Beyond sixth grade we don’t tend to think about tetherball much. It’s a pretty simple game. One of momentum, angles and coordination. Doug White a fellow broker here at Metro Brokers Boulder had a great idea about how tetherball is an analogy for the economy.
First, let’s review the basics. Tetherball is played by two people on opposite sides of a pole. From the top of the pole hangs a rope and at the end of the rope is a ball. The goal for each person is to push or hit the ball in a certain direction, either clockwise or counterclockwise around the pole. Before the rope begins to wrap around the pole the circumference of the arc is large and the ball seems to be moving relatively slowly. As the rope begins to wrap around the pole, the circumference becomes smaller and the time it takes for the ball to travel in a circle decreases. As the ball travels around the pole more quickly the players have less time to react. In the end the rope is fully wound around the pole and the ball hits the pole. The game is over and the ball begins to unwind. This is probably more than you ever wanted to remember about tetherball but here comes the analogy.
In our analogy the ball is the economy. On one side of the pole is “Positive Paul”. Paul stands for all of the positive forces of the economy. When Paul is doing well the economy is doing well. On the other side of the pole is “Negative Ned” and he represents all that would derail the economy. Since the early 1990’s Paul, for the most part, has been been doing well. All of the forces that make Paul work, like job growth, increased productivity, and population growth have been gaining momentum. As a result, momentum builds and companies are created, values on real estate and investments rise. With each arc around the pole momentum builds and the negative forces that slow the economy (Ned) has a harder and harder time even touching the ball. All is good.
During the last decade momentum has built up to a frenzied pace due to increased globalization, easy credit and unprecedented consumer confidence. As of two years ago, momentum had built up to a point where most thought it was unstoppable. The ball was whipping around the pole way out of the reach of Negative Ned. Positive Paul became complacent and cocky and then all of a sudden, just when Paul thought it would go on forever, Ned reached in and stopped the momentum. We are now seeing the excesses of the positive momentum resulting in the economy moving in the other way, quickly. The credit crisis, the housing crisis, unemployment, low consumer confidence; each of these factors is moving the ball in the negative direction. The negative momentum is moving fast since we still at the top of the pole. The economy seems to be unraveling.
Just as the exuberance (bad loans, over hiring, bad personal decisions) of the positive era caused the ultimate downfall of the economy. The correction (layoffs, record low housing starts, increased lending diligence etc.) is resulting in behaviors which will eventually turn it around.
What we need now are forces to stop the negative momentum. In a tetherball game more advanced players succeed because they know how to use angles. The strong hit is not nearly as effective if you hit it right to your opponent. To succeed a player must hit the ball so that the ball is at its highest point right where the opponent is. Right now, I think our overall financial re-trenching is weakening the negative forces, like a boxer punching the gut. What the government is trying to do with the proposed stimulus plan is to change the angle. To make the most of each action. Let’s hope they get it right.