State of the Economy

First, I have been way too long in writing this article. I have been head down working in my business, trying my best to keep the train moving. To all the new subscribers, welcome, I hope you find this useful.

I am sure everyone is aware we are in a very dynamic and unique time in history. The US and most of the world’s economies are on the verge of a massive economic correction. Maybe the largest correction ever in history, if not certainly in our lifetimes.

What is money, and who controls how much of it there is? How will this affect your job or business? How will affect my business? Why is this correction inevitable?

The vast majority of the world’s money is based on fiat, aka, nothing. In the US it is clearly unconstitutional as Article 1, Section 10, of the constitution clearly states:

No State shall enter into any Treaty, Alliance, or Confederation; grant Letters of Marque and Reprisal; coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts; pass any Bill of Attainder, ex post facto Law, or Law impairing the Obligation of Contracts, or grant any Title of Nobility.

But the constitution only maters if the government is held accountable by its citizens, and clearly we are not holding them accountable. If you try, even to make sure your kids are not being groomed at school, they label you a terrorist. I digress, now back to money.

What is money?

Many will say it’s evil, and has no purpose. Others will state that it functions to improve the flexibility of the market. Imagine trying to barter for a car and all you have to offer is a herd of goats. To make the exchange, you would need to find a person willing to trade a car you wanted for your particular herd of goats. Baring that, you could try to trade your herd of goats for something else that the car owner wanted, and on and on. This is not very efficient, and leads to lots of time exchanging goods trying to get what you want. Instead, what if you could exchange your goats for something universally recognized as valuable, desirable, and easily divisible. This is how money came about, and over known history the most widely used form of money has been gold.

How do banks get their money?

Do they just lend out deposits they get from other customers? Unfortunately, that’s not how it works. Instead, they get to lend out 10 times the money they have in deposits. If you or I were to try that, they would call it counterfeiting, but they call it fractional reserve banking and it’s perfectly acceptable.

Where does this additional bank money come from? What if they don’t have enough deposits to lend out for a loan? They go to the FED and get more money at the FED discount window. So, they borrow money from the FED to give it to you, but they must put up collateral to the FED. This collateral is usually in the form of loans, such as the one you are trying to get. Confused yet? The FED provides this money of course with an interest fee to the banks, who pass on this fee with additional interest to the borrower. In my case, I got a rate of prime +1.75% that adjusts quarterly. Prime is what my bank pays to the FED, and the 1.75% is what my bank is earning, excluding the fees they charge to originate the loan.

The bank that lent me money to buy my business has to only hold 10% of the loan amount to create the loan, which coincidently is the amount they required me to bring to get the loan. It could be fuzzy math on my part, but it certainly seems like the bank isn’t putting any money out to create the loan. They get the 10% from the borrower, then the 90% from the FED, and all is good while it’s being repaid. The problem for the bank is, will it get repaid? If not, they become the owners of a small business that they neither want to own, nor want to have to sell.

Who is the FED?

The FED (Federal Reserve Bank), cleverly named to sound like a public bank, it is instead a private bank that has the monopoly power to create money. The FED charitably provides this service for a fee, which is named interest. Every dollar they decide to create they get paid in interest for doing so, talk about a great business.

This bank has destroyed over 99% of the value of the dollar since its inception in 1913, but they have really been running the presses lately, more than doubling the money supply since 2019. This leads to what is termed inflation, or to the layman loss in the purchasing power of money.

How come everything hasn’t doubled in price since 2019? In a system where all the money was put to use right away, it would have. Instead, lots of this money has been exported overseas, to countries that the US is purchasing goods and services from. Thanks to the trade deficit, this money does not come back to the US right away.

In fact, the petrodollar is an agreement post WWII that kept most of the world using the US dollar for trade among most of the nations of the world. So if France was buying Chinese goods, they would settle in US dollars. Thus, they had a reason to keep US dollars. This is changing thanks to the BRICS agreements, and the sanctions on Russia over the Ukraine war.

As the world stops exchanging goods in US dollars, those foreign holders of US dollars are going to want to use those dollars for something. This will involve increases in purchases inside the US. This sounds great for the US sellers of goods, lands, and services. It is actually inflation that was created by printing money, which raises the prices of those goods and services. It won’t be good for most people, even those owning businesses.

