Remember George Bush’s magic wand? A few years ago he said that if he could wave a magic wand and lower oil prices, he would. I cringed at the time, thinking about the magic of prices, and what they communicate to everyone in an economy. If we mess with that language by distorting the price signals, we miss out on all sorts of important effects.
One example is winglets. You know, those little upturned jobs at the wing-ends of newer airliners. It turns out that this design saves the plane about 2% of its fuel cost each trip. And they have the added plus of smoothing out the ride.
But they cost about a million bucks to put on each plane. With jet fuel prices higher, the payback period for re-fitting the older airframes is a lot shorter now. And winglets are sprouting up everywhere.
This is just one example of the magic of prices. In a free market prices communicate incentives. If someone waves a wand and distorts this, we’ll all have a lot bumpier ride.
Douglas R. Tengdin, CFA
Chief Investment Officer
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