Scarcity Breeds Clarity

Every year the founders of the search company Google write an annual founders letter to shareholders. Though it has not been around as long as Warren Buffet’s popular annual letter to Berkshire Hathaway shareholders, it is a good read for investors, reflecting the thinking of one of America’s premier technology companies. When they wrote this past letter at year-end, the economy and the stock market were in steep decline. But Google founder Sergey Brin took a positive note, writing, “Nonetheless, I am optimistic about the future, because I believe scarcity breeds clarity: it focuses minds, forcing people to think creatively and rise to the challenge.” He noted that the “dot-com” bust of 2000-2002 forced Google and other technology companies to make tough decisions that made them stronger as a result.

We are seeing this same process play out across our economy these days. Last week the Treasury announced the results of their stress tests on major banks. Losses from the housing and credit crisis depleted the capital of our banking system, leading to the massive government investment in the banks and a comprehensive review of their capital adequacy. Scarcity has brought clarity to our banking system, credit markets have responded positively, and the crisis in banking appears to be ending. Regulations will be improved and America’s financial system will emerge stronger than ever.

The economy and the steep decline in auto sales are bringing about changes in major U.S. automakers as well. Chrysler has entered bankruptcy and General Motors is soon to follow. The economy has forced these companies to make changes that should have been made many years ago. It is now being forced to change because of the “scarcity” of auto sales and in turn cash to keep the doors open. Scarcity breeds clarity-the American economy is becoming more focused, more creative, and will no doubt rise to the challenge again.