Saturday, June 21, 2008

Welcome to the Recession

As the economy slips into the depths of a [Recession/Depression] (your choice), people are starting to consume less. This decreased consumption could cause prices to go up. It sounds contrary to what would be expected. Let’s use a public utility like a water treatment plant as an example. The water utility has fixed costs. They have an administrative billing department and a group that maintains the infrastructure for water treatment and delivery. The more water consumed, the cheaper the cost per unit of production. Notice when consumption decreases drastically, the fixed costs don’t go away. The water company has to charge more per unit to keep in business.

Another misconception,“Raising taxes will increase government revenues.” It often backfires. In the 1930’s many municipalities raised taxes because the real estate base was reduced by more than half in some areas. In this case, raising the tax rate did not bring in more revenue, it brought in even less. People abandoned their homes; they couldn’t pay the bills they had. Banks today, are not foreclosing on certain areas of Detroit. Why foreclose and take possession, only to pay the back taxes and be forced to tear it down? Let the city have it (with both barrels)!

Government services will have to down size. The electricity for street lights is a fixed cost, as are public pension plans for police, fire etc. The tax base is just not there and the fixed costs are just that, fixed. Looks like education, law enforcement, fire and emergency services are in line and up front for a cut.

In private industry, the airlines fixed costs can be a double edged sword. Ticket counters, plane gates, plane leases, take off/landing fees and retirement compensation packages are all fixed costs. Add to that a not so fixed cost of airline fuel and fares that are no longer affordable to many people. Competition for the lowest air fares will run, almost of all them into bankruptcy. Naturally, our government will assume financial responsibility for these failed retirement plans.

The implied future for the airlines, suggest a death spiral for the fast food industry. Why spend 6 bucks for lunch when you can put it in the gas tank? Brown bag it to work with a thermos of coffee. That kind of kills the 4 dollar Starbucks latte. This could really put a crimp in the fast food industry. Figure 241 working days this year, a person could save $2,410 on coffee and lunch ($3,000 if you add in the taxes paid earning it).

Common sense doesn’t seem to work properly in our new environment. I guess too much money has fogged our sense of reality. Don’t expect too much help from Congress they’re all over at Countrywide getting their “Friends of Angelo” loan. Since 5 of the 6 caught were Democrats, it brings to mind the quote "If Democrats had brains, they'd be Republicans" (Don't take it politically--just joking around). We're just looking at those who got caught. I suspect there are a lot more, the imbalance makes me suspicious. I don't hold either party in high regard.

There is also a rumor floating around that the "Dodds Real Estate Mortgage Bailout Bill" is going to be renamed the "Bank of America Self Enhancement Bill." This way, the people that wrote it will get credit for their work.

It's a little like giving a hooker a signed blank check, with the taxpayer picking up the tab. Of course I guess we shouldn't bitch, the money is coming from the same place Congress got the 150 billion stimulus package to give to us. That was painless, wasn't it?

Link: Stop The Housing Bailout------------Click here to sign the petition. Name and email and you are done-- quick and painless.


Dan Mac said...


Thought this video might be of interest to you. It pertains to banks being unable to provide documentation/proof that they actually hold the notes on properties that they intend to foreclose on. First time I have heard of this.

ps - thanks for the petition link

Jim in San Marcos said...

Hi Dan Mac

I hadn't seen the video, but the news has been around a while. Here is a link to it. It got cut off in your post.

This could end up really sucking for the homeowner. I paid off my home loan a few years back and the note had been sold so many times that they lost the title I signed. The bank's word to the county recorder was enough to give me clear title to the property.

This new ploy may work in reverse if you ever try to sell the house. You already proved that the bank can't show clear title to it. Guess who gets the last laugh? You are going from the frying pan to the fire.

Life is a little like a lottery, you could luck out.

Thank you for the video link and your comments.

I'm Not POTUS said...

I tend to give the drive thru's the benefit of doubt. $1 menus will prevail. How big a nibble you get for a buck will shrink but in the long run they will end up being modern day soup kitchens of America.
I can envision a Dodd bill crafted by Micky D's that food stamps will be issued on debit cards redeemable for "nutritious" meals at participating food service establishments.
It is the only way to keep the poor working and eating. 2 birds one stone.

Jim in San Marcos said...

Hi I'm not Potus

You cracked me up with the image of using the drive up window for a dollar special at McDucks. I just filled my gas tank for $62.

I'm good for about 12 of those dollar double cheeseburgers a month. It's getting harder and harder to pass up the fries. That and the soda is where they make their money.

I'm a damn good cook but sometimes you just can't wait, you want it NOW!

I think your right fast food will stay around and maybe for another reason, a lot of people can't cook worth a darn.

I agree with your subtle humor [redeemable for "nutritious" meals]. You can sure put on pounds eating them.

By a death spiral, I meant there will be a severe thinning of the herd.

Thinking about food is making me hungry. Thank you for your comments. I've got to go check out the fridge.

catholic girl said...

I ran across your blog and found it very informative and interesting. It's not going to get any better is it? It amazes me how the news outlets are not reporting with panic what is happening and is going to happen to our economy if oil does not decrease. It is as if they want us to be the last to know, that no one can afford to pay their bills any longer. My husband and I are already trying to hedge our own little economy. We have bought a tiny fuel efficient car- are reconsidering 200$ cell phone bills for college kids- and just last night discussed how expensive two all you can eat salads and water were at Ruby Tuesdays - was it really worth it?-( 22 $ with tip ) and the drive to the restaurant??
oh well, I am still hopeful all will turn around and our retirement will be safe - only 10 years left. I'll be reading you-

Jim in San Marcos said...

Hi Catholic Girl

I don't think that things are going to get better, but don't fault the newspapers. I guess that's why blogs have some success. We can report on stuff without a who, what, why, when, and where.

I think that a lot of people are now trimming consumption that weren't before. This reduction in consumption is I fear, going to make things worse.

Keep your fingers crossed, my retirement is only 5 years away.

Thank you for your comments, I'm glad you enjoy the blog.

Take care

Anonymous said...

Dude you so called the starbucks coffee analogy!! hahah 600 stores to close! You rock man, keep up the good work!

Anonymous said...

This Bailout Bill looks grim, but there is a chance to stop it from passing. It will pass the senate and then go back to the house for final passage. There is a House Coaltion known as the “Blue Dog Democrats.” These guys claim to be fiscally responsible. However, they vote for a bill that pays off reckless borrowers and lenders, rewarding foolish business practices w/ TAXPAYER money! the 4% who goofed up get a free ride while the 96% are punished for their good economic sense. Up to $30 Billion goes to cover bad mortgages, and the deficit will be raised by this bill $22 Billion. The Blue Dogs ALL VOTED FOR THIS (save one in TN who didn’t do anything at all…)

What can you do? Call Kristen Hawn, the communications director for the Blue Dog Coalition at 866-887-5841. ask her politely to tell her bosses to get their act together and follow what they have on their own website, namely, be fiscally responsible and help us keep taxes down and money in the consumers pockets.

I feel strongly about this. Folks already have a hard enough time affording gas that can’t seek out alternative energy sources at he moment. And No one has even talked about what the winter is going to look like in the N.E. Now is NOT the time to slap on more (in essence) penalties for being fiscally responsible for those who were negligent…