Saturday, May 02, 2009

Going Broke Without a Clue

A notice from the water company arrived yesterday. They are raising their rates because of decreased consumption brought about by the drought. They are selling less water, but their fixed costs remain the same. So we get to pay more for using less.

It is the same story with GM and Chrysler. Selling fewer cars makes the companies financial future questionable. The fixed costs don’t drop. It used to be that the last two months of the year was the car company’s profit. When sales drop 50% those last two months never arrive. The contraction of sales can have the unexpected effect of forcing a company into bankruptcy; the fixed costs just don't go away.

If that is not bad enough, there are 50 state budgets, whose tax collections could fall 30 to 40 percent in the coming year. The state legislatures will select which bills get paid. Usually, Police, Fire and Education get cut. This really irritates the taxpayer to say the least. There are a lot of fixed retirement costs that will not disappear despite the labor cuts. Most states have already spent the money collected for this year. Now with the revenue collections dropping drastically, there is less and less money to fund various state programs into next year.

We have a very good chance of several states declaring bankruptcy before the end of the year. California, Florida, Michigan, Arizona and Nevada are high up on the list. Will the Federal Government step in and save the states in trouble?

What happens in this new era of too big to fail? Does the bankruptcy court take over the powers of the state legislature? Or does the Federal government take over and administrate the bankrupt state?

The government appears to be in a cover up mode. People in charge are losing their jobs for going along with the government’s strong arm persuasions. Government entities are being accused of overstepping their mandate (The Federal Reserve, comes to mind).

The economy in our area doesn't seem to be improving. We went garage sale-ing yesterday and I noticed 6 new commercial retail plazas under construction and two brand new ones that were almost completely vacant. Half of the present plaza malls in this area have many closed shops up for rent. Commercial real estate building is still in a boom stage here and there is really no explanation for it.

Of course the stock market has no clue as to what is going on—yet. Stocks are doing OK only because your IRA money manager refuses to sell. The losses are yours not theirs. This vast pool of money they manage is waiting for the market to rise up and return to the way things were.

What can we interpret from all of this? Conditions are not quite what our leaders are suggesting. The reaction to the possible Swine flu pandemic was blown way out of proportion; the bail out AIG probably accomplished little. The guys in charge rattled our cage and we panicked and accepted their proposed solution, just as we were suppose to. The real problem right now is where do we get the money to fix what we have just "paid" for?


Are we going to die of Swine Flu, or freeze to death while sleeping next to our shopping carts out on the street? Actions speak louder than words. Bawl out car executives for taking private jets to Washington and then take Air Force 1/2 (the short bus) on a low level fly-by of NYC???? It gives you an idea of where we are headed. Greenspan's quote, "Often wrong but never in doubt," seems to sum up the governments approach to solving this mess.

27 comments:

OSR said...

Interesting. I've been looking at the budgets of various municipalities and I arrived at the same conclusions that you did for the states. In this era of kleptocracy, I don't think the states will get bailed out. Instead, I expect they'll get IMF-styled privatizations crammed down their throats.

Jim in San Marcos said...

Hi OSR

It sure would be funny to see the states get the "General Motors Package."

The kleptocracy label rings very true so far IMHO.

What could happen to the state's bond holders could be a very interesting meeting of the minds.

We are going to have a head on collision between the litigation lawyers and the politicians in office. Will the courts or the government win the day?

I think that the Chrysler bankruptcy outcome could indicate what power the government has left (if any), when the courts rule on the disposition of funds to be paid out.

If we wait another 6 months, you could be proven right. We just don't know, which state will be the first to file for bankruptcy.

Grab some popcorn and kick back and relax, the movie is about to start.

Thank you for your comments.

Rob in NS said...

Jim

As for the continuing retail construction my guess is it's just the hangover from boom a couple of years ago. I work in the industry and most projects take 3 or 4 years to get started. Getting all the permits and design aprovals for most mid to large size projects takes quite awhile. Once contracts are tendered the penalties for backing out are not worth it so most get built unless money behind building goes bust.