What’s the problem with inflation?

Can’t employers just raise wages? Sure, but are public companies even legally allowed to reduce shareholder returns to pay for these wage increases? Most will raise wages and prices, or find ways to reduce wages in other ways. One way is to reduce the number of employees. Why do you think there are so many self-checkouts these days? California in its infinite wisdom, just raised minimum wage to $22/hour, so either companies like McDonald’s will have to charge way more for their food products, automate most of the employees away, or exit the golden state.

Clearly, the FED has decided that the one big lever they have to tackle inflation is to increase the interest rate. By doing so, money gets harder to borrow. It gets harder to borrow because banks want to get repaid. The loans are harder to repay because the interest cost increases, making the monthly payments higher. Marginal companies will not be able to bear this increased expense and will go out of business. This process will slow the economy.

As the economy slows, jobs will be harder to find, and inefficient/unlucky companies will fold. Big companies with lots of cash will weather the storm by cutting back on employees, their benefits, and pay lobbyist to write legislation that benefits them at the expense of their competitors. The little companies are in much more uncertain times. When small businesses start seeing reductions in sales, many will throw in the towel. Some will become more efficient and try to capture the remnants of those folding business’s customers.

Why is the correction inevitable?

Malinvestment due to the artificially cheap money has meant some companies have made choices that won’t hold as money gets more expensive to borrow. The FED is tightening the money supply to bring inflation back down because if they do not, they risk Federal Reserve Notes (US dollars) becoming worthless, such as what happened in Zimbabwe and Weimar Republic. They, however, are performing a balancing act as if they raise interest rates high enough to stop inflation the government will not be able to service its massive debt.

What does all this mean for your job or business?

If you are highly levered, for instance, just took out a loan for a large percentage of the purchase price, then your risk is much higher as interest rates go up, and your loan payment goes up as well. For example, my loan payments went up before I even made my first loan payment, and now has increased two quarters in a row. This increase for me amounts to almost $5K/month since I signed the loan papers.

Most businesses like a stable, somewhat predictable environment to make the best economic calculations, and since 2008 they have had near zero interest rates. Now that the interest rate is increasing significantly, in fact, the fastest it has since the great depression, the tables have been turned.

Are you an employee now looking to buy a business, if so, it will be harder than it was when I purchased mine, a little over 6 months ago, but can still be a viable option? My suggestion is to be cautious and aim more for a stable company than one with growth potential. Also, try to think through what impacts each particular company might feel as the depression sets in.

For instance, a pool construction company, which I might add have had a record run with the government lockdowns closing public pools, then likely they are going to take a big hit as few will be able to afford to put in a new pool. If, on the other hand, you bought a business that sells directly to the government, have no fear you will still have plenty of business.

If you are an employee looking to stay an employee, you might want to find a company with a history of not laying off workers, or find a government job that won’t go away, or a company that thrives in a depressed economy.

Is it all doom and gloom?

No, with foresight and planning anyone can not only survive this economic environment, but thrive in it. To understand economics, my suggestion is to read up on the Austrian School of Economics, as they have correctly understood the business cycle. Whereas other economic schools of thought have been way off, going so far as to say right before the housing market crash of 2008 that the housing market was strong. The best place to find the writings of the Austrian School of Economics is Mises.org. There you will find thousands of hours of audiobooks and even more in e-book form, all on economics, and all free for your education.

As for my business in particular, my plan is to grow it with basic marketing, an additional sales representative, and good old fashion networking. At the same time, I want to be cautious with cashflow, and plan for consistent increases in the interest rate for at least the next year, and more than likely the next few. My prediction is we will have an interest rate 5% higher than it currently is before they start to bring it back down, and thus I need to make sure I keep enough in the bank to cover these loans.

As my competitors fold, I will be striving to pick up some of what’s left of their former customers, and maybe be able to purchase their equipment at a steep discount. Further, it might be possible to hire some of their former employees.

Disclaimers

I am just a guy on the internet making predictions about the economic future, I could be totally wrong. Likely, my description of the monetary system is overly simplistic.