There's the rub. My company's bank loan officer has called frequently asking if we need to borrow. They are begging to lend money. For what? We could buy a nice new machine tool at a good price, but why do that when sales are falling? Put an extension on our building? Buy some failing competitor and strap oneself with debt? Unless you absolutely need a new car or a new television or a new roof, the big ticket discretionary purchases paid for by loans aren't going to be made. The loans the banks are making now are companies rolling over existing debt, not new debt. Given the "stuff" out there that is discretionary purchases, I wouldn't be at all surprised to see unemployment hit 20% before a bottom is reached.
Copyright © 2009 by The Atlantic Monthly Group. All rights reserved.
Yep.
This is why I keep making the point that an economy exists, basically, to serve consumers. Not to provide jobs, not to create tax revenue, not to ensure social justice, but to sell somebody something they want at a price they are willing to pay.
I guess I'm not the only one worried about a Mad Max scenario.
This relates to what seems to me misguided about the 'stimulus bill.' As people get into a better balance sheet position, they are going to buy or take loans. For now, we have put the government in control of spending and, if it pleases the government, money will be blown your way (so you may want to blow some toward your 'friends' there). If we as a country were going to go into more debt, it would have been better just not to collect it. The behavior of Geithner and Daschle shows that, you know, really people could handle paying less (and rebuilding their balance sheets). People are not really going to spend until that happens.
Yes, TallDave, and right now, what people want most is security, something only saving can buy, not spending.
Why not offer tax credits then, to encourage spending? What if Creech's company were given a 50% tax credit on the purchase of a new machine tool, but only if they purchased it by the end of 2009? How about offering a similar credit to consumers? It wouldn't be a panacea for bankrupt businesses or unemployed people, but it might encourage more solvent businesses and employed consumers to open their wallets this year.
DaveinHackensack, that is at least as distortionary as just having the government buy the machine tool itself. Creech is saying he doesn't need the machine tool because he sees no prospect of rising demand. The government would do better to spend that money on fixing a broken school roof -- something for which there is indisputably demand, but no money available to pay.
Creech's point is really important: in a massive recession, banks aren't lending because businesses don't want to borrow because no one sees a prospect of rising demand. This is why we need government to step in and start buying a lot of those things we've been saying we "can't afford" for a long time. Somebody has to revive demand to get the economy flowing again, and the government is the only one that can do it.
"The government would do better to spend that money on fixing a broken school roof -- something for which there is indisputably demand, but no money available to pay."
I dispute that there is demand- by the actual owners of the school in question (the local property owners).
Actually, there are spending incentives--the homebuyer tax credit I heard changed into a true tax credit (not have to pay it back, was just an interest free loan from the gummint with tax prep hassle for the next 15 freakin' years)...and now there's a tax credit if you buy a new car this year.
I'm in the position to do both but real estate prices haven't softened in my area yet, and I think they will once a solution is under way...and who would buy a new car when it seems that some of the automakers are going to go under?
Incentives don't make wild gamble decisions rational. There's a lot to lose on the down side of a bad gamble, more than the value of the incentive.
I'm sitting on a pile of cash and there's no good place to put it right now. If things get much worse I might invest in canned food, guns, and ammo. And a horse for transportation. LOL
"DaveinHackensack, that is at least as distortionary as just having the government buy the machine tool itself."
How do you figure that? First, Creech's business -- and tens of thousands like it -- would have a better idea of what to buy for their businesses than the government would. Second, because it's only a 50% tax credit, and the businesses would have to spend some of their own money, so they'd be less inclined to waste it. The "distortion" of the credit wouldn't be to get businesses to buy things they'll never need, but to buy things they may need in the next few years now.
"Creech is saying he doesn't need the machine tool because he sees no prospect of rising demand."
Ever? If that's the case, then his business wouldn't take advantage of the tax credit. But a lot of other businesses -- including ones that have an institutional memory of surviving previous downturns -- would. Many companies in the non-financial sectors have strong balance sheets*, and could be encouraged to spend some of their cash given this sort of tax credit.