As regards the government they are indeed in panic mode. Here in my province they are raising fees (taxes) for all sorts of things. There has to be a breaking point when it will make more sense to quit working and stay at home and get a check from government like everyone else. I'm only kidding about quitting work as by the time I figure it is not worth it to work they will get rid of the cheques and start up the old fashioned soup kitchens.

Jim in San Marcos said...

Hi Rob

That makes sense on the construction time lag. When I worked for the highway department, it took about 5 years to get a traffic light put in place.

It kind of makes you think twice about this construction stimulus plan. It won't be up and running anytime soon.

We also are being nickeled and dimed to death here. Car registration fees went up 35%, and we are almost up to 10% on sales tax. And if you are still a smoker, the prices will kill you before the cigarettes do!

A cute young girl ahead of me in line the other day bough a pack of designer cigarettes for $5.25. It made me think back to when I was that age and paid 23 cents for a pack of Lucky Strike. Five dollars to her, today, has the same value as 23 cents had to me way back when. This generation just entering the workforce has never experience inflation. Where those of us who have stopped counting birthdays can see the ravages of it. They are already used to the prices that we choke on.---- I digress, methinks I talk too much.

Take care

AIM said...

Being in a depression which is going to worsen, being in a collapsed economy/society with a much lower standard of living, and coming into major inflation sooner or later, leaves us with one key factor...

everything depends on your ABILITY TO EARN.

You need to be in the right sector and have the skills and experience necessary. If not...

you are in for a world of hurt.

Anonymous said...

JIM IN SM----
A couple I know believe from there research that we have two years or less before the crash realy picks up speed and all hell breaks loose in the USA. They are liquidating their portfolio, selling their home and temporarily moving in with family, and gathering up all the cash they can and they plan is to buy:
1) a small apartment building.
2) a small farm that sells its produce to a food distrbutor (which is also where they plan to live).
3) gold bullion and silver.

It is very hard for them to disrupt their life and put this plan into motion and make all of these changes---- but they believe an ineviteble future is forcing them to do so.

They have always been conserv and foreward thinking people. They are not squirrelly type people.

They are giving me pause and making me wonder if I should start acting along the same lines.

Anonymous said...

Government employees know what to do
1. Cut only visable services- police, library, parks
2. When public outcry ensues, say
"We don't want to raise taxes, but the public has spoken"
3. Raise taxes.
4. Repeat as needed.
Many state retires make over $100K
in retirement benefits.
see
www.pensiontsunami.com

Jim in San Marcos said...

Hi AIM

I tend to agree.

There is one thing to think about though. While your at work, the unemployed may be "harvesting" what's in your home.

Having a job may be a plus, but having to deal with those that are unemployed around you could be the real problem.

Jim in San Marcos said...

Hi Anon 3:48

That's a little too radical for me. If you have the money to buy an apartment, a farm and gold and silver, your probably too old to farm the land like me.

Farming is hard work. My dad had this farmer come by and plow about 1/10 of an acre (an area of about 40 feet by 100 feet) once a year, and we would plant potatoes, peanuts corn etc. I got the job of weeding. My dad was very quick to point out that weeds don't grow in straight rows (everything looked like weeds to me). So you water your crops and watch them grow. Then the insects move in (I had a great bug collection). Figure you'll spend 2 hours a day on a small plot like this. Then come the deer, raccoons and rabbits. We barbecued many a rabbit. It always cracked me up when a guest would ask how did you get a chicken with 4 drumsticks? You just smiled and said nothing.

If you buy a real farm, your nearest neighbor could be a half a mile away, it gets real lonely out in the boonies.

Plus if you have a dog, you'll find out what use to be dog food before the commercial stuff was available--live chickens.

The last thing I would do is sell my home. Keep it and rent it out if you have to. It's a great inflation hedge.

