What is Going On?

January 23, 2003

Several things are going on.

1) The corporate world has been caught in a series of behaviors that can only be described as the largest and longest pattern of fiscal malfeasance and nonfeasance in history. This tends to make people leery of investing in them.

2) Lots of people are finding out that as a result of item (1), what they thought was their retirement money doesn’t exist anymore, and may never have existed in the first place. This causes people to spend as little money as possible.

3) The people in item (2) have friends, family, and neighbors who see this going on, which makes them tend to be nervous about what they think of as their own retirement money. This not only causes people to spend as little money as possible, it causes them to reevaluate how their plans to fund their retirement. Often, this causes people to take a close look at the folks who brought you item (1) and conclude they are not the best custodians of their money, drawing more capital away from the stock market.

4) When one pisses one’s capital away and then finds people unwilling to entrust one with more capital to piss away, one finds it difficult to operate at the rate of profitability one has operated at before. Since item (1) has brought to light many of the ways that this state of affairs has been masked from the public, it is more difficult to mask it from the public. Since (profit = revenue - expenses), if one cannot raise revenue, cutting expenses is the only way to increase profit.

5) When people pondering item (4) consider how to cut expenses, they notice that payroll is a big firkin expense.

6) When people pondering item (5) consider items (1) - (3), they consider that they may have more people on staff than they are going to need on staff to meet decreased demand.

7) When people pondering item (6) consider their own compensation packages, they realize they will personally profit or lose based on this quarter’s profitability, and will tend not to look at the long-term effects of firing staff they may well need. This leads often to layoffs.

8) Laid off people tend not to spend money if they can avoid it, bringing us back to point (2).

9) When our President considers the problems facing our economy, he thinks that the solution is clearly to give money to corporations, because obviously corporations take a “smoke ’em if you got ’em” approach to cash on hand, rather than investing just enough to meet demand.

This is probably incomplete, but it is certainly a part of the story.

In summary, the dot-com bust was bad, Enron and company was worse, 9/11 didn’t help much either, and we’re still only in the discovery phase regarding just how much invested capital was pissed away into nothingness between these three events.

—Dan Holtzman

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