The LeBron Effect

The new-look Cleveland Cavaliers open their season tonight, playing at home against the New Your Knicks.  When I was driving home from work tonight, one of the local radio stations announced that it would be carrying the game.

“That’s odd,” I thought.  I don’t think any station carried the Cavs games last year.

And then I remembered:  LeBron is back.

If you ever wondered about the impact of one player on a team, a franchise, and a city, consider the LeBron Effect. When LeBron James announced that he was returning to Cleveland, it energized the city and the Cavaliers franchise, produced huge ticket sales and set the roster dominoes to falling.  Now the Cavs have a changed lineup and a changed attitude — and so do their long-suffering fans.  My friends up in Cleveland say that the Cavs are by far the toughest ticket in town.

With LeBron, Kyrie Irving, and Kevin Love, the Cavs expect to contend for an NBA championship — which would be the first championship a Cleveland sports team has earned in 50 years.  Those expectations are a heavy burden, but LeBron James is used to the pressure.  It’s all just part of the LeBron Effect.

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Quantitative Ending

The Federal Reserve Board has announced that it is ending its Quantitative Easing (QE) program.  Monetary policy and Wall Street finance decisions like this one typically make the average person roll their eyes and groan about abstract concepts that don’t seem to affect them — that is, until the failure of poorly conceived financial instruments threaten to bring the American economy to its knees and produce a recession or depression.

So what is QE, exactly?  It began in 2008 and was designed to try to bolster the sagging economy by injecting money and increasing the availability of credit.  A helpful New York Times piece explains QE using charts.  They show that for the last six years, the Fed has been buying bonds — lots and lots of bonds, to the point where it now owns $4.8 trillion of them.  And it hasn’t limited its bond buying to its traditional market of presumptively safe U.S. treasury securities, either.  Instead, it has bought huge sums of mortgage-backed securities, too, to the point where about 40 percent of the Fed’s total portfolio consists of those instruments.  And although the Fed has announced that QE is ending, that really just means that the Fed has stopped buying.  It has no plans to do any selling and will continue to own and hold that $4.8 trillion of bonds.

Why should we care about any of this?  Some people say that, through QE, the Fed just created money out of thin air.  Of course, it has been decades since the “gold standard” applied and dollars could be exchanged for actual gold, and since then dollars and other currencies basically have only had the value that investor confidence places in them.  During the six years of QE bond-buying, inflation has remained under control.  And, in some respects, QE seems to have worked — borrowing costs have declined, the stock market has bounced back, and there has been some job growth since the dark days of 2008-2009, although the economy obviously remains weak.

My views about QE boil down to two thoughts.  First, QE illustrates the enormous extent to which our current form of government places a lot of trust and power in institutions like the Fed.  How would the Founding Fathers react to an unelected board independently making the decision to buy trillions of dollars of financial instruments as part of a specific effort to manipulate the economy?  Second, QE also reveals the puniness of the average American in the face of massive economic forces that are wholly beyond our control.

Many of us have tried to manage our personal financial affairs prudently, with an eye toward building a nest egg that will allow us to some day enjoy a comfortable retirement.  We are like the ants in the tale of the ant and the grasshopper, toiling and husbanding a portion of our earnings while the grasshoppers among us fiddle in the summer sun.  The risk for those of us who are following the path of the ant is that inflation begins to erode the value of what we’ve saved and reduced its ability to allow us to enjoy our golden years.  Has QE increased that risk?  So far it apparently hasn’t, but the jury is still out.  Like ants, we just hope that we don’t get crushed.