For the last 40 years the recovery from EVERY Recession was led by entrepreneurs, those gutsy people who start or build upon mom & pop size operations or who risk their money to create new businesses or to save old ones.
In the past, they’ve been the primary job engine and the spark that built a fire under America and got it going again. And when the massive U.S. economy got going, it took other economies with it.
But this time that’s not happening. Why?
When the U.S. government bailed out corporate giants such as AIG, Citibank, Chrysler, General Motors, Merrill Lynch, Wells Fargo and many other firms it called “too big to fail,” it tried to stop a natural business cycle, in these cases, not allowing them to bear the losses they so richly earned.
But by rushing in with vast sums of taxpayer money and borrowing more to bail out these grossly mismanaged firms it shook the confidence in the financial stability of the nation. And if that wasn’t enough, the U.S. convinced other nations to do what it was doing.
Now Europe and Japan are awash in red ink and staggering as well. Nearly everyone with the exception of Brazil, Chili, China, Germany, South Korea, Taiwan and a few oil exporting nations and a handful of others depend upon borrowing (or printing) money to keep themselves afloat.
But borrow the money from whom? Those who have cash reserves are leery and borrowing from the nations who also need money is becoming a Ponzi scheme the magnitude of which the world has never seen before. The International Monetary Fund and the European Bank are extensions of those other troubled nations.
Meanwhile, in the U.S. the unemployed, under employed, furloughed and the number of pay cut employees and those who have given up looking for jobs keeps growing. The unemployed alone are now an army of nearly 15 million people. And multiply those numbers by four or five because their families are also affected.
Car sales, home sales and retail sales of nearly every type are falling. That’s no surprise for the unemployed and underemployed have cut spending and many other people are scared to spend. U.S. household debt is at 122% of disposable income which means people are desperately trying to pay down debt, not go on shopping sprees.
While in real estate, prices are being artificially propped up by the U.S. government, which claims the market has turned upward. But rather than solve the problems, it makes them worse because it forestalls the investments many entrepreneurs would make in real estate if they believed in the values.
With time, the U.S. government will be overwhelmed by its massive real estate liabilities and with its financing partners, Fannie Mae and Freddie Mac it will have to let go. As this happens, values will fall to their real market levels, and buyers will emerge.
At these low prices, entrepreneurs can readily afford to buy and slash rents, which means home and apartment rents will drop making them more affordable. And commercial rents will fall as well making it cost effective for other entrepreneurs to occupy that space to start restaurants, clothing stores and other shops and HIRE EMPLOYEES, who then can afford to buy again.
Also, some of these “too big to fail” firms continue to need bailouts. Even now, despite their big profits, the giant banks are still so weak; the U.S. government continues to hold interest rates at near zero, deeply penalizing savers, so the banks can build their resources. And as my friend Jon Barnes pointed out, they’re jacking up their rates, even to their best customers
Yet they haven’t changed their ways. In a series of articles, The Wall Street Journal disclosed that many of them use financial “window dressing” of the type that bankrupted Lehman Brothers. They hide the size of their liabilities each quarter from their shareholders and customers using financial gimmicks to make the results appear far better than what they actually are.
Of course the banks’ management gets big payouts based upon those grossly inaccurate results
But there is some good news here. If some of these banks are finally allowed to fail, a whole new group of entrepreneurs will arise, some to liquidate their assets and others to buy those assets for pennies on the dollar.
To help those entrepreneurs, a new fleet footed industry of property management, consulting and financial service firms will come into being and they in turn will hire others to help them.
And there will be more opportunities. The U.S. government purchased many billions of dollars of what they call “toxic assets” (a contradictory term) from bailed out firms.
The government is still holding those toxic assets rather than flooding the market with them but it will need to hire small firms as well as big ones to help liquidate these portfolios for whatever the market will bear, again attracting entrepreneurs.
But entrepreneurs know more giant failures are waiting to happen. Many states from California to Illinois to New York are in dire financial circumstances. Most want a U.S. government bail out yet the U.S. government is insolvent and can only pay its bills by borrowing and printing money.
Some of these states are huge. California for example is the world’s 7th largest economy. If it fails, it will cause much more unemployment, endanger employee pensions and threaten the financial viability of those firms and individuals it contracts with. Its unsecured bond holders may also lose some of their money.
And these failures could wash through cities and counties, as many of them look to the states to partly reimburse them for vital programs, in some cases including police and fire protection.
Then there’s the worst news of all. The U.S. economy is dependent on perpetual war and weapon and fighter jet production. Millions of jobs depend on it. America has 5% of the world’s population and 50% of the world’s military spending. And it’s at taxpayer expense.
Unless your firm is Halliburton, Blackwater or the like, this is a financial and moral disaster that is sucking America dry. The U.S. is like Yosemite Sam. It’s hollering & firing its pistols & threatening everyone. Like many a cartoon, it hasn’t noticed it has already walked off a cliff and is hanging in mid-air high above the valley below.
It is simply waiting for its Bugs Bunny moment when the little critter points out the obvious, that it is hanging in mid-air and then like Yosemite Sam, it will fall far into the chasm below.
Entrepreneurs know we Americans must pay the price for our and our government’s financial and moral failures. And make no mistake, there will be hard times for we can’t borrow, print and spend our way out of this mess. But paying that price can unite us as happened in the Great Depression as we collectively work our way through hard times to a better future.
Hopefully, it will be an entrepreneurial driven future led by Silicon Valley firms, in which investors from all over the world invest capital to create entire new industries as they did in spawning Apple Computer, Facebook, Google, Hewlett-Packard, Intel, Oracle and other top quality firms.
And by an entrepreneurial resurgence of mom and pop size operations, many with 20 employees or less, that have long been the employment and taxpaying backbone of our nation.
Dick
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