Will the Real Economy Please Stand Up? (L-O-N-G)

No doubt you’ve heard everyone’s grand plan for rescuing our “economy”, but what is it they should be rescuing--the common man or business? Just what IS the economy, anyway?

Well, let me pull up a chair and get the tissues for you…it’s not at all what you think.

You probably think the economy is the reflection of ease in which you make your way through life, particularly financial life—can you afford to spend after the bills are paid, food procured, and gas tank topped off? This couldn’t be further from the truth, and in all honesty, the measure of the economy has nothing whatsoever to do with you or your spending habits personally. We don’t make up 2/3 of the economy with our spending—only about half.

In fact, what we spend the bulk of our money on—food and energy—isn’t even counted when gauging economic performance.

What the economy DOES measure, in reality, is the business cycle economy—how many jobs are created and lost, how much inventory/raw material is bought, stored, and used, how many sales were made, and how much profit margin there was in each product sold. John and Jane Q. Public don’t even show up until the very end, as the ultimate buyers of the finished product. The faster this cycle repeats itself, from the manufacture to the finished good sale, the better our economy does.

So please tell me: if a politician makes “economic stimulus package” promises to make money available to heat homes or extend unemployment benefits, how is this affecting the economy?

Also tell me: if we spend the bulk of our after-tax dollars on food and energy, which aren’t counted in tallying economic performance, how will putting tax rebate money into the hands of John and Jane Q. Public help the economy? Politicians are quick to agree that our mere spending will re-energize the economy by buying more end products from businesses, allowing them to buy more inventory to make more stuff, then continue to hope to make future sales—getting the raw materials-to-finished product cycle moving again. This is the theory behind the “keep America shopping” campaigns.

No matter how you get it, you’d most likely spend it on debt, food, energy, or savings/investments. Not very much of it would go into the actual economy, buying largely unnecessary goods and services.

Leftovers are leftovers, whether it’s food, houses, or machinery—when you make too much of something with no plan to use it or get rid of it, it’s waste. Businesses made too much, and now they’re sitting in their own resource waste. Nobody wants this stuff at any price, so it just sits there, causing recession in the business world as it depreciates into worthlessness and backs up the flow of goods.

Here’s the real economy: the bulk of personal spending is pretty much steady—we buy what we need, want, and not much else. Business spending, on the other hand, is as erratic as Britney Spears: huge cycles up, then down, then up again, depending on money availability, investment need, inventory replenishment needs, and labor needs. Currently, we are in a prolonged down-cycle with business spending grinding to a halt, and inventories rising higher and higher, causing a backlog all the way to the raw materials stage. The only perceived way to unclog this pipeline and get the process flowing again is to finance the end buyer (you)—either by discounting the final retail price, or offering you money to buy at any price. In some cases, both have happened at the same time—prices have been discounted to rock-bottom, and credit extended to even the riskiest borrowers, and look what happened! Now that credit has been tightened, business spending has come to a near-halt. The same can be said for consumers—tight credit, home foreclosures, and lack of savings pushed us into a near-halt.

When people talk about the economy and how bad it is, they’re talking about PERSONAL economy if they aren’t in business. Personal economy has nothing to do with business economy, and business economy is what the feds are all concerned over. Your buying a loaf of bread and some milk don’t really affect things like a construction company buying six brand-new Caterpillar bulldozers, or an airline company buying new Dreamliner jets, because those purchases run in the millions (even billions), while your bread and milk may run less than $10. The economy runs on millions and billions, not hundreds.

When a company that buys huge, costly pieces of equipment suddenly stops doing so, and is followed by other companies doing the same, it stalls the economy. Now, the huge, expensive equipment manufacturer has no reason to keep making huge equipment, and is stuck with inventory he can’t sell, and this leads to a write-down (or de-valuation), which leads to a tax loss—this directly affects the tax revenue stream our government relies on for spending.

When we all stop buying, the taxes stop racking up. The government (and business) is then forced to borrow money (from foreign investors, bond sales, etc.) to make up for the loss in revenue. When they can’t borrow any more, they’re forced to sell assets, as we saw in the Citibank stock sale to the Saudis, selling pieces of big-name Wall Street finance firms to other countries like China, India, Singapore, and Saudi Arabia, as well as Countrywide Mortgage going to Bank of America. When there are no buyers and no other alternatives, businesses go out of business, as witnessed by some big-name home builders filing for bankruptcy—there are too many homes and not enough buyers with access to adequate income or credit.

Your personal economy is how well you manage your money: spending, saving, and investing. If you have money available to do all three after taxes, you’re doing just fine. If you have to borrow (use credit) to get by day-to-day, you’re in trouble—that source of credit could dry up with higher rates and shorter payback times, causing you to do the same as businesses: sell off assets, make trade deals (renegotiating your debt), or default altogether.

