IT consulting is what I do for a living. I did not have a clue about finance or economics, since I was primarily an engineering graduate. However, I realized that I had to get familiar with them sooner or later, because I knew for a fact that, that would help me in making investments in the days to come. I guess I became very serious about economics, when we started having the sub-prime mortgage problem in 2007, which became a major problem by 2008. I started gathering some knowledge about economics by reading books, news articles, research papers and last, but not the least, discussing the nation's economic crisis with a colleague of mine, who was a CPA by qualification. The first book I read about economics was "Economics for Dummies", which I found very interesting and laid a good foundation for me in understanding the economic principles. So, it is evident that I am no economist, so I could always be wrong in my thinking.
The Economic Crisis
There coule be a zillion different reasons for the economic crisis in the USA, but I think it is just one, which is - too much is too bad. The business model or strategy of most of the business chains in USA has been "pile it high and let it fly". So how do they manage to pile it high? The answer is bank loans!
I have always wondered how business chains like Hobby Lobby, Michaels, Target etc are surviving, because they do not have too many customers everyday. I don't have the exact numbers, but anyone can tell that they aren't making enough sales to break even with the expenses that they have towards rent for the space, salary for it's employees, inventory, insurance for the inventory and last but not the least, the electricity. There could be many more expenses other than the one's I have mentioned, but the bottom line is that, expense is more than the income. The only business chain that in my opinion, is making profits is, Walmart, because they have too many customers everyday and stock items that are inexpensive, but they are also known to offer ridiculous wages to it's employees and probably this policy is helping them boost their profits. Anyway, I think we went on a tangent there, but coming back to the point, my gut feeling is that many business chains are going to close down in the near future or atleast shut down many locations. Circuit-City is already history and it really bothers me, because I bought my LCD TV from this store and even went ahead and bought a 3 year extended warranty, which cost me over $60. So if Circuit-City can go down, there is a good chance that other business chains would also go down under, unless they do some serious cost cutting, but cost cutting would involve lay-offs and doesn't help the economy nor the US Dollar.
The other classic example for the high-flying business models in USA are auto dealerships. Many dealerships have all sorts of automobiles. Sometimes they are from a specific manufacturer or sometimes, it is a collection. I think the latter is only in the case of used-car dealerships. Regardless, the point that I am trying to make is that - too many expenses, but less customers. So, where does the money come from? Bank loans again! The amount that a dealership pays for an automobile is half the amount the customer pays for it, so that's how the dealership gets the money to maintain the dealership, pay for insurance and it's employees. Now the question is, how many cars would the dealership have to sell at the minimum to stay afloat? Honestly, I don't have the answer to that question.
IT Budgets
IT budget is the other thing I would like to point out. Some companies have a conservative approach towards spending for IT implementations, so good for them, but there are some firms that have an IT budget, which can be a jaw-dropper to some. In addition to paying to paying for software applications & their licensing, they also hire top-of-the-line contracting firms to implement the solution and also reimburse all expenses bourne by the IT consultant, which includes, but not limited to hotel room stay, food, daily commute and weekend air tickets for the consultant to get back home and return the following week. It makes sense to make such an IT budget if the return of investment is guaranteed to be more than the expense. The reality is that, there is no such guarantee for ROI, if the investment is so ridiculously high. In my opinion, there is a good chance that companies might prefer the consultants to be local to the area or even relocate to avoid travel expenses, but how many people can relocate every once in a while? Not many I am sure.
Bail-Out Packages
President Obama is someone whom I admire. I think I started having an admiration after I listened to his election campaign speeches, his acceptance speech as the President of USA and his first televised press conference on 02/09/09 @ 7pm. He does seem to be honest in his responses to questions from reporters and is definitely not an empty brain like someone in the recent past. We ought to be proud, because he is well qualified for the position indeed. However, I have own doubts about the bail-out as well as the stimulus packages.
In my opinion, a bail-out package can only prolong the inevitable, unless the beneficiary makes changes to their business model. Let's take the 3 auto giants for example, namely GM, Ford & Daimler Chrysler. They have been in business for a long time, but the consumer confidence in American cars has never been good. I think the consumer confidence in the american cars sank in the 1960s & 1970s, when the American auto industry didn't have any competition, so there was no emphasis given on the quality of cars sold to the American public. Even though times have changed and there are many imports that compete with the American automobiles, the latter are lame in comparison. The imports have had a history for great performance, low maintenance, long life & a good resale value. The domestic auto manufacturers can't survive, unless they raise the bar. This is why I firmly believe that any bail-out plan wouldn't change anything, but only prolong the inevitable.
Stimulus Package
Coming to the stimulus package, where the intent is to give the consumer an X amount of money, which is expected to be spent on retail purchases, thereby improving the retail revenue and jump-start the economy. This is a macro-economic theory and is expected to work only when the stimulus package comes as a surprise and not made public about every detail. However, that is what is happening at the moment. Regardless, I have my own doubts about this package, because many people in the current economic situation would not be willing to spend this extra cash. They would rather save it for the rainy day. At the same time, I wouldn't deny that there are people who spend this extra cash that they had been wanting for a long time, but there is no statistic that tells us the percentage of people who would use this money to buy something that they have always wanted. If you ask me what I would do, then the answer is - I would save the extra cash or maybe even spend a fraction of that amount to buy something essential. So to answer the question if the stimulus package would really help in jump-starting the economy - I would think probably not. But like I said earlier, I am no economist, so I hope I am wrong. Unfortunately the economists themselves don't agree on these issues completely and that worries me.
The Credit Addiction
The entire financial industry revolves around credit, where money is made with money. The faster credit is provided, the faster the growth of the economy. However, the credit system can go out of hand, if the players involved don't play their cards right. Many people in the country have 5 to 6 credit cards, who happen to be shopaholics and belong to the lower income group, but wish to lead a luxurious life. I wonder how these individuals were given so many credit-cards to begin with. Didn't the providers look-up their credit history, before approving their credit application? If half of the Americans are facing credit default problems, then it is not their fault, but fault of the credit providers, who should have used their judgement, before issuing a credit card or even raising an existing card's credit limit.
One possible reason for this poor sense of judgement is corporate greed, which caused some limits to be stretched and here we are in this big whirlpool of a mess. Credit bureaus were created for a reason, but this very reason seems to have lost it's purpose these days.
The credit defaulters are also to blame, because of their urge to lead a luxurious life when their debt to income ratio is absolutely ridiculous. If I were to earn $40K a year, I would dream about driving an expensive car, but I wouldn't go ahead and make the dream a reality and get myself neck deep in debt. I would rather wait until I earned enough money to pay for the car of my dreams. The other day I was listening to NPR and this lady calls the talk show to explain her financial condition. She went on to say that she earned around $45K a year and drives a Hummer H2! I couldn't believe what I had just heard and started wondering if this lady happened to be a certified idiot.
I love watching creative commercials that have great slogans. The slogan in the Mastercard TV commercial is one of my favorites. I made some tweaks to it to go with this blog and here it goes -
There are some things, your check-card can buy.
For everything else, there is a credit-card.
Conclusion
The economic crisis that we are facing now is a combination of many issues. The US government might have been able to handle this crisis, if they were to face them one at a time, but we would have to wait to see how this plays out. As a final note, I would like to add that many things would need to regulated and changed, if this country would have to continue being the beacon to the entire world. Tables could get turned, if corrective measures aren't taken in the near future.