*E.g., Cisco Systems, an $89 billion market cap company, has about $23 billion in net cash; Graham Corporation, an $85 million market cap company, has about $45 million in net cash, etc., etc. Everyone isn't broke, but uncertainty (abetted by fear-mongering in D.C. and elsewhere) is prompting even those flush with cash to husband their resources.
There is demand, just not at the current prices. All of this artificial demand creation is just the broken glass fallacy with modern spin.
There are opportunity costs to deficit spending. There are unintended consequences of stimulus spending. It would be rational to debate the net benefit or harm of the program, but the harm is not being discussed at all.
Will our children approve of how we spent their money? Almost certainly not.
RELATED: My dad manages a doctor's office. He got a 150,000 loan with one phone call to his banker. Not even a handshake. He bought a wrinkle/hair removal laser. There goes my inheritance.
"and now there's a tax credit if you buy a new car this year"
Did this change? It was to originally be a loan interest deduction. If it really is a tax credit for purchasing I'll spend some of the money I don't know where to invest and replace my 11 year old car. If it's the loan interest deduction, what good is that.
Bearded Spock,
"He bought a wrinkle/hair removal laser."
Do you know what company manufactured that laser?
Will our children approve of how we spent their money? Almost certainly not.
Do you approve of how your parents spent your money? Since they likely voted for Ray-gun and Poppy Bush.
Over the long run, economic growth is driven by productivity improvements, both in terms of capital and higher-skilled laborers/entrepeneurs. What's different about today's economy vs. that of 50 or 100 years ago that allows it to be so much more productive on a per capita basis? A lot more machines and a lot more skilled employees.
I have to be skeptical when a politician tells me they're going to create economic growth with makework jobs, makework infrastructure projects, or social justice programs. None of those things make the economy more efficient.
Bearded Spock -- I agree 100% re: no real demand for new schools. I live in Massachusetts and for the last 10 years the state has been paying towns 50-90% towards new school construction. Towns have snapped up this so-called deal without considering if they really need the schools. There certainly would have been fewer schools built if the state didn't start this school ponzi-scheme. Has it helped learning? Not at all. But politicians love showing up at new school openings and patting themselves on the back. Meanwhile the next day when the town has to layoff teachers to pick up its part of the cost, the politician is onto his next ribbon cutting ceremony.
"Do you approve of how your parents spent your money? Since they likely voted for Ray-gun and Poppy Bush."
You are correct and no, I don't. Especially the laser. Don't waste your time responding to Criticism of the Dems by saying the GOP is just as bad. You are right, but so what? I don't like them either. I don't have this "there outta be a law" knee-jerk reaction to every social problem. The only problems that the state can solve are ones it creates in the first place, but even so, it usually makes it worse.
Right on Tall Dave -- if the government wants to give me or my unemployed neighbor money, then go right ahead. But please cut out the charade of having either one of us show up somewhere, drink some coffee, rake a few leaves, dig a whole, or whatever. If you leave out the faux jobs -- aren't we all better off 'cause my neighbor can stay home and play video games or work on his house. And I add insightful comments to enlightening blogs. Things we enjoy doing.
"Do you know what company manufactured that laser?"
No, why?
I second Bearded Spock! But the problem is no one wants to take the hit against current inventory. Not Target still trying to sell a $5 box of Kashi and not my local car dealer still trying to push $32k Explorer.
The businesses that succeed post Bear will do 3 things:
1. Figure out how to quickly work off current inventory and contracts at the best (or least worst) margins.
2. Get COGS inline
3. Develop sales model that meet the market where it is, not where "we" want it.
I said back in September when this recession began in earnest that prices and salaries across industry were going to have to come down in order to facilitate growth.
k1
ryanculver.blogspot.com
k1,
You are 100% correct. There is demand just not at current prices.
There are people out there who will be in the market for cars and trips and kitchen remodels when prices fall enough.
"No, why?"