So you see it isn’t really “our” economy that’s in trouble, but rather the business economy that has the problem. So rather than giving money to us as an economic bailout, the money should instead be going to businesses to shore up debt, liquidate overstock, buy more equipment and/or supplies, and create more jobs. But if nobody’s buying at even a deep discount, giving money to businesses won’t help, unless you happen to be a big business consumer—this means other big businesses and small business owners (wholesalers). Small businesses are the life blood of this economy, because they buy the most supplies and inventory (amount-wise, not dollar-wise) due to faster turnover, and they create the most jobs—but they are quick to cut jobs if the conditions are less than ideal. They have to because they want to avoid the traps of too much unsold inventory, and expensive hourly workers standing around with nothing to do. If there’s no demand for their goods or services, then nobody wins.

If we’re cutting back and only buying essentials, it means there’s a lot out there that we aren’t buying—we’ve deemed it unnecessary for whatever reason. Putting money into our hands to spend-spend-spend is not a remedy for the real problem—creating and carrying stuff we WILL buy under any financial conditions is. So far, the only two things we will continue to buy under any circumstance are food and energy (power for the home, and gas for the car). Anything beyond that is optional, and likely to be bought when we feel times are good, have excess discretionary income, or a surprise necessity arises.

The amount of “recession” in the business cycle should serve to show us just how much excess there is in our economy and business world—we’re chock full of things we don’t need or want right now, and it’s all dragging those businesses down in a big way. Even other businesses are sending this same signal by not buying from each other! A recession serves to wring out the excesses so we can get a clean start with a new economy and new business cycle based on things people and other businesses will likely buy. Competition will begin building up again, and the whole larger cycle will repeat itself over time. Tax revenues will also build up again over time, but the government can’t afford to wait until that happens—hence, the “stimulus package” to encourage SOMEBODY to buy, even if it’s us. This also is an indirect back-door way to buy votes.

Businesses have even had to go global looking for someone—anyone at all—to buy their goods and services, and even the government has helped this process by adopting pretty bizarre and seemingly desperate trade agreements (such as nuclear technology with India for mangoes, and high-tech weapons for oil in Saudi Arabia). I guess now even the globe is out of buyers—people with a need, a want, and adequate money or credit to do so.

Meanwhile, we consumers here at home chug merrily along buying what we need and deem necessary, our overall spending habits stable and contained. Non-food and non-energy companies would KILL for that kind of steady, stable demand, but how many of us buy bulldozers, jet airplanes, or cargo containers full of steel and wood? These companies went for the one-shot large profit, instead of opting for the small, cumulative, steady profit. Guess who won?

When WE quit buying anything because of exorbitantly high prices or no access to income, then we have collapse—depression. As long as we make money to satisfy our own needs and necessities, the economic recession isn’t our concern, and nobody should be trying to put (borrowed) money into our hands to divert our attention. As long as we still have jobs, we won’t run the risk of economic depression. If we lose those, we’ll just be unemployed. No matter if we exist on our own income, or are reduced to welfare and food stamps, we’re still going to buy food and energy—see the difference between a PERSONAL and BUSINESS economy? We can’t all lose our jobs at the same time, so there will continue to be steady spending on the part of the consumer, even if it’s a little less than usual—we have to eat, sleep, be warm, and transport ourselves somehow, and this is what keeps our PERSONAL economy afloat.

The same can be said for business: they can’t ALL go out of business at the same time, so only the strong and financially-prepared will survive, and new competition will spring up as time goes by. It just may be a rocky road to get through this die-off-and-start-anew point, and this is what our government (through stimulus package promises) is trying to stave off—the painful and ugly sorting-out process. Good luck with that.

Better spending control, tighter inventory controls, and a keen sense of demand is what avoids recessions, not more haphazard spending by John Q. Public (financed by his own future tax refunds—they call this a “rebate”). You’d think all this was a relic of the past with the invention of just-in-time inventory control, but no—there is just too much competition out there, and the field is too diluted with weak players offering the same things at the same price points.

Just when we’re salivating at the thought of getting checks in the mail, this caveat comes from the White House: “taxpayers” will get these checks. This means that if you didn’t work and file a return, didn’t make enough money to be charged a federal income tax, or your federal tax burden was wiped out by the saver’s credit, then you would get nothing. In other words, the bulk of this money would go to the rich, business owners, or just people who owed on their taxes—not what the presidential candidates had in mind (or you either, I’m guessing). This is precisely what should happen, because this will short-circuit the indirect vote-buying some candidates were hoping for, and most likely stimulate the spending that’s REALLY needed—business spending and large-ticket items.

What we need to spend like drunken sailors again is job creation, and higher-paying job creation at that (even this is no guarantee). No “stimulus package” direct to consumers is going to do that for us.