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Economy Opening… Stop… Start…

While everyone is eager to get the economy started, get back to work, get back to normal!  What we have seen this week with States and industry openings, may be a harbinger of the new “normal” at least for some time.

We will reopen but we may not be normal for a while

Since we know social distancing will stay in place for some months to come we can pretty much rule out crowded karaoke night at the local pub, or that big stadium rock concert you bought tickets to happening. 

A few states like Texas and Georgia began opening their economies in late April.  Almost immediately cases of COVID-19 increased in the Texas panhandle, due to outbreaks in meat packing plants amongst the approximately 12,000 industry workers.  Although all plants did not reclose, early response teams were sent to test and get a handle on the outbreaks.

Ford Motor Company opened its American auto plants just recently and then was forced to shut down two plants temporarily.  While one plant had a worker test positive and was shut down for disinfecting, another production line was halted because workers tested positive at a nearby parts plant – a link in their supply chain – and were unable to continue production.

We have seen the gigantic food industry in our country try to pivot their processing, packaging, and delivery resources to retail and away from restaurants – some of whom have shuttered completely, others still open but at a much reduced rate for take out only.  While a restaurant can shut down in a day, a farmer can hardly stop a radish from growing or a hog from fattening up, try as they might.  The food that would normally go to restaurants or big events now has no where to go.  And this affects both small and large farms.  It can take years to build up a customer base for your product.  Farmers can’t just knock on doors and sell those products to a few grocery stores, and so that means loss.  Not only loss of income but loss of investment dollars that just went to waste.  And a break – if temporary – in the food chain even after reopening the economy. farmers may not have had the wherewithal, nor the confidence, to replant and regrow the next round

As we begin to reopen we may see holes popping up in several supply chains, not just food.  What products should have gone into manufacturing or retail for sale are now hanging out in storage, or worse, have ended up in landfills.  Once production starts up across the country (and the world) there is no guarantee that raw materials and goods and even services will be readily available on time – which is what a well working supply chain requires. 

Besides supply chain kinks, possible worker absenteeism from outbreaks, businesses do not thrive unless they have that magical thing called the customer.  While continuing to wear masks and maintain social distance are on reopening plans, what can’t be planned is customer confidence.  A crowded waiting room once set a glow on restaurateurs’ hearts, but that sight might make potential customers flee.  Imagine the sight of a crowded waiting room in the doctor’s office.  It could be some time before customers are open for reopening. 

And like the great recession from a decade ago, while we can’t be certain how quickly the economy recover, what we can be sure of is that at least some businesses will never reopen.  We have already lost to the coronavirus Souplantation (and possibly all salad bars for all time), JC Penney retail, and at least 30 locations of Gold’s Gym that will never reopen.

Road Map to Opening

The news can be confusing. We hear that the nation is slowly reopening. Each state has a different plan, and county, and even each city! But a few clicks can keep you informed.

Information about your city is a few clicks away

Generally speaking this is a State issue. While the Federal government can give guidelines on how a State operates – including rules about opening businesses, wearing masks, etc. – only a State can make laws that govern behavior on the ground. Even each county and city is in charge of how reopening goes in their particular municipality. Though most States require that rules should not be less restrictive than the State level.

The United States Reopening Plan is located on the official White House website if you are looking to find out what the Federal plan looks like.

To find out what affects you, start with your own State’s website. In California, for instance, there are stages which you can find out about on the California road map site. Looking for your State’s official website is simple. The IRS has culled a list of each state government website so you can easily click through to the reopening plan.

If you are looking for more specific information on COVID-19 you can go to the CDC’s website where they list the websites for the health departments in each State.

And if you are looking for information about what is required in your particular city, you can easily find your city by searching the name and “official website” which will usually end with a .org. Particularly if you own a business it is important to get the information that directly affects you. And revisit often as this is a dynamic situation and you don’t want to be either behind or ahead of the curve.

