Beating Broke

Personal Finance from the Broke Perspective

The Role of Optimized Trade in the Worlds Economy

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First, let’s get the basics out of the way. From the World English Dictionary, we get this definition of Optimize:

2. ( tr ) to plan or carry out (an economic activity) with maximum efficiency

The world is a big place.  There are billions of people that live in various places all around it.  Heck, even at the poles.  What is the role of trade, and, more specifically, the role of optimized trade in the world economy?  A couple of days ago we spoke about isolationism and the stagnation that could occur after an isolationist stance is taken for a long enough time.  The specific example was that eventually the supply and demand would reach an equilibrium.  In truth, an equalized supply and demand trade system is a fully optimized trade system.

In our every day lives, we buy things that are made all around the world.  In fact, it seems that we buy more foreign made items than we do domestic ones.  Why?  The common answer is that it’s cheaper to make these things in foreign countries than it is to make them here.  Why is it cheaper?  Because the trade to and from those countries has become optimized to the point that it’s so efficient that the costs of freighting those items here is still cheaper than making them here.

Freight ShipMaking trade routes more efficient through optimization reduces costs for trade along those routes.  Many of the things that we have today wouldn’t be available to us if we hadn’t optimized the trade routes here.  Consider oranges.  They don’t grow up here in the northern plains.  The only way to get them is to import them from someplace like Florida or California.  If the trade routes between Florida and the northern plains hadn’t been optimized by the invention (and use) of the combustion engine and, later, the invention of the federal highway system, it would make oranges too expensive to ship way up here.  The oranges would either rot on the way here, or the added expense of keeping the oranges from spoiling on the way here would be cost prohibitive.  But, because that trade route has been optimized to a greater degree, it’s possible for me to go to the local grocery store and buy oranges that were grown in Florida for nearly the same price as I would for produce that was grown here.

Optimized trade has a grand role in the worlds economy.  The more optimized the trade becomes the more likely it will be that things will be made in so many more places around the globe.  It will become easier to get authentic items, rather than semi-authentic items made here.  Eventually, when the trade has become optimized fully, a stagnant period will occur.  That scenario is impossible to imagine right now, because there are so many parts of the world that have no access to optimized trade.  We call them 3rd world countries.  They are so far removed from the optimized trade that many of the things that you and I in our 1st world society take for granted are mere dreams for them.  A fully optimized trade system would eliminate that.  Who knows, maybe someone will invent the transporter and we’ll have instant transfer of freight.  Imagine the possibilities!

Image Credit: Freight Ship by SpammT, on Flickr

Isolationism and Stagnation

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Isolationism isn’t a new idea.  At it’s root, it is the idea of being alone.  Isolated.  There have been a few countries that have used Isolationism to cut their country almost completely off from other countries.  China, Japan and North Korea all are examples.  China and Japan have opened up, but North Korea is still cut off from most of the world.  (OT: Did you know that North Korea is technically still at war with us?  An Armistice was signed, but no declarations of the end of the war.)

Given a long enough time as an isolationist country, a stagnation can be reached.  I don’t believe any of the above mentioned countries ever reached that stage.  But, at some point, a country that has no exports and no imports will find an equilibrium of sorts.  The capacity of the manufacturing industry will be reached as will the consumption limits of the people.  When that happens, the economy of those countries will stagnate as well.  The law of supply and demand notes that the supply (and price) of an item can be an important factor in the demand for an item.  The opposite is true as well.  But, if demand is level, there is no need for increased demand and prices are likely to drop.  As the stagnation continues, the country will be forced to open it’s borders to outside trade in order to stimulate the countries economy.

How does all of this relate to personal finance and Beating Broke?

Mo Money Mo ProblemsPeople can be isolationist as well.  We each have a personal economy.  And each of our economies is a bit different.  When we treat our economy with an isolationist view, we too can stagnate.  But, how do we do that?  The most extreme example is to take all of your money and put it in a coffee can and then bury it in the back yard.  Or to take all of your money and stuff it in between the mattress and the boxspring.  That money is isolated from the economies of other people.  And while it isn’t necessarily shrinking (as long as you aren’t buying things), it also isn’t growing at all.

