A Slightly Longer View

Sometimes, it pays to shut up – for over a month or so, and take in what the pundits are saying in order to make some sense of their pontifications, which could then form a pithy blog posting that would somehow relate to SMEs.

Well that was the theory anyway.

And what did the last few weeks of studied silence reveal?

That Wall Street is trumpeting that everything’s great in the credit and stock markets. That Henry Paulson and Warren Buffet think the worst is over, that Jim Rogers and Nouriel Rubini think the worst is yet to come. That the US is in even more of a financial mess than originally imagined. The credit crunch may (arguably) be over but the recession is yet to properly kick in, and the jury’s still out as to how long that will last and what “shape” the recession will take i.e. will it be “V” shaped with a steep recovery; a “U” shape with a lull and then a steep recovery or an “L” shape with a sharp drop and indefinite flat lining.

As Bill Bonner of the Daily Reckoning for 12 May 2008 put it:

“In America, meanwhile, people are working their way down. We're not kidding. Wages are stagnant. Prices are rising. At the end of the day, they have less spending power; they are poorer. Besides, it said so in the New York Times. People lose their houses…move back in with their parents…and put their stuff in a storage unit. Then, they either can't make the storage payments…or they realize that the move wasn't just temporary and they give up. Pretty soon, the auctioneers are selling the stuff.”

Yeah, that all seems to gel with what I was reading too: Americans hauling stuff to the pawn shops, giving up their SUVs, cutting down on the Starbucks latte (assisted by Starbucks closing some outlets). Foreclosures, especially in California and Nevada, are at record levels.

But here’s the question: if people in the US can’t afford their home payments it means that their incoming cash flow is simply insufficient or they’ve taken on more debt than they can handle. Usually, incoming cash takes the form of wages and salaries. Either they’re not being paid enough or the average American is up to their eyeballs in consumer debt, mortgage debt and worsening credit. The latter appears more likely.

But, what about those compromised homeowners who also own their own businesses? It seems reasonable to assume that amongst the pandemic of foreclosures, there must have been independent business owners too. Their business cash flow was insufficient to maintain their house. If they too are caught up in the scenario that Bill Bonner sets out above, and are forced to move, what happened to their business and their employees?

Could it be that the previously self-employed are now being forced to relocate and turn into employees?

© 2008 Sanjeev Aaron Williams All Rights Reserved