End Of An Era?

Retailers will be closing over 6000 stores this year and into next year, perhaps more to come in 2016.  Now I don’t mean the mom and pop stores or the corner convenience stores, although some of them will close due to mismanagement and cash flow problems.  The Great Depression brought about store closings of all sizes during the thirties.  After the war the retail trade embarked upon a period of new openings and growth in sales and profits.  In the four war years we reduced our male population significantly but we also brought full unemployment to a level never seen before in our country’s history.  Even retired workers, those who were still alive (the average life span was about 60 for males, that’s why social security benefits had an age requirement of 65, no fool Uncle Sam) and the money was good and the overtime mandatory while the tax rates were high (someone had to pay for the new social programs and the war debts and bonds).  Of course there were a couple of bad recessions in the late forties and early fifties but that didn’t slow us down.  Indeed, new home construction boomed due to the GI Bill and VA loans.  No money down and no mortgage insurance kept the cost fairly low.  And credit slowly became available again.  New car loans, new home mortgages, loans for buying furniture for the new house, plenty of credit expansion but kept within reason.  The increase in wages, personal consumption, and continued defence spending was financed through the redemption of war bonds and an increase in capital spending and deficit spending by the federal government.  But where automobile plants had produced tanks, trucks, and aircraft for the war effort, all was replaced with new automobiles for the pent up consumer demand.  Air craft manufacturers had to compete against each other for the lower amounts of government funds while new development and new technology increased costs significantly.

Michael Synder of The Economic Collapse blog sees this store reduction as a sign that the consumer is tapped out, unable to spend any more.  But I believe that he is only partially correct.  There are a number of factors that have contributed to all these past and coming store closures.  Selling of retail goods on the internet (Amazon’s original business plan) showed the weakness of fixed costs for any business plan.  Granted, during and after the war we had a general inflation rate that tended to average more than two percent a year.  Even two percent a year doesn’t sound like much but given time you could watch a house that may have cost $7,000 in 1947 grow in demand value to of $70,000 30 years later and one gets the feeling that inflation is not a good thing.  The super inflated rates of 5 and 6 and 10 percent in the 60s, 70s, and early 80’s finally pushed by the year that price to $700,000.  That original $6,000 worth of materials became worthless as the entire house was replaced with $250,000 worth of materials and the expected value of that house is now over 1,000,000.  What most professors of economics won’t tell you is that inflation is bad, a heavy tax on the poor and a not so light tax on the middle class.  They also won’t ell you that excess credit is the culprit for an increase in inflation.

Inflation affects not just the price of goods and services, it affects the price of housing, retail space, education, including higher education, capital costs, and the like.  Where it hits most cruelly is in property and inheritance taxes.  A family farm that might have yielded a decent lower middle class income now becomes a liability because the local governments say it is worth far more as a new housing tract or industrial park.  In the sixties orchard and farm land that was worth a couple hundred dollars per acre was now valued by the state and local tax assessors at then thousand dollars an acre.  Yet the agricultural yields did not rise correspondingly.  It was a self feeding cycle frenzy that led to the destruction of family farms and the creations of housing tracks of over priced and under quality houses.  And that meant more pressure on community resources for water, power, sewage, and roads, all build through excessive union wages and compensation.  Cities, counties, and state government came to rely on deficit spending assuming they could always cover their increased costs and expensive expansions and projects with borrowing and higher taxes.  The promise of non-stop growth meant that tomorrow would never come when payback  was due.

But more than that, since FDR and World War Two our government has run deficit spending.  One can see the need in time of war, after all, if one lost the war then all those war bonds would be in default  and the enemy would extract war costs that equalled or exceeded what we, collectively, had borrowed.  But Congress, once addicted to spending well beyond its means would never consent to reform, like the obese individuals never willingly consents to a starvation diet unless his immediate death is apparent.  And this model meant that by the time Lyndon Johnson became president and had inherited the expanding NASA budget and the tiny involvement in Vietnam, his war on poverty would produce another demand on the American tax base and issuance of treasury debt instruments.(deficit spending means that either you print more currency or you issue more debt, or both, and so we did, issue both).  Vietnam was strictly an advisor war.  Johnson expanded that war, much to his sorrow, let idiots try to run a war by accountancy, and generally did everything to lose it.  The Brits proved that you don’t win against counter insurgency using set piece battle tactics and strategy.  We have yet to learn that lesson, even today.  Our armed forces leaders love shock and awe.  Unfortunately, that is the most expensive and least viable way to win against counter insurgency.

Well, if our President and Congress could convince us that deficit spending was the way to run a government, then it must be peachy-keen for the average individual.  If one can live beyond one’s means until one dies then he wins.  If not, well, surely a liberal government will rescue him in his old age.  People, our modern society has been and continues to be built on living far beyond our means.  I will tell you right now that if you wish to open a retail establishment you had better own the building and the land debt free.  As long as prices were rising faster than costs the retail boutique shop could stay in business in any mall even if its owner was making less that a middle class income.  I saw what happened to friends of mine who got sucked into the malls and opened stores.  That foot traffic, upon which so many individual stores depend, never lives up to the level promised by the developer.  Second, the mall always takes a percentage of you sales and that percentage usually has a minimum amount due.  Third, one is always subject to a rise in rents.  This was best illustrated by the major commercial real estate groups that would buy out the developers and then immediately raise the rates to cover the excessive no money down loans that provided the leverage for the buyout.  Credit, credit, credit.  How many small retailers have gone bankrupt by giving credit and having to eat the bad accounts, the defaults?  High fixed costs and excessive credit will eat you alive as a retailer, no matter how large your chain.  And when your customers have borrowed beyond their means then they no longer have the discretionary income to buy that nice sunday meal or extra shirt or new pair of shoes.  You lose sales because not only are your prices too high in relation to Amazon, but your customer can’t afford to spend anyway.  Excessive credit creation foretells a depression, the closing of high numbers of retail stores only confirms that the tain is on the tracks and depression will be arriving on time.  Yes, Hillary, its the credit problem, stupid.  And don’t think by giving debt relief to the millions who stupidly borrowed easy money for college will now become good tax paying citizens.  First they need a job.  Second, what is their gain in debt relief is another’s lost in investment.  That includes pension funds, most of which are grossly underfunded.  Maybe we should all be in the charity business, you know, collecting millions for personal influence in government matters and doling our hundreds in real charity giving.  Now there’s a good business plan, might even get elected president.

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