A less extreme example would be that of the person who keeps all of their money in a savings account that pays little interest.  With no growth (interest), your personal economy will eventually reach an equilibrium.  That equilibrium will be signified by the 0 cash flow situation that will occur when you begin spending as much as you make and are unable to add any more to your little lumpy mattress stockpile.  Given enough time, it will actually swing the other way as you find yourself pulling a bill or two out to buy stuff.

But, all of this is fixable.  All you have to do is be open to ways to grow your personal economy.  You can be open to increased imports (interest + wages).  Growing your exports (value of your work) can help grow your imports.  Finding a good savings account to put your savings in will grow your imports (interest).

Don’t let your economy stagnate!  Take the little extra time that it will take to find a better rate for your savings.  Find a way to increase your work output without increasing your hours, or take on overtime or a second job to increase your income . Maybe you can increase your financial knowledge and education with a finance degree.  The basic idea here is that you have to be open to new ideas, new products, and to the value that your economy has to you.

The effect that isolationism can cause to a region/country. Without outside import/export, optimization occurs and stagnation ensues.

Image Credit: Mo Money Mo Problems by greggoconnell, on Flickr

Has Stock Trading Ruined the World?

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The very basic essence of stocks is that you buy a “share” of a company in order to own a portion of the company and “share” in it’s successes.  If the company decides to not reinvest it’s profit into itself and instead pay a portion, or all, of that profit to the owners, you get a bit of it in the form of a dividend.  It the company does reinvest the profits into itself, it increases the value of the company, and your “share” of the company increases in value as well.  You can then sell your “share” of the company to realize that increase.

But, that’s only at it’s most basic level.  Today, the world of stock investing is so much more.  There are options, short selling, margin trading, ETFs, mutual funds, hedge funds, and a myriad other ways that you can partake in this sometimes exciting, and always risky world.  It isn’t just simply owning a portion of a company anymore.  You can sell shares of companies that you never owned in the first place.  You can buy on margin with money you never had.  And you can do it all whenever you want.

Bear MarketBut, has this evolution of the stock market become a cancer on the world?  So much of our economy relies on the stock market as an indicator of the world economic health.  If stocks drop, so too does much of the rest of the economy.  And if a company does poorly, and many of it’s shareholders sell, causing the price to drop, it can have a ripple effect on the rest of the industries companies, or even on the stock market as a whole.  In May of 2010, just such a sell off caused a drop in the stock market that had the entire world trembling in fear of a worldwide economic collapse.  It was caused by a trigger in an computer algorithm that was mistakenly set wrong.  Many of the stock markets closed early to try (unscheduled rather than one of the normal stock market holidays) and curb the crash and hold off a more drastic drop.

The way the stock market works has evolved so much in order to optimize the buying and selling of shares of companies merely for the profit of the brokers and day-traders.  Very few investors will buy a share with the intention of holding it for more than 5 or 10 years.  That’s a drop in the bucket for companies that have been around for over 100 years.

Events like the crash of May 2010 and the crash in 2008/2009 due to the real estate bubble bursting give us all pause when we think about investing.  For those of us who don’t want to try and “beat” the market and who proscribe to a more long term approach to investing, the drastic ups and downs of the market are cause for concern.  What happens if the crash can’t be stopped?

Is it fixable?

Perhaps, but I don’t think that the many brokers and traders who make their money with the newer methods of investing will allow it to happen.  To truly fix the market, it needs to revert to it’s much more simple state.  Simple buying and selling of shares.  No options, no shorting, no margin.  Just ownership of a company.  After all, that’s what it’s really about.  And if it can’t be fixed (or won’t be allowed to be fixed), perhaps it’s time the investors who don’t like the way it’s working move our money someplace else.  There are plenty of opportunities in your local communities to invest in start up companies and other investment vehicles.

A word of warning though.  Those local opportunities are generally much more risky than buying a share or two of a company like Proctor and Gamble who have been around for decades.  Only about 10% of start-ups still exist 5 years later.

Risky as it is, the stock market can still be a sound place to keep your money.  Yes, you do run the risk of losing your investment.  Nothing there is insured or guaranteed like you would see if you had your money in a savings account at a NCUA insured Credit Union or a FDIC insured Bank.

Has stock trading ruined the world?  Not yet.  Will it?  Let’s hope not.

Image Credit: Bear Market by AZRainman, on Flickr