Tuesday, December 30, 2008

The informal economy: how to make it

As small businesses close their doors and corporations lay off thousands, the unemployed will of necessity shift their focus from finding a new formal job (essentially impossible for most) to fashioning a livelihood in the informal economy.

One example of the informal economy is online businesses--people who make a living selling used items on eBay and other venues. Such businesses can be operated at home and do not require storefronts, rent to commercial landlords, employees, etc., and because they don't require a formal presence then they also fly beneath all the government junk fees imposed on formal businesses.

I have mentioned such informal businesses recently, and the easiest way to grasp the range of possibilities is this: whatever someone did formally, they can do informally.

Chef had a high fixed-cost restaurant which bankrupted him/her? Now he/she prepares meals at home and delivers them to neighbors/old customers for cash. No restaurant, no skyhigh rent, no employees, no payroll taxes, no business licenses, inspection fees, no sales tax, etc. Every dime beyond the cost of food and utilities to prepare the meals stays in Chef's pocket rather than going to the commercial landlords and local government via taxes and fees.

All the customers who couldn't afford $30 meals at the restaurant can afford $10. Everybody wins except commercial landlords (soon to be bankrupt) and local government (soon to be insolvent). How can you bankrupt all the businesses and not go bankrupt yourself?

As long as Chef reports net income on Schedule C, he/she is good to go with Federal and State tax authorities.

Now run the same scenario for mechanics, accountants, therapists, even auto sales--just rent a house with a big yard or an apartment with a big parking lot and away you go; the savvy entrepreneur who moves his/her inventory can stock a few vehicles at a time. No need for a huge lot, high overhead, employees or junk fees. It's cash and carry.

Lumber yard? Come to my backyard lot. Whatever I don't have I can order from a jobber and have delivered to your site.

This is the result of raising the fixed costs of starting and running a small business to such a backbreaking level that few formal businesses can survive.

One example of hundreds/thousands: 20 years ago I paid about $200 for a building permit for a $40,000 starter home. (Not in California, in Hawaii.) Locally in California you pay $350 just to have a staffer "review" your plans--even for a modest bathroom renovation. If they reject your plan for some reason, you still pay the fee. If they approve your project, the permit is much, much more. Oh, and they charge you for the electrical and plumbing permits, too.

Yes, I understand the movement to charge end users of government services; those who use the services should pay. Fair enough. But then what's happening to the 8.5% sales tax we pay, the $10,000 property taxes we pay, and the hundreds or thousands in other fees and income taxes we pay? Why don't those taxes go down if end users are picking up the tabs for "government services"?

Why have state and local government budgets all climbed by 30%-50% in a mere decade?

In a way, it doesn't matter; very few can operate a formal business profitably, and so they close their doors and scrape up a living in the informal cash economy. Local government will see its revenues wither and eventually insolvency will force a radical re-thinking of government revenues, expenses and services.

Until then, watch for the informal economy to grow and the formal economy to wither.

Until recently, the "growth sectors" of the U.S. economy were government and healthcare a.k.a. sick-care. As tax revenues plummet, then all government hiring below the Federal level will reverse into lay-offs. As for healthcare: as formal employment declines, so too will the funds flowing into insurance and healthcare via employers. As employers go belly up, the torrent of money flowing into healthcare will dry up.

Never mind that people want and need care; they can't afford $50,000 for tests and a few visits, or $120,000 for a procedure. Once employers stop paying premiums, then the healthcare industry will find its non-Medicaid/Medicare revenues declining. The future in healthcare is cash and carry, too; few recognize that yet, but more will as the formal economy continues down its high-fixed cost/debt-implosion death-spiral.

Those who survived the collapse of the Soviet Empire have experience with informal economies. Many of you have heard of Dmitri Orlov's Reinventing Collapse: The Soviet Example and American Prospects . We turn now to correspondent A.C.'s commentary on the informal economy in Eastern Europe after the Iron Curtain fell. (A.C. was responding to a previous entry.

