Are you ready for the next collapse?

| May 07, 2012

I learned today more about the global economy and potential economic disasters to come on or before January 1, 2013. Learned by reading news reports and commentary.

Diane and I woke up this morning at our Florida vacation house. The freight took us close last week and we stayed long enough to get the truck worked on at a nearby Volvo dealer. We left the house this afternoon and will pick up freight tomorrow morning in Jacksonville.

My interest in the global economy is general and ongoing but was piqued today by news of the elections in Europe. In France President Sarkozy is out, Hollande is in. In Greece there was also a voter pushback against austerity measures. Pundits took greater notice of that because it brings Greece closer to exiting or getting booted out of the Euro. Such an event would be catastrophic, perhaps on the scale of the 2008 meltdown we saw in the U.S.

Not to worry, though; European leaders have had multiple summits in recent months and years and they “saved” the Euro every time. But to worry, conditions continue to get worse, not better, because these summits only kick the can down the road. That started long ago when it would have been easier to take the pain and solve then-smaller problems. But now the problems have grown and bankers and politicians are running out of road down which to kick the can again.

Leaders in several European countries have paid the price with the end of their political careers. Voters booted them out. But the replacements are faced with greater problems than their predecessors were able to solve and the current leaders have less to work with. Previous bailouts are not having their desired effects. Millions of people are suffering severe economic pain. Disorder in the streets is increasing in some European countries.

Money is an extreme taskmaster. If you have more than you need, money will leave you in peace and reward you with more. But as soon as you come up short, money will grind you into the ground without mercy.

European voters who have seen their conditions worsen are electing leaders who promise to relieve the pain, but money is more powerful. Just as money is grinding individuals into the ground, entire countries are suffering the same fate because they too have taken on too much debt, giving money the opening it needs to exercise its power to destroy.

In the near future we will see more summits, more bailouts and more agreements that are designed to make people feel better. Because the political courage does not exist and the people are unwilling to take the pain, we will not see real solutions. Things were bad in the European Union before. They are worse now and will be even worse soon.

What does that have to do with trucking?

Plenty.

A meltdown in Europe will be felt in the U.S. While the U.S. dollar will get stronger as people worldwide sell their currencies to buy the “safe” Greenback, an economic collapse in Europe will be felt here, dragging the U.S. economy down and the transportation business with it.

And it’s not like we have no challenges of our own. The presidential campaign now underway is getting most of the attention but there is a development shaping up in the U.S. that all truckers should be mindful of and prepared for. It too is the result of politicians kicking the can down the road (and of citizens supporting them in doing it).

Names for the coming challenges (crisis?) include Taxmagedon, fiscal cliff and sequester. I encourage you to Google search these terms and read up on them.

The short story is that on January 1, 2013, huge automatic spending and tax cuts are scheduled to go into effect. Taxes will increase, taking more money out of our pockets. Government spending will decrease, taking stimulus out of the economy. The cuts are huge, such that spending on defense and domestic programs will gut massive programs that we take for granted today.

Do you remember the debt ceiling deal that Democrats and Republicans agreed to last summer? It is an example of can kicking at its finest.

Instead of solving difficult problems then, they crafted an agreement that postponed the hard work until after this year’s elections. But in November the chickens will come home to roost. There will be very little time between the November elections and January 1, 2013, for the then lame-duck congress to work together to solve any problems.

Working together has not been one of congresses’s strong points in recent years. And the way the primaries are going, it is clear that the nation will have an even more polarized Washington in 2013.

Will our cowardly leaders figure out a way to kick the can even further down the road after November? Maybe. That will be their first instinct. But the real question is will there be enough road left to kick the can down?

When sequester was agreed to last summer, a smaller version of kicking the can was built in. Do you remember the Super Committee? That was the group of legislators from both major parties appointed to make the hard choices and produce recommended changes to be adopted. Creating that committee when sequester was agreed to got congress off the hook that day. It shifted the focus onto the committee and into the future where the hard choices would presumably be made.

But true to form, that body failed. Senior legislators produced nothing, choosing instead to kick the can further down the road, beyond the November elections, to let congress deal with sequester then.

