Thursday, August 23, 2012

Fixed Costs the Giant Killer

A while back in San Marcos, California, we had a drought and our public water utility requested that everyone reduce water consumption. The plan worked great, with an unexpected consequence. We got a notice from the water utility that rates had to go up because we were consuming less. The water company had fixed costs that weren’t being met because of the drop in consumption.

These fixed costs could lead to cash flow problems in a business that expands too much during good times. They might not be able to meet their fixed costs when times get tough. For example, General Motors doesn’t make a profit on every vehicle. Everything they make up to September or October covers fixed costs. The rest of the year is their profit. Have a bad sales year or pay too much in retirement benefits, you don’t meet fixed costs.

Stores that may be in a trouble are chains like Staples, Home Depot, Lowe's and Wal-Mart. Fixed costs for each store are real, and when times were good, the money rolled in. A drop in consumption of about 15% really hits the bottom line hard. The real pain is felt one tier up in the organization, upper management, the bigger the organization, the more corporate infrastructure that demands fiscal support (i.e. fixed costs).

Internet competition is exacerbating the chain store problem. A brick and mortar store has obvious fixed costs in inventory, that a web based store doesn’t have to contend with. Display a photo and sell. Do it right and you bypass the sales tax.

Chains are starting to downsize. They are closing marginal stores and laying off personnel. The competition in our area is intense. We have 4 Home Depots, 2 Lowe's, 2 Staples and 3 Office Depots within 12 miles of each other. The Office Depot by our place is now closed and I had no idea when I drove over the other day. The Ace hardware I use to go to every Saturday for free popcorn with my son is gone.

We need to step back and realize that things are getting progressively worse only because people are not consuming as they were before. Once we realize that, we can understand why this mess is not going away any time soon. Consumption is what drives our economy. The super stores that displaced all of the mom and pop stores 20 years back now have a problem of being too big. Size does matter in a declining economy. These businesses are asking the question “Do we have the funds to continue operating?”

If we examine government, there is a different view to downsizing. Why bother. And the aggravating thing, any money left over at the end of the year has to be spent or turned back into someone higher up who will figure out how to spend it. So if there was a couple of million left that wasn’t spent, you kind of see how every department got the wide screen TV and the exotic exercise machine. What would happen, I wonder, if the department head got a 10% commission added to his paycheck, for funds not spent and returned to the General Fund? Of course, the taxpayers would never tolerate a State employee receiving a 10 million dollar bonus for cutting welfare by 100 million, or would they? (Can't happen but it sounded funny)

What we can deduce, is that private enterprises that expand, increase their fixed costs. And as these fixed costs increase, they tend to become unmanageable in a recession/depression when they try to downsize. Government on the other hand, has budgets that have been preapproved for spending. Government doesn’t have to make a profit in order to survive.

Both Private and Government entities can file for bankruptcy. This only happens after they have tried everything else. Private businesses fail for lack of consumption on the part of the consumer. Whereas, the problem for most of the city government failures to date, is too much consumption, sandwiched with declining tax revenues.

I was just listening to the nightly news and someone stated that Medicare had until 2023 until it went broke. That put my mind at ease, it’s kind of like the Captain of the Titanic advising the passengers that they get to keep the deck chairs when they leave the ship. The bankruptcies now happening, started 3 to 6 years ago. The business model for government and private enterprise has changed somewhat. Private enterprise will pay for failure by going out of business. Not so with government. They are the only abstract body that can perform a sexual act upon all of its constituents that doesn’t result in a single pregnancy. And if they can do it twice, they’ll probably get a pay raise. You can be rewarded for gross incompetence in the government sector, go figure!

Copyright 2012 by Jim Brubaker

Wednesday, August 15, 2012

The Depression Has Been Called Off Due To A Lack Of Interest

When our government collects 2.5 trillion and spends 3.5 trillion who gets hurt the most? The poor, they have the least to spend. Look at it this way, If government taxes were to cover expenditures, a dollar would be worth a dollar. But if the government spends 1/3 more than it collects, they have to print dollars. So now each dollar will only buy what 66 cents used to buy. You have just been taxed 33 cents on every dollar you earn after taxes by inflation. Notice, you didn’t have to fill out any forms or mail in a check to the government. Your dollars don’t go as far as they did yesterday.

These trillion dollar a year deficits will bankrupt the government. If you are on the receiving end of entitlements, who cares? They owe it to me, pay up. The concept of a train wreck is not there. Give me my benefits until you can’t and then we will sue for back payments. It’s kind of like adding more vehicles to the freeway until it clogs up and stops moving.