I own a few shares of a company in the medical laser business, Syneron Medical. It's trading for less than its cash now, after a bad quarter.
Oh baloney! Unemployment isn't going to get anywhere near 20%. It's probably not even going to get to 10%. It's taken a solid year for unemployment to hit just below 8% and numerous forecasts predict positive growth by Q309. Enuff with the predictions of GDII!
While drinking morning coffee I read the NYT and a couple of blogs. Megan, you are usually the only one who has something to say. You've done it again with this post.
The assets of savers have been decimated, actually, since 'decimate' means destroying 10%, it's more like 'semimated'. Anyone with a good credit rating can find money to borrow, but why reduce your net worth, if any, even more by borrowing?
As you say, Megan, what would you borrow for when the market for most things from houses to electronics still has not hit bottom, and why would a producer borrow when its warehouses are already full of unsold goods? This is a deflationary psychology that is bad for the economy but prudent and rational for the individual.
The government can do nothing about this. TARP's uncertainty so far delays the reckoning that must happen before we hit bottom. The various incentives for buying renewable energy and new cars are attractive until you calculate the payback at today's oil prices or wonder who will honor the new care warranty when the manuafacturer is gone.
Whoever your favorite villain is, Wall Street or Fannie and Freddie, the proximate cause of today's problems is a mountain of debt incurred for useless and expensive things whether it be Medicare Part D or the war on terror or granite countertops gleaming in the kitchens of empty condos. Stimulus spending of more borrowed money is just sowing the seeds for huge inflation later. Then it may be a good time to own some useful goods like gold, non-perishable food, and guns to deter those who would take it away from you.
But, pray tell, how do you build that security? If everyone tries to save, as you propose, then how will Acme Corp's employees build their savings when nobody is buying Acme's widgets? You MUST balance savings with spending, and the problem now is that everyone is trying to save--which is simply impossible and self-defeating.
Anony Coward,
Then surely the solution is to create the right conditions and incentives for some people to save and others to spend, but spend prudently.
The solution is probably not to confiscate the wealth of individuals and spend it for them, n'est ce pas?
I'm sure that the company would buy a new machine tool (or a used reconditioned one) if 50% could be written off against taxes. There's always some outdated, slow machine that can be traded in.
We know demand will someday return (we sell a lot to oil exploration and refining outfits). Ironically, however, any new machine would allow us to eventually ramp up productivity without having to add a job! (Two or even three CNC machines can be tended by one employee while older models usually required one per machine.)
Also, ironically, because we have been conservative with our lending, we actually have the cash to buy a new CNC without going to the bank - leaving more for the bank to lend to others who may have saved less for a rainy day.
My preferential "stimulus package" would have been to end corporate income taxes (which bring in about $400 billion to the Treasury) which would certainly help to attract investment, talent, and jobs from all over the world.
Matt Steinglass: "The government would do better to spend that money on fixing a broken school roof -- something for which there is indisputably demand, but no money available to pay."
Bearded Spock: "I dispute that there is demand- by the actual owners of the school in question (the local property owners)."
Me: Really? Where my kids go to school, there are about 500 local families that send their kids to the school. I would bet the vast majority of them would be in favor of paying to fix the broken school roof, as would many other families in the local area that sent their kids to the school previously, will be sending kids to the school in the future, or are just believers that kids deserve an elementary school with a roof that doesn't leak water in the summer and cold air in the winter.
DaveinHackensack hits the nail on the head: there are lots of companies out there that understand that the past two quarters' results aren't a forever trend. Smart companies are investing for the future. For example, a large firm based locally here is investing 9 figures to upgrade its ERP system. The project kicked off in early 2008 and will continue through 2011, with no interruption due to the change in market conditions. They are confident that despite the current situation, by the time they go live the upgrade will be not only a good investment, but a necessity due to significantly increased transaction volume.