Free Credit Reports

Normally all consumers are entitled to a free credit report from each of the three major reporting agencies once a year. This was provided by the Fair Credit Reporting Act (FCRA) which required Equifax, Experian, and TransUnion to provide you with a free copy of your credit report, at your request, once every 12 months. And this is enforced by the Federal Trade Commission (FTC), the nation’s consumer protection agency.

Free weekly reports now available

Now, through April 2021, all three reporting agencies will be offering one free report weekly so that you can more closely monitor your credit. You can got to AnnualCreditReport.com to request your copies.

The credit agencies cull information from all your lenders and determine your credit worthiness based on how much you earn, how much you owe, and how much credit you have available to you. They also take into account your payment history, whether you have been chronically late, or always on time paying your creditors, medical bills, and sometimes even rent. It is important – especially if you are going to be requesting a new loan (credit card, mortgage, car loan, etc.) in the near future – to make sure all of the information on your report is up to date and accurate.

What Are Libraries Doing Now

In the era of coronavirus almost every business has been affected.  But we forget sometimes about the other resources in our community.  What about our libraries?

Still a great resource even in “stay at home”

During and after disasters and big community events libraries are normally available and open, providing services from information, to shelter, entertainment, to food security.  In this pandemic though they can’t be open.  But that doesn’t mean they have given up serving us.

Many libraries across the country had already gone online in some way.  Either they provided ebooks, audio books, and newspaper access on their websites.  Now this forum is all they have so many are bumping up their presence.

While it may have been years since you have visited your local library in person you may miss them now.  Here in the Coachella Valley our library system is run by the County of Riverside.  We also have access to the Rancho Mirage Library and Conservatory.

What libraries provide us in normal times and how they are coping now:

Libraries provide us with books.  Right now you can’t check out a physical book because the library is closed.  But check your library’s website – there are many, many books available for e-readers or audio books.  And if you don’t have a library card, don’t worry, you can get one online too.

Libraries provide us with supplemental education.  If you check your library website you will be able to find activities and guidance for homeschooling and supplemental education for grades K-12.

Librarians steer you towards the right resource.  With libraries closed it may be difficult to find the information you are looking for to support your argument for a paper or find out what years the Civil War was active, for instance, from reliable online resources.  But guess what, you can use the library’s chat function to talk to a librarian who can still steer you to the right resource which you may even be able to check out as an e-book.

Libraries provide free activities.  For school age children it can be every ten minutes that they are bored.  They (and you) may miss the library activities where a zoologist would bring in a lizard to pet, or a puppeteer put on a show.  Instead of YouTube you can send your kids to the library’s website for fun (and educational) games to try online as well as curated videos. 

Libraries provide entertainment you would not see elsewhere.  Maybe it’s our puppeteer from above or a flutist playing chamber music but libraries are always looking for unusual and mind expanding entertainments.  While it may be some time before you can actually go to the library to see something interesting, the library system is stepping outside its comfort zone and entering the realm of online entertainment like this video from the Riverside County Library system posted on May the 4th (be with you!) about Star Wars.  Some libraries are even continuing with their activities online like Cathedral City Library’s Triva and Mocktails weekly event for adults.

And if you happen to have a book checked out right now you’re forgiven!  No late fees until libraries are reopen!

Time to Retire?

If you are nearing the age of 62, and particularly if you have been laid off or your work reduced due to the coronavirus, you may wonder if it’s time to take social security benefits.

Could it be time?

While you can that doesn’t necessarily mean you should. The Social Security Administration has on their site a benefits calculator which can help you figure out how much you will receive each month. Perhaps the most important consideration is that once you begin taking your benefits they will not change. If you take your benefits at age 62 you will receive 75% of what is owed to you – this is because you will be receiving benefits longer. If you take your benefits at your full retirement age (this age depends on your year of birth which you can find out here) you will receive 100% of the benefits due to you.