From Charles Smith


Anonymous Anonymous said...

Wow, this is eerie: This is exactly how I have planned surviving the depression. Assume this depression is a baseball game: we are in the 2nd or 3rd inning, folks, the "exciting" part still to come.....

I had a thriving contracting business from 1999 to @ early 2007, and in 2001, I saw the Bush tax cuts for the superwealthy and the budget deficits explode at the very same time Greenspan lowered the interest rates EIGHT TIMES in 2001 (after RAISING THEM EIGHT TIMES IN 2000, to stifle the economy "irrational exuberance", I believe the con artist republican called it, or was it really to make Gore look bad in an election year, you decide), and starting commenting everywhere about the looming "Weimar Dollar" policy sure to come.

Everyone scoffed.

Then the Fed announced in 2006 they would stop divulging the M-3 supply. Oh-oh.

Keep scoffing, Bernanke's got the presses running red hot. Only a matter of ever-shortening time until it occurs now.

Anyway, in 2001, I stopped renting a $3000/month warehouse for my office/fab shop, and found an old 3bd.2bth. house in an industrial area, with a big old shop in need of repair, and a large vacant lot attached, for $2250/month. I was then renting a beachfront condo for $1150/month, so total monthly outlays were $4150 just for business and home. Now they were $2250.

I had almost halved my expenses. 10 year lease.

Then, I spent $20,000, including getting all permits, (with new owner/landlord's approval, I was his first tenant in this location, and I had fixed up the old house to livable again with my workers on the few downtime days we had then), and to build a nice little office/shop on vacant lot, and now rent that out for $2000/month.

Then, I added on to the existing house for $8,000, divided it in two, and rented it out as an office with the old shop. $1500/month.

So now, I live in a nice little "duplex", 2 bd/1/bth, and GET PAID $1250/month for doing so.

I saved $1950 a month for the first 5 years = $114,000. I spent $28,000 improving the lot/buildings. $86,000 to the positive.

I went to my favorite place in the world, Chiangmai, Thailand, and bought a $32,000 condo in 2003 (now valued @ $100,000-110,000), and a $18,000 condo in 2006 (valued @ $20,000), cash. Then used the remaining savings ($36,000) to invest in a new house with a Thai national (as a foreigner, I am restricted from owning land, or single family dwelling, in Thailand). That house is now on market for $150,000, with a balance owed bank of $40,000 (we've been renting it to cover $600/month mortgage payment). The Second I hold is due and payable in October, 2009, with $10% interest).

Then, I did one last big pipeline project in Texas for the US military, returned home, gave everyone of my workers (12) a nice going away bonus, and sold all my equipment for $100,000.

Let's say I have a tidy little nest egg. Far from wealthy or even well-off, but "comfortable" and frugal.

Some investment in gold Panda coins I buy when playing in Wan Chai (google it and educate yourself) with my Thai girlfriend.

Some in 24K gold jewelry to keep my honey smiling, that the Thai jewelers guarantee in writing they will repurchase at current market prices anytime I should need to sell. Funny how all the "Thai" jewelers are actually ethnic Chinese, but that is another story.....

I hold NO DEBT. I can not stress that enough: GET OUT OF DEBT NOW, if at all possible.

I use a Visa check card on travel, and cash only at home in Guam or Chiangmai. I hold a few foreign currencies, Yen and Hong Kong dollars mostly, because I believe the Japanese have experienced this before, so they should have "gotten stronger" since it didn't kill them the first time, and Hong Kong dollars because that place has a HUGE cash reserve built up, and can "prime the public works pump" if necessary without going into massive debt.

And just enough separated from the mainland to be slightly immunized from the crash of Southern China's factories. Slightly. Their real estate market is falling, though. Falls any more, I might look at investing there in a nice condo. Maybe Wan Chai district.

Both my sons from a 20 year marriage ended 10 years ago are grown up and on their own.

