Special Report: 1.15.2009

Posted by TED Magazine on Thursday, January 15, 2009

What to do During a Depression

By Joe Salimando

Journalists, economists, and pundits say that we are NOT in a Depression. They are cowards.

We’re at the start of how this massive deflation will affect the general economy. Yes, the Fed is flooding the world with “reserves”; Congress will “stimulate” the economy. Obviously, they are trying to reflate.

What if that doesn’t work? History has a lot to teach us.

1. Ben Bernanke, the Fed head, studied the Great Depression of the 1930s. He thinks he knows what to do! Based on that, some are confident we’ll quickly come out of this whatever-it-is.

For amateurs (e.g., me) the 1930s economic problems seem to have ended only with World War II. According to Depression historians, 1937 actually was the worst year (for most U.S. residents), worse than 1932 or 1933.

So: That one got a lot worse before it got better, lasted 10-12 years, and ended with a global disaster.

Bernanke may be brilliant. But he is experimenting. Will you really put your faith in a government-sponsored (and government-run) economic experiment?

2. Before the 1930s, there was a major economic event called, believe or not, The Great Depression. It took place from 1873 to 1898. It was very good for people who had money; what they had bought more and more!

But: It was very bad for those with nothing; yes, prices declined, but people found their incomes fell faster.

Note: This one lasted 25 years.

3. While it was not a Depression, what happened in the U.S. from 1966 to 1982 was very, well, depressing. The economy was stagnant, but inflation roared (could that happen again?). The Dow Jones Industrial Average bounced around, but was essentially flat (over a 16-year period).

It took strangulation of the economy by Paul Volcker to beat inflation expectations into the dust. Today, Volcker is working with Barack Obama. A personal memory: The Dow began a huge bull run in 1982. But when I bought my first house in 1984, the mortgage interest rate was 13.67%.

4. Japan’s recent economic history is instructive. The country has undergone a discombobulation. The major stock market average declined from 39,000 in 1989 and is now around 9,000 (about 14% of the 1989 value after adjustment for inflation).

Real estate values declined 90%. According to reports, they haven’t come back, either.

The bottom line: There have been maybe 18 good months, economically, for the Japanese in the past 19 years.

Parallels between our situation now and Japan’s discombob are scary. In some ways, we appear to be doing exactly the same thing they did (only faster). But Japan had/has a tremendous advantage over the U.S., in that folks there save huge gobs of money.

Our advantage over Japan is that our dollar is the world’s “reserve currency.”

Let’s add it all up:

• The Great Depression of the 1930s: lasted 10-12 years, ended via world war.
• The previous “great depression” of the 19th century: lasted 25 years.
• Whatever-you-call-it from 1966 to 1982: lasted 16 years.
• Japan’s discombob: has been going on for19 years, and counting.

Some say the housing market will bottom out in 2009. Many think the massive Obama economic stimulus will turn things around, and 2010 will be a great year.

Based on the history detail above, while this Depression might end in the equivalent of the blink of an eye, it’s not reasonable to act as if all will be well in the blink of an eye!

WHAT THAT MEANS TO YOU: What’s reasonable for the owners and managers of small businesses (e.g., electrical distributors) is to change behavior, to adapt to the times. You’re probably already doing this, or at least thinking about it.

A Winning Attitude

Let’s say you were from another planet. If you learned human history, you’d be impressed at our kind’s resilience:

• One-third of Europeans were wiped out by the Bubonic Plague in the mid-1300s, yet Europeans still are around. In fact (with their American spin-off), they basically run the planet.
• We developed the atomic bomb. We manufactured vast quantities of these things. This all happened just years after a devastating world war that featured all kinds of genocide and horrible behavior (and yet we managed not to kill ourselves).
• Perhaps our collective behavior is helping global warming along. While the developed piece of the human race is moving very slowly to fix this, there is all kind of action on this front. One might say we suck at this! But a more reasonable approach would be to cut homo sapiens some slack; we’ve not previously been challenged on this scale.
• And on the economic front, there is solid evidence that while humans are incredibly stupid about how they invest their money, we’ve recovered from most of the Depressions and whatever-you-call-’ems listed above (and many other economic disasters not listed).

It’s not time to throw in the towel. However, 2009 might well be a line in the sand for some of us. Those businesses (and people) who respond creatively to a change in economic conditions will thrive; others might not.

Tell-Tale Signs

Let’s assume (for just a moment) that we’re NOT in a Depression. In previous recessions, we’ve all seen what happens with (and to) construction contractors.

a. That last big project starts to stretch out. Electricians can see the end, with no work behind it. They start to slow down (perhaps subconsciously). This is a tell-tale sign. You’ll see it, if you pay attention.

b. Construction contractors start taking work below cost. Some are good enough to do this and survive; others are not. How many of these others are among your customers?

c. What is a routinely slow-pay industry progressively gets even slower. The GCs start paying subcontractors as if they are handing out uranium, not cash. That bounces down the line, to you. If this isn’t already happening to you, it will (unless you have no contractor customers). What’s your plan to deal with this?

d. Projects will still come along. You’re going to want to be involved. The prices at which you’ll be able to sell materials will be low. How low are you prepared to go? This question is much better answered in a vacuum (i.e., right this very minute) than when the pressure is on. Self-discipline doesn’t happen on the spur of the moment, does it?

Overhaul Your To-Do List

For as long as I’ve listened to electrical distributors, there have been festering problems that many just put in a box. Then, the folks involved did their level best to lose the box!

In these times, you can’t continue to indulge yourself.

A few examples:

Obsolete inventory: Got stuff that you’ve routinely blown the dust off of every year for the past half-decade? Get that crap off your shelves and turn it into cash (even if it’s a miniscule amount). Can’t sell it to anyone? Hire some high school kids and teach them how to (safely!) dismantle these out-of-date products. Sell the components off for scrap (there might be some gold and silver in there!).

No, you won’t get much for the scrap, either. But at least you can say (a) you’re doing something green, and (b) you no longer count obsolete stuff among your “assets.”

Salespeople who sell too close to cost: Many distributors (judging by numerous conversations) have kept such people on their payrolls, while complaining about them the whole time. The problem isn’t with the sales guy, it’s in the mirror! Unfortunately, the economy won’t allow you to continue pampering yourself in such a way.

You didn’t want to bite this bullet earlier. Now, you have no choice.

Ignoring opportunity: Opportunity is not a person of the opposite sex who knocks loudly on your door, jumps in your lap, and proceeds to adore you. Sometimes, it creeps in quietly and takes a seat in the back of the room, waiting for you to notice it. Green technologies are supposedly “old hat” in the electrical industry, but that doesn’t mean you’ve capitalized on these opportunities.

Concrete example: Do you carry a line of LEDs? Does anyone at your company know anything about these things?

Customer relations: Do you treat your best customers better than your not-quite-as-wonderful customers? If a contractor gives you the chance to make money with him on a construction project, does he get the same price on the next project as his competitor?

What about the contractor who routinely “shops” your prices, over-orders and then hits you with returns, and always pays in 110 days. Does that guy get the same price as the decent guy?

Really? A customer can abuse you and get the same price as one who treats you well? Isn’t a Depression the perfect time to get better at picking your spots?

Service discrimination: You certainly provide numerous services that make contractors more profitable. Do you offer them to everyone, or just the good customers?

	Joe Salimando of EFJ Enterprises is a consultant, web content provider, and wordsmith based in Oakton, Va. To contact him, call 703-255-1428. See also The EleBlog.
Personal Disclaimer: The appearance of the ambling pachyderm is indicative of the writer’s obsession with elephants, not his political leanings.
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