So, as you are considering whether you can make ends meet, keep in mind that if you continue to work before you reach your full retirement age your benefits will be reduced. The good news though is that your benefit will be adjusted based on your continued work and added to your benefit amount once you reach full retirement age.

But wait, there’s more. Have you worked enough? In order to be eligible to receive benefits you must have earned 40 credits – translated into English that means you have to have worked for a cumulative 10 years at a job where you were paying into the system. So, that means if you worked 5 years as an employee and 5 years as an independent contractor and have not paid self-employment taxes then you have 20 credits or 5 years towards receiving social security.

You can make up for those 5 years by paying those back taxes. Or you can get employment with a company that will class you as an employee – if you have time. Your ten years needs to be earned before you reach your full retirement age. What is important to know is that income earned as an independent contractor is not calculated into your social security benefits unless you have paid self-employment taxes.

Whatever your age it is good time spent planning how and when you will take your social security benefits.

Why Some Mortgage Companies Aren’t Flexible

We have heard in recent months about how many Americans have lost their jobs due to the coronavirus pandemic and the stay at home orders. Many of those folks have a mortgage they may not be able to pay.

Mortgage servicers are not as flexible as banks

After the great recession, companies that offer home mortgages became more conservative in the borrowers they lent to. Before the crisis there was a virtual pandemic of what were called “Liar Loans” entering the mortgage market – essentially lending more than a borrower could reasonably handle.

What the mortgage market didn’t examine were the lenders. Not all companies that offer home mortgages are banks. Banks are mandated by law to hold a certain amount of cash in reserve. During a crisis like the one we are currently in they have been allowed to dip into those funds to keep the bank running – even as many people cannot pay their mortgage.

Those mortgage companies that are not banks are merely managing the loan, not the holder of the note like a bank. A mortgage servicer merely collects the mortgage payment from homeowners, handles things like taxes, and then sends the money to the investors – the holders of the note. What they get in return is a small sliver of each loan, allowing them to pay their expenses and maybe even make a bit of profit.

Why mortgage servicers cannot float delinquent borrowers is that unlike banks they are not made to hold cash in reserve. So, no matter how Congress may require banks to offer mortgage relief, mortgage servicers are not in that category, and so not obligated to live by the same rules. If you find your mortgage company not being helpful it may be that they are a servicer and not a bank.

The Supply Chain

In the past few months you may have had more time on your hands, watched more news, or been reading more.  So, you may have heard recently this phrase “breakdown in the supply chain”.  We thought we would visit this topic with a broad overview of what is a supply chain.

The supply chain is vulnerable to disruption at every link

Raw Materials

There are several basic steps on the supply chain.  First, before anything else raw materials have to have been identified and cultivated.  If you are looking for an engagement ring – one of the first places on that supply chain must be mining for the diamond.  If it is a pair of pants then you have to start with planting cotton, let’s say for simplicity.

The raw material step may itself have several steps.  Let’s look at our pants.  The cotton grower may actually purchase seed from someone else, so the seed producer is the first step.  The grower of the cotton may not do anything else but grow it and pick it, then the next step is curing the cotton – cleaning and spinning it into thread.  That processor may not actually turn that cotton thread into fabric, so that material now needs to travel to a fabric processor.

Supplier

Now that we have all this fabric there needs to be someone to get it to the people who will make the pants.  Most processors are too small to be able to deliver their fabric all over the country, maybe even all over the globe.  That is where the supplier comes in.  A supplier usually focuses on getting goods from processor to manufacturer so they may have a wide variety of products they provide.  A fabric supplier may also deal in other things their customers will need – if they are delivering to their customer who will make our pants, they may also pick up buttons, and zippers, maybe even the paper for labels for the pants, they may even supply sewing machines and their parts.

Manufacturing

Once the manufacturer of our pants receives all the materials it needs it can go through the manufacturing process which will include things like design, sizing, cutting, stitching the parts together, and labeling for sale.

Distributor

Now that the pants are made, unless the company that made them is huge and can afford their own trucks and drivers, it will have to engage a distributor to deliver the pants to the retail stores that would like to sell them.