Finally, James wrote, "what would you borrow for when the market for most things from houses to electronics still has not hit bottom, and why would a producer borrow when its warehouses are already full of unsold goods?" Some people (most?) believe we are close to a bottom if not already there. Why try to call it exactly? If the time for investment is ripe (for example, you have other components like man-hours available to take advantage of an investment), why wait for something at $50/unit to fall to $48.50/unit god knows when? If the investment will help you sell those warehouses full of inventory by, for example, enhancing capability through a bolt-on, why not make the investment for now and for the future?
We need to get over the confidence tipping point. We don't have to be at some magical point of economic recovery, but businesses need to see a viable path to it. Once they do, investment will restart by those forward-thinking firms.
"If everyone tries to save, as you propose, then how will Acme Corp's employees build their savings when nobody is buying Acme's widgets? You MUST balance savings with spending, and the problem now is that everyone is trying to save--which is simply impossible and self-defeating."
Really, how far is the normal person going to cut back, as long as their income is the same? I'm a Dave Ramsey fan, am trying to save about 15% of take-home a month toward a house downpayment, but that leaves 85% being spent, thousands of dollars a month going to rent, tuition, food, insurance, utilities, medical expenses, charity, etc. I'm not keeping the 15% in the proverbial mattress, either--it's going into an FDIC insured money market, where it is presumably leading a busy life. And two years down the road (barring catastrophic bank and government failure), it will buy us a cozy home, at which point we'll start paying through the nose for property tax and maintenance. There's no paradox of thrift here--all our money is fully employed.
Three years ago, we were spending 110% of take-home income. Nowadays we're spending 85%. Keynes might not approve, but it's sustainable--we can keep this up until the cows come home. Furthermore, all of our income is available to pay for stuff since none of it is tied up paying interest.
Given the venom being shown towards the bailout recipients, James' post above sparked a thought:
The assets of savers have been decimated, actually, since 'decimate' means destroying 10%, it's more like 'semimated'.
Perhaps we could have a real decimation of the crooks from Wall Street and the bad loan officers. Decimation comes from the Roman army, where a unit that performed poorly was divided into groups of 10 men and lots were drawn. 9 men got a club, one got nothing. The lucky ones had to use the clubs to beat the odd man out to death. In front of the others. We could have it on TV, right after American Idol!
So because bankers call a guy offering a loan, and he's too worried about the economy to take it, that means that we're approaching Armageddon?
Think of fear as a waste product, like garbage. Most people don't want it, but there are some people who are better equipped to "take it in".
The current economy is essentially attempting to find people who will take their fear away, and the ones that have the right "infrastructure" (a strong financial cushion, a more courageous heart, overconfidence) will do that. They'll buy things at a bargain, take loans to buy equipment that others are unwilling to buy, add that new wing to their facility because they can get the labor and materials dirt cheap.
And they will be the ones to profit early when the economy picks up again.
Really only time will restore confidence. As the distance from summer of 2008 increases without the worst cases occurring, people and businesses will come out of their respective shells. In the meantime, the governments (Fed, state and local) will get to take advantage of lower wage pressure and weak commodity markets to reconstruct public infrastructure that will have some impact on productivity in the future. If the process is inefficient now, it would have been more inefficient later as these same governments would have had to make the repairs anyway, and would have had to compete harder for materials, capital and labor.
As stated above, the cash to invest is out there, and once the unemployed see some light at the end of the tunnel, even if that light is dimmed by underemployment, the demand will be there.
"Where my kids go to school, there are about 500 local families that send their kids to the school. I would bet the vast majority of them would be in favor of paying to fix the broken school roof, as would many other families in the local area that sent their kids to the school previously, will be sending kids to the school in the future, or are just believers that kids deserve an elementary school with a roof that doesn't leak water in the summer and cold air in the winter."
If the locals are willing to pay for the roof voluntarily, then why would it remain unfixed? Why would any federal money be needed at all? Surely your community isn't completely broke and going hungry. The truth is that you have other priorities, as do the taxpayers you are trying to stick with the bill. There's plenty of things I would buy with other people's money that I wouldn't buy with my own. Anyone who claims that they are different is either lying or lacking self-awareness.