Here is what happens in a financial collapse. Nobody gets paid. Nothing gets delivered. You want to buy something, currency and credit cards would be worthless. A driver in Colorado with a full truck load of potatoes is not going to transport them to Pennsylvania without clear cut payment for fuel. Food distribution on the retail level would stop, if looting hadn’t already solved the distribution problem for what was already on the shelf.

At some point, the trillions of printed money will leave little to consume. The farmers this year have a very bad corn crop. But with insurance, the losses will be minimal. But notice one thing, the farmers get their dollars for a failed crop, but half of the corn is not available for consumption, it doesn’t exist. This is what happens when you print money, you’re not producing anything for consumption, you are only enabling consumption.

So the real problem will be that can of beans now selling for 98 cents and that gallon of gas at $4.20. If the can of beans increases in price to $9.98 and a gallon of gas rises to $42 dollars a gallon everyone will be out to crucify the local Arab or farmer with glee. Notice how the government is out of the loop.

Looks like the old farts in Florida will vote for Obama because of the free health care. Look at it from a different perspective. If you worked all your life and saved up one million dollars, an 8% return on you nest egg (80K), would cover most of the bills. With T-bills now paying a half a percent, how do you retire on 5K in interest a year? What caused it? The FHA has financed another 4 million homes with nothing down because the home buyers have no money saved up for a down payment. These loans merit an 8% interest rate just from the risk involve, but alas, they are government insured.

It pays to be a deadbeat. Why not tax everyone one months labor or let them pay someone to work for them? The concept of tax the rich has some merit, but why not tax everyone at least one month of their wages or one month of their life? Rome asked for two months and built a lot of roads. We need everyone contributing to make a better America, not just the rich.

There is a chance of reform with the next election, but will it happen? Its hard to say, If interest rates were to jump to 8%, Federal Income tax collections couldn't pay the interest on the national debt and the "Game Over" light starts flashing. We are almost there, and Congress is still stacking more hay on the camel. What's one more straw?

Copyright 2012 by Jim Brubaker

Friday, August 03, 2012

The Election is getting closer

I can hardly wait for the election to be over. The winner will be the big loser. The economy is tanking at a faster rate as every day ticks by. It’s Democrats against Republicans in the Congress. I would expect the people in Congress to keep their mouths shut and legislate. But oh no, they are too busy trying to get reelected. Naturally it’s all the other party’s fault. Turn on the TV and if you can’t tell the speakers party affiliation after 15 words, you have a problem—not the guy talking.

The biggest mistake of the present administration was trying to bring Democracy to the Middle East. Liberia, Egypt, Syria, Iraq, and Iran are all in a state of flux. Oil revenues were their “food stamp” program for the masses. We have destroyed that system of guaranteed delivery with a promise of Democracy. Hillary Clinton thinks that Democracy will spring up if the despots are disposed of. With dreams like that, even Lewis Carroll would dub her a “Snow Queen.” It’s all about power, the more you have, the more money and sex is yours for the taking.

We have Israel with nukes. We have a President that has wiped out two Arab leaders, Osama Bin Laden and Muammar Gaddafi. Where is the major population of the Middle East looking to for guidance? No food, no political order, they don’t give a damn about Democracy. The funny thing is that these people don’t give a damn about the oil, its water rights that determine whether their family lives or dies. Nobody is paying attention to the dams being built surreptitiously in the region (ok maybe Israel is).

Neither candidate has a real chance of solving “The Greatest Depression to ever be experienced.” The greatest hurdle facing the nation is our declining tax base. The United States is broke and we have Republicans and Democrats fighting over taxing the rich. When they pass this next tax bill, how’s that going to work? Obama’s speeches seem to imply, If you’re a Democrat, you don’t have to pay the tax, but if you are a Republican, you do. Maybe we can deduce from the heated political arguments, that “A Republican is a Democrat with money.”

Hiding money for the rich is very easy. I knew a doctor that formed a corporation and paid himself $600 a month. I asked him how he could live on so little, he said his wife was an RN making good money. These people write their own W-2’s, they are the employer. Show me a worker that would rather spend his paycheck on higher taxes than on his family? How many Congressmen have been caught cheating on their taxes as well as their wives?

The issue for the next election is higher taxes for the rich. The problem is, raising tax rates in this economy does not guarantee more taxes coming in. Common sense suggests that if you double the tax rate, you double revenue. What history teaches us, in a depression, you end up with less.

Obama stuck a broom in a hornets nest when he passed Obamacare. What happens from here is all scripted, Obama will get his comeuppance from Congress. Paybacks are a bitch.

From here, it’s all on TV, Republicans against Democrats. The trouble is, is anybody listening? Let’s face it; the voter is fed up and tuned out. Do we have a President or a jive ass pimp lookin to sell us what we want for our vote?

Copyright 2012 by Jim Brubaker