Monday, January 24, 2011

Diminishing Returns

When times were good, business’s everywhere realized that doubling in size, doubled profits. Now there is a problem of diminishing returns. The consumer is making choices on what to consume. In my quest to be shot for oversimplification, figure that a business that has 100 customers a day needs the first eighty to pay the bills and the rest is the return on investment or profit. Many businesses are seeing a 10 to 20 percent drop in consumer traffic. A drop in business like that is enough to give a store manager sphincter muscle lockup.

If you’re my age, a dentist chair is more than familiar. Now days, there are no long lines. No three week wait, they are going to do it today. I told my boss that I’d be a half an hour late because of a dental appointment—I spent 4 hours getting an inlay. I kept saying no, they kept saying yes. They wanted $400 to begin with. At $200, I gave in and said yes, kind of hard to believe that I have dental insurance. I don’t know what my HMO paid, but my cost wasn’t even close to what I had anticipated.

New Years, I bought chips and dip for the Rose Bowl and found out that it was on ESPN, my basic cable wasn’t good enough so I had to watch it on my laptop on ATDHE.NET. Then a week later, the Number 1 and 2 of college football played on ESPN and I had to watch that also on my laptop. I’m tossing the cable company; I can stick an antenna up in the back and get HDTV. Not the greatest solution, but I won’t be paying for all the Spanish channels I never watched.

The 10 to 20 percent drop in consumer spending is a real problem that is invisible to most of us. The good thing, there is no waiting to be seated or long lines at the checkout counter.

The neat thing about consuming less when it comes to public utilities, your rates increase. That might seem like I miss-spoke, but the utilities have fixed costs and if everyone cuts back, your share of the bill goes up,

Then when you get to government, 15 percent unemployment is about a 10% drop in tax collections. Sandwich that with decreasing property tax revenues. You don’t have to worry about a double dip; the politicians in charge haven’t even felt the first dip yet. There is a time lag where it all gets swept under the rug, and there is an awful lot under this rug.

People are getting less, but everyone still demands the plan they had yesterday. It’s time to realize, there are no government lifeboats, only government life vests made out of cinder blocks.

If you and the wife just retired with a half million dollar nest egg, you’re going to have lots of fun. Two percent of 500K is $10,000 per year to live on. Nothing like the 8% interest rates the banks use to pay, before Bernanke decided he needed to save us.

What we have here is diminishing returns; less earnings coming in and more savings going out. This is the new prosperity. Of course, government has been doing this for years; I wonder why it doesn’t work on the individual level?

Obama tomorrow will tell us that we are emerging from this recession. Think about it. We are getting less of everything and it is costing us more. Bernanke has saved us from deflation, and sentenced us “old farts” to financial retirement starvation.

Bernanke and Obama are kind of like hookers that grew old and fat. They were wise enough to know what worked in the past, but lack the insight to see what has changed.

Copyright 2011 All rights reserved


Anonymous said...

I live in the San Francisco area, and realized years ago that I do not need cable.
With just an antenna in the attic, I get 3 PBS stations, all major stations, and about 20 independent stations.
College football is shooting itself in the foot by puting all bowl games only on ESPN. I used to be interested in the post season bowl games. Now, unless "your" team is involved, most people could care less.

Anonymous said...

What do you think is the likelihood of interest rates going up over the next 5 years?

Anonymous said...

The rates will rise once the banks are finished stealing all the money that was saved in them. At least that is my theory.

rob in ns

Jim in San Marcos said...

Hi Anon 9:23

With all of the government guarantees, there is no risk in the loan market. The banks have a ton of cash with no one to loan it to and the only thing left to invest in is Treasury bills. Most people that want to borrow don't qualify.

Interest is a function of risk, prospect of inflation, and demand. As long as government is insuring everything, expect short interest rates to stay low.

Credit card loans are at 20 to 30 percent which is rather strange by contrast.

Sooner or later risk will enter the market and rates will have to rise. A doubling of the present rates would trash the bond market and probably our government as well.

I'm not sure where interest rates may be in 5 years, but if you have a million dollars in the bank, it might just lose 90 percent of its buying power. Cash is king when the government plays by the rules, and ours isn't doing that.

Jim in San Marcos said...

Hi Rob

I would blame the more abstract financial institutions for this mess. Banks have to account for every penny whereas institutions like AIG, Countrywide, Bear Sterns and Goldman Sachs do what ever they want under some vague set of rules.

I don't think that we can absolve the banks of blame, but it will be another 80 years before they get that stupid again.

I think we have to question the fact that no saver lost a dime in any US bank. The fact that the US government guaranteed of all of these losses with "real money" has to be somewhat suspect.

