Monday, February 08, 2010

The Paradox of Decreasing Consumption

When times are tough, families cut back on consumption. Last June, Vista Water District announced that we were doing such a good job of conserving water, that they had to raise rates to cover the fixed costs. People are starting to realize, a decrease in consumption raises the unit price of water, natural gas, etc. These suppliers have fixed costs no matter what the consumption level. The net effect, we consumed less and paid more.

Anthem Health Care for California, today raised rates 30 to 39 percent. The government is shocked, and by God, they are going to get to the bottom of this.

Basically families have decided to do without insurance unless they really need it. With less people wanting insurance, the rates have to go up, to pay for those claims from people who are sick. All the insurance company does is take total costs, add in a profit and divide it by the number of customers, to arrive at a billing cost. It could be argued that the insurance companies are ripping people off, but I would argue, if they show enough profit, there would be lots of competition.

Look for the same to follow with car insurance. Rates will go up. Our land line telephone just went up three dollars a month as did our cable bill. Our household has changed auto insurance providers in just the last month because of cost. We are about to drop cable and the land line telephone.

America is downsizing at a drastic rate. Costs will go up while this happens. Then follow the bankruptcies, and then we get the lower rates.

The irritating part of this is that a family can feel the financial pain of a contracting budget, just like a State government. The Federal Government still has money that they can pull from "thin air." It kind of makes you wonder. If they can pull something out of "thin air," what part of what they are doing, IS NOT a magic act?


AIM said...

Interesting Jim. With this phenomenon you just brought up one could think the rising prices was inflation. Yet, it is actually less consumption, causing a company to respond the only way it knows how (attempting to spread its costs out over its shrinking market share) as it slowly moves into the death throes of bankruptcy.

Ohio Loan Officer said...

The host on the "Smart Money" radio show made a good point---

The crest of the Baby Boomer wave was in their early to mid 40s in the late 1990s and early 2000s. Now they are in their mid 50s.

When in your 40s, you typically are at the high point of your career and income. It is during this period that people do a lot of excess consumption.

Now in their 50s, Baby Boomers are seeing retirement looming and will start to be more concerned with saving vs. consumption. This trend will lead to lower sales and a slower expanding economy.

frakrak said...

Interestingly, after attempting to read comment number three, (and if it is Chinese Script), the Chinese do not appear to have an equivalent for the word "sex"!

Intriguing when you consider their abundant numbers!!?

Perhaps they were pointing out that we're all "screwed" when it comes to the "Paradox of Decreasing Consumption"?

Jim in San Marcos said...


These companies have to downsize to survive. It's kind of a vicious circle that can feed on itself.

There is a lot of items people consider discretionary spending. If you have ever been in a car accident with an uninsured motorist, you'll understand what I mean. Your rates go up and his don't.

Jim in San Marcos said...

Hi Ohio Loan Officer

I tend to agree with you that consumption tapers off in the 50's. I, myself have run out of toys to buy. The garage is full to the top.

I think that a lot of the buying we are seeing is the result of If the banks paying very little interest while inflation has to be at least 8%. Why not spend it while it still buys something? This sort of rationalization could be behind the current buying in our economy.

Jim in San Marcos said...

Hi Frakrak

I had to delete post number three. The characters may have been Chinese, but each line was a hyperlink to a different porn site.

Your guess at what they were pointing out was close to being spot on;>)

Anonymous said...

just dumped the land line last week - 75.00$ a month
we have 4 cells- do we really need it - NO
Always stay ahead of the curve...
Catholic girl

Dan Mac said...

Jim - I dunno...It seems like you assume certain households will drop out of a given consumption pool (cable tv for example) but that the remaining customers have such a "staying power" that they will allow the company in question to ramp prices/rates with little additional (immediate) attrition. It seems to me that this is a FAST sinking ship as higher prices force out ('quickly') the next group that was hanging on at the margin.

The bankruptcies WOULD seem to loom as you suggested; but with that comes less competition and perhaps HIGHER prices?