Being a landlord in a depression is probably one of the worst times to be in rentals. You could have a serious cash flow problem.

Silver is still a good buy but gold is a little to steep for me to even think about.

The guy could hit a home run with his plan, it's anybody's guess. I look at real estate as a highly visible item to tax and gold as an item for government confiscation.

Hope this doesn't add to the confusion.

Jim in San Marcos said...

Hi Anon 5:14

Pensions are a major issue.

There is one problem with the idea of raising taxes. It assumes that if tax rates are raised more revenue will be collected. That is not the case. This sort of action in the 1930's led to a decrease in revenues not the implied increase. States raised property taxes and ended up being the new owners, the people walked away from their homes. Or are you going to buy a new car for 30K with 10% sales tax or fix the old one?

I think that those 100k pensions might not have many more payments left in them, something has to give. CALIPERS has lost a bundle on this mess.


Thank you for the link.

Brian said...

Jim,

A note on the commercial projects which are still being built.

For most of the developers, they are well aware of the amount of time required to bring a new project on-line. They have had these projects in the works which were too far along in sunk costs to stop, but they believe the other developers who were not so far along have stopped the entitlement process on their plots to reduce their exposure. The view this as an opportunity, as there will be a lag between the completion of their project and any new construction coming on-line for some years.

Of course, this tack requires an optimistic view on where the economy is going in the next couple of years. Most commercial developers I have spoken with in the last year believe that the economic situation will turn in the next 12-24 months. Their belief makes these projects viable, as they can suffer a period of negative revenues (built into their financing). The idea is that when the economy turns, they will have the space available to for the hordes of new nail salons, tanning salons, and boutique clothing stores which will want to open.

Keep in mind, these people are very self-delusional types who have not seen a really bad market in a long time (probably more than fifteen years). They have a vested interest in what was the status quo.

They believe because the alternative is to admit they have sunk hundreds of thousands, if not millions of dollars into a project which will never make any money. Another important fact is the developers pay themselves handsome fees for their time (out of the borrowed money) while the project is going up. If the project goes BK, they at least get to keep the development fees.

BTW, I speak from personal experience in the SoCal commercial RE development industry.

Rob in Nova Scotia said...

Jim

5,25 a pack all I can say is wow. Here in Nova Scotia they are over Ten Bucks a pack. I guess they have to pay for free health care somehow.

Jim in San Marcos said...

Hi Brian

Thank you for the input. The construction tends to give me a false sense of how the economy is doing when I drive by these sites. What you observe is quite different than what you expect to see, for an economy in a recession.
Your comments tie it all together.

Jim in San Marcos said...

Hi Rob

$10 a pack, that's highway robbery!

Actually smokes are around $3.50 a pack here. That girl bought a pack of designer cigarettes. The pack measured 1/2" by 1/2 inch by 5 inches and the cashier claimed there were 20 cigarettes in it.

I gave up smoking when the raised the price to 50 cents a pack.

I can't really see paying for health care with a cigarette tax. The price would piss people off enough to quit. Then they live longer pay less taxes and need more health care. It just doesn't work for all the wrong reasons, go figure.

I guess when I get ready to retire, I can smuggle cigarettes to Canada and on the way back smuggle Viagra to the US.

Anonymous said...

IOUSA is an excellent film. Very enlightening. David Walker is brilliant. The panel discussion on the DVD is very informative as well. Great graphics and simplicity so that the average American can understand the true financial condition of their country. Excellent solutions are offered as well.

Highly recommended. Rent it through Blockbuster or Netflix.

Rob in NS said...

Brian

I do think large projects and money behind them got caught up in hysteria chasing the American Dream along with the Joe Six-packs of the world. Everyone involved in construction understands timelines for getting things done it goes without saying. I know from experience as I am a rebar detailer and before one yard of concrete is poured my drawings have to be approved by engineer who designed whatever is being built. This one facet of project can take many months or even years to complete.
As to all this spending on infrastructure people are kidding themselves if they think any of this will get built anytime soon. FDR et al had luxury of almost no regulations during the 30's. That is not the case today.