Like suppliers, distributors can carry many different products.  So, when they drop off those pants, they may also drop off shirts and purses to the retailer they have gathered from other different manufacturers.

Retailer

The retailer now has the pants and they need to find a way to sell them.  They have to find a way to get in touch with customers and encourage them to come in and look at the pants – so that means being in a location where there is a lot of foot traffic or advertising, get the word out to a wide variety of people.

Consumer

The consumer steps into the store, spots the pants, treies them on and likes them, decides to buy them and all is well in the world.  The supply chain has worked the way it was supposed to. Everyone happy.

On The Whole

Though it is called a ‘chain’ it is much less linear in a world economy and more like a web.  When the pandemic broke out in China, many factories were initially affected by workers not coming to work because they were sick.  That was a break in the manufacturing link of the supply chain.  All the businesses before and after that step are negatively affected.  If you have raw cotton, but the fabric processor doesn’t need it because the factory that manufactures the pants is shut down because too many people are sick, you are left with a lot of cotton and nothing to do with it.  If it doesn’t get processed it will go to waste.  If the processor has no one to sell to they can’t very well carry on processing cotton into fabric, they only have so much capital to spend and only so much storage space to hold on to unsold fabric.

On the other side, the customer will come into the store and find no pants on the shelves so they may walk away and go to another store.  The suppliers and distributors in between are equally affected. 

If there are supply chain disruptions all along the line, because of illness, or as with our “stay at home” orders, it puts the whole system in trouble.  Because supply chains for almost all products are increasingly global and web-like, what happens in other countries can really affect what happens in ours.  And all the workers along the line, at all the steps, are also consumers of our pants.  We really are all in this together, on a lot of levels.

Let’s Revisit The Fed

A few months back, before the era of coronavirus, we talked about The Fed and exactly what they do. At this point in time it is worth revisiting them and talking about what they are prepared to do to help the economy recover during and after the impact of stay at home.

What The Fed is doing in this crisis

Back in March when states started ordering people to stay at home to prevent the spread of coronavirus, The Fed lowered the Federal interest rate to almost zero. But while businesses were shuttered they obviously weren’t going to borrow. So, while the effectiveness of a low interest rate didn’t play out as it would have during an ‘active’ economy (normally lowering interest rates encourages banks to offer low interest rate loans to companies) it set out plans for some other facilities it could use to help prop up portions of the economy.

While we may remember hearing the term ‘quantitative easing’ we might not remember exactly what it means. The Fed will buy up US Treasuries and mortgage back securities in order to infuse cash into the economy. It also has announced it will enter the repo market – essentially the market between banks lending money to each other – it also announced other US dollar swap lines with other central banks across the world to help shore up the US currency.

The Fed is also easing restrictions on banks so that they can tap into their capital and liquidity buffers – the amounts banks are supposed to keep on hand in case of an emergency or run on the bank. In this instance The Fed has eased up to make it easier for banks to lend to Main Street so businesses can stay afloat.

Along with a slew of other facilities to buy up corporate bonds and securities to help shore up medium to large businesses, it is planning to purchase short term municipal bonds to help local governments who see a shortfall do to reduced tax revenues because we have all be staying home and not spending as usual.

Because The Fed is also responsible for deciding how much money – actual coins and bills – to shove into the market at any given time it can do all this with an almost unlimited capacity. But they can’t just throw money into the wind, it has to go where needed and in exactly the right amount needed, no more or the dollar could tank and become essentially worthless.

As a refresher, below is our original article on The Fed published in September 2019.