Anonymous said...

I agree Jim but the problem right now is the government has guaranted that all the TBTF banks have a get out of jail free card with the suspension of mark to market accounting. This has to throw a wrench into forecasts. It's funny I read a book about ten years ago regarding the banking system in China. The basic premise was that banking sector there was about to fail because they were supporting inefficient state enterprises with loans that wouldn't or couldn't be paid back. Funny how the worm turns but here we are ten years later and same problem has infectd banking system in West. The boys in Beijing must be laughing now.


Anonymous said...

Speaking of China, I heard they are moving away from trade in US dollars. What will happen to our economy and our interest rates if we are no longer the world's reserve currency?

frakrak said...

Jim anonymous question from the 30th of January implicates China as taking over as part of a fiat currency that may soon be elevated to reserve currency status.

If the U.S. has 8,000 metric tons of gold in reserve at Fort Knox and 3,000 metric tons in additional storage throughout the country then I don't see this happening.

China is now busily buying European government debt, because Europe is the second largest holder of gold reserves.

If China has not got their hands on the above mentioned then it will come down to who holds these reserves, paper guarantees won't be worth anything when everything goes tits up!!

China may find themselves in a very precarious position playing with the adult capitalists.

So the question is: where is the gold??

Don't forget the FED gold reserve also holds the fortunes of other countries in its reserves.


frakrak said...

Also there is the question of financial competency here.... If China keeps lending to nations that are insolvent then technically they have done so on a premise of not getting their money back, which I suspect will be the beginning of WW3.

Jim in San Marcos said...

Hi Anon 8:12

Reserve currencies don't change overnight, it takes 30 years or more. If the world perceived us as a banana republic, that could change in a very swift way. If that did happen, the reserve funds would start flowing in as purchases and would be very inflationary. The previous reserve currency was Great Britain and that transition to the US probably took 100 years.

Jim in San Marcos said...

Hi Frakrak

I think we need define one thing. Gold is worthless to governments, it cost them nothing to acquire it from their citizens, they give them paper money.

If gold is used to settle trade imbalances, a country can quickly run out of gold. Gold is not used to settle trade imbalances, countries are trading million dollar cats and dogs right now (printing money) and everyone is happy.

I tend to agree with you that China is about to get burned big time. Treasury bills are not gold and if they want to get paid, it would be war, we are broke.

I think it is only a matter of time before gold becomes the medium of foreign exchange.

If you think about it, all of the worlds problems started when the world went off the gold standard. Politicians will never be held to the limits of consumption that apply to the common consumer when they can print all of money that they need. They will print it and spend it.

frakrak said...

Jim I read a few blogs, some are geared towards selling gold to the reader, I have never read an article that predicts the price of gold if the government of the time makes it illegal to privately own this precious metal!!

A few ugly market rumors about an immanent government bill to make this so would kind of crash the price?

The government steps in and offers the then current $330 an ounce for it.

About three years ago you could buy gold in this country with anonymity, now you need proof of identity, so the government has got you right where they want you:)

It has happened before, and when it comes to being the average Joe, trying to keep ahead of the government, I know who I would put my money on....

In the 60's and 70's diamonds were a good store of wealth, and have quite a few industrial uses, you could even go the Russian cubic zirconia path..

Jim in San Marcos said...

Hi Frakrak

I don't think that the governments can control the price of gold. Just look at a US 20 dollar gold piece from the 1920's. Nobody will redeem it for a 20 dollar bill.

An ounce of gold is about one weeks wages.

The only real purpose of gold as far as countries are concerned is that they can use it to settle trade balances (something they haven't done in years).

We saw a very large block trade of gold last year that took place in India between two anonymous governments. I have suggested that it was a good faith gesture by the US to China over our large debt we owe them.

Countries usually ban gold sales when it threatens to undermine the currency. Bear in mind that after the fact of this happening, governments have to pay more to accrue gold with their printed currency.

In the world's present financial situation, gold and silver seem properly priced. These two items are worthless as investments, they are nothing more than a store of value.

What we need to realize is that our financial markets are all screwed up. If we have a million wheat futures trading, it doesn't mean that we have produced enough wheat to feed the world. It means that 50 percent of the investors took one position and the rest took the opposite position. We could starve to death on the settlement date.

I look for gold and silver to hold their value and many governments from here will fail and when they fail, so does their banking system. So gold is good. It will prevent you from losing everything and give you a chance to start over.

frakrak said...

Thanks Jim for your reply, good to get some wisdom from a silver fox :)
as always you make good sense.