Ray Rothrock

You Cannot Save Yourself to Prosperity (Part 2)

In Energy on August 19, 2011 at 11:44 am

Everything in business starts with selling something.  Some businesses sell cars; some sell turbines; some sell software; some sell groceries; some sell consulting services.  And so it goes on and on throughout the full $14.12 trillion GDP of United States.  Fourteen trillion – the largest production facility in the world is the United States.  This is sometimes called the top line in a business report like an income statement.  This is where our modern economy starts and defines itself. 

As a business’s top line turns down and shrinks, as happens from time to time, in order to stay in business that business must reduce expenses so that it can still make pay its bills with its sales.  If a shortfall is temporary, sometimes that business will borrow money to pay its bills.  And then, when the business recovers it pays the loan back.  If the downturn is longer the business may have to reduce the number of jobs or idle production equipment.

Sometimes business expenses go up for external reasons.  External reasons are things like regulations, taxes, and the like.  This can happen in a normally healthy business.  When it does, it reduces the amount of cash left over after paying all the expenses that the business might be able to invest in itself and grow.

When a top line turns up indicating more sales are possible, a business must invest capital in its production capacity in order to keep up and expand.  This investment can be either machines or people, but to make more you must have more capacity of production, and usually also make things more efficiently.  Everyone benefits in this mode – the business, its employees and its customers all benefit.

In a downturn, sometimes business go into a saving mode.  That works in the short run but the not the long run.  If you are saving, you are not investing.  If the sales continue to decline (for a host of reasons perhaps), then more saving is required.  Ultimately, you cannot save any more.  Your expenses are at their minimum to maintain the business. Drastic action is required.  This action might include ceasing production for some period of time.  You may lay off your sales force or reduce your marketing budgets and even benefits for your employees.  It’s hard to get ahead of the down pressure, so the business must act quickly.  Unfortunately, your employees may lose their interest in your business and go elsewhere, if they can.  Your customers start looking elsewhere, too.  In short, it is a death spiral.   And this is a death spiral that is very hard to recover.

Drastic action is required when the death spiral begins.  The same is required of a country.

 

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