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Recessions be tachless Recessions be tachless
by Joseph Gatt
2019-07-11 09:20:45
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In Israel, to speak “be tachless” is the norm. There is no correct equivalent of the word “tachless” but I can give you examples. Your friend invites you home for lunch and you don't like the food. In most countries you would say something like “food tastes OK.” But in Israel you would say “this tastes terrible, don't cook this again.” Other example. Your friend just bought an apartment and takes you for a tour. In most countries you would say something like “wow this is really a nice place!” but in Israel you would say something like “there are not enough windows, you are going to suffer in the summer buddy.” Or you go to the bar and order a beer, and the beer tastes terrible. You don't just swallow your pride and drink it, you complain about it. Tachless.

So basically when it comes to recessions you have people blaming Wall Street and people blaming the government. But people never blame people. So I will try to be straightforward about how recessions work.

israe001_400If you own a business, there will always be cycles. Up and down, up and down, up and down. Some days will be very busy, sometimes you will go a week without a client.

So there are basically five factors involved in recessions: rent, production costs, demographics and human error and competition.

In the days of rent control, businesses did not have to obsess about breaking even because rent fees were reasonable, and in some cases, they could buy the property at a reasonable price. There were good days and bad days, good weeks and bad weeks, good months and bad months, but it didn't affect business because rent and property were cheap.

Today, when you start a business, you have to break even very quickly because the more crowded the area, the higher the rent. So the rent/customer base ratio is way too high, meaning that if you have a bad day, you're in trouble. If you have a bad week, you lose sleep. If you have a bad month, you start considering closing shop.

Two, production costs. Wages are high, equipment prices are high, raw material prices are high. Many reasons for this. First, in most developing countries where labor used to be cheap, wages have gone up. You have “fair trade” hipsters to thank for that. But I think it's a good thing that people in developing countries are getting higher wages. Second, there's more technology involved in every equipment and raw material. That adds to the cost. Third, transportation prices are higher because of higher oil prices and better technology in transportation vehicles.

So not only are you trying to pay rent, you are also putting large portions of your savings buying all kinds of equipment that used to be cheap, and is now very expensive. So not only is the rent deadline crushing you at the front, the production costs are crushing you at the back.

Third. Demographics. In almost every country in the world, the tendency is to have fewer children. And this has been the tendency over the last 40 years. So for every generation under 40, there are fewer people. That makes the rent/customer base ratio even higher, because rent is getting higher and the customer base is getting smaller as the years go by. There are fewer people under 40 every year, and people over 40 tend not to spend a lot of money. So your customer base is shrinking.

Finally, human factors. There's a tendency for business owners to mismanage. The main mistake it to make changes that business owners think will bring more customers, when they bring less customers. All kinds of mistakes are made for example, price deflation (lowering prices hoping that more customers will come). This mistake for example often means that customers will come when you lower the prices, but will leave when you raise back the prices.

The fifth factor is of course the competition factor. You are competing with dozens of companies that have the exact same product.

So where does Wall Street come in? Where do politicians come in? Wall Street is an institution that provides business money, and speculates on whether the business will be successful or not. So Wall Street is giving you money hoping that you will monetize the project. That's all they are doing. If they are loaning you money, they want it back. You are the one who asked for the loan.

There is household debt, student debt, business debt, and property debt. The debt levels have all skyrocketed. Households are still spending more money and go through credit card debt, but this cash inflow does not fix the recession because stores are constantly expanding hoping that more households will get more credit card debt by buying more stuff in their stores. Remember that the demographics are shrinking.

Students are taking more student loans for degrees that often can't be monetized. 200,000 dollars of student debt for a history or anthropology or sociology degree? Come on! What kind of job were you hoping to get with that degree? And people are buying houses at inflated prices hoping that the price can be even more inflated when they sell the house. And businesses are borrowing more money thinking that “risk is necessary.” When your business will fail, will you still be saying that the risk was worth is?

But I believe in free markets. So if you are starting a business, I recommend you do the following:

1- Look for a good rent/customer base ratio or a good rent/demographics ratio. I have a couple of friends who drive food trucks around crowded markets and venues. Whether they are making a lot of money is another story, but they have a very good rent/customer base ratio.

2-Don't overspend on production costs. Only hire the people you need, only use the equipment you need. Be penny-pinching about your production costs. Look for the best quality, but cheapest raw materials. Don't cut corners and buy low-quality cheap stuff.

3-Keep in mind that your demographic base tends to be shrinking. Keep that in mind, especially if you are planning to expand your business.

4-Don't believe anything marketing gurus tell you. Ignorance is bliss. Don't try to sell at a loss hoping that your customers will be loyal. There's too much competition out there.

5- Because of competition, you have to be perfect with your customer base. One small mistake and your customer base is gone.

6-Buy a cheap house, get a cheap education, ditch that credit card, and don't invest too much money in your business, but if possible don't go into debt.

If everyone does this, we can have 5, maybe 10% growth at the national level. Otherwise, we will have to settle with 2% growth. /

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