Did Anyone Get The License Number
What happened? Did you get the license number?We were in our small business race cars ... driving in the economy's fast lane ... posting record lap speeds ... nothing but the checkered flag between us and the victory circle.
All of a sudden - screeching tires and the dashboard in our face.
It's Not Your Fault
Before you go beating yourself up because you think your business's driver did something wrong, let's take a look at the multiple entries in this accident report.
Most of the things I am going to tell you about were not caused by you or me. We're more innocent bystanders than anything else. But since we are part of the global economy, I think it's important to understand how macro economic issues have an impact on our micro economic lives.
"We Brake For Pet Problems"
Mr. Greenspan's Federal Reserve Board members said, "A race car must have brakes." The race car they were talking about was the U.S. economy that was going very fast. They also said their plan to slow this race car down was to "tap on the brakes."
In Fed terms, a tap is an increase in short term interest rates, and the Fed tapped on the brakes six times over an 11-month period from June 1999 to May 2000: five quarter-point increases, and just for good measure, one final half-point "tap" (www.federalreserve.gov).
One year ago in this space (February 27, 2000), I accused the Fed of doing too much tapping. And that was before the quarter-point tap in March, and the half-point pedal-to-the-metal "tap" in May, 2000.
I was, and am still, convinced that the Greenspan group was largely targeting the stock market's "irrational exuberance," especially the Nasdaq. In warfare, collateral damage occurs when civilians are harmed by attacks on the enemy. I warned that the unintended consequences of firing on Wall Street would result in collateral damage being done to Main Street - you and me. I still think I was right.
If your business is slow right now, you aren't the enemy. You are collateral damage.
Asian Contagion and LTCM
Let's look at two other circumstances that contributed to our current economic deceleration:
1. Asian Contagion
In 1998, Mr. Greenspan was worried, with cause, about currency devaluations in Thailand and Indonesia, plus the potential for the same thing happening in other Pacific-rim countries. Japan's economy had been (and still is) in the crapper since 1989, and post-USSR Russia's economy was in shambles.
The Fed, now more than ever before the de facto global central bank, had to make sure the U.S. economy remained strong enough to absorb the shock waves and product dumping from ailing economies around the globe. Consequently, in order to accelerate our economic race car, the Fed goosed the gas pedal of our economy by lowering short-term interest rates a quarter-point each in September, October, and November 1998. One of these was a rare adjustment between meetings of the Fed's policy setting body, the Federal Open Market Committee (FOMC), which meets approximately every 6 weeks.
2. Long Term Capital Management
A simultaneous problem cropped up in the fall of 1998 to further encourage the Fed to put their foot on our economy's accelerator: the imminent failure of Long Term Capital Management (LTCM), an international hedge fund. In the marketplace, LTCM is to a small business what a blue whale is to a paramecium.
LTCM's size and faulty currency investment models surprised the Fed and many members of the global banking community. According to the Wall Street Journal, the No. 2 man at the Federal Reserve Bank of New York, Peter Fisher, was stunned when he discovered that LTCM was "a lot bigger than anybody thought." And he feared that its failure would "put the world's financial markets at risk."
More justification for stepping on the accelerator of the U.S. economy with interest rate reductions - just in case.
,b>What's Wrong With Lower Interest Rates?
I know, you're saying, "But, Blasingame, you tell us that interest rate reductions are good. How did these two examples hurt my small business?"
The answer is these interest rate adjustments weren't made to fine-tune the U.S. economy. They were made to heat up our economy.
What's wrong with that? Things settled down overseas, and the U.S. economy heated up too much for our friends at the Fed, which caused them to start tapping a different pedal. The brake pedal.
If your sales are off, you can thank Thailand, Indonesia, LTCM, and the Fed's schizophrenic foot tapping.
Triple Witching - Record Growth, Y2K, and The Bubble
During the last half of 1999, the Fed was facing three very unusual, simultaneous problems: Two were pretty rare, and one was an absolute once-in-a-lifetime occurrence.
1. Record Growth
The Fed's Keynesians just couldn't believe that the increase in structural productivity in the U.S. economy was real, and that we could sustain such record levels of growth and unemployment. Inflation, while virtually nowhere in sight, just had to be lurking, ready to pounce at any moment. The Fed's answer? Brake tapping: One and three quarter points of interest rate increases in less than a year - the first of which occurred only six months after the last rate reduction in 1998.
