leading a GSE team of young professionals to Norway. You travel from community to community and visit people who are in your own profession. You attend Rotary Club meetings and tell about your home and work. You stay in the homes of local Rotarians. You are treated like royalty. On this trip I learned a valuable lesson about the economy of environmentalism.

When it comes to the environment we all want to preserve it for future generations. After that, there isn’t much consensus. But we know what happens to the goldfish bowl if the water doesn’t get changed. So where do we find solutions? First, the best thing for the environment is a strong free economy. You don’t see a strong economy unless it is free. And you don’t see a good environment unless the economy is strong. You might say that these factors are interdependent.

In Norway, they have had two environmental and economic disasters, not entirely of their own making. And they got one really big break for the economy. In the old days, their economy was built on fish and timber. At some point the waters were over fished and the fish stock became depleted. At some point the timber began to die from acid rain. Russia (that command economy, environmental disaster of a nation) was polluting the air.

When it affected their pocketbooks, Norwegians became environmentalists. Their big break came from oil in the North Sea. They are the third largest exporter of oil and gas. As a result, they have the national wealth to provide for the social systems that are in place.

So what does all this mean for us? We must protect our economy as well as our environment. Government can set policy. Education works. Beyond that, should government do more, can government spend tax dollars without harming the economy? Keynes may say yes, Friedman or Hayek would say no. Can the justice system rather than budgets keep the environment clean? What part of the resources can the government take to spend and we have a free economy? Does really big business become a branch of the government? Our children need to learn about economics. And there are some questions we can’t answer. That’s economics. So learn, participate, think and vote. That’s all folks.

Frank Givens, CPA, is a registered representative with and securities are offered through LPL Financial, Member FINRA/SIPC. Frank can be reached at frank.givens@lpl.com. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

SURVIVING AND PERHAPS THRIVING DURING RECESSIONS

SURVIVING AND PERHAPS THRIVING DURING RECESSIONS

by Frank Givens

If you haven’t heard about the economy, the recession, the stock market, the stimulus plan then you must be hiding under a rock.

Most financial experts agree that we haven’t hit the bottom of this and it will likely take years for our economy to be back to pre-recession levels.

I have seen some organizations that have not only survived but done well during the last two recessions. There are several common characteristics shared by these companies before, during and after the recession.

So what did they do? They didn’t get sick and go to bed; they didn’t roll over and die. They did more than “make do” and they continued to succeed during a recession.

They all had a strong strategic vision and knew who they were before, during and after the crisis. Before it began they controlled costs and established a rainy day fund which they then used during the crisis. They continued to advertise, reduced costs without long-term damage to business and they figured out ways of growing new revenue.

These same basic ideas can be applied to the family. Communicate with your family—be honest about your financial situation. If you don’t have a rainy day fund, start one. Savings accounts are free and usually require just a small deposit to activate.

Let your teenagers get a job to pay for their own spending money. If you’re eating out every night learn how to cook. There’s a reason that the “greatest generation” grew up during the Great Depression.

When my daughters were little one of their favorite books to have read aloud was the Laura Ingles Wilder series. As Pa used say, “It’s better to be safe than sorry.” He was talking about not falling in a well, but the same is true for your long-term and short-term financial goals.

Today, yes, the economy is bad. History tells us that eventually the economy will turn around. Hopefully, the young people witnessing this today will make better choices about spending and saving in the future because of what has happened.

Frank Givens, CPA, is a registered representative with and securities are offered through LPL Financial, Member FINRA/SIPC. Frank can be reached at frank.givens@lpl.com. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

Free to a good home: economic perspective

In an unprecedented move today, Treasury Secretary Timothy Geithner asked Congress for the power to regulate non-banking financial companies. If granted, in addition to power wielded over bailed out banks, the Treasury Department could seize control of financial institutions outside the banking industry, essentially nationalizing our country's financial system.

What does this mean for the average American citizen?

Beyond talking points issued by talking heads, many of us taxpayers don't fully understand how a blended economy based on the principles of capitalism is supposed to work. Some of us decry government controls but lack the knowledge to defend our arguments. Others of us vilify for-profit corporations but don't fully understand the implications of our pro-regulation theories. Fortunately, you don't have to be an economist to understand the economy.

Thanks to the omnipresence of the internet, you don't even have to buy a book. Economics in One Lesson by Henry Hazlitt is online in its entirety (Side note: I don't know who Jim is, but I'm glad we at least have such widespread access Hazlitt's work, which is still relevant more than 60 years since its original publication.).

You're busy. I understand. You don't have time to read all your email, much less a whole book (on economics, no less). Humor a tired, cynical blogger and just read a few chapters:

Chapter 1: The Lesson
Chapter 2: The Broken Window
Chapter 5: Taxes Discourage Production
Chapter 6: Credit Diverts Production
Chapter 14: Saving the X Industry

Of course, reading the book cover to cover would be beneficial, too.
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Posted by Natalie Criss