Archive for May, 2011

Economic Disaster in the Southern United States

May 27, 2011

If you live in A-Town as the truckers call Atlanta, you know things are bad economically when you can get anywhere in half an hour anytime between 6:00 AM and midnight. Things are BAD in A-Town, and they are not getting much better any time soon. Period. That part is obvious, because the area has been in economic decline since prior to 2004. There are a collection of reasons for this, none of which perhaps has all that much to do with anything by itself. The collection as a whole, however, pretty much guarantees an ongoing local economic catastrophe.

A-Town, has always been a marketing center laid over a transportation hub, laid over a provincial southern state capital. The transportation hub predates the uncivil war, and today encompasses the worlds largest and busiest airport, highways in all directions, plus an extensive heavy rail system. Marketing dates to a pharmacist developing soda pop around 1876, and the cola business which grew from it. Soda sales in the US have long since saturated the US market. Sales do not change appreciably in saturated markets. Growth in soda sales has strictly been a product of international markets at least since before the rise of Regan-ism circa 1980. The provincial southern state capital bit was well hidden in the good times, however with the rise of Republicanism and the tea party in Georgia, the political situation is somewhat more obvious and troubling. To appreciate this, one must remember many Georgia Republicans are the children and grand children of southern Democrats. Those of us who are old enough, remember what many southern Democrats were busy doing circa 1964. The other side of this picture involves a population today which is better educated, and much less tolerant of  crime, than in years past. Crime has been a big issue in A-Town for a long time. One political party primarily benefits from this issue, and will tend to do so for some time to come. That political party has largely, even on a national level become more extreme, and less tolerant, occasionally delving into issues like secession from the union, which might make business, extremely uncomfortable.

The boom in A-Town between 1982 and 1990 had more to do with the completion of a lot of road construction which has always been years late and billions short. The perimeter highway aka I-285 was widened to at least four lanes each direction by 1986. spaghetti junction was completed in the late 1980’s enabling people living in Gwinette to finally drive directly into the city, without waiting for everyone else to get on-or-off of I-285. Widening the freeways from the rural four lane to urban expressways dramatically impacted the value of property beyond the perimeter highway. Adding light rail service to the North East suburbs didn’t hurt property values or prices one bit, either. The best way on the planet to turn a $50k house into a $250k house is to add a light rail line going to where people want to go. Dunwoody, Roswell, and many of the other outlying cities quickly changed from farming communities to suburban, and then urban sprawl. One of the olde Georgia politicians at the time said there was no point in building all those roads, because they would just fill up with cars. He was right. By 1990 the new highways were filled with cars. A-Town had become “Boomer City” as baby boomers moved from rural America to “HotLanta” to join the reputed party life, which was incidentally more reputed than actual, much of it created in the delusional minds of drunken sales people on convention.

In early 1984 the first echo of the baby boom was born. The mythical restaurants and bars of Hotlanta were soon replaced with real daycare, schools, churches, minivans, toy stores, mega-malls, and a lot of shopping centers known as strip malls. I always wondered if these places got their name trying to compete with strip clubs on Cheshire Bridge road. Speaking of strip clubs one day I came home from work to discover my wife had struck up a friendship with a new neighbor who was trying to sell Tupperware. Turns out this girl was trying to get herself extracted from the stripping business, which was not easy, apparently all that money and attention were, shall we say, addictive. Let’s just say that if you have some desperate need to involve your self in such, take a lesson from the “Housewives of Cary”: Live in Cary, do any stripping closer to Greensboro, hire a limo which is met at some random, non-descript location, and make sure you live in a gated community. For more info on that checkout the archives of Raleigh area TV stations. The apartment a few exits north of the Cheshire Bridge club just didn’t work out all that well, does not make for good relations with neighbors, and seemed to involve a lot of police presence in the community.

