The Rolling Stones are very poignant, "If you try sometimes you just might find you get what you need". Recently, I've talked to two different mortgage brokers in the past few weeks about their business. Both of which own and operate their own mortgage company with employees and loan officers to manage.
What I found out that was really interesting is both are thinking about looking for regular 9-5 jobs that come with a paycheck. They both uttered they would be more than happy to make enough just to cover their bills and not have the stress anymore of running a business, covering payroll, and/or burning personal savings to stay in business. Gone are the big incomes of the past, and the steady paycheck is looking mighty good these days.
A couple months ago, one of my clients (plumbing contractor) told me he found a 30 year veteran of the business that "came with clients/profits", so he hired him at a rate of $20 per hour, a substantially lower income level than his current employees at the time, which were at $35/hour. This new employee was tickled to just have a job that covered his bills/needs. Since then, my client has reduced the payroll on the higher paid employees to bring them into line with the seasoned employee. No one has left his company, as they are happy to have a pay check in this environment.
I have two other clients that have about 100 employees each, down from levels of 200 and 300 during the peak economy days. In the past few months both have made salaries reductions on all existing employees of 10% for each company, and again no one left because there's no where to go, and keeping a paycheck, albeit a slightly smaller one is a no brainer, and most are quite happy to have a paycheck that covers their needs.
I've noticed a new trend emerging. We're all quite aware of the layoffs that have happened, but what's happening now is the lowering of salaries and bonuses. It might be on existing employees, or it might be highly paid people that have lost their income either through being laid off or a reduction in their self employed income, who are staring at lower income levels from their next job. And, as part of this trend, society is more than happy to have some basic pay check that covers the bills. Yes, people are quite happy to make less if they know they are still on the payroll. If you try sometimes you just might find you get what you need!
Yes, lower income levels are beginning to take hold as a trend. I saw it first in the self employed mortgage and realtor brokerage business, and then it spread to employees in the general and subcontractor world. Currently, we see it most in the real estate related fields of the economy because that's where the bubble busting creates the most downward financial pressure.
However, the pressure is mounting every where. There is intense pressure on local and state governments to trim costs via salary cuts as part of their budget short fall solutions. The auto industry is under a great deal of pressure to reduce expenditures as sales volumes no longer support existing compensation packages to union employees.
So, let's project this forward a little, if the economic trends of business are going to be less than peak levels for a while, and corporate America is under a great deal of pressure to increase earnings and repair balance sheets, and the current glut of human talent makes people more affordable (cheaper), what do you think is going to happen going forward? Wouldn't it be logical to expect to some degree a broadening of this trend to spill over into all most all other industries? Yes, it might take months or a couple years, but doesn't it seem like a very easy trend to visualize occurring?
Don't think for a minute, that the executives at your company aren't considering this financial maneuver right now or in the near future. They know it's an easy way to boost net income or help repair a balance sheet, but they also know there is no where for most employees to easily get another job at the same income level. Simply put, the demand/supply equation on human talent does not bode well for the employee. It's an employer market.
When I think about the deflationary spiral that I see occurring in the coming 2-5 years, there a few factors that I feel will inevitably push us into this deflationary period, and some of them may occur at or about the same time. One of those forces is the trend of lower incomes. And at intense periods that will stem from higher unemployment, a mass waive of boomer retirement, but it could very likely stem in part from an exacerbation of this trend of lower salaries and bonuses to the employed.
What's concerning is that no one is discussing this trend or its related issues yet, or some of the possible ramifications:
-
If compensation packages go down through lowered salaries or lowered bonuses or a reduction in benefits, doesn't that place downward pressure on personal net income? That creates two issues, which include lower consumer spending and less home affordability, neither of which is a great development for the economy or for the real estate valuation model. Less consumer spending and lower real estate values create addition issues of their own.
-
If income levels are declining, what does that do for the collection of taxes at the local, state and federal level? It has to force lower tax collections, which creates or intensifies budget shorts falls, which creates two addition problems, which include the pressure to reduce government spending on projects and/or a reduction in payroll on government employees, and secondarily at some point we have to get much higher taxes. Each of these two issues (especially the tax consequence) also spawns their own issues.
I really wish I didn't see this deflationary spiral coming but it seems like a no brainer. The trend of lower income levels is just one a few reasons why I see the deflationary spiral. If we evaluate just this one potential issue we see a problem of significance creating 2 additional problems, which create their own inevitable problems economically and hence the vision of a deflationary spiral. Add in other issues that will probably occur during the next 5 years, and the spiral gains significant momentum in the near future.
It's highly relevant for us to see how this potential deflationary spiral occurs in order to know what to do with our money today, because if you wait until its front and center, well my friends, it's too late for you to do anything about it. Which assets should we own to protect ourselves, which assets will provide an opportunity to make money, and what type of financial life should we live in this new era of frugality? If you try sometimes you just might find you get what you need!
