Thomas Schinkel and Associates » economic crisis

And now, some GOOD NEWS for a change!

tom — Wed, 18 Jan 2012 13:05:23 +0000

First of all, my best wishes to all my readers for a happy, healthy and prosperous 2012! But the new year is hardly more than a week old and our e-inboxes are already flooded with messages of bad news:

The Dollar Imploding!
The Euro Collapsing!
Middle Class Drowning!
Gold Skyrocketing!
We’re in the Grip of Inflation!
No, No, Deflation!

I could go on, but you get the picture. The funny thing is, this doom and gloom is not a national phenomenon. It seems to have crept into the collective veins of every country from Eastern and Western Europe to all of North America. This state of affairs is a bit unsettling, especially because not more than ten years ago, we were at exactly the opposite end of the emotional spectrum, before the dot-com bubble eventually burst.
Now, don’t get me wrong. I am in total agreement with the doom-and-gloom artists that the world is a volatile place, that there is much uncertainty, and that the future remains utterly unpredictable. But are those reason enough to slip into a state of collective doom?

Over the Christmas holidays, I though more about this state of affairs and what became clear to me is that much of the gloom is the result of uncritical recycling of the same old news. This is done to the point that people can no longer see the full spectrum of challenges and opportunities and they latch on to thenegative.
So, to do something about it, I decided to give myself an assignment. It was as follows:

“Try to find three pieces of good news, not widely reported, not placed in the proper context or perspective, and once you have found these pieces of good news, share them with as many people as you can”.

And you know something? I found those pieces of good news! Here they are:

1. Manufacturing

Employment and output in the manufacturing sector appear to be on a structural upswing. With all the weaknesses in the American economy, (retail, financial services, real estate), manufacturing stands out as an area of strength. In fact, manufacturing companies have added jobs two consecutive years in a row!
A survey conducted by the Institute of Supply Management has shown more companies planning to hire than to fire in every month since October 2009. That string of 27 months is the longest such string since 1972!
Major corporations such as General Electric and Boeing are planning or are in the process of bringing manufacturing jobs back to the shores of the U.S.A. Incredibly, Toyota just announced that it is embarking on a strong EXPORT program of Toyota’s Made in the U.S.A., rather than exporting them from Japan!

At the second tier of manufacturing, a specialty manufacturer called Fellowes announced that they are bringing the production of certain types of paper shredders back to the U.S. from China.

In a broader context, the many changes taking place within manufacturing technology may have much to do with this. For example, “Distributed Manufacturing”, (making small batches of product close to the distribution pipeline), is gaining attention as an increasingly viable alternative. In some cases, this puts an end to the global supply chains and makes it possible to produce in a high-cost labor environment. And it is not just a cost issue either. Flexibility of marketing and offering variety to satisfy regional and local tastes are equally important variables.

2. Energy Independence: a step in the right direction

Last year was the first since 1949 in which America exported more fuel than it imports. The U.S. still imports around 9 million barrels of crude oil every day, but soaring exports of refined petroleum products are converting it into a net exporter. In the first nine months of 2011, the U.S. imported 690 million barrels and send 754 million barrels of petroleum products abroad to countries including Mexico, Brazil and the Netherlands.
The reason? “We are simply not using as much”, says an analyst at the Energy Information Administration. “Prior to 2008, basically anything we produced, we used”. “A sharp rebound for the U.S. economy could make it a net importer again, but this looks like a trend that could stay in place for the rest of the decade”, says the global director of oil at Platts, the oil and energy market tracking firm.

To me, these two examples are like green shoots of rejuvenation, tell-tale signs that the U.S. Economy is adapting to a new dynamic, and in the process correcting imbalances that the 30-year old mantra of ”America as the Consumer Society of Last Resort” had caused.
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These two trends are also positive because they help reduce America’s structural trade deficit, and put the focus on value creation rather than on value consumption. If these two trends continue for a couple of years, we may find ourselves having solved at least one huge problem, especially in the broader context of trade relations with the rest of the world.

And now to my third item of good news:

3. Crisis Resilient Business Models

Whenever there is a financial or economic crisis such as the one we experienced from 2008 to 2010, many companies in a given industry suffer revenue loss and a decline in profitability. But there is also a small group of firms that appear to be the exception. Despite the downturn, their sales keep rising, their bottom line remains healthy and in some cases even improves. They have a characteristic in common that can best be described as

“Crisis-Resilient”.