As the echo of the boom grew up they created a huge demand for kidstuff much as their parents had a generation earlier. This demand drove prices and presumed value, especially of real estate. The bar hoppers of the late 1970s moved to the burbs after 1985 driving prices from under 100K in the early 1980s to well above 300K in the early 1990s. Old rural neighborhoods were dozed and replaced by new homes priced closer to a million than not. Real property prices were based strictly on demand, with little attachment to actual cost of replacement. Meantime a revolution was beginning. In 1995 the potential of the world wide web was beginning to awaken. The net was built out, the backbone upgraded, fiber laid in a few places, etc..

Business saw a vision of the potential of the internet then invested heavily in companies with no real assets, skills, or value. It is probably safe to say most investors were clueless as to the worthlessness of the average internet company, until millions were actually lost in the bubble of 2001. Technology companies were punished, valuations went from stratospheric to subliminal almost overnight. People who worked in technology were punished more however, than the business morons who were rewarded for having oversold the technology idea. This eventually percipitated an even bigger disaster. As noted in a previous article, it is this writer’s opinion that $100 billion in technology salaries were lost to the outsourcing of information systems work at about the same time as the collapse. The trickle effect is perhaps closer to one trillion dollars. One should note here, that technology people often invest in the technology stocks of companies they worked with, so when computer programmers lost their jobs they could be expected to cash out of their software stocks. People working in telephony could likewise be expected to cash out of telephone business stocks. This could have been a precipitating factor, because lots of technology people were dislocated after Y2K.

The 9-11 disaster, pretty much eliminated any hope of a technology recovery, deepening the continuing technical recession into a full scale technical depression, from which many of us have not, and probably will never fully recover.  At the same time the first echo of the baby boom headed off to college the next year. Lots of boomers were now thinking of downsizing out of the big house, from minivan to sports car, etc.. Boomer Cities such as A-Town were dramatically effected. Developers were outbuilding each other in the ongoing strip mall craze, however the country was off contemplating it’s toenails, so demand for goods and services in strip malls was heading off the cliff, but no one knew yet. No one knew, in large part because investors escaping from put their money into real estate, creating a faux demand which served to move prices beyond the earnings of the working middle class who were earning fewer real dollars each year.  Perhaps in an effort to make market for investors now in the wrong place at exactly the wrong time, the mortgage of choice became the zero down ARM complete with balloon payment.  This particular collection of balloons began to burst in 2006, and the securities which supported them popped in the fall of 2008. The financial business, being so full of itself, had constructed a layered maze of loss prevention, which benefited the aggregating  seller, but represented catastrophe behind a curtain for even large investors. There is no reason to believe the people who put this disaster together had not at some point moved beyond their own mental capacities. Traders and bankers had build a monster which only the most clever of them even professed to understand. Clearly the banking class depended on their customer’s lack of insight into what they were actually doing.

At the same time the investor class moved from investing in real property, to short on real property, then on to commodities. The real killer in the room in 2008 was commodities, oil, in particular. Had investors turned speculators not gotten into oil, chances are perhaps even, the disaster could have been averted. The quest for ever increasing profits however, was without reason. As the price of oil headed for 150 dollars per barrel, investment banks envisioned 250. When the price of motor fuel reached $3.00 per gallon, a noticeable drop in driving and sales were immediately apparent on A-Town highways. This bumping of the $3.00 price barrier went on for months, until the speculators with some help from weather and other random events, finally forced the price above $4.00 per gallon in the spring and summer of 2008. The price of motor fuel decimated spending for every other consumer good and service. The immediate result was massive business failure, and early terminations in short term business leases.  New strip malls stood vacant, old strip malls became vacant. As jobs began to melt down, mortgage failures rose, eventually collapsing banks lucky enough to have bought up mortgage companies. Once the bank collapse started, investment banks with derivative portfolio’s were easy pickings for their friends and counter parties, however one may choose to use that particular term.

