This is Part 6 of an article series which takes a look at a 7 steps to lift yourself out of the recession, no matter how deep it gets.
Adding money into the economy, like the government has been doing for many years through loose monetary policies, causes consumer spending distortions.
Injecting money (inflation) into the economy causes these distortions in consumer spending. These distortions are the reason that many businesses are going bankrupt and many more have been bailed out.
When the government artificially juices the economy, they increase consumer spending, but consumers spend the new money that they think they got for free on non-essential goods, like cars, entertainment, eating out, luxury items that they would have lived without if they didn't get the easy money.
In the process consumers reduce their spending on basic essential goods and instead turn to hiring others to do many of the things that they used to do themselves like cut their lawn and clean the house.
The result is a drastic shift in spending. Businesses that produce non-essential luxury items see a boost in sales quickly increase their investments in production. And businesses that produce essential goods see a decrease in spending and quickly begin decreasing their investments in production.
As expected, investors shift money to the more profitable businesses, which are based on the shift in consumer demands. But the investments are misguided because consumer demand has been misguided.
This concept is called ‘malinvestments’
Injecting money into the economy results in investments being misdirected, which eventually leads to major losses as the government stimulus money misguides producers into thinking consumer demand was higher than it really is.
When the easy money runs out consumer demand drops even lower than it was before the easy money was handed out, resulting is way too much supply begin produced by some businesses and not enough supply by other businesses.
This is how the government caused and continues to cause capitalism to fail. If governments didn't expand the money supply, investments wouldn't end up in the wrong places and businesses wouldn't need bail outs. Supply and demand would always line up. But that wouldn't be any fun for the politicians who like to play monopoly with our money.
The businesses that over-produced (cars, houses, boats, etc.) have to liquidate their supply and suffer major losses that results in bankrupties, high unemployment, recessions and depressions.
The under-producing businesses miss the opportunity to profit by not having enough products to sell.
And consumers end up having to pay higher prices for the goods that are under-produced because of the shortage of supply. Everyone ends up with less wealth.
This is why we have too many houses, too many cars, too many shopping malls, etc.
When the boom turns into a bust, the governments answer is to increase the money supply (inflation) even fasters to get the economy back on the path to hyperinflation.
Real Consumer Demand
Ok now that you understand how ‘malinvestments’ can mislead businesses with phony consumer demand, you need to consider what true consumer demand will be after the government stops playing matchmaker with the economy - and believe me they are going to soon be forced to stop.
As I said in the previous article, consumers are going to be interested in buying essential goods like, food, water, clothing, housing, entertainment, information, education, furniture and basic household supplies.
These are the area’s in which successful businesses will be found. These are the areas to think about starting a business in today so that your business will thrive in the future. Consumer demand is going to shift from non-essential goods and services to essential goods and services.
For example, one of the local businesses where I live that has grown the most last year, was a used clothing store. The owner recently just opened two additional stores.
Large businesses are going to feel a lot of pain because they will not be able to react to the change in consumer demand. It will be the small business sector that will come alive, quickly creating new products and services to meet new consumer demands.
Many businesses will continue to suffer from misguided investments that will not alllow them to hire people back. It is unlikely that the jobs they cut will be restored unless they are successful in new markets.
Therefore businesses that were focused on markets that thrived while consumer credit was expanding and housing prices were rising, are in desperate need of attaching new markets if they are going to survive.
That means that a lot of people are not going to be able to find a job and their best opportunity is perhaps to get a job at a new business or to create their own job by starting a business.
This is good time to start a new business based on true consumer demand, because credit is tight, savings are gone and incomes are flat. The current consumer demand today is more dependable then is was three years ago.
So if you build a business today, you are unlikely to suffer a downturn because consumers are not likely to get a boost to consumer spending for many, many years.
In Part 7, I’m going to talk about how difficult is it to create a business and how important it is to prepare yourself to apply relentless will and vision.