It is difficult to pinpoint this resiliency in any specific way, as if all of them had preferred access to a set of magic bullets that protect them from the vagaries of the next crisis that lurks around the corner.
These crisis-resilient businesses cannot be defined in terms of demographics or size. Some are operated by older entrepreneurs, some by younger ones. Some are directed by women, some by men. Some are very large, others are much smaller and often compete against players with far more resources and muscle.
Geography is not a defining characteristic either. I see these firms all over North America and Europe. Is it limited to certain industries perhaps? Not really! Services firms, resellers and manufacturers, you find them everywhere!
After much thought, I have come to the conclusion that crisis-resilient business models result from a combination of harmonious actions informed by values and beliefs that approach risk in a very different way.
On the one hand, these models set limits and say “NO” to business opportunities eagerly embraced by more traditional types of companies. On the other hand, crisis-resilient business models have a knack for raising the bar to new extremes on a whole host of other parameters, such as customer service, and embracing new technologies.
In my next blog, I’ll flesh this out in more detail. For now, I can say one thing and that is that crisis-resilient business models are much better learners than their more traditional counterparts.

So, here you have three pieces of good news, that in my opinion fly in the face of the doom-and-gloom industry. In closing, I invite you to join me in pushing back on the merchants of doom, by taking a renewed focus on positive news and developments and on the human ability to make our world a better place, rather than succumb to the parroting of fear.
If you have some good news to share, send me an email. I will compile a list of each and every of your contributions, and recycle that back to all participants in this push-back drive.
In turn, you can share your list with all your friends and acquaintances. Let’s get our own worlds back on an even keep, work hard, and recommit like never before to good business practices that create value for the present generation and the next. Stay away from gambler, short sellers, speculators and merchants of doom.

Have a great year everyone!

America’s New Deal with Capitalism Part Two

tom — Sun, 15 Feb 2009 09:37:25 +0000

America’s New Deal with Capitalism Part II

Thomas Schinkel

February, 2009

In Part One of my article entitled “2009 America’s New Deal with Capitalism,” I concluded that the economic crisis that has enveloped us all had a scope in the range of $9 trillion, that this was a lot of money and that it was accompanied by an even more severe crisis, and that was a crisis of trust.

Trust in this context means implied trust among various groups in society such as the middle class, the financial services community and the governing class. Each of these groups has a stake in our present system of capitalism, and without credible efforts to restore this trust, nothing will work to save this system of capitalism from collapse.

In this second part of the series, I will first outline an alternate set of action steps that I believe are necessary to arrive at a solution. Then I will outline the benefits of such a new way of thinking.

Preamble
Instead of focusing all its energies on preserving the top- tier of the financial services architecture, what the Federal Government needs to do instead is focus on preserving the economic integrity of the American middle class!
Without the top tier of banking institutions the world will function anyway. Competition within the banking community is sufficient for the remaining, more mundane, bankers to pick up the slack in the event that the top ten banks disappear altogether.
By contrast, if you want to know how a world looks like without a middle class, go visit Mexico City or Sao Paulo, and if that does not get your attention, on your way back home make sure to stop over in Port au Prince (Haiti) and take a look at poverty in its ugliest form.
One aspect of the present crisis offers a glimmer of hope, and that is the historically low interest rate that the Federal Reserve is charging the most elite members of the financial community. The Bank of England went a step further, and set the rate to zero, a phenomenon not witnessed since 1650.

The Real Challenge:
With the steep deflation of real estate markets, millions of members of the middle class (especially the lower echelon), are at risk of losing the equity in their homes, the only real connection they have with - and commitment to - our present system of capitalism. This scenario is getting more real by the day.

AMERICA’S NEW DEAL WITH CAPITALISM

An action plan to prevent the real challenge from becoming a reality consists of two components. Component One is a household debt restructuring program consisting of interest-free “emergency” loans to members of the middle class. It capitalizes on the historically low interest rates charged by the Federal Reserve, but instead of offering it to the banks, it is offered as a one-time emergency opportunity directly to individuals and households. Component two is a tax burden restructuring program that allows the government to get its own financial affairs in order.