2. Y2K
This will never happen again. I'm not talking about a new millennium. I'm talking about the computer date problem, which I'm sure you know all about. Here's what you may not know:
Hundreds of billions of dollars were spent worldwide to prevent a Y2K meltdown. And even though no U.S. industry was more Y2K ready than banks, the Fed feared the same people who were capable of irrational exuberance - you and me - would create runs on banks to put money in our mattresses during the millennium changeover. To shore up cash reserves, the Fed injected $50 billion dollars of liquidity into the economy during the last half of 1999. Enough for every American household to have an extra $500.
We had our Y2K spending foot on the economy's accelerator, plus the Fed's $50 billion liquidity foot pushing down on the go pedal. And you know what we do with liquidity: We spend it. And spend it we did.
Renowned economist, Arthur Laffer, wrote recently in The Wall Street Journal regarding the Fed's Y2K liquidity, "...the excessive growth of the monetary base did push...the Nadsaq and real economic growth way too high. Fed policies have consequences." Indeed. Don't forget - while all of this liquidity is being pumped into the economy, the Fed is simultaneously tapping on the economy's brakes with six rate increases.
When you learned to drive, your teacher instructed you to use the same foot for the accelerator and the brake pedal. This was so you didn't confuse your vehicle's stop and go systems and cause mechanical damage, or worse, a wreck. Where did the Fed learn to drive?
3. The Bubble
No doubt thinking of Tulipomania, the Mississippi Scheme, and The South Sea Bubble, irrational exuberance examples of centuries past, the Fed saw unprecedented price-to-earnings ratios on the Nasdaq as an economic wreck waiting to happen. Mr. Greenspan called it a "bubble." Frankly, I don't disagree with Mr. Greenspan's "irrational exuberance" assessment of stock prices. But I do disagree with what I believe was no less than the Fed targeting Wall Street with 1.75% of interest rate increases in less that a year, at the expense of Main Street. And don't forget, the Fed's reaction to Asian Contagion, LTCM, and Y2K contributed significantly to fueling the "irrational exuberance," and the "bubble."
If you're having cash flow problems in your small business, it's probably not your fault. I believe you can thank the people who don't know how to drive. I'm ready to revoke some licenses.
Fast Forward To 2000
Y2K came and went with barely a whimper, and the Nasdaq bubble has burst. There were no more feet on the economy's accelerator because the Fed felt it had to wring all that Y2K liquidity out of the economy, and 5% growth could not be sustained without mean old inflation returning. Consequently, the Fed kept tapping on the brakes - the last three of the six rate increases.
Other Factors
In fairness, there were other factors that contributed to our economic deceleration. Crude oil prices tripled from 1998 to 2000. Corporate globalization and consolidations created unprecedented economies of scale (read: budget reductions and lay-offs).
And now that El Nino and La Nina are gone for the next 17 years, a cold 2000/2001 winter came just in time for rising natural gas prices.
Did Anyone Get The License Number?
Our economy decelerated from as much as 5% growth in some recent quarters, to what is currently estimated to be between 0% and 1% growth. While technically it doesn't look like we are in a recession, so what? When you go from 60 to 0 MPH in your vehicle, even when you don't hit anything, the deceleration forces still take a toll on the driver. It still feels like you were in a wreck, only since you didn't hit anything, the airbag didn't deploy.
I am not an economist. I didn't even stay at a Holiday Inn Express last night. But I talk to, and interview, economists on my show. They tell me that most economic downturns in our nation's history have been due more to policy mistakes than to fundamental economic problems.
I believe our economy is where it is today primarily because of monetary policy mistakes, not because of anything you or I did in our small business, or our lack of confidence as consumers.
The Porpoising Economy
Pardon me for changing metaphors, but a pilot who over-corrects the pitch adjustments of his airplane ultimately creates what is called "porpoising" - dramatic, and sometimes wild, up and down gyrations. A porpoising airplane is an airplane out of control. I believe we have had porpoising monetary policies for the last three years.
If you are having a tough time in your business this year, take a good look at what you're doing. You can always do better. But before you beat yourself up, much of what you are facing is probably not your fault.
Write this on a rock...Small business created the jobs and the structural productivity of the 1990s. It looks like we will have to pull the economy out of the ditch again this decade. It would help if the Fed had more regard for the collateral damage their monetary policy decisions do to the little economic engine that could, small business.