A Brief History

The Federal Reserve System (what we normally just call “The Fed”) is the central bank of the United States and was created by The Federal Reserve Act and passed by Congress in 1913. Before the centralized banking system there were financial panics, or what we commonly hear called “bank runs”, meaning, for some reason or confluence of factors, the customers of a bank suddenly feel their money is not safe and attempt to take all it out of that bank. Now, if this were just a customer or two, the bank wouldn’t be hurt. But when enough customers decide to take out their money all at once, the bank can go under. The business of banking can be complicated, but basically a bank “holds” your money and hopes that you don’t take it all out at once. While they are holding it, they can be using it to make money for the bank. Fun fact: Banks do not have as much cash on hand as customers have deposited. 

The Federal Reserve System was created to prevent these kinds of financial panics, but also to do things like set monetary policy, and ensure the stability of prices and promote full employment. Since The Fed was created its mandates have, of course, grown and changed, but one thing that hasn’t changed is its insulation from political or private influence. By being decentralized and having 12 Reserve Banks across the nation acting somewhat independently, and also the Chair of the Fed being appointed by the President of the United States but not beholden to that office or to Congress (though they do have to report to Congress) The Fed stays independent and can do its work without fear of retaliation.

But What Does It Do Again?

Probably the thing you hear about most often is The Fed setting what is sometimes called the Federal interest rate, but is actually called the Federal Funds rate. With the creation of The Fed came the mandate that banks must keep a certain amount of cash on hand. That amount is a percentage of what their depositors have put in their bank. These funds must be kept in a Federal Deposit account in one of those 12 Federal Reserve banks. What a bank has in their Federal Reserve bank account over their required percentage they can lend to one another. The percentage at which they can lend to one another is set by, viola, The Fed and that is the Federal Funds rate. (Why they need to lend each other money is a whole other post we can discuss on a different day).

And, So…?

It’s a sort of domino effect.  While the Fed can’t tell a bank “you must lend at this exact percentage rate” it can adjust the money supply (the actual amount of dollars and coins that are floating around out there) and so this puts a little pressure on the banks to adhere to the rate The Fed has set.  You can’t lend what doesn’t exist and if there will be less actual cash available chances are you are going to hold on to what you’ve got.  And while the Federal Funds rate does not directly affect businesses and consumers it does influence the percentage rate at which banks are willing to lend to their customers.

And… So…?

What percentage businesses can borrow money for (and the amount of interest they will eventually have to pay back to the bank, thus lowering their profits) determines, in part, whether they are willing to do job creating things, such as, creating a new product line, opening a new retail store, building a factory, or adding another shift.

Also, the Federal Funds rate has an effect on inflation – that is the amount that  prices of things rise over a period of time (when prices go down that is called deflation and can be equally bad if out of control – again a post for another time).  If inflation is high that means your dollars don’t go as far as they used to, boo.  If inflation is low, more bang for your buck!  Yeah!  However, ups and downs have a chilling effect on both business and personal economic decisions.  Just as a business has to feel secure to know if they can safely open a new store, you need to know that you are going to have a job at that store going forward in order to buy that new car you need.

But of course…

As we know, especially if you are old enough to have lived through the Great Recession of about a decade ago, even The Fed can’t totally control the economy.  The Great Recession was caused by a number of bad actors and bad policies put in place by a number of organizations both private and public and even though The Fed did lower the Federal Funds rate when it saw unemployment rising, the crisis was already snowballing.  After the onset of the crisis The Fed, partly because of its independence and decentralization from government and business influence, was able to adequately prop up some financial institutions.  Whether the Fed would be able to avert another such crisis is yet to be seen.  Bad actors and bad policies are somewhat like whack-a-mole – they pop up where you can’t believe and then slip away before you can whack them – but they still left a hole in the (economy) ground! 

In The Grand Scheme

All in all, the United States economy is stable relative to many other countries which have experienced terrible financial crises, such as Argentina and Greece which have had punishing inflation rates in the past.  And though no one can foresee the future, the Federal Reserve System has been able to help hold our economy together and prevent the kind of collapsing inflation rates seen by other countries even in the worst of times thus far.

Now What?

Most of us in the country have been ordered to “stay at home” to prevent the spread of COVID-19. And this has been difficult in myriad ways, no doubt sending the economy into recession for some time to come.  But oo matter how long it lasts and no matter when we get back to “normal” we can move forward now – albeit a little at a time. 