Joseph Oppenheim said...

FDR et al had luxury of almost no regulations during the 30's. That is not the case today.<<<<<

But, FDR didn't have the luxury of computers and operations research software like "Critical Path Method", P.E.R.T., etc, like the ones I designed and developed for the construction industry, and other industries, so they would have better tools with which to accelerate schedules and minimize costs, and government would have better means to audit such projects.

Regulations are key, to make sure such tools, are used.

Plus, early results from the recently enacted stimulus package shows projects are generally ahead of schedule and under budget.

....Joseph

Rob in NS said...

Joseph

The Hoover Dam was started with intial appropriation of funds in 1928. It was completed in 1936. If it was built from scratch today they would spend that much time doing environmental reviews.

Jim in San Marcos said...

Hi Rob

I agree that it will take time to spend the money on infrastructure.

A big thing we have completely missed is the government regs. Federal pay scales have to be used, minority contractors have to be a part of the mix, environmental surveys for drainage and endangered species,right of way access, acquiring private land, Security bond posting by the contractor and government inspection of the work.

I remember one farmer in Colorado that wanted an outrageous price for his property since we were splitting it in half with the Interstate highway. We ended up running the survey line around his property. The court litigation would have taken a couple of years. So the next time you see a jog in the road for no reason, you'll understand why. Sometimes it costs a little more, to spend a lot less, to get it done sooner.

Joseph Oppenheim said...

The reason why it takes so long now<<<

Sorry, that is not the way it is now for stimulus related projects in the US.

So far, early results show that generally the projects are BOTH ahead of schedule and below cost.

Here's one of many reports, with specific projects mentioned...

http://www.msnbc.msn.com/id/30190464/

Sure, it could be all lies, but I doubt it, since financial markets seem to be moving up in concert.

Believe it or not, there are many potholes in roads, cracks in bridges, etc with "shovel ready" projects all ready set up to go, only waiting for money to be available. Plus, all one has to do, to manage allocation of the money is to look at regions which already seem smart in how they manage their recent infrastructure spending.

....Joseph

Rob in NS said...

Jim

This is sort of anniversay for me.

You have been blogging now about this topic for quite sometime. I have a question. Do you think when you talk to people face to face that there is more awareness about the precarious state of the economy or do you think that vast majority still have heads stuck in sand? Are you frustrated when people don't want to listen?
I ask this because MSM is trumpeting latest rise in stock market and many of my friends feel that worst is over. I try and tell them different but their eyes seem to glaze over.
I may have told this story before on your blog but I'm going to try and use it as an analogy of my line of thought today.
Long time ago I worked at coal mine called Westray in Plymouth NS my hometown. If you're bored sometime google it. My job there was to work in coal lab testing coal and making sure mine was safe. On May 6,1992 I did tests that proved mine was unsafe to work in. I spent most of work day arguing with mangagement that something should be done. Nothing was and three days later on May 9,1992 it blew up and 26 men died in expolosion including two of my friends. It is a hard way to be proven right about something. I do hope that government can figure out how to stay solvent because I don't want to be proven right again. I think everyone reading this will concurr.

This is an apology for earlier post. 51 weeks out of year I would not have been rude to Joseph.

Jim in San Marcos said...

Hi Rob

I don't think that people are putting their heads in the sand and avoiding reality. This is something new to them and they have nothing to compare it to, for reference. A majority of the people that hit this blog for the first time probably think, "It can't possibly get that bad."

Plane crashes make good newspaper copy. Run and article on rising unemployment and your circulation will drop. People want to feel good and informed when they read the paper. Its a little like the mine disaster you mentioned. Any piece of news that offers hope is welcomed with both arms. Nobody is receptive in a negative sense.

