Over the fourth of July weekend one of my sons-in-law rented a houseboat on Rainy Lake. This sprawling body of water lies half in Minnesota and half in Ontario. It’s a five-hour drive north of Minneapolis. When we got to the houseboat agency outside of International Falls, I was perplexed by the 15 or so houseboats at the dock. Why, I asked the proprietor, weren’t they out on the lake?
He explained that in a normal year all of them would be rented. This year only three were booked. The rental fee for our houseboat that carried 10 of us was $1100 a day. When we returned, only one boat was on the lake in what normally was their busiest week. He wearily explained that the business had taken a tremendous nosedive.
We have no way of knowing his financial circumstances. If he owes the bank, he could be in serious trouble. You can find stories like this all across America in every business. Sadly, most of the struggling entrepreneurs are hoping for a rapid improvement which isn’t likely to happen. The consumer has run out of gas. We had high times based on income growth, full employment, credit card debt and refinancing. Savings were nil, spending was excessive and debt went into orbit. You could buy a room full of furniture a few years ago and the first payment may still not be due. You could even get a chunk of cash for buying something on credit.
Everybody knows that three-quarters of GDP (our economy) comes from consumer spending. That’s why you can’t be too optimistic about a return to the high life. In fact, things can get a whole lot worse as those who used debt to make purchases continue to be liquidated.
The businesses that flourished serving this runaway consumption binge have run into a concrete wall. They are learning to live on less. If they over-borrowed, they’re done for. We have a car dealer in Minnesota who was so successful he reached celebrity status. He had 24 car dealerships in Minnesota and California. He borrowed relentlessly to buy more. He financed a $12 million dollar home, a $9 million dollar lake place and a winter retreat in Cabo where he kept his yacht. He traveled by private jet. He bought interests in upscale restaurants and resorts. He owned a rental car business and a mortgage company. In a good year he made over $20 million.
When the car business soured and the economy retrenched, his empire collapsed. He owed $550 million to auto companies. His personal bankruptcy included scores of creditors. Among them were Las Vegas casinos for $600,000 and credit card debt of $365,000. His Neiman-Marcus bill was almost $200,000. (My wife reminded me hers was quite minimal in comparison.) A newspaper article claimed he owed so many banks they didn’t have the space to list them all.
As the economic crunch eliminates one business after another, commercial real estate feels the squeeze. Financings in this sector exceeds all credit card debt, student loans and auto loans combined. The Wall Street Journal wrote recently about this crisis in the making. While visiting with the president of my bank recently, he told me about a request for a loan from a beleaguered property owner. This client had a $9 million dollar commercial building and another $6 million dollar property. In order to keep them out of foreclosure he had to borrow $2 ½ million. The bank turned him down. My banker advised me that commercial real estate was in big trouble.
Already, some politicians are pushing the administration to ready a new stimulus package. If commercial real estate lenders have to be bailed out, and the government floods the country with more stimulus, it can set off a firestorm of dollar dumping and eventually runaway inflation.
Normally we get a recovery soon after a downturn. Things eventually get better. This time it’s different. We’re still sinking. Another burst of deflation, followed by more government ineptitude, a devastating deficit, a moribund economy and, ultimately a grievously debauched dollar seems to be the order of the day. The government will want to spend us into recovery and borrow the money to do so. If they can’t borrow, they’ll print. Predicaments don’t get much worse than this.