Life will get back to normal, someday. What now though?

What can we do now?

Apply.  If you have lost your employment apply for all the help currently on offer.  Many of us never imagined filing for unemployment but this is no usual circumstance.  File as soon as you can for unemployment and even food assistance.  This is what our tax dollars have been going towards – to take care of us when we need it. 

Reach out.  If your income has been affected by the pandemic reach out to your creditors.  Many are offering a reprieve from payments and are willing to work with you if you’ve gotten behind.  Not only landlords and mortgage companies, but credit card and other lenders are offering flexibility on payments right now.  That is not to say any of your debt will be forgiven, but the requirement to make an immediate payment will be delayed.

Make a budget.  Even if you never have before, now is the time.  But this is not a ‘want’ budget, this is a ‘need’ budget.  Include the absolute bare minimum of what you need to stay afloat, stay healthy, and get through this period in time.  So, eating out, Starbucks, new clothes, new pillows to spruce up the living room, may all have to be left off this budget for now. Knowing exactly what you need to survive the era of coronavirus can give you some peace of mind and a target.

Where you can, shop local.  Though the CARES Act has made funding available to small business, not all businesses will be able to avail themselves of the funds.  Already banks are overwhelmed with applications and starting to halt acceptance of new applications. So, your dollars going to your local mom ‘n pop retailer or restaurant may make a difference in them being able to make it to the other side of this pandemic still in business.

Get online savvy.  Being familiar with current tech has always been important to our work lives but never more than now.  If you have never taken a class online maybe now is the time?  Maybe there is some skill you can add to your work arsenal, or a hobby you have always been interested in knowing more about, or history.  If you have never had a FaceTime chat with your kids, or gone to a Zoom meeting, learn now.  Even calling your friends on the phone can be heartening and a welcome distraction to the grind of news and boredom.

Be flexible.  If you are a business owner or an independent contractor now is the time to plan how you will get back to work in the era of coronavirus.  Until we have treatment and a vaccine we will likely have to continue some level of social distancing.  How will your business be able to adapt?

Rethink.  Much that we can’t foresee will change during and after the pandemic.  This may be the time to rethink priorities and what is important and mostly where we are spending our time.

SBA Loans for Pandemic Rollout

As a small business owner you no doubt jumped at the chance to get your employees back to work and get your business up and running. And you were probably at your computer reading your application the instant CARES Act loans were available.

And now. Wait.

As banks scrambled to make their policies line up with Congress’ guidelines for the loans, they were also inundated with an unprecedented number of applications. Banks struggled to handle the volume even as they awaited clearer guidance and needed forms from the SBA.

As details of how to approve, how to deliver, and how to forgive are hammered out between the SBA and lenders, money will most certainly run out. Congress is currently attempting to pass a bill for more funding.

As this week has unfolded, details about the various programs have emerged. The Economic Injury Disaster Loan Emergency Advance (EIDL), the up to $10,000 available to small businesses, is considered an advance and there are limits. The advance is on the Paycheck Protection Program – so the amount that a business is funded in the EIDL will be subtracted from the amount distributed after approval. The limit is, according to a report by INC, $1,000 per employee. Unfortunately, the emergency response time of three days has been delayed because of overwhelming response.

The upside is that advance can be rolled into the PPP loan and forgiven in full or part. Current information from SBA site states that what will be forgiven of the loan are payroll costs, interest on mortgages, rent, and utilities – at least 75% of the forgiven amount must have been used for payroll. What will happen if businesses don’t meet the 75% threshold or if part of the loan is used for product, say for a restaurant, to get up and running is unclear.

There are also limits as to what payroll is covered. Current advice says businesses can use the funds for payroll as far back as February 15, 2020 but that businesses can use their own date on the application. And funds must be used to hire back employees or replace positions that were vacated due to the pandemic.

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