If it were up to me, I would CUT prices to keep retention high (obviously at the expense of margins and further industry price wars) and try to wait it out. Seems like a lose lose all the way around.

AIM said...

C'mon Jim. Don't delete the sex. We need something to keep our spirits up in this depression!

Just got some insider info...

300-400 banks will fail in 2010. Better make sure that you are in a strong bank.


Anonymous said...

Not every family can decrease discretionary spending. It is hard to buy less when your fridge is empty.
I see a wave of mandatory spending being cut. Some will not file tax returns. Others will drop mandatory insurance, or pay a credit card over a mortgage. There are a host of societial 'fees' that may simply be ignored.

Jim in San Marcos said...

Hi Dan Mac

It is hard to call. Public utilities have a captive audience. You can't say the same for cable TV. Each person will trim in their own way. One might unplug the second refrigerator and save $30 a month while the other might unsubscribe to the sports channel saving about the same. In either case, the decrease in income affects the profit margin, the fixed costs for the provider don't decrease.

The thing to look at, a company doubling in size, doubles its fixed costs. Downsizing by 50% might not do much to fixed costs already in place (leases, contracts, retirement benefits). You could burn up on re-entry with downsizing like GM.

I think right now, you are seeing price wars like you suggested in the fast food industry. I don't think it is lose lose all the way around,--- I'm not losing any weight eating that stuff;>)

Take care

Jim in San Marcos said...


Sorry about the deletion. Here is a replacement. Google "Readon TV Movie Player" It's free and you can watch a lot of cable TV for nothing. I watch Bloomberg on my desktop while blogging. Be careful with the program if you have high school kids--its alphabetical; "Adult" comes before "Business news"

300 to 400 banks sound a little low to me. With all of the bailout money floating around, that averages out to about 8 banks a week. I was expecting about 15 a week. Either way it's a lot more than anyone wants.

Jim in San Marcos said...

Hi Catholic Girl

Glad to see you're ahead of the curve.

Here is something else you may like if you have a microphone with your computer. Go to It is a free download and you can call just about anywhere in the world for free.

Anonymous said...

Three school systems in the San Francisco area have declining enrollment. But, the number of school employees has increased each year for ten years. Now, all of us are expected to pay another parcel tax, to balance the budget, which has gone up,despite decrease in the number of students.
Educrats live must live on Fantasy Island.

Rob In NS said...

I like article and kind of explains what happened to me a while back. The cable company here tried to gouge me with increase by bundling a sports network I watch with about 12 french channels. Just a quick explanation my favourite hockey team is Montreal and station is french. It doesn't matter because I can follow game without commentary. Anyway I threatened to cancel cable and they relented and gave me the sports network and all the french stations for nothing. I won this round but I'm guessing they aren't going to give up. I the mean time I can watch all the movies I want I just need to brush up on my french.

Anonymous said...

With all the new digital stations, you no longer need cable.
Cancel your cable, and save $1,000. a year.!!

Jim in San Marcos said...

Hi Rob

It's the same here. The basic package for $16 is 24 stations. 8 of them are Spanish. Plus the cable company charged us $20 to reduce our package to just the basic.

Anon 11:49 is right, with HD TV all you need is an antenna to get all of the local stations. But we haven't seen the need to buy a HD TV yet so the wife and I are still stuck in the stone age.

Jim in San Marcos said...

Hi Anon 7:32

The school system in SF have declining enrollment, I can believe it. More employees makes it even sadder.

Poway Unified School district cut expenses by 17 million to get in line with the state budget in California and now they have raised the bar to 24 million. I posted a previous letter by Dr Don Phillip December 11, 2009 and maybe I will post this one he wrote the other day.

Anonymous said...

I do not have a HD tv, either.
But if you have the HDconverter box on an old TV, you get all the HD channels (about 25-30 in the San Francisco/ San Jose area.)
Dump your cable, and it will pay for your vacation!