That leaves us with January 1, 2013, the date when Taxmagedon-fiscal cliff-sequester will go into effect. With an incredible lack of foresight, congress has committed multiple can-kicking acts with several big programs such that the day of reckoning for each one falls on January 1, 2013. On that date, there won’t be one can to kick but many.

Given the lack of statesmanship and leadership that exists in congress today, it is unlikely that our elected officials will rise to successfully avert this predictable and preventable crisis. How do I know that? I know because they are not dealing with it now, while time remains to do so.

The U.S. House recently passed a bill that attempts to undo sequester to protect defense spending. That bill is DOA at the Senate because the money to pay for defense comes from domestic spending programs that the Democrats favor. Neither party is showing a willingness to work with the other to solve the problem. Both are sticking to and fighting for their one-sided views. That’s the way it is now and the very same people will be the players between November and January.

Between now and January 1, 2013, look for some big market whipsaws as people worry, get reassured, and worry again. Look for that activity to have a chilling effect on U.S. economic growth. And look for a European meltdown to tip the U.S. into another recession.

Will it be as bad as all that? Will these bad things really develop? I don’t know. But I do know that sound money management at the individual level is vital. The truckers and trucking companies that survived the 2008 market panic and the Great Recession that followed were the ones who managed their money well before.

The principles remain the same. Eliminate or minimize your debt, live within your means and save money for a rainy day. There are fancier names for it like debt to equity ratio, current assets, etc.; but that’s it in a nutshell: eliminate or minimize your debt, live within your means and save money for a rainy day.

For Diane and me, this means build cash while we can and be prepared to park our truck for a few months next year because already low freight rates may plummet. Freight rates may plummet because if the above mentioned negative conditions develop, the economy will tank. There is no way the economy will continue to grow if the government sucks hundreds of billions of dollars out of it with draconian tax increases and spending cuts. The economy will tank.

As with the Great Recession, truckers desperate for cash will beg shippers to haul freight at any price just to pay next week’s bills. Like the politicians they hate, these truckers will kick their own cans down the road and then succumb to the excessive debts they got themselves into with irresponsible spending and the lack of foresight. But before they wash out of the business, they will drive freight prices down to low if not money-losing levels for everyone else.

Sorry to be so gloomy but as a survivor of the Great Recession, and one who saw it coming , I’m here to tell you that you have to consider all possibilities and be prepared for every one. (I saw a recession coming but did not expect it to be as severe as it was).

Europe is shaky. The January 1, 2013 day of reckoning is in clear view. Do what you can today to prepare for a gloomy tomorrow.

Now, on the positive side, there is a ray of hope. It is called the Simpson-Bowles plan. It is the bipartisan product of of the Simpson-Bowles Commission which was set up by President Obama in 2010. Most observers agree that this plan provides the tough medicine — a blend of spending cuts and tax increases — needed to put the U.S. budget back on an economically sustainable path.

The problem is Obama dismissed the plan soon after it was published. He thanked the commission members for their good and important work and filed the document away, thereby taking it out of the spotlight. With congress, he then led America into the situation that exists today.

Simpson-Bowles supporters have not given up. While a bill based on Simpson-Bowles was defeated in the U.S. House in April on a 382 to 38 vote, optimists suggest that the Taxmagedon-fiscal-cliff-sequester realities will be so terrible and so repugnant to legislators of both parties and to the American people that Simpson-Bowles will be seen as the best alternative and adopted.

After it was dismissed, Erskine Bowles put a great deal of time into converting the 66 page Simpson-Bowles report into 800 pages of legislative language. Later this year, after congress has put off dealing with these issues until the last possible minute, the Simpson-Bowles document will be ready and waiting.

What our elected officials will do with it us anyone’s guess. The optimists point to the more severe alternatives and say Simpson-Bowles will be adopted (no picnic for Americans either, by the way). Pessimists look at the gridlocked and ineffective congress we have now and note that the people who produced that reality will be the same ones to deal with Simpson-Bowles, if they take it up at all.

I do not know what will happen between now and January 1, 2013. I do know that the best thing for individual truckers to do is focus on what you can control. For Diane and me, that means continuing our debt-free ways, continuing to live within our means, and building cash so we will have the option of parking our truck for several months next year.

If the worst case scenario develops, we’ll be ready. If not, we’ll be relieved and be able to keep the money in the bank that we would have spent to survive the killer drop in rates.

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