So when someone touts the stock market going up it stimulates hope and listeners are very receptive to the "good news." It kind of reminds me of the excitement generated by a horse race. The finish line is reality.

My goal in writing this blog was just to connect the dots and show people where we are headed. After studying the Great Depression I came to the realization that no one at that time in history knew they were in a depression. 60 percent of the population went through it OK, 40% didn't. Once it passed by in time, it was labeled a Great Depression.

This Great Depression will earn its label in the future. We get to experience it now.

Your comment to a fellow poster was in line, and I agreed with it. That's why I deleted his post. After doing that, I realized that leaving your remark, would confuse readers, so I got rid of it also. Sorry for the confusion, I have to do some pruning from time to time.

Joseph Oppenheim said...

60 percent of the population went through it OK, 40% didn't.<<<<<

Precisely!

Unemployment varied from about 20-25%, meaning nearly 80% were employed through the mess. Plus many bargains appeared if one had the money to take advantage of them. Unlike the US, which basically did the right things, Japan's and Germany's entire societies were demolished. And Europe, Russia, not much different.

My family did fine. In fact, though my Dad had a rigorous work schedule - but he liked his work, they probably had some of the best times in their life, then. A lot of exciting things were happening back then, if people had an optimistic attitude and sought out the fun things, and lived and worked in the right places. It was basically a time, probably in some ways similar to now, where people who had lived solid lives, avoided debt, etc during the 20's survived just fine, because they were rooted in good values.

I have always lived my life with the same mentality, prepared for another Depression, though at the same time being optimistic.

But, one thing I have learned is that history NEVER repeats itself, exactly. It is mathematically impossible. It takes a creative attitude to not be oblivious to new realities which happen every day.

...Joseph

Jim in San Marcos said...

Hi Joseph

Our figures work out well.

40% of the population suffered from unemployment and 20% were out of work completely.

When you realize that it only takes 5 percent of the population to start a revolution, you understand the predicament we were in at the time. We survived and I wonder if it just wasn't luck?

Joseph Oppenheim said...

When you realize that it only takes 5 percent of the population to start a revolution,<<<<<

Yes, and one reason for my optimism, is despite tough times we endured without a revolution, during the 30's. We actually came close to a revolution during the 60's, but also didn't.

By the way, where I began life was in a neighborhood with but two blocks away, lived Woody Guthrie and Pete Seeger, revolutionaries, but different from many. That Seeger won a Grammy this year, is the simple kind of thing which brightens my life.

No one will ever take my optimism away from me, no matter what happens. The book, "Tuesdays with Morrie" is quite a real life testimonial that it is all about attitude.

Neuroscience has proven that it is possible to not only change your mind, but permanently change your brain, just by the way you choose to think. It has been proven that it is possible to entirely remove emotions such as anger, hate, jealousy, envy, and greed. I know, personally, because I have no such emotions anymore. I lost them a long, long time ago, though two of them I never had. America still has so many wonderful things about it. I can understand why there are people who wish to keep those emotions, especially during these times, but the way I look at it, this is a test for America and Americans. Negatives are but opportunities to turn them into positives, but many don't choose to see it that way, but also many do - not out of blindness but out of awareness.


...Joseph

Anonymous said...

>>Yes, and one reason for my optimism, is despite tough times we endured without a revolution, during the 30's. We actually came close to a revolution during the 60's, but also didn't.<<

I think two small historical footnotes, World War 2 and Vietnam, could have something to do with that. Whether a war happens or not this time around, we will not be so lucky. Revolution IS happening and you'll be surprised to know who is leading it. THAT should make you even more nervous.

Joseph Oppenheim said...

Revolution IS happening and you'll be surprised to know who is leading it. THAT should make you even more nervous.<<<<

Sorry, but a group of well-off baby boomers, and their like-minded wannabes, don't make me nervous.

Fortunately, the people who are likely to be the most desperate, the poor, figure to be helped by our government, which is now firmly on their side.

...Joseph