Now, I spend my time riding my Ducati around my little island, or going out with a buddy (fellow contractor I've known for 12 years) fishing all day or night, then going to beach on weekends. Sometimes i go down to the tourist area (Tumon) and watch the Korean and Japanese tourists watching the American strippers bare it all. Guam is quite a place: "Where America's day Begins", been here on and off since 1992. Mostly on.

I rented the office/shops to an auto repair business, and an auto body repair shop. Both do well in a downturned economy: people repair/fix up their used cars instead of forking out for new ones. They've never been busier from what they tell me. They also like having me as free "night-time security" since I am here most late nights.

They have access from 6:00am to 6:00pm, Mon-Sat. I unlock and lock the mailn gate, only I hold the keys, and I have a friend I pay to do it when i am off-island.

Quiet by dinner time (industrial parks are like ghost towns after dark, with paid private patrols cruising around, kinda nice if you like privacy and quiet nights), and ultra quiet Sundays...sweet.

So now, I have a little over 4 years left on lease, no worries about repairs to properties, as I am not owner, nor property tax increases (the military has plans to spend $8 billion here over the 2010-2015 timeframe), a small cash flow from my rental condo in Chiangmai, a very "well appointed" condo (I spent $6000 for labor AND materials installing new floor tiles from Vietnam throughout, black marble countertops, S.S. sink and fridge, S.S. oven and hood from Portugal, black glass stovetop burner from Germany and new birchwood island in kitchen, removed old tub and installed new glass block-walled shower, fresh paint everywhere with imported European wallpaper in bedroom, and huge flat screen Samsung in L.R.

All in a newly remodeled building (art noveau style, way cool, had no idea it would happen when I made purchase),with fulltime security and a $400/year Common Area fee. Clean as a whistle and safe and secure.

That's right, $6000 to remodel 72 sq.mtrs. With all new toys and goodies, labor included. LABOR INCLUDED.

And guess what?

In Guam, I still have same zip code I had with beach front condo I rented, and am only 1.2 miles from swanky tourist beach area. Japanese cuties in bikinis so tiny, I have to close to see it. Yes, I LOOK CLOSE.

So, sometimes "downsizing" can be not only relatively painless (for those that could see the trainwreck BEFORE it occurred), in some cases it can be downright profitable.

Don't get me wrong: Thailand is not immune to the economic distresses world-wide, but hey: I can go out and shop at nearby local fresh air market (one minute walk), buy freshly butchered (on-site)and locally raised pork, chicken, veggies, fruit, rice (Chiangmai is agricultural gem of Thailand), and walk away with 3-4 meals worth of food for two, for @ $3.00 US. Or just buy freshly prepared food at one of the many stalls: $1.25 a meal. Delicious and fresh, no preservatives. EVER TASTE MEAT WITHOUT ANTIBIOTICS LIKE THE US HAS? No? You'd be amazed....

And have visited the hospital around the corner when I got the flu, visit and medicine: $8.00 Again, one minute walk from condo.

Sometimes I "splurge" on Sundays, and take my honey next door to Holiday Inn (was a Sheraton hotel when I first moved there) for buffet breakfast, and cry over the $12 bill.

So, I will stay here in Guam for 4 more years, collect $52,000 in rent, and just work part-time when I feel like it, and fly to Thailand, and live like a wealthy person for $10/day, with $700/month left in savings from Guam rent.

I try to avoid touching my capital: you never know when an opportunity to make a purchase of an asset you never thought you could afford presents itself in these economic conditions.....opportunities exist....if you have CASH.

Hell, I'll be 57 when the lease is up, and have already asked to sign extension on lease for another 5 years. Landlord (retired Korea couple in their late 70s) agreed, but want to raise the rent to $2500. Gee, I'll "only" make $1000/month the last 5 years.

I guess I can live with that, until I am 62. I doubt the heirs to my landlords will agree to let me have another 5 years at that time..... unless theold folks live into the late 80s....

Tell me what YOU plan to do when the excrement meets revolving blades this year.


5:33 PM  

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