Monday, July 5, 2010

This is what the beginning of real economic pain feels like.


By Nick Sorrentino

So word is that the big box discount stores are discounting deeply again. As the summer gets hotter, the economy continues to cool, and the cooling trend seems to be accelerating. The big retailers are feeling very pinched, so much so that they are using what one analyst called “desperation tactics” to get people through the doors. In an environment where the American consumer has little left there is a race in consumer retail to get whatever is still to be had. Of course after that…Well it’s probably not good.

This is why Sam’s Club has embarked on a program to market Small Business Administration backed loans to its customers. The loans are for 5K-25K. This is exactly what is needed of course, more debt. This should do much to solve the problem.

Consumer retailers engaged in “desperation tactics” en masse just prior to Christmas 2008. That fall, the world was plunging into the abyss, and retailers had a lot of excess inventory, and so they cut prices deeply. They had to cut loose of their excess inventory. There was a lot of fat to carve off in the fall of 2008.

Now retailers are very lean, yet they still feel they need to cut prices by big margins to motivate purchasers. When you’ve got no fat left, the knife starts to carve into the bone. And that is what retailers are beginning to do. They are doing whatever they can to get people through the doors, but the options are just running out. The middle class is tapped.

It is said that the American consumer constitutes 70% of the American economy. If this consumer can no longer participate in the economy at the level it has historically the economy must contract. Things must deflate.

Deflation is what we have folks. Prices are going down for houses, cars, nearly everything. There are pockets of prices rising here and there but currently the economic draft is strong, and it is downward.

The Fed will probably crank up the printing presses to 11 from 10.5 but the problem is that there is a huge black whole of 65 trillion (formerly) in derivatives (that are now worthless) sucking this printed money into whatever alternative universe exists on the other side of the hole. Bernanke can get in his helicopter and toss hundred dollar bills out the windows all he wants, but even the mighty Fed, may find itself on the other side of the event horizon of this economic singularity.

*An addendum to this piece.

I just went out grocery shopping and was thinking about the above post and it occurred to me that some might consider it to be a very pessimistic view of the future. Let be clear. I am more optimistic about the future now than I have been for a long time. I believe that there are huge opportunities for entrepreneurs as the economy reinvents itself. This is a great time for those who thrive on change. The old, highly buerocratic order is coming down, and for some, including me, this is a good thing.

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About Me

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Nick Sorrentino is the Editor of The Liberty and Economics Review and CEO of Exelorix.com a social media management company.