Component One: Household Debt Restructuring Program

Bypassing the Federal Reserve, the Federal Government offers every family or individual the option to enter into a one-time, interest-free loan of up to 50 percent of their reported household income for last year, or up to $50,000 per person and up to $100,000 per household. This loan is directly with the Internal Revenue Service (no middlemen, no fees, no closing costs, nothing). Prerequisites are that applicants have filed tax returns for the last three years and that they are current on their taxes. Conditions are that applicants agree to use the loan for restructuring of their debts only. They also agree to a tax bracket that is three points above what they pay now, for the duration of the loan, a maximum of ten years. The debt restructuring loans are to be used in the following manner (a simple, one page affidavit attached to the applicant’s form 1040 will establish the specific goals of the applicant):

1. Pay off or reduce the balance on any home equity loans or second mortgages outstanding;

2. Pay off or reduce the balance on any education debt owned to financial institutions;

3. Pay off or reduce the balance on any unsecured lines of credit with their bankers;

4. Pay of or pay down any credit card debt or other forms of consumer debt with financial institutions or equivalent organizations.

As part of “‘America’s New Deal with Capitalism”, the government mandates from the bankers that any of their customers who participate in this program of debt restructuring receive a one-time, two percent discount on any of the debts they pay off to their banks under this program.

Component Two: Comprehensive Tax Restructuring

The government is already way over its head in debt and there are several fairly painless measures to overcome this challenge of government deficits, as follows:

1. A nationwide consumer tax on all purchases that are non-food and non-investment. What comes to mind here is a Value Added Tax such as that in use by practically all other major countries in the world.

2. A five percent tax on all services that are performed in the economy. The largest portion of our economy is in services and this sector is under-taxed or there is no tax on services transactions at all. The services sector includes architectural, consulting, legal, and numerous other services that are now under the tax radar. It also includes financial services such as buying and selling shares in publicly traded companies. A tax on this hyper-active trade is long overdue.

3. A significant increase in the Federal tax on gasoline use.
It is my contention that this simple to understand program not only stands the test of fairness, it is also doable in a very short period of time, and it solves several problems at once, as follows:

1. It reestablishes credibility to the idea that capitalism is for all citizens, not just for the well-connected and the upper crust.

2. It gives everyone – young and old – breathing room to restructure the composition of their finances, especially since the tide of the markets has turned against them. People who have bought homes in the last three years can restructure. People who have lost fifty percent of their retirement savings can restructure their finances.

3. Large cash deposits come into the banks through the front door, not the back door (the way it is done now with the TARPS program) This will unfreeze the credit markets from the ground up, not from the top down. The latter has been tried; it did not work, and no more tax dollars should be squandered in this manner.

4. After an initial, huge increase in government debt, this debt will rapidly disappear from the additional tax revenue streams that will be created by both components. After all, participants are motivated to pay off their loans early so they can go back to the lower tax bracket. My sense is that with the proper balancing of rates, the government can return to a debt ratio of - say – where it was in 1998.

5. The collective savings rate will increase from minus 2-3% in 2008 to a positive 3-5% within two years, and it may even climb back to 10 percent in five years (where it should be).

6. It provides specific tools to help transform the economy to a post-consumer society (a natural next phase in society with the baby-boomer generation entering retirement by the millions).

7. It acknowledges that the problems we are in now - were created and ignored by the upper echelons of our political and business elites and it would be unconscionable to reward that class for the errors of their ways while leaving the masses behind. After all, if the American middle class disappears into bankruptcy, so goes the upper class and so goes the world.

8. It is inflation/deflation neutral;.

9. Its elective nature gives it a surgical precision because only those individuals and households that really need it will opt for it. The carrot for the others is to remain with the lower tax rate.
Most important, the program outlined above incorporates something that is missing from anything else that has been proposed to date. It will restore a sense of trust among the various groups in society, a prerequisite for stability, progress and the achievement of a shared sense of prosperity. As a result, large groups of people will come back into the market (financial and real estate), and the deflationary spiral will be broken before the entire system crashes into the ground. Breaking this downward spiral in the financial and real estate markets will be the ultimate cure that will help the American and world economies regain their footing.

In short, I believe that this is a win-win situation for all. It throws a lifeline to the millions of Americans who otherwise will be kicked out of the middle class. It also reestablishes the credibility of the Federal Government and its institutions, badly bruised by fifteen years of thoroughly discredited mantras about privatization and liberalization. It will maintain the core of our traditions of capitalism and democracy, while renewing an emphasis on responsibility, oversight and accountability; that sharing the wealth creates prosperity for all.

With the inauguration of a new President, this line of thinking may well be in harmony with a new spirit that is emerging in America, a new dawn, a new beginning for our global village. Goodbye Crassus, Caesar and Rome! Welcome Compassion, Hope and Goodwill among all!