The massive influx of cash generated by US Treasury and Federal Reserve activities eased the collapse and enabled some what of a stock market recovery, however the profits went to wealth funds and institutional investors who did not re-invest those funds into either business or consumer services. By this point the financial class have come to believe their own wisdom from the 1990s which generally stated financials were big enough to carry everything, and nothing else was all that important anyway. The end result of this flawed wisdom is ever higher prices driven up by the need to keep stock holders happy by increasing their dividends, while units sold steadily decrease. Rising commodity prices in the spring of 2011 are once again the final branch cracking away from the tree of un-restrained capitalism. Signs on North Georgia commercial real estate changed from “for lease” in December 2010 to “for sale or lease” in January 2011, to “for sale” in February, to “make offer” in April. Once again massive speculation on motor fuel is obviously rampant, as prices burned through $4.00 per gallon in April, 2011, and the number of real property sales of existing houses collapsed by double digit percentages in the same time frame. Commercial real estate has meanwhile burned through what ever goodwill it has had with banks and investors since the fall of 2008, so that particular bubble is now in some version of final bust.

The problem in A-Town is compounded by fundamental issues involving marketing and transportation however. Transportation has become more regionally diversified, moving further out, as the cost of fuel, and urban traffic has increased in the last decades, so A-Town no longer enjoys significant large benefit from changes in import or export activity. In the Late 1980s and early 1990s GDOT wanted to buy up property to build an outer beltway between 30 and 50 miles out. The idea was eventually crushed by the rising conservative political machine, so any economic advantage such a project might have brought is lost.

Marketing has consolidated to save costs by becoming an internet activity, as opposed to lots of sales people wandering from business to business, grabbing a burger and soda between calls. The idea of taking a client out has devolved to the equivalent of a peanut butter sandwich over a Skype call. Small Business people in particular have come to accept the advantages of ordering supplies as needed via the internet, rather than wasting time schmoozing with sales people from the wholesale company – it is a lot easier to compare prices when not dealing with a vendor rep telling them what to think.

To put it simply A-town is residentially and commercially overdeveloped. The job base which once supported those activities and businesses has long since evaporated. Nothing obvious is standing by as a replacement. Boomers themselves are no longer able to positively effect the local economy, having become political liabilities, often vilified by conservative political figures. Many boomers have credit issues and are thus eliminated from candidate pools for good jobs because of the now routine use of credit reports in making hiring decisions. Boomers are typically not as well off, as either the “baby bust” generation which immediately followed them, or their children in the echo. Experience indicates it is difficult to get a manager age 29, with an MBA, to hire to anyone significantly older than himself, and near impossible to get him to hire anyone over the age of 40 for any reason. These issues generally mean diminishing productivity within the populace, which by definition dictates a declining, if not collapsing economy.

The last problem is student loan debt. The people who can qualify for good jobs are so loaded with student loans they will be beyond middle age before they can daydream about either buying a home, or starting a business of their own. This is true whether they borrowed from the US Department of Education, private lenders, or their parents. Because A-Town is a boomer city, with a lot of the echo, all of these problems come together here, with the economic impact measured in catastrophic terms.

All of these problems come together in A-Town.  Collapsed transportation. Collapsed marketing. Collapsed lending. Collapsed value. Collapsed economic reality. Collapsed political reality. Collapsed banks. Collapsed expectations. It is no accident that bank failures in Georgia have been off the charts. It is no accident that state politicians have muddled things by talking about secession. The same people who religiously vote for a politician who desperately needs to control illegal immigration, will frequent the rent-a-crew places where illegals gather to find work, out along GA-9 in Forsyth County.

The only way out of an economic crisis is to develop income. You can never save enough to find your way out. Conservatives are in charge of the economic world, and conserving has more than a lot to do with saving. Any liberal can tell you saving only works if you do it before you have a catastrophe. When everybody goes off saving after the crisis starts, that is called a panic.

It sure seems like it will be a long, long, time before HotLanta is HotLanta again, if ever.