I was talking (emailing) to a buddy of mine about whether the economy was getting better and he sent me the reply below.
*** No cliffs, so if you're not into reading, stop here, it's a tl;dr***
(RE: The statement that the economy is getting better) I wonder if it’s a “false positive” due to all the government stimulation
I’ve been doing an unscientific poll by asking every one I meet how their business is doing and almost everyone says it’s the worst it’s ever been and I’m in the Dallas Market where it’s supposedly doing well. The bars aren’t as busy, restaurants aren’t as crowded and the traffic seems lighter on weekends when you would expect it to be busier.
It just seems to me that it’s going to take a while for all the losses to be absorbed so a new economy can build off of an adjusted baseline.
Example:
Someone builds a commercial building expecting to lease it for $30 per SF. They manage to lease it to a bar owner. The bar sells drinks and food based on a price that will recoup their rent, overhead and cost of sales. Customers no longer want to pay $7.00 for a beer and $10+ for a mixed drink, food is too expensive, etc, so customers don’t give the bar the business it was expecting and they can’t reduce prices because their fixed costs like rent are too high. Eventually the bar goes out of business.
The commercial developer tries to rent the property out at $30 per SF but can’t get any takers because the market won’t support the prices necessary to pay rent this high. The commercial bldg owner can’t reduce his rent because his interest and fixed costs are too high to allow him to even break even so eventually he either has to let the property go into foreclosure or convince the bank/investor to adjust the terms of their notes.
People don’t want to lose their properties and banks/investors don’t want to reduce their terms so it takes time to get to the point where all parties realize it’s in their best interest to adjust everything. Oftentimes this will never occur and the property will ultimately be foreclosed upon, sold at foreclosure and losses absorbed.
The guy that buys the commercial bldg at foreclosure can now rent the property for $20 per SF because he paid a lower price at foreclosure, the new tenant can rent the property because he can support this rent on $3.00 beers and $5.00 mixed drinks and cheaper priced foods, customers come back, etc, etc
The same process has to occur in the residential market but people historically overvalue their homes based on their emotional and financial investment. As a result, residential homeowners are even more reluctant to reduce prices until its too late further dragging out the time it takes for the market to correct itself
Combine these two aspects of our economy and it seems plausible to me that it will take years for a true market correction to take place and until a market correction occurs, the economy can’t begin to grow again. The government stimulation in my opinion has just delayed the inevitable but perhaps made it less painfull by allowing the correction to occur over a longer period of time.
Niche markets will find success in any economy (Apple for example) but if I understand correctly, our economy is heavily based on construction so I don’t see how things are going to get better anytime soon since so many people rely on this industry.
Add in the fact that we now have a global economy in which technology allows people to compete against each other while on opposite sides of the globe and I can’t help but think there will be further downward pressure on US wages.
I believe wages have historically been the highest in the US and therefore will incur the most downward pressure.
Add in the loss of manufacturing and the pitiful car industry in the US and I can’t help but wonder what the US has to offer the world market in the long run. Creativity? Ingenuity?
I haven’t even brought up our governments spending, multiple wars, government ineficiency and waste plus the seemingly endless social programs. How can we sustain them all long term?
Some revenues are kept artificially high by companies like AT&T & Apple that structure their businesses to not offer the best service at the best prices. Instead they use creative extortion that forces you to use AT&T if you want the Iphone, won’t let your mobile and home number combine into one thereby forcing you to have more phone lines than you’ve ever had and far more than you ever needed,
I think eventually internet phones will slowly take away business from AT&T because people will realize they can just spend money on a great internet service and then use a VOIP phone (like Ooma
http://www.ooma.com/ ) and drop their home phone and internet service with AT&T. Now imagine if your mobile phone can work off of VOIP and you no longer have to spend extra money on your mobile phone service.
I believe in the long run the competition will create a product that allows us to spend fees on one service that provides our internet (Wimax wherever we go like Clear Wireless
http://clearwimaxdfw.com/ ) that will allow us to have internet access anywhere and also provide the connection we need to run our phones.
How much in revenue will be taken away from fat cats like AT&T when they can no longer extort us for multiple phone line costs, mobile phone costs, 3Gs internet for the Iphone, Home internet fees, text message fees and 40% taxes on top of that?
The same synchronization is going to occur with computers if they can perfect cloud computing. The Ipad may be the prelude to the device that allows us to get rid of multiple computers and just have a small mobile device that is portable and powerful. It won’t need huge hard drives because programs will be internet based and everyone’s files will be stored online. Sound crazy? Check this out:
http://www.ted.com/talks/pranav_mist...echnology.html
If we had good government, they should use this time to rebuild our infrastructure and push our economy toward energy independence. Imagine the industry that could be created by using a shotgun approach to our energy needs. Some parts of the states could work off of geothermal that would create local jobs for installation, service and maintenance, others would use wind (say in Kansas, Oklahoma and other windy locations), other parts of the states might use solar (Arizona, Neveda). The same industries for installation and service could arise from these energy solutions.
We’re a hard working country and can definitely create a new economy based on new industry and technology, I just hope politics and our government don’t screw it op.
