David R. Henderson  

Do High-Income People Lose Income in an Economic Slowdown?

Grist for Arnold's Mill... Boo, Eugene Fama...

It seems obvious that the answer to the above question is "yes." But it wasn't obvious to a small businessman who bet hundreds of thousands of his own money and hundreds of thousands of other people's money on his answer.

Chuck Bidwell is co-owner of a company that sells luxury luggage. Here's what the news story said:

"Chuck said that because he deals in luxury goods, he wouldn't be affected by the slowing economy, because his customers are affluent," Mr. Kassim recalls. "But I wasn't so sure."

Mr. Kassim, by the way, was one of the major lenders.

The whole story is worth reading.

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CATEGORIES: Business Economics

COMMENTS (5 to date)
RJ writes:

This story, and the explanation following it, are obviously flawed. There is a difference between the buyers of luxury goods and high-income people. Many high-income people scrimp and save and rarely, if ever, purchase or consume luxury goods. I know people like this within my family.

On the other hand, many low and middle income people consume luxury goods, many times financed by debt or by giving up other goods. For example, low income people in the ghetto wearing $200 pairs of shoes and gold necklaces. Teenage girls of middle income families buying dolce & gabbana. Numerous examples exist. As a full-time student, I shouldn't spend my meager income on luxury goods, but I occasionally do.

This article proves nothing at all.

Nick_L writes:

This story echos a number of situations out there, as businesses both big and small have chosen to adopt this style of 'otimistic' financing, with consequences now all too obvious in hindsight. This has happened before and as usual history repeats itself. One wonders what effect these outcomes will have for the future of business financing - maybe very little, as people have short memories and incessant needs. Perhaps these events will act as an impetus for further developments in the area of Risk Management.

scott clark writes:

Maple Bank, Mr. Kassim's bank, has a Texas Ratio (one measure of bank credit risk) of 54. That's pretty high, and is a tough place to be for a bank with only $44MM in assets, so he may not be as conservative as he claims in the article. The average Texas Ratio across the 8274 banks in the US is 17 and the median is 8, using the latest FDIC figures available. But the story is a tough one. Borrowing from banks and friends and family, missed milestones, big dream piling up big inventory and big equipment.
But they should have had some caution, they paid $600M for a business that was losing $150M a year, so I can't be too sympathetic.

BTW, M above represents the Roman Numeral M for 1,000. Not M for 1,000,000.

Dan Weber writes:

High income people might buy more luxury goods, since lots of high-income professions require signaling. (You wouldn't hire a lawyer in a T-shirt.)

High net worth people tend not to be as interested in luxury goods. Quality, yes, but that's separate from luxury.

I have no idea if a falloff in luxury luggage means high income people are hurting. More likely, while it is often the fashion for them to do conspicuous consumption, right now the fashion for most is to do the exact opposite. From feast right to famine, do not pass GO.

Paying $600k for a business with only $450k in sales was the first sign of stupidity.

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